Sabana Shari'ah REIT

[momoeagle]

Hi all,

6 years ago, I didn't invest into this but into AIMS, in the same industrial REIT arena.
One of main reasons was: I felt that Shar'iah Compliant is not an asset, but a liability. It is a form of restriction, and restrictions like this doesn't really help any business.
However, Sabana repackaged it as an asset, and something to brag about.


*Not vested since IPO.

Hi monoeagle,
Could you elaborate more on why you view Sabana  as liability , form of restriction?
I bought Sabana a few years ago and sold it about 2 years later. The time read AK71 blog and he liked this Reit , however when the dividend started to drop, he immediately sold it. He wrote a blog why he sold it. Then Sabana started the trending down terribly and never stop. I was amazed that he could predict this and sold it immediately and as novice , I sold it one year later. But at least this wise person liked Sanbana at the beginning, however you had a different view even at its IPO, Seems you see even deeper, so I'm very interested how you came to that conclusion. I'm very keen to learn . Thanks



Sent from my iPhone using Tapatalk

Hi SpaceX, 

I actually typed out a long post, but accidentally pressed back button and all gone

My view is not deeper. It is just a different view. Me then and now are different, perspectives are different, networth is different, so actions may also be different already. 

Anyway, I shall summarize. Most of the stuff I wrote about Sabana are in the first few pages of this thread. Mainly, if I am going for stability, I will want to look for a strong sponsor. Vibrant Group, or previously FreightLinks, isn't really a strong enough sponsor in my opinion. The ability to refinance loans in the future in the event of downturns is questionable.  Of course, sometimes I break my own rule, as in the case of investing with Saizen REIT. But that's another long post altogether.

Looking back at my own posts, I was too focused on three things
(1) The Sponsor
(2) Being too close to NAV at IPO. I like to buy at a discount to NAV for REITs. Of course, I broke this rule again with CapitalMall Trust's purchase at 1.91. 
(3) Fellow REITs' opportunity cost, i.e. AIMS. 

Although I did look through a little about Shariah Compliant, I didn't think of it much back then. 
My views are simple: Would you go into a business by limiting your own clients when you do not need to? We have to remember that this country is not mainly comprised of businesses who need this restriction. 

I vaguely remember that Sabana marketed this as something which will attract investors who are interested to invest in Shariah Compliant businesses. I am not sure how true or successful that is to this extent. However, Sabana mentioned nothing, or maybe minimally, about the advantages of having this in terms of revenue generation, something investors are more interested in. In business, we have to go niche for a reason, e.g. usually a part of the market that is underserved. Not niche for the sake of being niche. 

A check with news on google also reveals "A lack of incentives for Islamic finance in Singapore and the absence of pension funds and bond investors that need to invest in a Shariah-compliant manner have hampered industry growth."

In addition, there are so many things unclear about being Shariah Compliant, that I wouldn't be able to understand, or take way too long to understand, that I rather just forgo earning from investing in Sabana. How do we know which businesses can rent and which businesses cannot? Supermarkets are definitely out of the picture. Storage solutions too. A A number of food preparation industry. Airlines... Many more that we might know or not know. 

And do remember that is only the tip of the iceberg. If well managed, Sabana might have still be able to minimally retain DPU.

My 20/20 hindsight opinion. All these amount to nothing.

[laksaman57]

Reit mgr violated MAS ruling on independent directors percentage allocation ?

[SpaceX]

Hi monoeagle, thank you very much for taking time to write this long post . Now I understand you view Sabana as a form of restriction. What you wrote does help since we do need to view things from different angles. The more we learn, the more variables we take into consideration, the more we could form a more comprehensive strategy. Thanks a lot and also thanks for all those experts in this forum, I did learn from you guys a lot.


Sent from my iPhone using Tapatalk

[Boon]

Confusion is part of the learning process.
 
In Singapore, RM (Reit Manager) is a Company (or corporation)
 
“At least half of the Manager’s board of directors must be independent directors if unitholders do not have the right to appoint the Manager’s directors.”
 
http://www.mas.gov.sg/news-and-publicati...arket.aspx
 
What is the point of giving right to unitholders to appoint members of BOD of the RM company?
 
If this right to appoint members of BOD is not given (or exercised), what is the intent of mandating that at least half the Manager’s BODs must be independent directors?
 
The purpose of ID in RM company is to protect interests of unitholders of the Reit which the RM manages, and not to protect shareholders’ interests of the RM company, IMO.
 
Technically speaking, since RM must be a separate company, internalization of RM means making the RM company wholly owned by unitholders – and there are more than one way to achieve this……………………. 
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The RM is a company own by shareholders and usually not the unitholders. My understanding is that unless the RM is majority owned by the Trust, the RM need to have 1/2 of the board as ID, to prevent conflict of interest with the sponsor, not so much to guard the interest of the unitholders per se.

Reits in Singapore adopts the Manager/Trustee model.
 
In externally managed REITs, the REIT manager (RM) is a separate company, and is usually majority-owned or wholly-owned by the Sponsor.
 
The Sponsor of Sabana Reit owns about 12% (< 15%) of all voting units in the property fund – hence not a Controlling Unitholder in accordance to CIS code (page 72).
 
The Sponsor of Sabana Reit owns 51% of the RM – hence it is the controlling shareholder of the RM.
 
With externally managed REITs, many governance issues arise because of the inherent principal– agent conflict between RM (agent) and the unitholders of the REIT (principal).
 
If the RM is majority owned by the Sponsor – potential conflict of interest (COI) would arise if the Sponsor want to sell more of its asset into the Reit. – what is in place to prevent any potential unscrupulous RM from taking advantage of unitholders’ interests, if less than ½ of board is ID ?
 
