The REITs with the highest price to net asset value (P/NAV) ratios have been fairly constant this year. Four of them are industrial REITs: Keppel DC REIT, Mapletree Industrial Trust, Mapletree Logistics Trust, and Ascendas REIT. The fifth REIT is ParkwayLife REIT on which we have a longer story this week.
See: With new mandate, ParkwayLife REIT readies for next growth phase
While industrial REITs have fared better this year than other sectors in price performance and also in their DPU performances, ESR-REIT and Sabana Shariah Compliant Industrial REIT are trading below their NAV per unit.
To recap, Sabana REIT revalued its properties for its proposed merger with ESR-REIT. Master leases have always been controversial for it because its former sponsor divested properties into the REIT on master leases where rents were sometimes above market rents. Therefore, when these master leases expired and rents were marked to market, valuations fell, and so did Sabana REIT’s NAV.
Last November, Quarz Capital Asia wrote an open letter urging ESR-REIT and Sabana REIT to merge. Yet when they obliged this year, Quarz Capital and Black Crane — which each holds 5% of Sabana REIT — kicked up a ruckus. This was because the agreed price is at a premium to market price, and Sabana REIT is trading a discount to NAV. More importantly, there is no cash component. At any rate, the merger has little chance of succeeding because Quarz Capital and Black Crane would have voted against the merger during the EGM, and the larger unitholders such as ESR Cayman and Tong Jinquan were not allowed to vote.
However, that has not satisfied Quarz Capital and Black Crane which claim there is a conflict of interest because the same shareholder has controlling stakes in two managers. According to the REIT code, the manager is required to uphold the interests of unitholders whenever there is a conflict between unitholders and sponsor. That means Sabana REIT’s manager may need to get a better price for its unitholders, if the intention is to sell.
Since ESR-REIT’s manager has stated the price is final, only two avenues are open to Sabana REIT and its unitholders. One, they need to look for another buyer with a higher price and a cash component as Quarz Capital and Black Crane demanded. Or they can all wish and pray very hard that ESR-REIT’s unit price rallies to 55 cents. But would that satisfy unitholders of Sabana REIT?
