Quarz announces committee for Sabana&rsquo s internalisation, invites unitholders to join

On August 29, HSBC Institutional Trust Services (HSBC Trustee), the trustee of Sabana Industrial REIT, announced that it has appointed FTI Consulting as its professional adviser, and will work with FTI on the " required and necessary steps to be taken to implement the resolutions passed on August 7" .

 

" The Trustee reiterates that its key priority is to act in the best interests of all Unitholders in the implementation of the Resolutions," HSBC Trustee says.

 

The Trustee will continue " to engage with the Manager on a regular basis and will communicate its expectations of the Manager to ensure the ongoing and stable operations of Sabana REIT" .

 

HSBC Trustee has reiterated that an internalised management structure that does not currently exist will need to be identified, established and then approved by Unitholders and in view of the complexity and unprecedented nature of the internalisation process and dependencies beyond the control of the Trustee (including legal, regulatory and taxation), it is expected to take at least 12 months to internalise the REIT management function.

 

This is in contrast to Quarz Capital Asia' s own view. Quarz requisitioned an EGM to remove Sabana REIT' s manager, Sabana Real Estate Investment Management (SREIM), and to direct the Trustee to internalise the function of the manager, and believes that the entire process can be done in four months.

 

During a recent results&rsquo briefing by ESR Group, Executive Chairman Jeffrey Perlman was asked how the removal of Sabana Industrial REIT&rsquo s manager Sabana Real Estate Investment Management (SREIM) affects ESR.

 

In 1HFY2023, ESR reported an Ebitda of US$550 million, down 18% y-o-y. However, fund management Ebitda rose 14% y-o-y to US$329 million on higher fee revenues, cost efficiencies and economies of scale, and fund management margins rose by 400 bps y-o-y to 82%. Patmi declined by 26% y-o-y to US$304 million.

 

&ldquo Patmi was in line [at 51% of our FY2023 estimate of US$594 million] but down 26% y-o-y due to lower fair value gains, divestment gains, and higher interest expenses,&rdquo notes HSBC in a report. &ldquo The Ebitda for fund management which now makes up 55% of total segmental Ebitda compared with less than 25% at the IPO, managed to rise by 14.2% y-o-y or 19% y-o-y excluding promotes, given the higher fee revenue and Ebitda margin,&rdquo the HSBC report observes. And, despite the depreciation of key Asian currencies such as yen and RMB against ESR&rsquo s reporting currency in USD, AUM increased to US$147 billion as at June 30 compared to US$145 billion as at December 31, 2022.

 

HSBC has tweaked its target price and reduced it by 20 HK cents, based on an average discount of 26% (from 21%) to its revised fair value from the sum-of-the-parts approach of HK$24.70 from HK$24.90 previously.

 

ESR plans to &ldquo double-down&rdquo on its New Economy strategy, Perlman indicated. During the results briefing, ESR&rsquo s management pointed out it had increased its Data Centre Fund 1 to US$1.3 billion with eight seed projects across the Asia Pacific region, comprising over 560MW of capacity. Five projects with US$ 1.5 billion in development value were started in 1H2023 and an additional 1GW of projects are in the pipeline.

 

ESR has established its largest-ever income fund in mainland China with a total investment capacity of RMB10 billion, seeded by an initial portfolio of RMB2.3 billion from its balance sheet. ESR is also in the process of planning a C-REIT.

 

Contribution from SREIM less than US$1.5 million

 

On August 7, 56.4% of Sabana REIT&rsquo s unitholders voted for resolution 1, to remove SREIM, and 55.6% voted for resolution 2, to internalise the function of the REIT manager. Resolution 2 comprised many directions to Sabana REIT&rsquo s trustee including a number of changes to the trust deed.

 

&ldquo The materialness of [SREIM] to Ebitda is less that US$1.5 million, so it&rsquo s inconsequential,&rdquo Perlman says, referring to the $1.5 million of pre-tax profit reported by SREIM for FY2021 and around $2 million in FY2022 compared to ESR&rsquo s US$550 million Ebitda for 1HFY2023. ESR reports in US dollars.

 

&ldquo With reference to the internalisation, it has not been approved. That would require a change of the trust deed which would require 75% vote. From ESR&rsquo s perspective, we continue to remain the manager of the REIT pursuant to the guidelines for what MAS has given us,&rdquo Perlman explains.

 

The 75% vote refers to the many changes of trust deed that the requisionists have proposed in resolution 2, which &ldquo directs&rdquo HSBC Institutional Trust Services (HSBC Trustee) to internalise the function of the manager. Changes in the trust deed require extraordinary resolutions (ER).

 

&ldquo We think how this REIT is managed is very important. We remain the largest unitholder and we want to ensure that it is handled appropriately. The trustee has not removed us as the manager. Internalisation requires a 75% vote. We' ll have to kind of see where it all goes from there on that basis,&rdquo Perlman says.

