Reit managers, take note: General mandate to issue new units is least popular resolution at S-Reit AGMs

THE manager of Sabana Industrial Reit will no longer be able to issue new units without the express approval of unitholders. Managers at other Singapore-listed real estate investment trusts (S-Reits) should take note.

On Apr 25, at the Reit’s annual general meeting (AGM), a resolution to allow the manager to issue units and to make or grant convertible instruments failed to get through. Votes against the resolution represented 57.86 per cent of total units voted at the AGM.

Among those who have been following Sabana Reit’s ups and downs, the conclusion of the AGM may have been unsurprising. It had also lost its general mandate in 2017, and it had lately been the target of a campaign by an investor – Quarz Capital – that wants to see some changes at the Reit.

In the Singapore investment scene, however, it is rare that AGM resolutions do not pass. In fact, some resolutions are passed with a favourable voting share of 100 per cent. Most pass with votes of 90 per cent or more in favour.

One reason for this voting pattern is that many Singapore-listed entities are controlled by a family, an entrepreneur or a large state-backed investor. These controlling shareholders tend to support resolutions put forth by the board, and few minority shareholders can be bothered to cast their votes in AGMs.

For that reason, voting percentages that are anything less than 90 per cent are worth some attention. No doubt, a small group of shareholders should not, on their own, set the course for a board. But questions can be asked about why this is the case.

In the case of Singapore’s real estate investment trusts, boards should be asking themselves why the general mandate is unpopular.

Data compiled by The Business Times (BT) shows more unitholders voting against giving Reit managers the authority to issue new units via rights issues or placements as well as to make or grant convertible instruments. This is also known as the general mandate.

Of the 40 actively traded S-Reits, 29 held their AGMs over the past month. On average, only 92.8 per cent of the share of votes at these AGMs were in favour of the general mandate resolution.

In contrast, close to 100 per cent of unitholders typically vote in support of other resolutions tabled at these AGMs – such as to adopt the audited financial statements and for the appointment of external auditors.

Seven S-Reits – or nearly a quarter of those that held their AGMs in April – saw more than 10 per cent of unitholders present vote against giving the Reit managers the general mandate.

Another example of an S-Reit that received low unitholder support for its general mandate is Keppel Pacific Oak US Trust (Kore). Only 64.9 per cent of unitholders at the AGM voted in favour of the resolution – a steep decline from the 96.11 per cent of favourable votes garnered the previous year.

Kore’s US office peers Manulife US Reit and Prime US Reit were also among the seven S-Reits that received low unitholder support for the issuance of new units.

This is understandable. Investors are less likely to be happy about the Reit managers offering new units – often at a discount to the current trading price – when the counter has been hammered down.

Apart from being highly dilutive, new issues have tended to depress valuations further.

Already, units of the trio of US office Reits have fallen by between 49 per cent and 71.4 per cent over the past 12 months.

Most Reit managers would argue that taking away the authority to issue new units could be detrimental to a Reit. The inability to conduct equity fundraising until the next AGM a year later could see the Reit hamstrung and unable to capitalise on opportunities – or worse, save itself from ruin.

“I’ve not had to issue new units in the past two years,” one S-Reit manager told BT in an informal meeting. “But it’s still good to have (the general mandate).”

“Just because I can drive a car with one hand doesn’t mean I want to do so with one arm tied behind my back,” the manager added.

But investors, in these uncertain times, are starting to question the motivations of managers.

In an open letter to Sabana Reit’s management and board of directors before its AGM, activist investment firm Quarz Capital suggested Sabana Reit could finance future acquisitions internally given its available debt headroom and low aggregate leverage. Quarz therefore argued that the general mandate is not necessary.

A mandate makes it easier for a manager to buy assets without going to unitholders for approval, which may put unitholder interests at odds with the interests of managers. Managers are paid a fee just to acquire a property, whereas unitholders only see a return if the acquisition is accretive to distributions on a per-unit basis post any equity fundraising.

Would S-Reit investors be better served under an internally managed model? Perhaps. But there are no internally managed Reits listed in Singapore.

Meanwhile, would you voluntarily hand your wallet to someone you do not trust? Or get into a car with a driver you believe is out to hurt you?

If investors do not have conviction that a Reit manager’s interests are aligned with their own, perhaps they ought to put their money somewhere else.