What’s going on with Sabana REIT?

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Issues are getting messy at Sabana REIT (SGX:M1GU). Whether or not you’re a shareholder attempting to determine which aspect to vote for within the upcoming EGM tomorrow (7 August) or a bystander interested in what the hell is occurring, right here’s my fast tackle the scenario.

Essential Disclaimer: This text represents my impartial ideas after reviewing data and statements from each events (Quarz Capital vs. Sabana REIT’s supervisor). I used to be not paid for this text nor did I obtain any in-kind advantages in any manner.

You will have first heard of Sabana REIT right here on this weblog once I talked about it again in 2018. Since then, quite a bit has modified, and tomorrow will doubtlessly mark one other key milestone for the REIT because it holds its EGM to find out whether or not activist shareholders will get their manner in having the present REIT supervisor changed with an inner one.

Right here’s a fast timeline of occasions:

Sabana REIT went public in 2010 as the primary ever Shariah compliant REIT to be listed in Singapore, at an IPO worth of S$1.05.
Sadly, after hitting a excessive in 2013, the share worth has been on declining ever since. Shareholders additionally noticed decrease distributions with every passing 12 months, thus aggravating their losses (capital and dividend earnings).
This was due to some causes, together with the efficiency of the underlying properties deteriorating and new properties suspected to have been acquired at overvalued costs.
In 2017, annoyed activist minority shareholders rallied collectively to name for an EGM to fireplace the REIT supervisor, however failed to assemble sufficient votes.
In 2019, Quarz Capital began urging for the merger of Sabana REIT and ESR REIT, which passed off in 2020. FYI: ESR REIT had merged with Viva Industrial Belief only a 12 months earlier than. The proposed merger, nonetheless, was voted towards and shut down in 2020.

Sidenote: I bought my shares after that as I felt it wasn't a good provide - the deal was valued primarily based on Sabana REIT's then-share worth relatively than its NAV i.e. it was made at a considerable provide to Sabana's ebook worth. There was additionally not going to be any money funds concerned as ESR REIT merely wished to create new items to "pay" Sabana REIT shareholders i.e. 0.94 ESR REIT items for each Sabana REIT unit owned.

ESR Group and Quarz Capital at the moment are each in battle as they take reverse stands on this challenge, which I’ve summarized beneath:

Quarz Capital’s Claims	ESR Group’s Claims
Internalisation of the REIT supervisor can be extremely helpful and worth accretive for all unitholders. Sabana unitholders will now be capable to absolutely personal their inner supervisor with a projected setup value of solely S$3-5million and profit from a possible S$2.4million of value financial savings per 12 months which might improve unitholders’ DPU by greater than 7%.	The resolutions proposed by Quarz will result in vital worth destruction for unitholders and a lengthy interval of uncertainty which will compromise the way forward for Sabana REIT. Any potential value financial savings out of the S$1.26million of revenue generated by the Sabana REIT Supervisor can be worn out by the potential improve in borrowing value and unitholders can be worse-off on an ongoing foundation.
The present REIT supervisor doesn’t have full alignment of curiosity of unitholders. We must always not waste any placements and rights in doubtlessly worth damaging acquisitions accomplished solely to spice up charges for the exterior supervisor. The absolutely aligned inner supervisor will even give attention to rising DPU and unit worth for its proprietor, the unitholders, above all else. “Proof” cited included the present supervisor leaving 1 Tuas Ave 4 empty for greater than 6 years earlier than lastly executing on an AEI in 2Q2023, and that the present supervisor additionally really helpful unitholders to half with NTP+ within the merger with ESR Logos REIT simply 6 months earlier than it was because of begin contributing rental earnings to unitholders. The Belief Deed doesn’t present for the Exterior Supervisor to ‘resign’ except accepted by MAS or the Trustee. The Trustee has additionally acknowledged that it expects the Exterior Supervisor to proceed till the Inner or Alternative Supervisor is appointed.	Every REIT has its personal Board (which includes majority impartial administrators with diversified experience), in addition to its personal strategic course and funding rationale. The method of internalisation can also be unprecedented in Singapore and might result in workers leaving within the face of uncertainty over their roles, which might trigger much more administration uncertainty throughout the transition interval. On 1 August, the CEO of the Sabana REIT Supervisor, Mr. Donald Han, acknowledged that members of his crew are already resigning.
It’s illogical to imagine that the Exterior Supervisor determines the financial institution loans. Until date, none of Sabana’s bankers have publicly acknowledged that the internalization is a dangerous and unsure act. Banks have additionally persistently prolonged help in loans and rate of interest hedges in all instances of REIT supervisor and/or administration possession adjustments because the financial institution loans are backed by the REIT’s portfolio.	In such uncertainty, Sabana REIT’s lenders (e.g. the banks) might demand rapid reimbursement of any excellent loans or rising the rate of interest on their loans. Every improve of 1 share level (100 foundation factors) might value unitholders as much as S$8.3 million in curiosity annually, which can scale back DPU by as much as 0.75 Singapore cents.
Internalization and having an Inner Supervisor is nothing new in Singapore. Croesus Retail Belief efficiently internalized its Supervisor in August 2016, and its Inner Supervisor labored arduous to rental earnings and scale back curiosity value which ultimately led to a beneficial buyout provide from Blackstone at a 23% premium to its NAV and 38% premium to its 12-month quantity common share worth.	The method of internalisation can also be unprecedented in Singapore.

