Sabana Reit's dissident unitholders were right to fight its manager, but it's time to make peace

QUARZ Capital Management and Black Crane Capital waged a bruising campaign last year to prevent Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) from being merged with ESR-Reit on terms that were plainly unfair.

They ultimately prevailed when the deal - which would have valued Sabana Reit at a steep discount to its book value - was put to a unitholder vote on Dec 4 last year.

Since then, the market value of Sabana Reit's units has risen more than 25 per cent. Sabana Reit closed Tuesday at 44.5 Singapore cents, which represents a 14.4 per cent discount to its book value as at June 30 of 52 cents per share.

Yet, for Quarz and Black Crane - who own roughly 12 per cent of Sabana Reit - the war is not over.

The two dissident unitholders have harangued Sabana Reit's manager to stump up the cost of pursuing the merger with ESR-Reit, and demanded that steps be quickly taken to extract value from the Reit's property portfolio.

They have also repeatedly fought with Sabana Reit's manager over the appointment of independent directors (IDs).

On June 25, Quarz and Black Crane requisitioned an EGM to, in effect, boot Chan Wai Kheong off the board of Sabana Reit's manager. They also sought to have their own respective chief investment officers, Jan Moermann and Peter Kennan, appointed to the board.

A one-time managing director of Credit Suisse (Singapore) and founder of Charlie Chan Capital Partners, Mr Chan had been appointed only on June 2 - partly on the recommendation of Quarz and Black Crane.

In their June 25 letter, however, the two dissident unitholders said "several facts" about Mr Chan had been discovered after he was proposed for the position.

For starters, he owns a stake in Aims Apac Reit, which operates in the same segment of the real estate sector as Sabana Reit. Moreover, his stake in Aims Apac Reit is worth far more than the units he holds in Sabana Reit.

Mr Chan also sold a stake in ESR-Reit to ESR Cayman at a premium to market price back in 2017. ESR Cayman controls the managers of Sabana Reit and ESR-Reit, and holds substantial stakes in the two Reits. It also holds a substantial stake in Aims Apac Reit.

Quarz and Black Crane went on to note that ESR Cayman has expressed its "belief in the consolidation of small, illiquid Reits to create a sizeable, large liquid Reit".

They concluded that the appointment of Mr Chan to the board of Sabana Reit's manager further complicates the potential conflict of interest issues that already exist with ESR Cayman owning the managers of Sabana Reit and ESR-Reit.

On June 28, Sabana Reit's manager said it would not convene an EGM, as none of the issues raised about Mr Chan disqualify him from being an ID. The manager also said it intends to seek unitholders' endorsement of Mr Chan as an ID at the next AGM, which is in line with the directions of the Monetary Authority of Singapore (MAS).

Quarz and Black Crane requisitioned an EGM again in a letter dated Aug 2, this time with a single proposed resolution of having Mr Chan's appointment as an ID endorsed immediately by independent unitholders.

They said in the letter that Sabana Reit's manager was effectively circumventing the directions of MAS by postponing the endorsement vote to when the AGM is held next year.

On Aug 6, Sabana Reit's manager said it would not convene the EGM. It also denied it was circumventing the directions of MAS, and stated that it has sole discretion on when to seek the endorsement of unitholders for Mr Chan's appointment.

Constant conflict

Many unitholders of Sabana Reit may well have sympathy for the adversarial stance Quarz and Black Crane have adopted in engaging the Reit's manager.

If the proposed merger of Sabana Reit and ESR-Reit last year demonstrated anything, it is that IDs cannot always be relied upon to act in the interest of unitholders.

On the other hand, the constant state of conflict between Sabana Reit's manager and its unitholders is unlikely to be conducive to getting business done. And, even the most fair-minded of ID candidates might think twice before joining the board of the manager.

In March, two IDs on the board of Sabana Reit's manager resigned after Quarz and Black Crane said in an open letter that they would not endorse their appointment at the AGM scheduled for the following month.

"Based on our meeting with them, we are not convinced that the proposed directors are committed to defend independent unitholders' interests," they said in the letter.

The two IDs - Yeo Wee Kiong and Willy Shee Ping Yah - had been appointed only in January.

Explaining his decision to resign, Mr Shee said he did not want to "be subjected to the approval and endorsement by certain unitholders in exchange for their demands being met".

Mr Yeo said he found the pending situation and his continued service "pointless and unwelcomed".

Looking ahead, the likelihood of Quarz and Black Crane finding fault with other potential ID candidates may have increased with ESR Cayman's acquisition of ARA Asset Management.

The US$5.2 billion deal unveiled earlier this month will add yet another locally listed industrial Reit to ESR Cayman's fold - ARA Logos Logistics Trust.

Time for a truce

The adversarial tactics of Quarz and Black Crane may have been unavoidable to stop Sabana Reit's manager from pushing ahead with the merger last year, and refocus its attention on the Reit's operational performance.

But the time has come for the dissident unitholders to change tack.

The market price of Sabana Reit's units has risen significantly in recent months, supported by its financial performance. For H1 2021, the Reit saw a 14.1 per cent year-on-year rise in gross revenue to nearly S$39.1 million. Net property income climbed 23.2 per cent to S$25.7 million. Distributable income was up 41.2 per cent to more than S$15.6 million.

For the half-year, Sabana Reit's distribution per unit was 1.48 cents.

If Sabana Reit's market value continues scaling higher, the possibility of its unitholders being ripped off in any merger deal will probably become more remote.

Sabana Reit might even eventually find itself in a position to raise funds and make acquisitions; and become a useful securitisation platform for ESR Cayman.

To seize this future growth opportunity, it would be helpful for the manager to have broad support from its unitholders - including Quarz and Black Crane, assuming they are still invested at that point.