ESR Group and activist investor Quarz, which have been trading blows over an attempt to internalise Sabana Industrial Reit&rsquo s : M1GU 0%manager, defended their positions ahead of an Aug 7 extraordinary general meeting (EGM) that will decide the fate of the real estate investment trust (Reit).

 

ESR said it has always supported Sabana&rsquo s growth, while Quarz pledged to engage with all stakeholders to support the internalisation of the manager.

 

ESR, which is opposing the internalisation, rejected claims that it has conflicting interests. The Securities Investors Association (Singapore) or Sias had asked how it would respond to unitholders who believe ESR has an interest in maintaining the status quo, as a stronger and larger Sabana Reit could become a credible competitor to ESR-Logos Reit.

 

ESR is a sponsor of ESR-Logos and owns 99 per cent of its manager.

 

In responses published on Thursday (Aug 3), ESR said it does not prioritise one Reit over the other. It said it has been supportive of Sabana&rsquo s growth plans, and pointed out that it had voted to approve the general mandate for unit issuance.

 

ESR, which is a 20.6 per cent unitholder of Sabana, reiterated its concerns over financing costs rising should Sabana&rsquo s manager be internalised.

 

It said being linked to a larger sponsor group enables a Reit to benefit from more preferential credit terms and greater access to capital for growth.

 

&ldquo Quarz does not have the track record or the financial strength to provide similar support to Sabana Reit, and as such, runs the risk of eroding Sabana Reit&rsquo s ability to raise capital on favourable terms,&rdquo ESR said.

 

Separately, Quarz said it has been actively engaging with various key stakeholders who will be involved in an internalisation, including the Monetary Authority of Singapore (MAS), Singapore Exchange Regulation, bankers and corporate governance experts.

 

Quarz, which has a 14 per cent stake in Sabana, said banks have consistently extended support in loans and interest rate hedges in all cases where there is a change in ownership of a Reit&rsquo s management.

 

&ldquo This is because the bank loans are backed by the Reit&rsquo s portfolio and MAS also takes prudent measures to ensure that the leverage levels of Reits are below 50 per cent to facilitate such changes if necessary,&rdquo Quarz said.

 

It added that a new internal manager will have stronger credibility as it will be backed by all unitholders, including significant institutional investors and individual unitholders.

 

Quarz requisitioned the EGM in June for unitholders to vote on two ordinary resolutions: to remove Sabana Real Estate Investment Management as the manager, and direct the trustee to internalise the Reit&rsquo s management function.

 

Proxy advisers Glass Lewis and Institutional Shareholder Services (ISS) have recommended that unitholders vote against the second resolution, in view of uncertainties and adverse consequences that could potentially arise. But they differed in their views on the first resolution.

 

SREIM chief executive Donald Han said there are plans to raise the value and improve the DPU of Sabana Reit to around $1 billion in the next two years.

SINGAPORE &ndash Unit holders of Sabana Industrial Real Estate Investment Trust (Sabana Reit) will vote next week on whether to remove the Reit&rsquo s external manager and replace it with an internal manager.

 

The extraordinary general meeting (EGM) will have two resolutions &ndash the first to remove the external manager, and the second to replace it with an internal one.

 

Both resolutions require a simple majority vote to pass.

 

The 42 Reits listed in Singapore all have external managers, so next week&rsquo s vote will be unprecedented.

 

The EGM, which was requisitioned by activist investor and unit holder Quarz Capital Asia on June 7, will take place at New Tech Park in Lorong Chuan, a flagship Sabana Reit property, at 10am on Monday.

 

Here&rsquo s what unit holders should take into consideration before casting their votes:

 

What is the difference between an internal and external Reit manager?

 

An internal manager is generally owned by the Reit and its unit holders, while an external manager is owned by a third party such as the Reit&rsquo s sponsor.

 

Having an externally appointed manager can lead to conflicts of interest if the manager tries to generate higher management fees by expanding the size of the Reit at the expense of its performance or by diluting unit holders. If the manager is also owned by the Reit sponsor, the fees benefit the sponsor too.

 

But an external or third-party manager can offer better resources and talent than an internal one.

 

Sabana Reit trustee signs $100m UOB facility tied to any change in Reit manager

Reits were launched here as an alternative fund-like product to provide stable and reliable dividend yields, so the expertise of the manager is vital. They are usually sponsored by property firms, which take a stake during the initial public offering.

 

The sponsor plays a key role in providing a steady pipeline of real estate assets and other capital to the Reit, so the interests of the sponsor and unit holders are expected to be aligned.

