Sabana unitholders ask sponsor to sell stake in manager, seeking regulatory guidance

A GROUP of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) unitholders is "urgently" seeking guidance and support from regulators to stop the "potential severe conflict of interest issues" that they say are resulting from ESR Cayman's controlling ownership of both Sabana Reit's and ESR-Reit's managers.

In a letter sent to the Monetary Authority of Singapore (MAS) and the Singapore Exchange Regulation (SGX RegCo) on Tuesday, over 50 minority unitholders, including fund managers Quarz Capital and Black Crane Capital, stressed that they were "deeply concerned the Sabana Reit manager may have been conflicted and is not acting in the best interest of Sabana unitholders".

ESR-Reit and Sabana last month revived their merger proposal after earlier talks in 2017 fell through. ESR-Reit plans to acquire all units in Sabana in exchange for new ESR-Reit units at a gross exchange ratio of 0.94 time. By way of illustration, assuming an issue price of S$0.401 per new ESR-Reit unit, this would work out to Sabana holders receiving S$0.377 per Sabana unit.

In Tuesday's letter, the unitholders said they found it troubling that the Sabana manager's actions during the one-year period before the proposed merger might have "significantly" depressed the real estate investment trust's (Reit) valuation and unit price, and that the potential conflict of interest issues had culminated in what they described as a "suboptimal" bid offer by ESR-Reit.

The minority unitholders asked MAS why ESR Cayman was first permitted to acquire a second Reit manager, resulting in a "significant" overlapping investment mandate, and then allowed to manage both Reits for an extended period of time.

They also sought guidance from MAS on how the alleged conflict of interest could be resolved immediately. "This is crucial information for Sabana unitholders to have before they make their voting decision on the proposed merger," they said in the letter.

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The group urged the regulators to disallow ESR Cayman to manage the two Reits through the current structure if the proposed merger fails.

The unitholders in the letter also called on the sponsor to immediately divest its controlling stake in Sabana's manager, so that this stake could be purchased by the Reit at tangible book value or by third parties that do not have overlapping investment mandates.

There is a "full" overlap of the investment mandates of the two trusts, which creates "critical corporate governance issues, especially relating to the acquisitions and divestment of assets, and the strategic direction of both Reits", given the sponsor's ownership of both managers, according to the letter signed by Quarz's chief investment officer (CIO) Jan Moermann and Black Crane's CIO Peter Kennan.

"We plead with MAS to openly provide regulatory guidance and 'draw a line in the sand' on this key issue," they added.

Tuesday's letter is the latest in a string of comments Quarz has directed towards Sabana's manager since November 2019, when the activist investor had lobbied for a merger of the two Reits that would have valued each Sabana unit at around S$0.545, or a 2.7 per cent discount to book value. Quarz had already flagged then that the sponsor's cross ownership put Sabana at a disadvantage when the two Reits' investment mandates overlap.

In response to Quarz, ESR Cayman said last November that it was aware of possible conflicts of interest and had put in place "strict internal controls". The sponsor added that it had gone through a thorough process of setting up structures to prevent the sharing of information between both managers.

After the two Reits unveiled their proposed deal, Quarz argued that the implied offer price was too low as it represented a 26 per cent discount to Sabana's book value.

Earlier this month, Quarz and Black Crane said they would vote against the merger because they believed Sabana was undervalued based on the current transaction terms. The funds and entities that the two firms act for and advise collectively own more than 10 per cent of Sabana.

ESR-Reit's manager subsequently said that the scheme consideration was final.

Sabana units ended Monday at 37 Singapore cents, down 0.5 cents or 1.4 per cent. Units of ESR-Reit were flat at 38.5 cents.

Quarz and Black Crane have prepared a website to share further information about the proposed merger with Sabana investors.