ESR and Sabana respond to questions from Sias over proposed merger
Executives reassure that ring fencing is in place to ensure perceived conflicts of interest are managed
Singapore
THE Securities Investors Association (Singapore), or Sias, said in a statement on Thursday that it had conducted a dialogue with the managers of Sabana Shari'ah Compliant Real Estate Investment Trust (Sabana Reit) and ESR-Reit, to address questions from Sias over their proposed merger.
The dialogue was attended by Sias' chief executive David Gerald; chief executive and executive director of ESR-Reit's manager Adrian Chui; chief executive of Sabana Reit's manager Donald Han; and Justin Tang, head of Asian research at United First Partners in Singapore.
On July 16, ESR-Reit and Sabana Reit reannounced the proposed merger of the two Reits after earlier talks in 2017 fell through.
This has since drawn much discussion from shareholders over concerns such as the sale of Sabana Reit's assets below net asset value (NAV) as well as accusations of conflicts of interest with ESR Cayman, as it owns substantial stakes in both ESR-Reit's and Sabana Reit's managers.
At the fireside chat, Mr Chui said that the proposed merger resurfaced this year as part of the "continuation of (its) next stage of growth plans", following ESR-Reit's merger with Viva Industrial Trust in 2018.
Post merger with Viva, ESR-Reit has "benefited a lot" from the greater trading liquidity, and debt cost has come down "tremendously".
He added that ESR-Reit is "now able to access more opportunities . . . (and) investment opportunities have been coming (in) more often," proving that "size does matter when it comes to Reits".
As for Sabana Reit, Mr Han said that with the Reit being one of the smallest in Singapore, it is "looking to sustain growth moving forward", and that the proposed merger "presents that opportunity for (it) to be on a bigger platform (and) have a deeper balance sheet".
"On top of that, there is the potential to have a re-rating, with the chance to be included in global indices," he added.
Support for the proposed merger from analysts has been relatively positive thus far, given how the transaction may put Sabana Reit in a better position.
United First Partners' Mr Tang said that "high net worth individuals" he had spoken to, who bought Sabana Reit during its initial public offering, are "generally of the view that if this doesn't happen, it is going to be very difficult for their investment in Sabana Reit to see the light of day".
He added: "They feel that they have a better chance if they roll over their units into ESR-Reit, and from there, hope that if ESR-Reit's unit price appreciates, then they might get to see daylight."
Addressing concerns over ESR-Reit's low buyout offer for Sabana Reit at a 26 per cent discount to the latter's book value, Mr Han said that being in a "very regulated market", it is "not easy to achieve the kind of price (investors) are looking for".
Additionally, time, cost of funds and ability to raise financing are also factors for Sabana Reit to be able to trade at unit prices closer to NAV.
On issues regarding the conflict of interest with ESR Cayman, Mr Han said that "there are necessary safeguards involved", and that the Reit does not share offices with ESR Cayman nor information regarding it.
All of its board of directors are also independent.
Similarly, ESR-Reit's Mr Chui said that "ring fencing and structures are put in place to ensure that such perceived conflicts of interest are managed".
The proposed merger will also bring down the cost of debt for both Reits, said Mr Han and Mr Chui.
"In the immediate term, there are cost savings . . . and we are refinancing Sabana Reit's existing cost of debt . . . So immediately, unitholders on both sides are actually having lower costs on top of increased tenure," said Mr Chui.
He added that post merger, the enlarged Reit - with 75 properties and a combined value of S$4 billion - will have "much more tenants" and become "much more diversified", improving its credit profile.
However, even if the proposed merger with ESR-Reit falls through, Sabana Reit "will survive" said Mr Han.
The Reit has plans to sell its underperforming properties and expand its portfolio overseas, though plans are "fraught" as a result of the Covid-19 pandemic.
"By being a merged entity, it would accelerate our positioning to be able to capitalise on the growth factor, in particular, unutilised plot ratio, and to be able to facilitate growth in acquiring properties abroad," added Mr Han.
Should investors choose to vote against the transaction, Mr Tang from United First Partners said that retail minority unitholders "need to be prepared".
He added: "If they do not get onboard a bigger ship, they will still survive, but the waters out there are going to be choppy."
