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Sabana REIT’s Master Leases Gets Renewed at Lower Rent Again

I don’t wish to write too much on Sabana REIT (7.3% dividend yield on my Dividend Stock Tracker).

I believe the saga have been covered adequately by the media. There is a high chance readers where would be aware about it.

The last development is that E-Shang Redwood (ESR), who is the manager of ESR REIT (formerly known as Cambridge Industrial Trust | 6.9% dividend yield), took a 5% substantial stake in Sabana REIT.

Sabana in the mean time went into a strategic review, to find out how best to proceed forward.

As my friend B alluded here and here, there is a high chance that the properties would be realized at higher than fair value. ESR, being the substantial shareholders can trigger an EGM.

This morning, Sabana and ESR REIT provide further clarification that they are not pursuing transaction options anymore.

The strategic review yields 3 things:

  1. They will rationally pursue options to sell off their assets. 6 Woodlands Loop have been classified as available for sale in 3rd quarter. The management have further renew the master leases which were leased to sponsor Vibrant group. The proceeds will either be use to de-leveraged, used as working capital or pay out as distributions.
  2. CEO and Executive Director Kevin Xayaraj will leave Sabana effective on 31st Dec 2017. They will intensify the search for the CEO
  3. Sabana needs to reconstitution the board. They were not able to meet the minimum number of directors stipulated by SGX

The narrative you get is that they have not started finding a CEO or very little viable candidate is out there. I wonder FSL Chairman Tim Reid is interested to take on another project.

The main purpose for this article was to continue my commentary on the master lease of

  1. 51 Penjuru Road
  2. 33 & 35 Penjuru Lane
  3. 18 Gul Drive

These three properties have been master leased to their sponsor Vibrant Group (formerly Frieghtlinks) even prior to IPO.

Since Nov 2015, Vibrant Group, the sponsors are only extending the lease 1 year at a time.

The combined IPO rental revenue was $12.5 mil.

In Nov 2015, it was $10.5 mil.

In Nov 2016, it was $10.1 mil.

Sponsor Vibrant Group Renews Sabana's Property Lease at even lower rent

This time they were renewed for a combined rental revenue of $8.84 mil.

The sponsors should have the ability to instill confidence in the REIT by providing a rental support. However, it looks like they are unwilling to do that.

Sale and Leasebacks have their pros and cons.

Technically it makes it very easy for owners of property to sell their property at a good price by signing on an above market average rent.

This seem to be the case for Vibrant.

However, as I have covered in the past, there can be good situations that come out of this.

In the case study where Warren Buffett’s Berkshire taking a 9.8% stake in STORE capital, if your market is large enough, and when store owners have a different motivation, sale and leaseback can be rather good deal for the REIT operator. It gets even better when these sale and lease back tend to be triple net lease, where the REIT manager gets paid a fixed rent and the tenant takes care of the insurance, fittings, maintenance and other costs.

The past 2 commentaries on these 3 properties can be found here:

  1. Sabana Industrial REIT renews three master lease for 1 year at Negative Revisions
  2. Sabana Industrial REIT’s Heavy Year End Acquisitions and Disposals
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