Sabana Shariah Compliant REIT has outlined five reasons why a merger with ESR-REIT would be beneficial for its unitholders. And memories from 2017 could still be fresh in the minds of most unitholders. In the past two years, a clear trend has emerged among REITs — the quest for size. A small REIT — and Sabana REIT is the smallest industrial REIT by assets under management (AUM) — has many challenges.
As Sabana REIT has found, turning master-leased properties into multi-tenanted properties has been a particular problem. A larger merged ESR-REIT would catapult Sabana REIT from the smallest REIT into the fifth largest by AUM. With size comes liquidity. A larger REIT would inevitably have more unitholders and a higher free float market capitalisation. This in turn would get the enlarged ESR-REIT into important indices, which in turn would lead to greater recognition.
As with a virtuous circle, being in an index could lead to lower cost of capital, of both equity and debt. If the enlarged ESR-REIT trades well, distribution yields would contract. Lower yields would enable the merged REIT to acquire yield-accretive assets more easily.
Similarly, the cost of debt would also fall. At present, Sabana REIT’s debt is secured, leaving it very little debt headroom for asset enhancement initiatives (AEIs). That leaves it with limited financial ability to undertake AEIs for the 1.2 million sq ft of unutilised gross floor area in its portfolio. Larger REITs have a network effect by virtue of having more tenants, and the ability to offer tenants options.
A larger size also means that AEIs can be more easily undertaken without significant lowering of distributions. Furthermore, the merger is distribution per unit (DPU)-accretive for Sabana REIT unitholders to the tune of 12.9%.
Unhappy with no cash payout
Now, Quarz Capital and Black Crane — two hedge/activist fund managers which together hold 11% of Sabana REIT — are planning to vote against the merger because the merger is done at a significant discount to net asset value, and there isn’t a cash element to the transaction.
Donald Han, CEO of Sabana REIT’s manager, says: “While some have looked at implied offer price and asked why there is a discount to NAV, the proposed transaction is not a sale but a merger. In this transaction, Sabana REIT unitholders will still have an interest in the current portfolio and a larger one that is more diversified and resilient. While NAV per unit may be pertinent in a sale, it should not be the only criterion in a merger.”
In addition, Deloitte & Touche Corporate Finance, Sabana REIT’s independent financial adviser (IFA), says in the scheme document that the financial terms of the merger are fair and reasonable, and has advised the independent directors to recommend that the Sabana REIT unitholders vote in favour of the merger.
Quarz Capital and Black Crane have focused on the independence of a director, and questioned the loyalty of certain staff at Sabana REIT’s manager. These issues are tangential to the merits of the merger.
“A lot of ink has been spilled this year both in print and online about the independence of REIT Manager independent directors,” says Tan Boon Gin, CEO of Singapore Exchange Regulation, at a webinar organised by the REIT Association of Singapore.
“REITs must be prepared to dive into details and provide the transparency to address the concerns raised head-on. Once this has been done, REITs should then draw a line under it, and move on to focus the minds of unitholders on the merits of the real issues at hand and stop questions of independence from being a distraction,” says Tan, without making direct reference to this saga.
On Nov 10, Quarz Capital and Black Crane requisitioned for an EGM with unusual resolutions verging on the bizarre. Resolution 1 and its sub-resolutions all deal with Ng Shin Ein’s independence. Resolution 2 was about staff at the manager that were recruited from another manager. Resolution 5 was the strangest, asking for distributions that had been withheld because of the rent relief programme.
Ng, now an independent director of Sabana REIT’s manager, had previously owned a stake in Blackwood Investment which owned a 45% share in Sabana REIT’s manager, with the controlling 51% held by Vibrant.
In 2018, ESR Cayman acquired Sabana REIT’s manager and an increased stake in the REIT. Hence, Ng was paid by ESR Cayman for her share in Blackwood. These payments were received in 2018 and the second payment was in August 2019. Ng was re-designated an independent director in November 2019.
In addition to planning to vote against the merger at Sabana REIT’s EGM on Dec 4, Quarz and Black Crane are planning yet another EGM — their second in a month — with a couple of resolutions, to remove the manager, and to internalise the manager. If this sounds familiar, it is.
Look to the past for future steps
In 2017, stockbroker Jerry Low and a group of unitholders requisitioned an EGM to remove the manager. The resolutions were very well thought out, with four resolutions. Resolutions 2, 3 and 4 were dependent on the outcome of resolution 1. And, the reasons for removing the manager were relevant. The REIT had a very dilutive rights issue, announced at end-2016, to acquire properties that were not DPU-accretive, at artificially high prices based on master leases and passing rents above market rents.
In the unitholders’ EGM, held on April 28, 2017, Resolution 1 was to remove the manager. Resolution 2 was to instruct the trustee to incorporate a wholly-owned subsidiary to replace the manager for the purpose of internalising the REIT management function and search for qualified candidates to be appointed as the directors of the internalised REIT manager. If the newly-incorporated subsidiary was not approved by the relevant authorities to act as the manager of Sabana REIT, Resolution 3, to wind up the REIT, would have been put to a vote. If Resolution 1 is not passed, Resolution 4, to wind up the REIT, would have been put to vote.
Contrast the unitholders’ EGM in 2017 to the open letters by Quarz Capital and Black Crane to Sabana REIT’s unitholders this year, the latest of which was sent on Nov 18, and their EGM requisition with a focus on Ng. And the irony is that in 2017, Ng — who was then not an independent director of Sabana REIT’s manager — acted in the interests of minority unitholders.
At any rate, the Monetary Authority of Singapore usually provides approval for — and is certainly made aware of — any change in CEO or board member of REIT managers, and this is likely for internalised REITs.
In 2017, the arithmetic did not quite work out. In March that year, e-Shang Redwood (now ESR Cayman) had acquired 5.01% of Sabana REIT, the REIT’s then-sponsor Vibrant Group owned 12% and Tong Jinquan held 6.18%.
Back then, Resolution 1 did not pass with 69% voting against it. The resolution to wind up the REIT also did not pass, with 71% voting against it. This year, ESR Cayman holds a shade under 21%, Tong Jinquan holds 4.72%, and the likes of UBS, Blackrock and Vanguard hold 5%, 4.98% and 2.72% respectively. In a resolution to remove the manager, ESR Cayman and Tong can vote.
Unitholders need to be aware of their choices, and they may end up with their worst options. If Quarz Capital and Black Crane vote against the merger on Dec 4, and the resolutions to remove the manager and internalise management are not passed in a subsequent EGM, unitholders will be back at square one, and so will Quarz Capital and Black Crane
