Cost savings from internalisation of Sabana Reit’s manager ‘grossly overstated’: ESR Group

QUARZ Capital’s push to internalise the management of Sabana Industrial Reit will result in unitholders being worse off once higher debt costs are factored in, said ESR Group in a letter to the Reit’s unitholders on Friday (Jul 28).

A key argument raised by activist investor Quarz, in pushing for the internalisation, was that unitholders would benefit from cost savings once the external manager is removed.

ESR Group, which owns the Reit’s manager Sabana Real Estate Investment Management (SREIM), said in its letter that the claim has been “grossly overstated”.

“Any potential cost savings out of the S$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,” said ESR.

It argued that without the backing of a strong sponsor for its unsecured facilities, Sabana Reit’s borrowing costs are likely to rise.

Each increase of one percentage point will cost unitholders an additional S$3 million in interest each year, potentially reducing distribution per unit by 0.27 Singapore cent, according to ESR’s estimates.

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The removal of the manager may trigger an unwinding of interest rate hedges, meaning the actual impact might be even deeper, the group argued.

Quarz had requisitioned an EGM, to be held on Aug 7, for unitholders to vote on two resolutions.

The first resolution is to remove SREIM as the Reit’s manager. The second resolution, if passed, will put into action the internalisation of the Reit’s management by incorporating a subsidiary wholly owned by the Reit’s trustee, and appointing the subsidiary to act as the Reit’s manager.

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Procedures for internalisation of Sabana Reit’s manager are in place: Quarz Capital

Since Quarz’s requisition, there has been a fiery exchange between the activist investor and ESR, which also owns a 20.6 per cent interest in Sabana Reit.

ESR said on Friday that “Quarz’s claims and assumptions of a financial upside are…overestimated and ignore the realities of running a business in today’s volatile and uncertain market”.

Units of Sabana Reit closed flat at S$0.41 on Friday.