Proposed merger between ESR-Reit and Sabana Reit falls through

THE proposed merger between ESR-Reit and Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) has fallen through.

Exactly a third of the votes cast by Sabana Reit unitholders were against amendments to be made to the Sabana trust deed to allow for the scheme to even take place.

At the extraordinary general meeting (EGM) on Friday afternoon that lasted less than 10 minutes, Tan Cheong Hin, chairman and independent non-executive director of Sabana Reit, said: "As the Sabana trust deed amendment resolution is not carried, the Sabana manager will not be proceeding with the scheme meeting."

Votes representing 192.04 million units or a 33.33 per cent stake were against the resolution, while votes representing 384.16 million units, representing a 66.67 per cent stake, voted in favour.

An extraordinary resolution has to be carried by a majority consisting of 75 per cent or more of the total number of votes cast for or against a resolution.

The resolution was in essence seeking the approval of unitholders to amend the trust deed dated Oct 29, 2010 to include provisions that will facilitate the implementation of the scheme.

This was an upset - although not an entirely unexpected one - following unitholders of ESR-Reit voting overwhelmingly in favour of a merger with Sabana Reit earlier on Friday morning.

Some 98.91 per cent voted in favour of the merger deal, and 98.87 per cent voted to approve the proposed issue of about 989.9 million new ESR-Reit units to Sabana unitholders based on a gross exchange ratio of 0.94 time as consideration for the merger.

The virtual EGM, chaired by independent non-executive director Stefanie Yuen Thio, lasted just 30 minutes, and included responses by chief executive officer (CEO) and executive director Adrian Chui to unitholders' questions about the rationale for the merger as opposed to more attractive growth options.

Donald Han, CEO of Sabana Reit's manager, in a statement said the manager respects the unitholders' decision.

"While we believe the merger has a compelling strategic rationale, unitholders have expressed that they prefer for Sabana Reit to remain as a standalone Reit. We are heartened by their confidence in Sabana Reit's prospects and remain committed to continue creating value for all unitholders."

He added that the manager has been working hard to increase the portfolio's occupancy rate and this remains a priority. Discussions with existing and prospective tenants to renew leases and secure new ones are also ongoing.

"The asset enhancement initiative at New Tech Park is progressing well too and we are focused on completing it by the first quarter of 2021," he said. "We are also exploring other potential portfolio rejuvenation opportunities in a prudent manner, balancing the need to be cautious amid ongoing macroeconomic uncertainties and the need to grow."

Quarz and Black Crane noted that this was the first time in the 18-year history of the Singapore Reit market that a proposed merger has been voted down. Independent unitholders' turnout was also one of the largest among the S-Reits' EGMs.

Jan Moermann, chief investment officer of Quarz, said the outcome underscores the lack of confidence that independent unitholders have in the current board and management of Sabana Reit's manager, and sends a strong signal that Reit boards and managers should not ignore independent unitholders, who, when they band together, can protect their collective rights to ensure that their investments are managed in the best way possible.

Peter Kennan, chief investment officer of Black Crane, added that unitholders' patience has worn thin after two years of consistent underperformance of the Reit manager which has now culminated in the lack of support to the value-destructive merger.

BT understands that the fund managers also plan to continue work on the internalisation proposal for Sabana Reit that they had raised earlier. "Quarz and Black Crane have laid a clear path and forward strategy for the Reit manager to immediately execute on, and increase distribution per unit (DPU) and unit price for all unitholders. Our five-point plan can be immediately executed to increase DPU by more than 40 per cent in the next one to two years.

"If the existing manager is unable to execute, they should resign and allow professionals with the right expertise and skillset to contribute to the Reit. We maintain our views that Sabana Reit's portfolio has substantial upside potential which can be achieved under the right management team," they said.