 

Among the various steps any trustee which is directed to internalise a manager, would be appoint a new external manager, with a new trust deed, and then work to staple the manager to Sabana REIT, with the unitholders owning the stapled security.

 

On August 8, HSBC Trustee said via SGXnet, &ldquo Consistent with the Trustee&rsquo s Statement, the Trustee will now proceed with identifying and appointing professional advisers to advise it on the implementation of the Resolutions, including the holding of Further EGM(s) to seek Unitholders&rsquo approval on, among other things, the necessary and specific amendments to the Trust Deed by way of extraordinary resolution(s).&rdquo

 

The requests by the requisionists for many changes in the trust deed, and the necessary and specific amendments in the trust deed referred to by HSBC Trustee which required extraordinary resolution(s) are what Perlman is most likely alluding to in his answers.

 

&ldquo During the transition period, the Trustee will expect the Manager to continue to serve as interim manager until a replacement internal manager is appointed. 4. The Trustee will provide further updates as and when there are material developments in respect of the implementation of the Resolutions. Such updates will be in the form of announcements on SGXNet,&rdquo HSBC Trustee says in its August 8 announcement.

 

Sabana could be one-off because of unusual maths

 

Perlman says: &ldquo The extension is do we see an impact in how we think about externally managed REITs? We think that there is not going to be a material change in thinking in Asia as it relates to externally managed REITS. Real estate is much more more closely held in Asia than it is elsewhere around the world. So the ability to grow REITs, the ability to secure financing, is highly dependent on the sponsor of said REIT.&rdquo

 

Perlman continues: &ldquo If you look at kind of the alignment that comes with the sponsor, being a meaningful unitholder of the REIT, you' ve already seen situations even just over the last couple of months with highly reputable internally managed REITs, doing things that honestly really surprised unitholders, to their detriment. And part of that was because of the misalignment necessarily of not having a true sponsor, who owns units directly in the REIT and is highly incentivised by the growth and long-term success of creating unitholder values.&rdquo

 

To Perlman, the Sabana issue is a one-off situation, &ldquo which is an unfortunate reality of some information put out in the market. When you parse through it, taking for example, that you could have $40 million in cost synergies by internalising the manager which makes only US$1.5 million today, would certainly require a lot longer than what was articulated to the market.&rdquo

 

In an open letter on Wednesday (Aug 23), Quarz said HSBC Institutional Trust Services would be prejudicing the interest of the Reit&rsquo s unitholders if it causes any delays in the internalisation process. 

 

ACTIVIST investor Quarz Capital has declared that the trustee of Sabana Industrial Real Estate Investment Trust (Sabana Reit) should take no more than three to four months to do the preparatory work required to set up a new internal Reit manager.

 

Laying this out in its open letter on Wednesday (Aug 23), Quarz also said that delays in the setup by the trustee, HSBC Institutional Trust Services, would prejudice the interest of the Reit&rsquo s unitholders.

 

The activist investor, which holds units of Sabana Reit, said it came up with the three- to four-month window for preparatory work from its engagement with stakeholders, service providers and professionals with strong track records in setting up new Reit managers, following the Reit&rsquo s Aug 7 extraordinary general meeting.

 

Preparatory work refers to the incorporation and setup of the internal manager, human resource considerations, documentations, and filling up the application form for the Monetary Authority of Singapore (MAS), it noted.

 

Quarz said in the letter: &ldquo All (the engaged parties) outlined clear and straightforward processes which the trustee can set up and license the internal manager, due to the transparent and precise application process and licensing requirements provided by MAS.&rdquo

 

They agreed that the preparatory work required to submit the application for the licence to MAS should not take longer than three to four months, Quarz pointed out.

 

It also expressed confidence in the level of expertise and number of precedent cases that would support the trustee in expediting the setup of the internal manager, and noted that MAS has approved more than 45 Reit management and 1,000 capital markets services fund management licences.

 

Quarz also noted that a number of law firms have strong track records in this area of work, having set up more than five new Reit managers each such firms can &ldquo strongly support&rdquo Sabana in this process.

 

Quarz said that since HSBC Institutional Trust Services has repeatedly stated that its responsibility is to support unitholders and act in their best interests, it should push forward the internalisation &ldquo swiftly and decisively&rdquo .

 

This means that the trustee should set a clear target to complete the setup and licensing of the internal manager by the Reit&rsquo s April 2024 annual general meeting, it said.

 

Doing so would require the trustee to give unitholders a clear, detailed timeline of the process, for the sake of accountability and transparency, it added. The trustee should also give a breakdown of the amount of time needed for preparatory work before submitting the application to MAS, it said.

 

In so saying, Quarz stressed: &ldquo We remind the trustee that any delay in the setup process of the new internal manager clearly prejudices the interest of all unitholders.&rdquo

 

It reiterated: &ldquo Any delay in the setup prejudices the interest of all unitholders and is in conflict with the trustee&rsquo s key responsibility to safeguard unitholders.&rdquo