Why some shareholders want to remove Sabana Reit’s manager and what to know before voting

SINGAPORE – Unit holders of Sabana Industrial Real Estate Investment Trust (Sabana Reit) will vote next week on whether to remove the Reit’s external manager and replace it with an internal manager.

The extraordinary general meeting (EGM) will have two resolutions – the first to remove the external manager, and the second

to replace it with

Both resolutions require a simple majority vote to pass.

The 42 Reits listed in Singapore all have external managers, so next week’s vote will be unprecedented.

The EGM, which was requisitioned by activist investor and unit holder Quarz Capital Asia on June 7, will take place at New Tech Park in Lorong Chuan, a flagship Sabana Reit property, at 10am on Monday.

Here’s what unit holders should take into consideration before casting their votes:

What is the difference between an internal and external Reit manager?

An internal manager is generally owned by the Reit and its unit holders, while an external manager is owned by a third party such as the Reit’s sponsor.

Having an externally appointed manager can lead to conflicts of interest if the manager tries to generate higher management fees by expanding the size of the Reit at the expense of its performance or by diluting unit holders. If the manager is also owned by the Reit sponsor, the fees benefit the sponsor too.

But an external or third-party manager can offer better resources and talent than an internal one.

Reits were launched here as an alternative fund-like product to provide stable and reliable dividend yields, so the expertise of the manager is vital. They are usually sponsored by property firms, which take a stake during the initial public offering.

The sponsor plays a key role in providing a steady pipeline of real estate assets and other capital to the Reit, so the interests of the sponsor and unit holders are expected to be aligned.

Why does Quarz want to remove the manager and internalise the management function?

Quarz said having an internal manager will improve corporate governance and align the interests of the manager with those of unit holders.

Sabana Reit’s sponsor and major unit holder, ESR Singapore, owns Sabana Real Estate Investment Management (SREIM), which is the Reit manager.

Quarz research head Havard Chi said an internalised manager will be fully incentivised to raise the distribution per unit (DPU) and the unit price. Sabana Reit’s unit price of about 41 cents has been trading at a discount of over 20 per cent to its net asset value of 53 cents.

Mr Chi said some of the ways by which the internal manager could raise DPU include increasing the occupancy rate at New Tech Park to 90 per cent, developing 200,000 sq ft of new gross floor area at the property, and developing more than one million sq ft of untapped industrial gross floor area in exchange for higher rental rates.

Quarz also projected that the internalisation would “immediately” result in cost savings of about $2.4 million a year, which would offset the $5 million cost of setting up a new internal manager within two years. These savings would also improve DPU, it said.

ESR and the external manager have presented evidence in letters filed with the Singapore Exchange (SGX) that some of the numbers and projections provided by Quarz are false and ill informed.

Other unit holders The Straits Times spoke to have noted that the activist investor’s claims of cutting costs and growing DPU lack substance and a proper execution plan.

What takes place in the process of internalisation? What should unit holders expect?

A Sabana Reit trustee statement on July 21 noted that if Resolution 1 is passed and Resolution 2 is not passed, a replacement external manager will need to be appointed, with no assurance that it will agree to the same fee structure as the current external manager.

Sabana Reit’s 2022 annual report stated that fees payable by the Reit to the manager included a management fee comprising a base fee not exceeding 0.5 per cent of the value of the Reit’s properties and a performance fee of 0.5 per cent per annum of the net property income.

There is also a fee of 1 per cent of the acquisition price of any real estate acquired and a divestment fee of 0.5 per cent of the sale price of any real estate sold or divested. These fees are in line with the industry’s, the manager said.

The trustee statement added that if Resolution 2 is passed, an internalised management structure will need to be identified, established and then approved by unit holders. This could take at least 12 months and involve at least two more EGMs.

If either or both the resolutions are passed, the trustee will appoint professional advisers to help implement the resolutions and the ongoing management of Sabana Reit. The fees, costs and expenses of professional advisers will be reimbursed out of the trust’s assets.

Other concerns include lenders demanding mandatory prepayment of all the Reit’s outstanding loans, which SREIM said is a real risk, given that its existing loans are unsecured.

Mr Robson Lee, a partner at Kennedy’s Law, said: “The requisition proposal does not provide a definitive management structure for the Reit, assuming unit holders support the proposal to oust the existing Reit manager.

“The cardinal issue is whether the existing staff of the Reit manager will remain if the EGM resolves to internalise the Reit management.”

Who are Sabana Reit’s major shareholders and how will they vote?

The Reit has three major shareholders, the largest being property investor and SREIM owner ESR Singapore, which holds 20.58 per cent of Sabana Reit.

Volare, a Switzerland-incorporated entity with various businesses, earlier in 2023 raised its stake in Sabana Reit from 5.4 per cent to 16 per cent. Volare has been silent on the recent developments and did not reply to requests for comment from The Straits Times.

Quarz holds a 14 per cent stake. Its Quarz Active Value Fund engages with the management of undervalued companies and prompts them to boost shareholder value through measures such as selling unprofitable assets. It invests in firms with upside potential of 30 per cent over two years.

The board of Sabana Reit recommends that unit holders vote against both resolutions.

While it agreed that unit holders should vote against Resolution 2, proxy adviser ISS recommends voting for Resolution 1, given Sabana Reit’s governance flaws and its falling behind its peers in terms of performance and valuation under the current manager.

What will SREIM do to raise unit holder value if it is retained as Sabana Reit’s manager after the EGM?

Sabana Reit had a portfolio comprising 18 industrial properties in Singapore valued at $885.7 million as at Dec 31, 2022, according to its website.

SREIM chief executive Donald Han said there are plans to raise the value to around $1 billion in the next two years by adding value to New Tech Park, among other assets.

Mr Han said that since 2018, Sabana Reit has not acquired any new assets requiring acquisition fees or capital raising, resulting in unit price dilution.

He added that DPU has doubled since the fourth quarter of 2019 to 1.61 cents in the first half of 2023, making it the best-performing industrial Reit on the SGX in 2022 in terms of returns

While analysts at DBS Bank were satisfied with the Reit’s higher occupancy rates and rentals, they have a “hold” call on it, pending the outcome of the EGM.

Editor’s note: This article has been edited for clarity.