Chances are you’ll learn each events’ responses to SIAS questions in full right here and determine for your self.

Okay, so what ought to shareholders vote for?

Let me first reiterate that I’m not a shareholder (though I’m positively watching on the sidelines to see if this era of uncertainty might result in one other buy-in alternative for myself).

I’ve been on the lookout for a (impartial) supply that aptly sums up each events’ positions (or claims, for those who might name it) in the previous couple of months whereas they fought towards each other, however there wasn’t…so I made a decision to lastly pen this text. I hope that this supplies a very good abstract, and that you simply’ll have extra data at your fingers to decide as to what you need to vote for as a unitholder to find out Sabana REIT’s finest future pursuits.

To me, it’s fairly clear:

It’s debatable whether or not the present REIT supervisor has been working in alignment of shareholders’ pursuits, relying on which lens you view it by means of. ESR Group is utilizing Sabana REIT’s “outperformance” since 2018, citing its outperformance towards the STI Index, iEdgeS-REIT Index and FTSE ST All-Share REIT Index and that Sabana REIT was the best-performing industrial REIT in 2022. Alternatively, shareholders have lengthy felt that the supervisor has not accomplished its finest in the case of getting most worth out of the REIT’s property portfolio and arguably overpaid for buying new properties on the expense of unitholders.
Whereas an internalisation could also be “unprecedented” in Singapore’s REIT panorama, it might arguably present for extra aligned pursuits with shareholders whereas eradicating any qualms of potential conflicts of curiosity between Sabana and ESR Group on the similar time.
I can’t touch upon the prices and potential outcomes of Sabana REIT’s present excellent loans within the months forward. Quarz Capital claims that ESR Group is just doing “fear-mongering”, whereas ESR Group issued an open letter titled “Save Sabana REIT from Falsehoods and Destruction” – you’ll must discern and decide for your self.

What would Price range Babe vote for?

In fact, I’m not a shareholder at current, so this complete part is moot. However that’s the burning query in your thoughts, isn’t it? So I’ll prevent the suspense and reply it.

Though I can’t rule out that I’ll not re-initiate my place in Sabana REIT sooner or later, ought to the chance presents itself i.e. it has to suit my standards of what I search for earlier than I spend money on a REIT.

IF I had been a unitholder who has to vote tomorrow (and that’s an enormous IF), I’d vote for the internalisation and help Quarz Capital.

My three major causes are:

The present Exterior Supervisor Mannequin suffers from a misalignment of pursuits between the Exterior Supervisor in query and unitholders of a REIT. Whether or not this misalignment is just in concept or in observe, solely the present REIT supervisor will know (and neither you nor I).
As a former PR practitioner, I’ve to confess that I cringed once I learn ESR Group’s assertion and their alternative of titles (“Save Sabana REIT from Falsehoods and Destruction”). Up until earlier than the letter was issued, I used to be nonetheless undecided on whose stand to help, however as soon as this got here out, I see it as a infantile transfer and that the supervisor might have communicated its stance in additional skilled language as an alternative. Quarz Capital is an investor in spite of everything, whose monetary pursuits can be affected by whether or not this deal goes by means of – certainly they aren’t doing it to impact losses upon themselves? Whereas I’d even be aggravated if an activist investor of my firm tried to push me out of administration, however given the (presumably) aligned possession pursuits, relatively than participating in civil, constructive discussions with Quarz Capital, why select to talk and use such phrases?
Quarz Capital is not simply an activist shareholder who’s making empty speak – it has additionally taken the additional mile to supply extra substantial particulars of their plan on what an inner supervisor can do to extend worth of Sabana REIT and for shareholders i.e. together with finishing the asset enhancement of 1 Tuas Ave 4, renting out ~90% of the asset at internet lease of no less than S$1.45psf/month, creating ~200,000 sq. ft of recent house at NTP+ and greater than 1 million sq. ft of untapped GFA/landbank with give attention to sizeable key belongings resembling 33&35 Penjuru Lane, 26 Loyang Drive which may be reworked into New Economic system ramp up logistic hubs or knowledge centres. The quantity of effort they’ve put in – regardless of NOT being the REIT’s present supervisor – is noteworthy.

What’s going to shareholders vote for throughout tomorrow’s EGM?

What’s going to YOU vote for?

The outcome: Sabana REIT unitholders have spoken. The bulk voted to take away the exterior supervisor and impact internalization. The outcomes breakdown is tabled beneath.