 

Why does Quarz want to remove the manager and internalise the management function?

 

Quarz said having an internal manager will improve corporate governance and align the interests of the manager with those of unit holders.

 

Sabana Reit&rsquo s sponsor and major unit holder, ESR Singapore, owns Sabana Real Estate Investment Management (SREIM), which is the Reit manager.

 

Quarz research head Havard Chi said an internalised manager will be fully incentivised to raise the distribution per unit (DPU) and the unit price. Sabana Reit&rsquo s unit price of about 41 cents has been trading at a discount of over 20 per cent to its net asset value of 53 cents.

 

Mr Chi said some of the ways by which the internal manager could raise DPU include increasing the occupancy rate at New Tech Park to 90 per cent, developing 200,000 sq ft of new gross floor area at the property, and developing more than one million sq ft of untapped industrial gross floor area in exchange for higher rental rates.

 

Quarz also projected that the internalisation would &ldquo immediately&rdquo result in cost savings of about $2.4 million a year, which would offset the $5 million cost of setting up a new internal manager within two years. These savings would also improve DPU, it said.

 

ESR and the external manager have presented evidence in letters filed with the Singapore Exchange (SGX) that some of the numbers and projections provided by Quarz are false and ill informed.

 

Other unit holders The Straits Times spoke to have noted that the activist investor&rsquo s claims of cutting costs and growing DPU lack substance and a proper execution plan.

 

What takes place in the process of internalisation? What should unit holders expect?

 

A Sabana Reit trustee statement on July 21 noted that if Resolution 1 is passed and Resolution 2 is not passed, a replacement external manager will need to be appointed, with no assurance that it will agree to the same fee structure as the current external manager.

 

Sabana Reit&rsquo s 2022 annual report stated that fees payable by the Reit to the manager included a management fee comprising a base fee not exceeding 0.5 per cent of the value of the Reit&rsquo s properties and a performance fee of 0.5 per cent per annum of the net property income.

 

There is also a fee of 1 per cent of the acquisition price of any real estate acquired and a divestment fee of 0.5 per cent of the sale price of any real estate sold or divested. These fees are in line with the industry&rsquo s, the manager said.

 

The trustee statement added that if Resolution 2 is passed, an internalised management structure will need to be identified, established and then approved by unit holders. This could take at least 12 months and involve at least two more EGMs.

 

If either or both the resolutions are passed, the trustee will appoint professional advisers to help implement the resolutions and the ongoing management of Sabana Reit. The fees, costs and expenses of professional advisers will be reimbursed out of the trust&rsquo s assets.

 

Other concerns include lenders demanding mandatory prepayment of all the Reit&rsquo s outstanding loans, which SREIM said is a real risk, given that its existing loans are unsecured.

 

Mr Robson Lee, a partner at Kennedy&rsquo s Law, said: &ldquo The requisition proposal does not provide a definitive management structure for the Reit, assuming unit holders support the proposal to oust the existing Reit manager.

 

&ldquo The cardinal issue is whether the existing staff of the Reit manager will remain if the EGM resolves to internalise the Reit management.&rdquo

 

Who are Sabana Reit&rsquo s major shareholders and how will they vote?

 

The Reit has three major shareholders, the largest being property investor and SREIM owner ESR Singapore, which holds 20.58 per cent of Sabana Reit.

 

Volare, a Switzerland-incorporated entity with various businesses, earlier in 2023 raised its stake in Sabana Reit from 5.4 per cent to 16 per cent. Volare has been silent on the recent developments and did not reply to requests for comment from The Straits Times.

 

Quarz holds a 14 per cent stake. Its Quarz Active Value Fund engages with the management of undervalued companies and prompts them to boost shareholder value through measures such as selling unprofitable assets. It invests in firms with upside potential of 30 per cent over two years.

 

The board of Sabana Reit recommends that unit holders vote against both resolutions.

 

While it agreed that unit holders should vote against Resolution 2, proxy adviser ISS recommends voting for Resolution 1, given Sabana Reit&rsquo s governance flaws and its falling behind its peers in terms of performance and valuation under the current manager.

 

What will SREIM do to raise unit holder value if it is retained as Sabana Reit&rsquo s manager after the EGM?

 

Sabana Reit had a portfolio comprising 18 industrial properties in Singapore valued at $885.7 million as at Dec 31, 2022, according to its website.

