ACTIVIST investor Quarz Capital has requisitioned an extraordinary general meeting (EGM) to remove the manager of Sabana Industrial Real Estate Investment Trust : M1GU 0% (Sabana Reit) in favour of an internal manager.

In a letter dated Jun 7 seen by The Business Times (BT), Quarz requested for the board of Sabana Reit to convene an EGM to pass two resolutions.

The first is to remove Sabana Real Estate Investment Management as manager of Sabana Reit as soon as practicable.

The second resolution seeks to effect the internalisation of the Reit management function by incorporating a subsidiary wholly owned by the trustee and appointing such a subsidiary to act as the manager of Sabana Reit.

Quarz also wants the trustee to “hire and appoint qualified candidates as directors and staff of the internal manager” and “consider the retention of Sabana Reit’s existing staff in order to maintain the continuity of Sabana Reit’s operations”.

In its letter, Quarz said that internalisation of the manager would bring benefits to unitholders by providing cost savings once the external manager is removed.

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“The replacement of the ESR Group-owned external manager by an internal manager will resolve the potential corporate governance flaws and can potentially result in higher distribution per unit (DPU) and unit price to Sabana unitholders in the future,” Quarz noted.

It estimates that there would be cost savings of around S$7.3 million of fees and net profit “which unitholders currently pay to the external manager and its shareholder, ESR Group”.

Quarz added: “The removal of the external manager will also likely eliminate all other fees such as performance, acquisition, divestment, lease and property management fees which need to be paid by unitholders to the external manager.”

Quarz indicated that the new internal manager will be fully owned by unitholders, and there would be better alignment of interest.

Quarz pointed out that the external manager model presents a “potential misalignment of interests” between the external manager and unitholders.

It highlighted that an external manager can increase the profitability of its sponsor by: increasing acquisition fees from doing more acquisitions; increasing management fees by acquiring and enlarging the portfolio; or acquiring the sponsor’s properties at a profit for the sponsor’s benefit.

“While an internal manager works to increase the DPU and unit price (for) unitholders, an external manager tends to serve the interests of its owner, namely the sponsor, by increasing its profitability where possible,” Quarz said.

It noted that the majority of Reits in the US and Australia are managed by internal managers. “As the Reit market in the US and Australia have been in existence since the 1970s, the general investors’ sentiments backed by numerous academic studies is that the external manager model tends to underperform the internal manager model, especially in terms of DPU and unit price,” it added.

BT has reached out to the manager of Sabana Reit for comment. The manager said on Jun 8 that it is considering the requisition notice and seeking legal advice.

Units of Sabana Reit closed unchanged at S$0.43 on Wednesday.