Sabana Reit denies upcoming bond issuance is ‘highly abnormal’ or ‘impedes internalisation’

SINGAPORE – The manager of Sabana Industrial Real Estate Investment Trust (Sabana Reit) has denied allegations that the upcoming issuance of its sustainability-linked bond puts the trust in “financial jeopardy”, and said it does not “complicate and impede” its internalisation process.

This was in response to allegations by activist investor Quarz Capital in a letter dated June 14.

In the letter, Quarz said Sabana Reit’s upcoming bond issuance of $100 million five-year sustainability-linked bonds is “highly abnormal and extraordinary” since the trust currently has “zero refinancing needs”. This is especially since the $100 million term loan maturing in October 2024 was refinanced with a new $100 million four-year unsecured facility in May 2024, it said.

Quarz is also concerned that the bond terms could “potentially result in substantial disruptions to Sabana Reit if the sponsor (ceases to hold) at least 50.1 per cent of the Reit manager”.

The bond issuance may also “substantially complicate and impede the internalisation process to potentially entrench the current Reit manager and its sponsor from being removed” and even put it in “financial jeopardy”, said Quarz.

In a bourse filing on June 17, the manager of Sabana Reit clarified that it has been working on the bond issuance since June 2022, before Quarz even requested to convene an extraordinary general meeting to discuss its internalisation.

The bond issuance is being undertaken by the manager in accordance with its fiduciary duty to act in the interests of the unitholders, and will help to “stabilise the cost of funding, diversify the sources of funding, and mitigate the refinancing risks” for the Reit, said the manager.

“Contrary to Quarz’s allegation... such (a) refinancing exercise is essential to the capital management planning for (the Reit),” the manager added. “It is not in the interest of Sabana Reit for such (a) refinancing exercise to be put on hold on account of the ongoing internalisation exercise, especially in view of the attendant uncertainties and in the current high interest rate environment.”

The manager cited its first quarter in financial year 2024, for instance, when the trust faced “operational challenges in obtaining hedging arrangements”. This resulted in its proportion of fixed rate borrowing dropping to 51.8 per cent, it said.

The completion of the bond issuance will improve this figure to more than 80 per cent and significantly reduce interest rate risks while improving stability to the cost of funding, said the manager.

“As the primary use of proceeds from the bond issuance is to refinance the debt tranche expiring in 2025, this is expected to have (a) neutral impact on the Reit’s gearing ratio upon completion,” it added.

Furthermore, the manager explained that it is a “common and prudent practice” to plan ahead for refinancing and this is commonly undertaken at least a year before the expiry of current financing. “This is to provide flexibility for the borrower and cater for ample time to negotiate terms,” it said.

It also highlighted that it is an event of default should the manager resign or be removed without any replacement or substitute manager. And should the manager be replaced, the bonds will still continue to their scheduled maturity.

Units of Sabana Reit closed down 1.43 per cent at 34 cents on June 18.

THE BUSINESS TIMES