Friday 16 April 2021

The Sabana REIT Showdown Between Sponsor And Unit-Holders

I used to be a unit-holder of Sabana REIT back in 2011. I recalled its unit price dropped after IPO (@ S$1.05 per unit) and then I started accumulating units for investment. Anyway, I held onto Sabana REIT for a short time due to its high dividend yield after the decline in price post IPO. But once I observed that the previous management seems to be having trouble getting new tenants and a potential cut-back in dividends, I got extremely worried and exited towards the end of 2012. But if one has been holding on to Sabana REIT since IPO, the total returns if inclusive of dividends is actually just a loss of less than 10% albeit the unit price dropping by more than half- so still not too bad. Since the end of March'21, I have started taking up a small investment stake into Sabana REIT despite the current ongoing spat ("War" maybe a better word) between the sponsor and the rest of the unit-holders.  

New Tech Park before the Asset Enhancement Exercise by Sabana REIT

1."Refresh Strategy" under new CEO is actually working well
Donald Han joined Sabana REIT as the new CEO in January 2018. He is a real estate veteran with over 30 years of experiences including working as the Managing Director Asia Pacific of Cushman & Wakefield and also the Managing Director of Chesterton Singapore. Donald had introduced and also implemented the "Refresh Strategy" which involves (i) disposing underperforming assets and matured assets, (ii) undertaking asset enhancement initiatives and (iii) acquisition of yield accretive assets locally or overseas. He is thus instrumental to the New Tech Park revamp- please see point 2 below. 

2. New Tech Park under "Refresh Strategy" beautifully executed as alluded to pt 1 now has a new retail F&B podium and also foodcourt at level 2 to be operationally ready by Q2 of 2021.
New Tech Park has already secured many new tenants for its retail F&B podium as well as got an operator for its 2nd level foodcourt. Good quality tenants include Collins, Wine Connection, Dutch Colony Coffee and Signature (a full range supermarket specializing in international produce).

I did a rough projection of the expect upsides to Sabana REIT unit holders for post execution of New Tech Park. This is going to increase the distribution per unit by 16.7% for FY2021 and 22.0% for FY2022 relative to FY2020 (reason being FY2021 only has around 8mths positive impact from opening of the new retail mall and foodcourt). If the market price is at S$0.40 per unit, the distribution yield is expected to be 7.17%. for FY2021 and expected to go up to 7.51% for FY2022.

Projected distribution yield after AEI at New Tech Park

Extracted from Commercial Guru for benchmarking

I estimated the rental per shop is at S$15,840 using a listing for New Tech Park new retail shop at Commercial Guru (S$19,800 per mth) and then applying a discount of 20% on S$19,800 per mth to be conservative in the projection. 25 retail units available per the news articles will thus mean S$396K additional contribution per month and S$3.168Mil for remaining 8 mths in FY2021.

Another point to note is that I have seen some people projected the yield to be up to 8%. This is not true. For FY2020 2nd half distribution, there are excess distributions due to previously withheld dividends from the 1st half as well as additional distributions in respect of prior years. Hence once you normalise the numbers, it should be only 6.15% for FY2021 at S$0.40 per unit market price. But if you included in the AEI done, this will go up to 7.05% in FY2021 and 7.51% in FY2022.

3. Potential acquisition of Sabana REIT by ESR REIT and possible 20% capital appreciation
Based on the full year results of 31 Dec 2020 released, the net asset value is worth S$0.57 per unit. This seems to be a vast improvement from the S$0.51 per unit as at 30 June 2020. Since Sabana REIT is adopting fair valuation of its investment properties, the net asset value will approximate the fair value. I reckon that there is a 20% to 40% upside if ESR REIT make a higher bid for Sabana REIT based on my entry price of S$0.39 per unit to S$0.40 per unit. 

4. Key risks holding on to Sabana REIT - The not so good parts
There are a few unstable risk factors underlying Sabana REIT despite the potential returns from distributions and capital appreciation. 

(i) Too few properties and small size 
The main key risk of holding on to Sabana REIT is that its portfolio only has 18 properties worth around S$1 billion. Any asset enhancement initiatives which needs to shut down any 1 property for such enhancement will mean down time which translates into loss of rental income generation for 1-2 years. This can be substantial in terms of the temporary losses in distribution of a single property relative to bigger REITS such as ESR with a bigger portfolio and many properties.

(ii) Sponsor ESR REIT not as prominent as some of the local REITs 
Another risk is that the sponsor is not as strong as Mapletree or Capitaland which are backed by the Singapore government. Weak sponsors will not be able to have the financial muscles to rescue them during times of financial crisis. Look at what had happened to Eagle Hospitality Trust and First REIT.  

(iii) Current minority unit-holders lead by Quartz Capital and Black Crane are very aggressive towards management of Sabana REIT.
Although I salute the efforts and leadership of the 2 fund managers in preventing low ball offers by the sponsor ESR to buyover Sabana REIT, I find their aggressive stance very troubling. Recently, they have been calling for the REIT manager to bear the cost of the failed EGM as well as asking independent directors that they do not like to resign. This constant infighting and stirring up of negative feelings of other retail unit-holders internally means management is spending more time fighting off its own unit-holders than concentrating fully to run the business. I do hope both fund managers can soften their aggressive stance and adopt a more diplomatic engagement approach to resolve the current impasse. 

(iv) REIT Manager- I think need to perform better and with more independence
My own view on this is simple. The claim that if ESR is not appointing any directors to the REIT manager means that the REIT manager is independent is nonsense to me. This is just playing with words. If you are getting your remuneration from the sponsor as a director of the REIT manager, then obviously there will be conflict of interest. The REIT manager needs to wake up and be more pro-active to doing the best for Sabana REIT. For example, during the last offer by ESR REIT, the offer values Sabana REIT at only S$0.362 per unit. This is almost a 30% discount off the 30 June 2020 Net Asset Value.

The REIT manager should have just rejected the deal or call in other bidders. I found their argument that any offer needs to be determined by unit-holders in an EGM illogical. For example, if a crazy bidder puts in a lowly bid of S$0.10 per unit pricing, does the REIT Manager still went on to call for an EGM for unit-holders to consider the low ball bid?
(v) Risk of ESR not offering acquisition anymore or fund managers selling off stakes leaving retail investors in a lurch
Sabana REIT as a standalone does not have much economies of scale which is a trend these days to enjoy a distinct competitive edge. At such high risk premiums due to so many unstable underlying factors as mentioned above, it will be hard for Sabana REIT to find yield accretive good properties. For many years, Sabana REIT has been languishing. The usual virtuous cycle of asset injection of yield accretive properties and then good capital appreciation of unit price which will lower its current yield for more future acquisition breaks down when we are talking about Sabana REIT. There is no better illustration than referring to its IPO price relative to current market price.

I do hope that the boxing matches between the sponsor ESR and the minority unitholders of Sabana REIT blow over soon. Both should actually give and take to resolve the current impasse which is a hindrance to the future growth of Sabana REIT. 

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