The local experiences with internalisation and removing a REIT manager have not been great so far. Here's why.
Internally managed REITs such as Australian or A-REITs are stapled securities, giving investors exposure to a real estate portfolio and a funds management company or property development business.
The A-REIT comprises of a one unit in the property trust which holds the portfolio of properties, and one unit in the management company, stapled together.
Link REIT is slightly different. At the top is the trustee which holds Link Asset Management and The Link Holdings. Link Asset Management is the manager, and The Link Holdings holds the SPVs and subsidiaries which own the properties. The trustee is the sole owner, on behalf of all unitholders, of both the Manager and The Link Holdings, which holds all of the Link’s assets. The Link units traded on the market represent stapled interest in these two companies.
Link REIT's structure (source: Link)
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Both the A-REITs and Link were “born” as internally managed REITs. What if a REIT or property trust wants to change its status mid-stream?
The Singapore experience of internalisation was found wanting. In 2016, Croesus Retail Trust, a business trust, announced that it planned to internalise its trustee-manager, Croesus Retail Asset Management (CRAM). CRT would acquire CRAM for $50 million. Unitholders voted on three ordinary resolutions, the proposed Internalisation; the proposed distribution of returns; and the proposed preferential offering.
The preferential offering was to pay the shareholders of CRAM the $50 million for the internalisation. At the time, the shareholders of CRAM argued that internalisation would help align interests and reduce costs, especially as the amount saved from fees was supposed to be paid as dividends to unitholders.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Not surprisingly, CRT unitholders were up in arms. How could a trustee-manager with no real stake in the business trust sell itself for $50 million to its unitholders especially without any control premium? But there just were not enough unitholders voting against the resolution and the internalisation vote passed with around 60% (give or take) of unitholders present voting for the process.
Croesus Retail Trust's structure
Par for the course?
Fast forward to 2023. On June 8, Sabana Industrial REIT’s manager announced that a large unitholder had requisitioned an EGM on June 7 to vote out the manager, and to internalise “the REIT Management function by incorporating a subsidiary (Internal Manager) wholly owned by the Trustee”. This is akin to Link REIT’s structure.
The first step here may be to set up a REIT manager to be acquired by Sabana REIT in a stapled security form. Since S-REITs are regulated by the Monetary Authority of Singapore, MAS would need to approve of the new manager. The main qualification would be for the manager-to-be or manager-in-waiting to hold a Capital Markets Service (CMS) licence by the MAS.
The minimum base capital for such a manager would be very modest, $250,000 or so. Maybe more perhaps? However, the manager-in-waiting would likely be required to maintain risk capital commensurate with its activities and AUM. Sabana REIT’s AUM is around $983 million, and its net asset value $586 million. The cost to set up the new manager could well be modest, say no more than $5 million or $6 million, excluding the risk capital.
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Following MAS approval, the new manager-in-waiting along with the REIT trustee would need to engage Sabana REIT’s financial institutions and banks to ensure that they won’t enforce their financial covenants such as change of control, and accelerate loans repayment or force a liquidation.
Financial advisers will be needed. An independent financial adviser will need to be appointed to advise the independent directors. Ideally, the requisition party may need a financial adviser. How about proxy advisers? Legal advisers? Expenses? These steps are likely to be par for the course.
REIT manager booted out
Singapore has experienced a REIT manager being booted out. On November 20, 2020, MAS directed DBS Trustee, the trustee of Eagle Hospitality Trust LIW , to remove its manager and appoint a new manager “as soon as practicable”. On October 26, 2020, MAS had already issued a notice of intention to direct the trustee to remove EHT’s manager.
EHT was a stapled REIT and business trust that owned the Queen Mary Long Beach. In the Singapore context, hospitality trusts were structured as stapled securities (not to be confused with stapled structures such as A-REITs or Link). The REIT – a passive entity – held the properties. The business trust was usually dormant except in cases where it was activated to manage a hotel in the event the hotel lacked a manager.
On Dec 8, 2020, five resolutions were put forward for EHT’s stapled securityholders to vote on. Resolution 1 was to appoint SC Capital (part of SC Group) which at the time managed US$7.3 billion in AUM, as the new REIT manager. Resolution 2 was the amend the trust deed to reflect a new base fee structure to reflect the new REIT manager as an interested person transaction. Resolution 3 was more of a housekeeping resolution to appoint a unit of SC Capital as the trustee manager of the business trust. Resolution 4 was for the issuance of new stapled securities as base fees to pay the new REIT manager.
Resolutions 1, 2, 3 and 4 were inter-conditional, which means if any one was not passed, all four resolutions would not carry, and securityholders would move to vote on Resolution 5 which was liquidation and winding up of EHT.
As it turned out, the trust deed amendment, which was a special resolution, did not carry, and as history is the witness, EHT was liquidated. The proceeds were sufficient to pay the secured creditors, but there was nothing left for the equity holders.
How would Sabana REIT’s restructure proceed?
First off, the manager has 21 days to issue a circular for an EGM from June 7. During this period, the requisitioning party would have identified a REIT manager to be approved by MAS. There could be a big reveal on July 6.
Based on precedent, the resolution to remove the manager is likely to be an ordinary resolution. The second resolution may need to be a change of trust deed in order to change the fee structure and other elements, and hence it would require a special resolution. Voting in the new MAS-approved manager is likely to be an ordinary resolution.
Since these resolutions are likely to be inter-conditional, the EGM may include an additional resolution to liquidate the REIT in the event the new manager isn’t voted through, or the change of trust deed doesn’t pass. During the period up to the EGM, various parties may be looking for irrevocable undertakings.
Questions are likely to arise around risk capital required by the internal manager. Since Sabana REIT has many retail investors, risk capital may need to be higher. (We don’t need another Eagle).
Internalisation is viewed in some quarters as panaceas to the issues that have arisen around unknown sponsors – CRT is surely a case in point. There are others. EC World REIT’s manager recently announced that it has refinanced its onshore and offshore loans for a period of time. EC World REIT BWCU owns port logistics assets in China and has committed to selll two of them to its warehouses, after a few delays, a related party by October.
In a separate filing, it was revealed that the major unitholder with close to 40% of EC World REIT, Forchn Global, had pledged 34 million units to Bright Oasis Vision, 40.2 million units to Ali CN, and 58 million units to Franklin Medici Alternative Investment VCC. Forchn Global is a unit belonging to the sponsor, which in turn owns the manager, and is also the master lessee and major tenant of the REIT.
