Sabana Shari'ah Compliant REIT - Rumblings of Unitholder activism
Event-driven trading idea
- The price of Sabana Shari'ah Compliant REIT (SSREIT) had declined by $0.335 or 47% to $0.380 for the year ended December 30, 2016; and returned only 5.26 cents in distributions (for 4QFY15 to 3QFY16) during the year.
- The recent dilutive 42-for-100 Rights Issue with Issue Price of $0.258 to fund acquisitions that are non-accretive on a pro forma basis, appears to be the last straw for Unitholders and they are doing something about it.
Investment Action: Event-driven Trading Buy
- Our "Trading Buy" call is specifically with a view to trade on the event risk arising from the potential general meeting and subsequent re-rating of the REIT, should Unitholders successfully remove the existing manager.
- It is not based on any merits/demerits of the proposed acquisitions or fundamental outlook for the REIT.
- Key risk: All bets are off, if a general meeting does not materialise.
What Is The News?
Unitholders are taking matters into their own hands
- One Unitholder has started a blog, looking to muster the 50 Unitholders required to convene a general meeting, with the intention of removing the existing REIT manager and replacing with an internalised manager, or winding up the REIT.
- Meanwhile, another Unitholder has created a Facebook group to generate awareness – all in a bid to galvanise other Unitholders. As of this writing, there are already 65 members in the Facebook group.
What do we think of this?
- If the existing manager does get removed, possible outcomes are an established manager with a track record comes in to manage the REIT, or the REIT gets sold to a buyer at a fair market value. Either outcome should re-rate the REIT.
Mustering 50 Unitholders is the easiest hurdle
- "As at 25 February 2016, 80.0% of the Units in Sabana REIT are held in the hands of public" (Source: FY15 Annual Report, page 154). In view of the loosely held Unitholding structure, we believe that the mustering of 50 Unitholders should be achievable with ease.
Will a general meeting actually get convened?
- This is the key uncertainty, as there has not been any recent precedence for a call to remove a manager and it remains to be seen whether a general meeting will be convened. However, we view that once a general meeting materialises, it will be sufficient catalyst for the re-rating to occur.
Sufficient minority Unitholders will have to vote at the general meeting
- As disclosed on page 25 of the Offer Information Statement, insiders held a 20.49% interest in the REIT (including 3.68% by the manager).
- While minority Unitholders will need to aim for representation larger than that at the general meeting, insider holding after allotment of excess Right Units could subsequently be slightly different from this.
We build in a margin of safety for asset impairment at the end of FY16
- In deriving our back-of-envelope estimate for the post-rights and post-FY16 NAV/share, we have imputed the S$76.8 million net cash from the Rights Issue onto the balance sheet and increased the Unitholder base by 310,712,244 units.
- Our key assumption is a further 8% haircut to the existing 3QFY16 S$1.028 billion of Investment Properties on the balance sheet. (Investment Properties portfolio had already been revalued downwards by 4.6% in 1HFY16 on a "same-store" basis.) Consequently, we are expecting a NAV/share of $0.56, which compares against the manager's pro forma guidance of $0.64.
Our base case scenario is the stock gets re-rated to 0.9x P/NAV, or $0.51
- Apart from our base case scenario, our bear case scenario is 0.8x P/NAV, or $0.45; and bull case scenario is 1.0x P/NAV, or $0.56.