It is also in the midst of applying for a capital markets services licence for the new internal manager

 

THE trustee of Sabana Industrial Real Estate Investment Trust (Sabana Reit) has identified and executed letters of intent with &ldquo preferred candidates&rdquo whom it intends to propose as directors and senior management of the Reit&rsquo s new internal manager.

 

This comes as part of HSBC Institutional Trust Services&rsquo update to unitholders of the Reit on Monday (Aug 5), which outlined the latest indicative timeline for internalisation up to December 2024.

 

The updated timeline follows recent court rulings on an application by the trustee to clarify steps for the internalisation process, and a since-dismissed appeal by several ESR entities.

 

As the trustee of Sabana Reit, HSBC Institutional Trust Services said a draft of the new internal manager&rsquo s budget and operating plan has been created and will be presented to the new board of directors and senior management, following their appointments or commencement of employment.

 

It is also in the midst of applying for a capital markets services licence for the new internal manager.

 

Among other administrative matters, work for the licence application includes &ldquo addressing the fit and proper criteria&rdquo for its proposed directors and chief executive of the new internal manager, said the trustee.

 

On Jul 23, the Reit manager reported a distribution per unit of S$0.0134 for the first half of its fiscal year ended Jun 30, down 16.8 per cent from S$0.0161 in the corresponding year-ago period.

 

Total income available for distribution came in at S$16.4 million, 8.2 per cent lower year on year, mainly due to higher finance costs from increased borrowings and higher borrowing costs.

 

The manager estimated total costs of about S$8.9 million incurred by both itself and the trustee from Jan 1, 2024, until Jun 30, 2024, in connection with the Reit&rsquo s internalisation process. 

 

This comprised nearly S$1.9 million in expenses incurred by the manager and another S$7.1 million by the trustee, noted the former in its Jul 23 results presentation.

 

In its latest update to unitholders, HSBC Institutional Trust Services estimated that about 16 per cent or S$1.4 million of total costs had gone to relevant service providers, including for proposals for requisitioned resolutions, and convening additional extraordinary general meetings (EGMs) that were &ldquo not contemplated&rdquo in the trustee&rsquo s work plan.

 

Another 12 per cent or S$1.1 million was in connection to the Order 32 application and ESR&rsquo s appeal due to divergent views among unitholders deemed &ldquo fundamental to the progress of the internalisation as well as the trustee&rsquo s proposed path to internalisation&rdquo .

 

Finally, the trustee noted that about 15 per cent or S$1.4 million of total costs were incurred by both itself and the manager from pre-internalisation activities.

 

This includes but is not limited to legal costs incurred in the process of preparing for Sabana Reit&rsquo s EGM on Aug 7, 2023 &ndash along with logistical costs of convening the event, noted HSBC Institutional Trust Services.

The Reit will proceed with its extraordinary general meeting on Aug 6

 

THE Singapore High Court has thrown out an appeal by several ESR entities to vote on the proposed trust deed amendments of Sabana Industrial Real Estate Investment Trust (Sabana Reit).

 

It also ordered the entities to pay HSBC Institutional Trust Services (Singapore) &ndash the Reit&rsquo s trustee &ndash S$16,119.80 in legal costs, with the remaining costs and expenses to be paid out of the trust.

 

On Friday (Jul 26), the trustee noted that the court would issue reasons for its decision at a later date. It also added that the Reit would proceed with the extraordinary general meeting (EGM) on Aug 6.

 

In a statement seen by The Business Times, Sabana Growth Internalisation Committee (SGIC), set up by unit holders including Quarz Capital, said the ruling &ldquo clarifies and strengthens&rdquo investor protection in Singapore.

 

SGIC also urged all unitholders to vote for the resolutions in favour of the internalisation at the EGM.

 

The committee said: &ldquo The successful internalisation of Sabana Reit will allow all unit holders to own the manager. It will bring about stronger corporate governance, investor protection, higher distribution per unit (DPU) and the revival of the Singapore Reit market.&rdquo

 

The committee also asked Sabana&rsquo s manager and trustee to protect unit holders&rsquo interest by returning costs and DPU withheld to them.

 

It also requested the sponsor and the owner of the trust&rsquo s current manager to protect jobs, uphold corporate practices, as well as waive non-compete agreements and allow the current staff of the external manager to join the new entity.

