Saturday, January 28, 2017

Sabana Reit - At the cusp of an epoch

HSYT
HSYT keeps saying my english sucks and i am unintelligible. Hence, the need of a nice cheem title to show that i have some class in my english. Anyway, HSYT came to collect angbao from me today and before she left, she muttered the following under her fragrant breath, just to rankle and jiggle this old brain of mine.( got class?)
Aha! Old Uncle who likes to eat soft grass immediately linked up what she was trying to say!That little limkumput of a HSYT!Luckily only gave you $2 for your angbao ,padded with massage and skincare vouchers with minimum spend of $88 bucks.. TAKE THAT!

So back to the Sabana story which i just recently bought just to support the movement. Unlike others who have lost money, i did not.

SO WHY SO KAYPOH?

I own many other counters, including a splattering ( got class?) of REITs. I thought that if we could make this a precedent (got class?) , it will bode well for minority shareholders in that we would not be taken advantage of for all other REITS or companies. It doesn't cost much to have a voice. It cost only $37 ( 100 shares ) to make your voice heard and start making all REIT managers or companies more accountable.

Fees, Fees,Fees, Heads i win, Tails i still win

Let's look how misaligned a REIT is to the unitholders. 
(below is summarised from Sabana IPO prospectus. Nearly all REITS have a similar structure if not identical)

Base Fee  
Up to 0.5% per annum of the value of the Deposited Property.
Performance Fee 
0.5% per annum of net property income if it achieves at least 10.0% in annual growth in DPU over the previous financial year
Acquisition Fee 
1% of acquisition price
Divestment Fee 
0.5% of sale price

**Any acquisition or divestment of properties do not need unitholders to vote

Now, how could a REIT manager game the system to earn more money?  

If the REIT gearing is low, i could borrow more money to acquire a lot of properties and increase  the DPU at the same time, increasing my base fee, netting performance fee and earning acquisition fee.

If the REIT gearing is nearing the regulatory limit of 45%,  I can issue rights or issue perpetual bonds to purchase new properties to increase my value of deposited properties to increase my base fee, and earn acquisition fee.I could also divest properties, netting some divestment fee in the process.

Will it be to my benefit to work hard to negotiate a lower price for the new property purchases?NO. Since the higher the acquisition fee, the more i earn as i earn 1% on the price, but better to play safe by buying at market value based on independent consultant's assessment so that i have evidence to back me.

Do i care if the purchased property i buy is lousy? Not really, since i can always dispose of it and earn the divestment fee.

Would it benefit me to spend money to do Asset Enhancement ( AEIs) so as to retain or attract new tenants? Not really, if it's unoccupied, maybe it's better and i can now justify its disposal and earn the divestment fee.

What happens if the DPU or share price goes down eventually? I am still earning the base fee, acquisition fee and divestment fee. I can't be fired. Heck the performance fee, it's too much work to find tenants, market the properties and retain tenants just to earn the miserly 10% of net property income.


WHERE IS THE ACCOUNTABILITY AND ALIGNMENT?


In case you are unaware, Sabana is in the process of  buying three properties and disposing 1 property. 

On a side note, please do not depend on the Monetary Authority of Singapore( MAS) to help us. They have many stakeholders whose interests MAS needs to balance while looking at the big picture. I think they are doing a good job already, having come up with a consultation paper on REITS and the issue of accountability and alignment was brought up. 

It is we, the unitholders, who must ACT as no one care more about our money than ourselves. 

REMOVAL OF THE MANAGER OF SABANA REIT
http://sabanareit.blogspot.sg/

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