THE proposed merger of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) with ESR-Reit is not an asset sale, but a merger by way of a trust scheme of arrangement that will enable unitholders to stay invested in a "stronger, larger and more resilient enlarged Reit", Sabana Reit's manager clarified in a bourse filing on Wednesday.
The manager was responding to comments by activist fund Quarz Capital Management on Thursday, which criticised the implied offer price, representing a 26 per cent discount to Sabana Reit's book value, as "too low".
"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 said then. The fund has a 5 per cent stake in Sabana Reit.
The manager on Wednesday said Sabana Reit's existing portfolio has consistently traded at a discount to net asset value (NAV) in recent years. However, while NAV "may be a pertinent metric in an asset sale", it is important to consider other factors in the context of a 100 per cent unit swap between two listed entities, it added.
These factors include trading unit prices and the corresponding exchange ratio, pro forma dividend per unit (DPU) accretion, the ability to leverage the benefits of scale, enhancements to portfolio resilience and diversification, and other potential future upsides not available in an asset sale.
The manager added that there were several challenges involving an asset sale, including searching for willing and approved buyers that can acquire all Sabana Reit's assets on a portfolio basis at NAV, and the "relatively high" transaction costs that an asset sale on a portfolio basis may incur.
Under the proposed merger, Sabana Reit unitholders will be entitled to receive new units in ESR-Reit on an agreed exchange ratio of 0.940 ESR-Reit units for every one unit in Sabana Reit.
The manager said the agreed exchange ratio is at a 4 per cent premium to the exchange ratio implied by the volume-weighted average price of Sabana Reit units for the one-month period up to July 15, 2020, which is the last trading day before the date the proposed merger was announced.
It added that the pro forma DPU accretion of 12.9 per cent for Sabana Reit unitholders, on a H1 2020 annualised adjusted basis, will be "the highest in the history of S-Reit mergers".
The proposed merger will allow Sabana Reit unitholders to continue to have exposure to both Sabana Reit and ESR-Reit assets, and benefit from the enlarged scale and future growth opportunities available to the enlarged Reit, the manager said.
It reiterated the "compelling transaction rationale" for the proposed merger, including the creation of a "sizeable and liquid" industrial Reit with an expanded network of 75 properties.
This would increase the Reit's market value and free float, allowing it to benefit from potential inclusion into key indices, higher trading liquidity, a wider investor base, and broader research coverage, eventually leading to a potential re-rating of the enlarged Reit.
Its enhanced scale will raise visibility and enable it to be more competitive within the industrial S-Reit space, with a potential re-rating benefiting both Sabana Reit and ESR-Reit unitholders.
The enlarged Reit will also be more diversified and resilient, and benefit from significantly more favourable debt terms, making it better equipped to face the current Covid-19 challenges, the manager added.
It said that the enlarged Reit will be better positioned to capitalise on future asset enhancement initiatives and acquisition opportunities locally and overseas.
This will let it overcome the structurally short land lease tenor of the Singapore industrial market, and allow it to participate in the continued growth of the industrial sector as the global economy emerges from the pandemic.
Quarz on Wednesday evening responded that it was "appalled" at the manager's "persistent defence of a proposed transaction which clearly undervalues Sabana units and is suboptimal to unitholders it has a fiduciary duty to".
"It is absurd that the manager uses the continued undervaluation that the Reit trades at to justify the takeover price to be substantially lower than book value," it said.
"We would like to reiterate that never in the 18-year history of the Singapore Reit market with multiple takeovers has there been a merger or takeover of a Reit at such an unprecedented and substantial discount to book."
Quarz said it believed that the Reit's continued trading at a discount to book value could be potentially attributed to the manager's lack of capability to execute various strategies to improve the Reit's valuation in a timely manner.
Besides the development of its retail component, the manager had not executed any strategic transactions since early 2019, despite the Reit having one of the lowest leverage levels among Singapore-listed industrial Reits with substantial debt headroom, Quarz said.
It added that the manager had omitted to mention the commencement of a new retail component at 151 Lorong Chuan in early 2021. This addition could increase the Reit's pro forma H1 2020 DPU by at least 15 per cent - a number "far superior" to the 12.9 per cent DPU accretion from the merger, it added.
The manager had also "seemingly failed" to execute "easily identifiable catalysts", such as improving occupancy rates, Quarz argued.
It said the Reit's portfolio occupancy had plunged by about 10 per cent from 84.1 per cent to 77.3 per cent since chief executive of the manager Donald Han was hired in January 2018.
"Despite arguments that this is due to the end of master leases, peer industrial Reits with similar portfolios have been able to manage the situation with substantially higher occupancy rate versus Sabana," Quarz said.
It added: "Given the low leverage, ample liquidity and healthy financials of the Reit, why is there the pressure to conduct a transaction now?"
Units of Sabana Reit were trading at 37 Singapore cents as at 4.31pm on Wednesday, down 0.01 cent or 2.6 per cent. Units of ESR-Reit were trading flat at 38.5 cents.