 

ESR&rsquo s appeal came after the court in May ruled that the trust deed amendments are required to effect the internalisation of Sabana&rsquo s manager, but barred the entities from voting on them.

 

The court ruling arose from an Order 32 application submitted by the trustee in January to clarify steps for the internalisation process.

 

In the application, the trustee sought court declarations that proposed amendments to the trust deed were required to implement internalisation. It also sought a declaration on whether ESR entities ought to be permitted to vote on the amendments.

 

ESR entities were prohibited from voting as the court deemed them to have an interest from fee income the external manager earns.

 

Sabana Industrial REIT&rsquo s 1HFY2024 results for the six months to June 30 had some good news, and some bad news.

 

First the bad news. Financing costs rose to 4.3% in 1HFY2024, from 3.89% h-o-h and y-o-y. In June, Sabana REIT&rsquo s manager refinanced a $93 million syndicated bank loan with a $100 million 4.15% bond that matures in 2029.

 

Lim Wei Huang, CFO at Sabana REIT&rsquo s manager says: &ldquo The $93 million loan was under a syndication arrangement. This is part of proactive capital management. The market was conducive."  

 

Lim was referring to the $100 million loan being guaranteed by Credit Guarantee and Investment Facility (CGIF) a unit of the Asian Development Bank. He adds that the REIT manager had been in conversations with CGIF since 2022.

 

&ldquo For the refinancing, the REIT is facing operational challenges in even obtaining hedging with the banks and this option is not available to the REIT. We are seeking their waiver for the internalisation and they are still assessing it,&rdquo Lim says. &ldquo I won&rsquo t say conventional financing is not there. But there are operational hurdles we are facing with our current lenders.&rdquo

 

Donald Han, CEO of Sabana REIT&rsquo s manager adds: &ldquo We did not get our general mandate in the last AGM and that reduces the additional lever to look into various ways to reduce our financing. The situation is different for us than for other REITs. And, since 7 August, 2023, the internalisation process has cost us $8.92 million.&rdquo

 

In the application to the High Court of Singapore in HC/OA 19/2024 (Order 32 Application), the Court ordered that Quarz&rsquo s and the ESR Entities&rsquo costs of the proceedings be paid out of Sabana REIT, save that Quarz may only claim 70% of its costs out of the REIT. With respect to HC/AD 37/2024 (AD 37 Appeal), the Appellate Division of the High Court has not yet determined whether parties&rsquo costs should be paid out of the REIT. The quantum of costs in both the Order 32 Application and AD 37 Appeal remains undetermined at this juncture.

 

No surprise then, that, as a result of higher finance costs due to increased borrowings and higher borrowing costs, total income available for distribution fell 6.6% y-o-y to $16.6 million. Income available for distribution per unit was 8.7% lower y-o-y at 1.47 cents due to the enlarged unit base on the back of the distribution reinvestment plan. With the retention of approximately 10% of distributable income which will be deployed to fund costs incurred in connection with the internalisation, distribution amount declared per unit decreased by 16.8% y-o-y to 1.34 cents for 1H2024, compared to 1.61 cents in 1H2023.

 

Now for the good news. Sabana REIT suffered two master lease terminations and repossessed 33 & 35 Penjuru Lane and 30 & 32 Tuas Avenue 8. Nonetheless, Han points out that his leasing efforts have produced good results, with about 42% of the total lettable area at 33 & 35 Penjuru Lane leased out and a one-month booking fee received for around 27% of total lettable area.

 

&ldquo We have also quickly arranged for a number of prospective tenants to view 30 & 32 Tuas Avenue 8,&rdquo he adds.

 

In the meantime, Sabana@1TA4 has obtained its TOP on July 9. Lease documentation is underway with a prospective tenant for the annex block, which accounts for about 64% of the property&rsquo s total lettable area.

 

Elsewhere, the seven-year commercial zoning for NTP+, a mall carved out of New Tech Park, is due to expire in late 2026. &ldquo There is a clause in URA that allows us to extend and we can approach the authorities for the extension. We are able to onboard tenants like Kopi & Tarts. There is a lot in the value proposition for us to maintain this as commercial zoning. It helps to support existing tenants, schools and residents. It&rsquo s a matter of procedure to get an extension by working closely with the stakeholders of NTP+&rdquo Han says.