Warburg-backed shareholder may ride in as Sabana Reit white knight

Singapore

THE troubled Sabana Reit may have found its white knight in Warburg Pincus-backed logistics developer e-Shang Redwood (ESR), following its unitholders' attempts in April to oust its manager and months of trying to sell its underperforming industrial portfolio.

On Monday, responding to a report by Reuters, the management of Sabana Reit clarified that it was "in discussions" with ESR Funds Management, the manager of ESR-Reit (formerly Cambridge Industrial Trust) to "explore options" in connection with its strategic review.

It added: "At this point, Sabana Reit has not entered into any definitive legally binding agreement with ESR-Reit."

When contacted, ESR declined to comment.

Reuters had earlier on Monday reported that ESR was in advanced talks to buy Sabana Reit and was conducting due diligence on the trust, citing sources familiar with the process.

Sabana Reit's unit price shot up 10.1 per cent to 49 Singapore cents in response to the Reuters report; its trading volume tripled from Friday's to 6.5 million.

At about 11am, the manager requested a trading halt.

Market watchers noted that there has been a build-up of events leading to the latest announcement, starting with ESR's purchase of a 5 per cent stake in the trust in March. This was a surprising move, given that the trust had been underperforming for a long time as a result of falling rentals and occupancies, and expiring rental support at many of its properties.

There was also ESR's acquisition of an 80 per cent stake in the manager of ESR-Reit and an interest of up to 10.65 per cent in ESR-Reit as well.

The name change from Cambridge Industrial Trust to ESR-Reit further signalled to the market ESR's intention of becoming more entrenched and visible as a logistics player in Singapore.

Talk has begun brewing that ESR is looking to restructure the small- and mid-cap Singapore Reit space, with the end goal of combining managers and portfolios for efficiency purposes.

Over at Sabana Reit, there has been a recent shuffling in the boardroom and management team. Chief executive officer Kevin Xayaraj will quit by the end of this year "to pave a way for change".

Two weeks ago, board chairman Steven Lim resigned for health reasons, and was replaced by Yong Kok Hoon, the remaining independent non-executive director.

An analyst who requested anonymity said that the Reit has been finding itself between a rock and a hard place. Following a very dilutive rights issue last December, unhappy unitholders voted in April to bar Sabana Reit's manager from issuing units and granting convertible instruments.

Its leverage at 37 per cent at end-June 2017 also does not leave much debt headroom for it to borrow too aggressively.

The analyst said: "The Reit does not have many options left to drive growth, and the former management seems to have given up already."

Meanwhile, Lee Nai Jia, head of research at Edmund Tie & Company, said Singapore's logistics sector is primed for growth on the back of growing e-commerce, but the smaller players may have to consolidate to build scale.

"The smaller players face challenges from the expected completion of about 394,000 sq m of warehouse space for the rest of 2017. They may lack the economies of scale to manage multiple properties and to serve a regional network of clients, as well as to hold a substantial portfolio of properties and collaborate with transportation companies to offer clients a one-stop service."

Sabana Reit has nine warehouse and logistics assets in Singapore, out of a portfolio of 21 industrial properties.

Given that the Monetary Authority of Singapore does not generally allow Reit managers to manage more than one Reit if they have potential conflicts of interest - such as owning properties within the same asset class - a merger of the two Reits seems a likely route that Sabana Reit and ESR are exploring. This could occur by asset acquisition, a trust scheme or a general offer.

Retired stockbroker Jerry Low, who requisitioned the recent meeting to vote out the Reit manager - a resolution which eventually failed to pass - said that he hoped a buyout would indeed occur.

"The present team does not know how to improve the Reit. The team has tried for the last six months, but the results have worsened, with an additional S$28 million drop (in fair-value of investment properties in its second quarter), and the portfolio occupancy has not improved. Every unitholder is monitoring their performance."

Co-founded by Warburg Pincus and its senior management, ESR is also backed by investors including APG, Canada Pension Plan Investment Board, Goldman Sachs, Morgan Stanley, pension fund company PGGM and Chinese insurer Ping An.

As of June 2017, it managed 8.4 million sq m of projects with US$9 billion of assets under management across China, South Korea, Japan and Singapore.

Last month, its parent Warburg Pincus lost its bid for Global Logistic Properties to a Chinese consortium fronted by GLP chief executive officer Ming Mei, which paid about S$16 billion for the Singapore-listed warehouse operator.