In its latest open letter to the unitholders of Sabana REIT M1GU , ESR Group says an internalisation of Sabana REIT’s manager will not result in cost savings.
Once the higher debt costs are factored in, unitholders will be worse off, says the group, which is the largest unitholder in the REIT.
“If the manager is removed, Sabana REIT’s borrowing costs are expected to increase, without the backing of a strong sponsor for its unsecured facilities. Each increase of one percentage point (100 basis points) will cost unitholders an additional $3.0 million in interest each year which will reduce distribution per unit (DPU) by 0.27 Singapore cents,” warns the group. The estimate is based on Sabana REIT's outstanding 1.102 billion units.
Table from ESR Group's letter.
This goes against Quarz’s July 20 statement that Sabana REIT’s unitholders “can potentially save more than $40 million of fees they need to pay to the external manager over the next 10 years”. The activist investor adds that unitholders would reap “[i]mmediate cost savings of [around] $2.4 million per year” with the internalisation of the REIT manager.
See also: This is the cost of running Sabana REIT’s manager; are savings from fees worth the risk?
The removal of the REIT manager may also trigger “an unwinding of the existing interest rate hedges which have been put in place”.
“If this is the case, the actual impact of one percentage point (100 basis points) will be even higher at $8.3 million in interest each year which will reduce DPU by 0.75 Singapore cents,” adds ESR Group.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Table from ESR Group's letter.
In its letter, the group accused Quarz of gross overstating the net savings from the internalisation of the REIT manager, noting that the REIT manager only generated $1.26 million of profit in FY2021 out of the $5.14 million of fees it received from the REIT. This was from the “ongoing recurring operating cost of running the REIT”.
“Any potential cost savings out of the $1.26 million of profit generated by the Sabana REIT manager will be wiped out by the potential increase in borrowing cost and unitholders will be worse-off on an ongoing basis,” notes ESR Group.
“This further ignores the one-time costs associated with implementing the change which Quarz itself agrees is between $3 million – $5 million. This could be higher as according to the trustee, it will need to appoint professional advisers (including investment, legal, financial, tax, property and other advisers),” it adds.
ESR’s letter, dated July 28, comes a day after Quarz issued a response to the group’s July 25 letter. In Quarz’s letter, it highlighted the dismissal of ESR’s injunction by the court to stop Sabana REIT’s extraordinary general meeting (EGM). The court also confirmed that the removal of the REIT’s manager is the “fundamental right” of unitholders in Singapore.
“We highly recommend unitholders to directly refer to the court papers instead of listening to opinions of parties which are potentially conflicted. In particular, we strongly reject ESR's claim in paragraph 10 of its letter dated July 21 that the resolutions are not meant for the immediate implementation of internalization. The resolutions as tabled provide an unequivocal mandate for the trustee to execute the internalisation,” says Quarz.
Units in Sabana REIT closed flat at 41 cents on July 28.
