Monday, September 16, 2013

Sabana's IR response to my questions

8 Commonwealth Lane

My questions, their response:

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Sabana announced not too long ago about a MTN programme,so why do placement? Why not drawn down loans?

 

  • ·         Tapping the established MTN programme (debt funding) at this point would be too costly. In addition, the MTN programme is feasible only if it involves an amount of at least S$50 million, which is higher than what we required (about S$30 million).


I am fully aware that with the $60 million acquisition, gearing will go above 40%, 40.5% if my calculation is correct. Then my next question, why not a rights issue so that existing shareholders can participate in it without dilution and enjoy a discounted price.

 

  • ·         The funds (equity) were raised to partially finance the acquisition of 508 Chai Chee Lane.  The vendor of the property is a third-party, unrelated to the sponsor. This therefore means a less flexible timeline to complete the acquisition.
  • ·         We believe that 508 Chai Chee Lane is a good quality asset to be added to our existing portfolio that will help generate attractive and stable DPU for Unitholders over time.
  • ·         We had evaluated relevant funding methods and concluded that for an amount of S$40 million, it would be more practical to raise funds via a share placement (for equity portion) in order to meet the timeline given by the vendor. Fund raising via a rights issue, for example, would take longer than what is acceptable to the third party vendor.
  • ·         The balance of about S$30 million will be funded by debt.
  • ·         We do not expect the overall gearing to reach 40%.

 

Lastly, why a discount of more than 9% and more than 10% to last traded price of 1.125? Please be mindful that Acendas reit, Ascott reit, and Aim industrial reits recent placements are all at discount of below 5%. If the discount is necessary to attract investors at such unfavorable terms, then back to the first question, why not a rights issue at 5% discount? Or for the case of rights, a 10% discount will be welcomed. Pardon my bluntness, such exercise come across to me as opportunistic and shareholder unfriendly. 

 

  • ·         The pricing of the share placement reflects the prevailing market sentiment and expectation of investors given the uncertainties in Syria and the upcoming FOMC Meeting scheduled for 17-18 Sep 2013.

 

Lastly, UOBKayhian mentioned that your proposed acquisition of Chai Chee is a half vacant building. Why buy a half vacant building when URA figure shows supply pressure. If the report is accurate, you purchase yield will be 2.5% - 4.5% using the average of your portfolio rents. Hardly a value purchase or yield accretive one? 

 

  • ·         The property at 508 Chai Chee Lane is approximately 11.0 years old, with balance land tenure of 46.5 years, longer than Sabana REIT’s existing portfolio of approximately 38.8 years. It is strategically located next to the Pan Island Expressway (PIE) and is about five minutes’ drive from Bedok and Kembangan MRT Stations on the East‐West Line. Long‐term leaseback to the Vendor provides initial income stream and potential access to increasing market rentals for balance of space leased to third party tenants. Given the excellent location and good building specifications of 508 Chai Chee Lane, we are confident of filling up the remaining 50% occupancy.
  • ·         Based on our projected occupancy assumptions, the initial yield is likely to be higher than our estimated wacc (weighted average cost of capital) of sub-7%. Hence, from this perspective, the acquisition is attractive.

 

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My thoughts:

I appreciate the reply from management, but I felt a rushed deal it seldom a good deal.

I am not a industrial property guru, so I reserve comments on how good the buy is, but given new supply coming online in the next 2-3 years, and industrial rent index starting to trend down, why the rush to buy the building and adhered to the harsh timeline?

Drawing down loans to meet the timeline, and explain the rationale for momentarily breach of self-imposed 40% gearing and get rights to bring it down, seems more reasonable. 

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