Quarz to Sabana Reit manager: Will you sell your personal property at a 25% discount to book?

NOT everyone is pleased with ESR-Reit's offer to buy out unit holders of Sabana Reit, and one investor is arguing that the implied offer price - which represents a 26 per cent discount to Sabana Reit's book value - is too low.

Activist fund Quarz Capital Management told The Business Times on Thursday: "Unless the management of Sabana Reit's manager shows that they are willing to sell their personal properties at a 25 per cent discount to valuation, we are puzzled why they would propose to merge Sabana Reit at a 25 per cent discount to book value."

Quarz raised its stake in Sabana Reit to 5 per cent, according to a filing with the Singapore Exchange (SGX) on Thursday evening.

Quarz chief investment officer Jan Moermann said: "In the history of the Singapore-listed Reit market, there have been no mergers where the target is acquired at such a steep discount to book value, and we don't see why this should be the case with Sabana Reit.

"As mentioned in our previous letter, we see a lot of value in Sabana, and urge unit holders to do their research and take their decision mindfully."

Last November, Quarz published an open letter to Sabana Reit and ESR-Reit that anticipated their merger. Quarz lobbied for ESR-Reit to make an offer that would value each Sabana Reit unit at around S$0.545.

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As at June 30, Sabana's net asset value (NAV) per unit stood at S$0.51, down from S$0.57 as at Dec 31, 2019.

Quarz has stressed that the directors of the manager of Sabana Reit have a fiduciary duty to unit holders: "They (the Reit manager) actually earns management fees from the Reit and should be acting in the best interest of unit holders."

On July 16, ESR-Reit proposed to acquire all units in Sabana Reit in exchange for new units in ESR-Reit at a gross exchange ratio of 0.94. Assuming an issue price of S$0.401 per new ESR-Reit unit, this would work out to Sabana Reit unitholders receiving implied S$0.377 per Sabana unit.

Analysts who are positive about the merger have generally focused on the DPU (distribution per unit) accretive nature of the deal.

DBS Group Research also observed that Sabana Reit has traded with a five-year mean discount to NAV of 26.4 per cent.

DBS had a S$0.48 target price on the industrial Reit, which it lowered to S$0.40 after the offer was announced. The proposed merger will be put to a vote at an extraordinary general meeting (EGM) in October.

The deal has been structured as a scheme of arrangement. This means a majority of Sabana unit holders representing no less than 75 per cent in value of the units voted must approve the scheme. The amendment to the trust deed must also be approved by no less than 75 per cent of the total number of votes cast.

Separately, ESR-Reit unit holders must also approve the merger by a simple majority. If the proposed merger goes through, Sabana Reit will be delisted from the SGX in November.

Chinese tycoon Tong Jinquan, a common unit holder in both Reits (but with a larger stake in ESR-Reit), is a concert party with the offeror and will abstain from voting.

Other investors in Sabana Reit include Hong Kong-based Black Crane Asia-Pacific Opportunities Fund, which raised its stake to 5 per cent in April this year.

Back in 2017, Sabana Reit was the subject of a unit-holder revolt. A group of retail investors tried to vote out the Reit manager at an EGM due to poor performance. Large investors helped fend off the threat, but many nonetheless voiced disappointment with how the Reit had been run.

Sabana Reit units closed at S$0.38 on Thursday, down 1.3 per cent.