Although I expected a decline in DPU from Sabana REIT, the decline to 1.88c is rather drastic. Based on a unit price of $1.08, this gives us an annualised distribution yield of only 7.05%.
Remember I made an assumption in an earlier blog post on Sabana REIT regarding how Mr. Market might demand a premium in distribution yield from the REIT compared to A-REIT? At that time, I said that Mr. Market might send the unit price down to $1.03 if it should demand an 8.5% yield. In fact, it touched a low of $1.005.
With distribution yield now at 7.05%, to get to an 8% yield, unit price might fall to 94c. Well, a drastic fall in DPU might just be accompanied by a drastic fall in unit price. I am not saying that it will happen but I won't be surprised if it should happen.
If we look at the numbers, it is really the almost 400% increase in property expenses that has resulted in a huge reduction in DPU. Of course, there is also the issuance of new units in payment to the management of the REIT as well as a higher vacancy rate.
As investors, we want to know if the increase in property expenses is temporary or permanent. So, we have to look at the details. These expenses are:
Source: 1st Quarter Financial Statement.
From what I can see, all four expense items are here to stay. So, even if the REIT should achieve 100% occupancy once again, it will be difficult for it to achieve a DPU that is even close to that of last quarter's.
The much lower DPU this quarter and a weaker outlook for industrial properties, together with my belief that the management's interests are not strongly aligned with minority unit holders', have pushed me to look into possibly making another partial divestment.
The good news? We now know what is probably a realistically sustainable DPU for Sabana REIT, everything else remaining equal. Things could worsen, of course, if the one Master Lease expiring end of 2014 is not renewed but it would be unlikely for things to worsen considerably. Having baseline information like this will help us in deciding when it could be a good time to buy into the REIT again with a greater measure of confidence.
See presentation slides: here.
1. 4Q 2013 results.
2. Reduced Sabana REIT.
3. Buy but remember the Sukuk.