Friday, 6 January 2017

Sabana Reit (On A Skyfall)


Source: NextView 
Looking at the price action of Sabana Reit, I was quite astonished by the steep fall whereby their peak was around $1.20 in 2013 and is currently trading at $0.35. It have been on a steady decline since 2013.

Part of the recent fall is due to a rights issue of 42 for 100 at $0.258 which will be used to finance the purchase of 3 new industrial properties.
Background:
Sabana Reit was listed in 2010 at an IPO price of 1.05. It plunged on opening and was trading as low as $0.75 before recovering where income generation assets became a favorite asset class in the late 2012 to 2013 period. Their sponsor and manager is the Vibrant Group which is previously Freight Links [Freight Links Express Holdings Limited (now known as “Vibrant Group Limited”) is an investment holding company established in 1986 and listed on the SGX-ST in 1995. Headquartered in Singapore, the Group has over time grown its business from that of being an integrated logistics solution provider offering a comprehensive range of integrated logistics services including international freight forwarding, chemical storage and logistics, warehousing & distribution and record management ("Freight and Logistics Business") to include the business of fund management, financial leasing services and asset and trust management services ("Financial Services Business"), and the business of property management services as well as real estate development and investment ("Real Estate Business")]

Sabana holds 23 industrial properties if all their recent acquisition and disposal across Singapore goes through and will manage them in line with Islamic principles. To be Shari’ah Compliant, the premises cannot be used for gambling or the production of pork or alcohol for human consumption.

Ratios:
Price to book: 0.53
Price Earnings Ratio: Negative (Making a loss in terms of Earnings per unit)
Dividend Yield: 10.7% (Based on last year payout)
Net Debt to Equity: 0.7
Current Ratio: 0.23
Price to free cash flow: 11
Source: Shareinvestor.com

Analysis:
Sabana Reit was having good occupancy rate of 100% since listing till around Q3 of 2013. Occupancy rate started to fall to high 80s and 90 percent level since then which affected their distribution per unit. The distribution in 2012 was 9.3 cents and the payout for 2016 was 4.7 cents. One of the reasons for the fall in distribution could be that more master leases were converted to multi tenanted leases as according to JTC ruling, master lessor have to take up 70 percent of the lettable space. Therefore, it is tough to get master leases into the portfolio. Currently the ratio is around 44% master leases and 56% multi tenanted leases. Moreover, with oversupply of industrial spaces and competition from Iskander region coupled with bleak economic conditions, it will be challenging to get tenants and rental rates are likely to revise downwards. Currently, multi tenanted leases occupancy rate is at around 82%.

Their average weighted lease for master leases is around 2.5 years and for multi tenancies is at around 2.6 years. Their average weighted tenor of their loans is at 2.1 years with average financing cost at around 4.1%. We could foresee there could be lots of refinancing needs ahead and in a rising interest rate environment and with a deteriorating industry landscape, the financing cost could see a steeper increase in the near future. The leases renewal could also be an issue given the competition and the sponsor is taking up just around 15% of the lettable space.

Their earnings per unit were negative since 2015 but they managed to generate free cash flow through sale of properties and factoring in revaluation losses which allowed them to distribute dividends. Going forward, they have to ramp up their occupancy rate to be able to maintain their distribution per unit which I feel would be a challenge and thus there could be further downside to their distribution per unit.
Conclusion:
The lack of a strong sponsor is a crucial factor for the confidence level and investment merits in Sabana Reit. Given the general outlook and oversupply situation, we might have to monitor the occupancy rate for multi tenanted leases and the refinancing rate for their debt (An indicative based on my checks, the bonds expiring in 2018 is having a yield to maturity of around 5.5%) before we might want to consider an investment in this Reit. For better alternatives in the industrial space, we could look at Ascendas Reit with assets such as Science Park which is their niche and is therefore relatively more resilient. Also, we can look at Frasers Logistics Trust with assets based in Australia that could see a potential good upside if the commodities recovery is intact.
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