SOME unitholders of Sabana Industrial Real Estate Investment Trust : M1GU +1.39% (Sabana Reit) who voted to remove Sabana Real Estate Investment Management (SREIM) as the trust&rsquo s manager and kick off the process of internalising the Reit&rsquo s manager on Aug 7, 2023, may be overcome with remorse.

 

The path to internalising management whereby the Reit&rsquo s trustee owns the manager instead of outsourcing management to an external party appears to be messy and costly.

 

Sabana Reit posted year-on-year (yoy) growth in gross revenue and net property income for H2 2023. However, the board of directors of the trust&rsquo s manager declared a distribution per unit (DPU) for the second half which fell 21 per cent yoy. 

 

The declared DPU declined largely due to the retention of 10 per cent of distributable income for use to fund costs incurred or to be incurred in connection with the internalisation. And further retention of distributable income may be required going forward.

 

Added to that, the Reit&rsquo s manager faces challenges in attracting and retaining talent given uncertainties arising from the internalisation push.

 

Recently, some unitholders of Sabana Reit, who were dissatisfied with and concerned about lack of progress on the internalisation by the trustee &ndash HSBC Institutional Trust Services &ndash requisitioned an extraordinary general meeting (EGM), which was held on Mar 8. 

 

Eight of the 10 resolutions tabled at an ill-tempered EGM were passed. Unitholders supported directing the trustee to form an internalisation committee whose members include several employees of activist investor Quarz Capital Asia. They also supported setting a maximum price of S$10 million to buy the existing external manager within a month of the EGM.

 

Amid the bickering over the progress of internalisation, Sabana Reit closed on Monday (Mar 18) at S$0.365, down 9 per cent from its close of S$0.405 prior to the meeting where unitholders voted to remove SREIM and kick off internalisation of the management.

 

Internalisation

 

I think internalising a Reit&rsquo s management has merits. Unitholders may enjoy potential cost savings. Possibly, there is better alignment of interest between management and unitholders. 

 

When I handled investor relations as part of the management of Hong Kong&rsquo s Link Reit, many investors whom I interacted with told me they like the trust&rsquo s internal management model.

 

Indeed, the Singapore bourse gains if investors have various externally and internally managed Reits to choose from.

 

Could regulators do more to smoothen the path for externally-managed Reits that are looking to internalise their management? 

 

Hopefully Sabana Reit&rsquo s move to internalise its management might encourage some externally-managed Reits here to consider internalisation, instead of discouraging such a move because of the mess the trust finds itself in.

 

However, what may best serve Sabana Reit&rsquo s unitholders is to stop pursuing internalisation of management and put the trust or its assets up for sale.

 

Sabana Reit probably belongs to the pool of smaller Singapore-listed property-related trusts, which do not trade well, and should either be bought up by others or divest their assets.

 

Perhaps, Sabana Reit can save on management costs when it becomes internally managed. In turn, such savings may translate into higher DPU and unit price.

 

Lacking scale

 

However, Sabana Reit, whether externally or internally managed, is likely hampered by its lack of size.

 

Sabana Reit owns industrial properties in Singapore under four main categories, namely high-tech industrial, chemical warehouse and logistics, warehouse and logistics, and general industrial.

 

As at end-2023, Sabana Reit held total assets of S$1 billion. This pales compared with trusts which own industrial or logistics assets such as CapitaLand Ascendas Reit : A17U 0% (Clar), Mapletree Industrial Trust : ME8U 0% (MIT) and Mapletree Logistics Trust : M44U -0.69% (MLT) that had total assets of S$18.3 billion, S$9 billion and S$13.9 billion respectively.

 

Clar, MIT and MLT are constituents of the benchmark Straits Times Index, unlike Sabana Reit.

 

Larger trusts may enjoy better trading liquidity and draw stronger interest from institutional investors. Some larger trusts may also enjoy better access to credit or cheaper financing.

 

As at Mar 18, Sabana Reit traded at a 30 per cent discount to its-end 2023 net asset value (NAV) per unit of S$0.52. Meanwhile, Clar, MIT and MLT traded at premium to end-2023 NAV per unit of 18 per cent, 23 per cent and 2 per cent respectively.

 

Selling out

 

Rents and prices of industrial space here rose yoy by 8.9 per cent and 5.1 per cent respectively in 2023 according to data from JTC.

 

Given the healthy prospects and buyer appetite for industrial properties here, Sabana Reit&rsquo s property portfolio could draw eager suitors.

 

Unitholders of Sabana Reit will be richly rewarded if they can fetch a valuation of around the trust&rsquo s NAV from either the trust merging with one of Clar, MIT or MLT, or selling its assets.

 

Certainly, there are other property-related trusts owning Singapore assets in segments with strong prospects that should look at putting the for sale sign up too.

 

For example, Far East Hospitality Trust : Q5T +2.48% (FEHT), which had total assets of S$2.6 billion at end-2023, traded at a discount to its end-2023 NAV per stapled security of 33 per cent as at Mar 18.

 

FEHT owns various hotels and serviced residences in Singapore. For H2 2023, the trust&rsquo s hotels saw revenue per available room rise 19.9 per cent yoy while its serviced residences posted yoy growth in revenue per available unit of 10.7 per cent.

 

Singapore&rsquo s Reit sector has expanded rapidly since the first Reit was listed in 2002. Low interest rates helped fuel the rapid growth of Reits.

 

When interest rates were low, Reits could easily make debt-funded yield-accretive acquisitions and investors were hungry for yield instruments such as Reits.

 

Today, interest rates are much higher versus pre-Covid pandemic days and could remain elevated amid persistent inflation. 

 

Thus, many Reits struggle to cope with steeper borrowing costs. Also, investors apply higher discount rates to value Reits, which depresses unit prices.

 

Given the above backdrop, many Reits and property-linked business trusts should seriously consider exit options.

 

Sabana Reit can lead by abandoning its fraught journey of internalising its management and working on an exit instead.