 

SREIM chief executive Donald Han said there are plans to raise the value to around $1 billion in the next two years by adding value to New Tech Park, among other assets.

 

Mr Han said that since 2018, Sabana Reit has not acquired any new assets requiring acquisition fees or capital raising, resulting in unit price dilution. It has also not undertaken any renovations warranting project management fees.

 

He added that DPU has doubled since the fourth quarter of 2019 to 1.61 cents in the first half of 2023, making it the best-performing industrial Reit on the SGX in 2022 in terms of returns

 

While analysts at DBS Bank were satisfied with the Reit&rsquo s higher occupancy rates and rentals, they have a &ldquo hold&rdquo call on it, pending the outcome of the EGM.

THE Securities Investors Association (Singapore) or Sias is seeking further clarification on unitholders&rsquo behalf from ESR Group and Quarz Capital about the internalisation of the management function of Sabana Industrial Real Estate Investment Trust : M1GU 0% (Reit).

 

The matter would be put to a unitholder vote on Aug 7, in an extraordinary general meeting (EGM) requisitioned by activist investor Quarz Capital.

 

In an e-mail on Wednesday (Aug 2), Sias asked ESR Group, the Reit&rsquo s sponsor, how it would respond to unitholders who believe ESR Group has an interest in maintaining the &ldquo status quo&rdquo and ensuring Sabana Reit does not become a competitor to ESR-Logos, another Reit sponsored by the group.

 

It also asked ESR Group why it does not support the internalisation of the Reit manager, Sabana Real Estate Investment Management (SREIM), as the sponsor does not appear to actively contribute to Sabana Reit&rsquo s growth.

 

&ldquo This move would eliminate any operational and governance constraints,&rdquo said Sias.

 

It noted that establishing an internal manager to drive the Reit&rsquo s growth would also benefit all shareholders, &ldquo especially minority shareholders who find themselves caught between the clash of substantial unitholders&rdquo . 

 

In addition, Sias requested the group to outline how it might have directly or indirectly helped Sabana Reit lower its costs.

 

The association questioned whether ESR Group had contacted Sabana Reit&rsquo s borrowers to confirm if borrowing costs would be increased and existing interest rate hedges unwound, should the manager be removed. 

 

ESR Group was also asked to confirm that it would not &ldquo take any active steps to undermine Sabana Reit if unitholders voted for the internalisation&rdquo . 

 

Separately, Sias queried Quarz, which is pushing for the internalisation of SREIM, on whether it would be willing to provide financial support to Sabana Reit if the manager is internalised. 

 

Quarz has &ldquo repeatedly pledged its support to help the trustee effect the implementation of internalisation&rdquo , noted Sias.

 

It asked if Quarz had been engaged by the trustee of Sabana Reit since it requisitioned the EGM, to be held on Aug 7, or whether it has, in turn, engaged with the Monetary Authority of Singapore and Singapore Exchange Regulation. 

 

Quarz should also explain why unitholders should not be concerned about Sabana Reit having an estimated S$300 million in unsecured loans, despite Ernst & Young highlighting it as a material uncertainty, said Sias. 

 

Sias also asked if Quarz had considered the risks and potential impact of SREIM failing to fulfil their obligations, in the event unitholders voted to remove them. 

 

The association questioned Quarz&rsquo s confidence that an internal manager would be value-accretive for unitholders, particularly as Singapore law requires a Reit to have a board of directors and chief executive officer. 

 

Internalisation of a Reit manager is &ldquo neither tested nor proven in Singapore&rdquo , the association noted. 

 

Sias therefore requested Quarz to outline areas where it can help to &ldquo add value and expedite the internalisation process&rdquo .

 

Both parties were asked to respond by Aug 3.

 

Also on Wednesday, HSBC Institutional Trust Services, the trustee of Sabana Reit, sent a letter to SREIM reiterating its stance. It also stated that unitholders should read its statement in full &ldquo when referring to any market commentary&rdquo .

 

Meanwhile, ESR Group on Wednesday sent another letter to the Reit&rsquo s unitholders, urging them to &ldquo vote for stability and allow the manager to focus on delivering returns&rdquo .

 

It highlighted that independent proxy advisor Glass Lewis had recommended unitholders vote against the resolutions to remove SREIM and internalise the management function of Sabana Reit.

 

ESR Group said it was &ldquo now clear&rdquo that removing SREIM would not result in the cost savings outlined by Quarz.

 

Should the resolutions pass, unitholders would still have to pay ongoing management fees to the interim manager until a replacement can be appointed, it added.