If the RM is majority owned by the Trust (or Unitholders), how could potential conflict of interests of similar nature be arisen, as unlike the Sponsor, unitholders have no properties to sell into the Reit?
 
If RM is 100% owned by the Trust => internalization of RM would have been achieved – interest of Trust and RM would be aligned.
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[specuvestor]

IIRC there are some REITS that the sponsor owns 51%

The selling point of this sponsor-REITS is the pipeline of assets that can be injected. But of course price is the double edged sword, or rather how the price was derived. That was what Mdm Ho was talking about with regards to Suntec REIT and also why City Dev Hospitality REIT was postponed.

The flip side of internalising REIT investment manager is to have a proper incentive system in the midst of cost-cutting before it becomes another administrator.

[Boon]

IIRC there are some REITS that the sponsor owns 51%

The selling point of this sponsor-REITS is the pipeline of assets that can be injected. But of course price is the double edged sword, or rather how the price was derived. That was what Mdm Ho was talking about with regards to Suntec REIT and also why City Dev Hospitality REIT was postponed.

The flip side of internalising REIT is to have a proper incentive system in the midst of cost-cutting before it becomes another administrator.

RM is usually majority-owned or wholly-owned by the Sponsor, at inception.
 
If the Sponsor also owns 51% of all voting units of the fund, it means the RM cannot be removed by minority unitholders.
 
Further, if ½ the board of RM is not ID, it means the Sponsor/RM (if they have the evil intention to do so), could take advantage of minority unitholders’ interests to the extent it is permissible within bounds of the laws, including loopholes.
 
There are pros and cons on internalization of RM.  From the perspective of reducing COI and better alignment of unitholders’ interests and RM interests, I reckon, it is a plus.
 
The trend in US is towards internalization.
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[ACTIVIST SPEAKS]

I am quoting you guys in the FB. Hope you don't mind.

[laksaman57]

http://www.theedgemarkets.com.sg/article...h-property

[Boon]

.   (b)  Mr Low criticised the purchase of the property at 47 Changi South Avenue 2 (“Changi South Property”) at $23 million as being too high, as “...the same property sits in (the Sponsor)’s book at only $9,935,000”. Mr Low queried the “objectivity and independence” of the valuation by Colliers, Savills and Knight Frank which valued the Changi South Property at $23 million. We would point out to Unitholders that the Sponsor had purchased the property for its own use, and therefore the book value of the Changi South Property in the Sponsor’s books reflected the original cost of acquisition of the property by the Sponsor less accumulated depreciation. As such, the book value is irrelevant and not a good basis for comparison. The property was independently valued by Savills Valuation And Professional Services (S) Pte Ltd (“Savills”) and Knight Frank Pte Ltd (“Knight Frank”) in connection with the acquisition by Sabana REIT, taking into account the long term lease for the property and the rental income support provided by the vendor before arriving at the valuation of $23 million. We strongly disagree with Mr Low when he queried the objectivity and independence of the valuers. The valuations correctly took into account drivers like rental income support, and the ten-year lease back to the Sponsor and the property’s long remaining leasehold tenure of 40 years. It would not be fair to compare these current valuation(s) as at 9 December 2016 with the book value (historical) of the property in the Sponsor’s books. The Changi South Property is strategically located and will provide cash flows and generate stable and growing returns for the Unitholders. The Manager is confident that the acquisition of the Changi South Property was in the best interest of Sabana REIT. 

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http://sabana.listedcompany.com/newsroom...XXZX.1.pdf

3. DETAILS OF THE ACQUISITION AND LEASE (COLLECTIVELY, THE “TRANSACTION”)
On completion of the Acquisition, the Vendor and the Trustee will also enter into: 
1.   A lease agreement (“Lease Agreement”) pursuant to which the Vendor will lease back 74% of the total GFA of the Property for a term of 10 years with rental escalation of one per cent per annum starting from year two. The Vendor’s lease is expected to commence in the first half of 2017.
2.   The Vendor will provide rental income support to Sabana REIT for the first three years, commencing from and including the date of the completion of Acquisition.
3.   A service agreement (“Service Agreement”) pursuant to which the Vendor will be appointed by Sabana REIT and paid a service fee of S$1,000 per month (subject to Goods and Services Tax (“GST”)) to provide ancillary lease, property management and maintenance services in respect of managing the direct subtenants.
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Question 1:
Without taking into account the artificial impacts of the 10 years lease back and the 3 years income rental support provided by the Vendor, what should be the value of the property be?
Question 2:
Without taking into account the “artificial arrangement of 10 years lease back and the 3 years income rental support provided by the Vendor, what should be the yield of the property be at year 1, year 4 and year 11?
Question 3:
Taking into account the impacts of “artificial arrangement" of 10 years lease back and the 3 years income rental support provided by the Vendor, what should be the yield of the property be at year 1, year 4 and year 11?
Question 4:
What is the NPV of the “artificial enhancement” portion of the cash flow?
Question 5:
“The valuations correctly took into account drivers like rental income support, and the ten-year lease back to the Sponsor”
In arriving at a value of SGD 23 million, what discount rate did the valuers used in valuing the “artificial enhancement” portion of the cash flow? 
Question 6 :
"The Manager is confident that the acquisition of the Changi South Property was in the best interest of Sabana REIT. "
Where are the supports and justification?

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[specuvestor]

http://www.theedgemarkets.com.sg/article...h-property

I actually agree with the logic but Activist is nonetheless gutsy