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Quarz ups stake slightly in Sabana Reit, restates plan to vote down ESR-Reit merger

QUARZ Capital has raised its stake in Sabana Reit slightly from 5 per cent as it stood in late July to 6 per cent on Monday.

A disclosure filed to the Singapore Exchange showed that the latest transaction by the investment management firm was a purchase of 15,000 shares in the Reit for S$5,625.

In a statement, Quarz's chief investment officer, Jan Moermann, said: "Having increased our stake, Quarz and Black Crane reiterate our intention to vote down the proposed Sabana-ESR-Reits' merger at the current transaction terms."

He added that Reits generally trade on distribution per unit (DPU) and dividend yield, yet in its historical gross exchange ratio (GXR) analysis, Sabana Reit's manager had neglected to consider that ESR Reit's DPU in 2018 and 2019 had contained sizeable non-recurring components which might have increased ESR-Reit's trading unit price during that period.

"The adjustment for these critical factors to ensure a like-for-like comparison with Sabana Reit would have clearly shown that Sabana has historically traded at a potentially higher GXR than the proposed merger (terms)."

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He added that he believes Sabana Reit on a standalone basis can potentially achieve significant DPU growth in 2021 of more than 30 per cent on a like-for-like basis, far superior than the current proposed transaction terms.

This would come from the contribution of the retail component at 151 Lorong Chuan, adjustments for one-time provisions and using a higher leverage ratio to purchase accretive assets.

He also pointed out that Sabana Reit had historically operated with a higher leverage ratio and proportion of unencumbered assets, prior to the entry of the current management team with ESR Cayman as the controlling shareholder of the Reit manager.

He added that besides "broad strokes" such as size benefits, Sabana Reit's manager, while proposing to unitholders to vote and stay invested in the enlarged Reit, has not provided much information on ESR's current portfolio.

He said that in fact, more than a fifth of ESR-Reit's portfolio by asset value has land-lease terms of about 20 years and less, and there has been no confirmed updates from the authorities that any of the land-lease terms will be renewed. In comparison, more than 90 per cent of Sabana Reit's portfolio are on land leases exceeding 20 years, and more than 80 per cent of Sabana Reit's portfolio has long land leases exceeding 30 years.

ESR's leverage level of about 42 per cent is also one of the highest among industrial Singapore Reits (S-Reits), and could rise if its S$150 million in perpetual bonds were included, which is likely why ESR Reit chose to undertake a non-cash merger with Sabana Reit, which has the lowest leverage level among industrial S-Reits.

He believes that these factors have resulted in ESR Reit's lower book value of S$0.41 per unit, versus Sabana Reit's at S$0.51 per unit as at end-June 2020.

"It seems that (Sabana Reit's) manager, without much in-depth analysis of ESR-Reit, is asking its unitholders to exchange their more resilient Sabana Reit assets for ESR-Reit assets," he said.

Units of Sabana Reit closed flat at S$0.375; those of ESR-Reit added half a cent to finish at S$0.40 for the day.

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