PROXY advisers have recommended that unitholders vote against the resolution to internalise the management function of Sabana Industrial Real Estate Investment Trust (Reit) during the requisitioned extraordinary general meeting (EGM) next week.

Glass Lewis and Institutional Shareholder Services (ISS) were both against the second resolution brought forward by Quarz Capital in view of uncertainties and adverse consequences that could potentially arise.

The advisers, however, differed in their recommendations on the first resolution to remove Sabana Real Estate Investment Management (SREIM) as the Reit’s manager.

Glass Lewis was against the proposal to remove SREIM, while ISS recommended that unitholders vote in favour of the first resolution.

Activist investor Quarz – which holds a 14 per cent stake in Sabana Reit – requisitioned the EGM in June for unitholders to vote on two ordinary resolutions: to remove SREIM as the manager and direct the trustee to internalise the Reit’s management function.

It rationalised that internalisation of the manager would bring benefits to unitholders by providing cost savings once the external manager is removed.

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ISS said that a vote for the first resolution is warranted, “given the governance flaws raised against SREIM and the weak performance delivered by Sabana Reit”.

In terms of governance, ISS noted that ESR Group wholly owns both SREIM and the manager of ESR-Logos Reit.

“Sabana Reit and ESR-Logos Reit operate under the same sector and have overlapping investment mandates, which could potentially see themselves competing with each other,” it said.

The report also noted that Sabana Reit has “barely grown”, with revenue up 11 per cent in the past five fiscal years, as compared to the median of 85 per cent for peers including Capitaland Ascendas Reit, Mapletree Logistics Trust and Mapletree Industrial Trust.

Meanwhile, book value per unit has also decreased slightly by 1.5 per cent compared to a median 25.5 per cent increase for its peers.

Glass Lewis, on the other hand, had a different opinion on the Reit’s financial performance.

It noted that Sabana Reit may lag industry peers on certain metrics – such as trading at a lower price-to-book ratio – but this could be partially attributed to the fact that Sabana is significantly smaller than its peers in terms of market cap and total assets.

“Despite (Quarz’s) critiques, we find that the trust has largely outperformed its peers in terms of total unitholder returns in recent periods,” Glass Lewis wrote. It noted that one-year total returns of 2.5 per cent were better than the peer average of -4.1 per cent.

Sabana Reit’s three-year total return of 45.2 per cent was also better than the 1 per cent peer average.

“Our findings suggest that the trust has been outperforming its peers in terms of total unitholder returns over various short-, medium- and long-term periods.”

Glass Lewis added there is “insufficient evidence” to warrant the removal of the external manager or for the internalisation of the trust’s management at this time.

It noted that the external manager has provided detailed responses to various concerns and made a “compelling case” that the proposals are unlikely to result in a superior outcome for unitholders at this time.

“Additionally, in the absence of further details from (Quarz), we are inclined to agree with the external manager’s position regarding the potential uncertainties and adverse consequences that could result from the approval of (Quarz’s) proposals,” it said.

Similarly, ISS called the strategy to internalise the manager “highly uncertain” with a lack of relevant details. It noted that the unprecedented move in Singapore lacks track record to prove success in a relatively small Reit.

“Quarz has not proven the advantage of having an internal manager against hiring a new external manager,” ISS wrote. “Also, Quarz has not introduced a new strategy on how the internal manager would improve performance and financial results. Therefore, a vote against the proposed internalisation… is warranted.” 

The ordinary resolutions at the EGM on Aug 7 will require a simple majority from unitholders. Substantial unitholders in Sabana Reit include ESR Group and Volare Group, with a 20.6 per cent and 16 per cent stake respectively.

Quarz is the third-largest unitholder, with its 14 per cent stake worth around S$63.3 million, based on a unit price of S$0.41.

The activist investor is a registered fund-management company (RFMC) in Singapore, its website indicates. Monetary Authority of Singapoore regulations indicate that the total value of assets an RFMC can manage must not exceed S$250 million.

Quarz has previously challenged Sabana Reit’s manager and sponsor. In 2020, it opposed a plan for Sabana Reit to merge with ESR Reit. The proposal, which required 75 per cent approval from unitholders was voted down.

More recently – at Sabana Reit’s annual general meeting in April – Quarz also successfully lobbied unitholders to reject two resolutions: to endorse the appointment of an independent director; and to authorise the manager to issue units and to make or grant convertible instruments.

Sabana units were trading flat at $0.41 as at the midday trading break.