ESR, Quarz dispute level of investor support for Sabana Reit’s manager internalisation

THE outcome of the extraordinary general meeting (EGM) of Sabana Industrial Real Estate Investment Trust (Sabana Reit) unitholders on Aug 7 was clear.

Resolution 1, which calls for the removal of Sabana Reit’s existing manager, passed with 397.4 million units (or 57.5 per cent) voting in favour and 294.2 million units (or 42.5 per cent) voting against.

Resolution 2, which directs Sabana Reit’s trustee to set up an internal manager, passed with 384.5 million units (55.6 per cent) voting in favour and 307 million units (44.4 per cent) voting against.

When it comes to such contentious resolutions, however, it is always tempting to consider how small minority investors might have voted – if only to deflate the victory that one party or another might be trying to claim.

ESR Group started the ball rolling almost as soon as the EGM results were announced. In a statement to the media on Aug 7, it said the majority of unitholders – excluding itself, Quarz Capital and Volare Group – had voted against the two resolutions.

ESR Group’s assertion appeared to be based on the information about Sabana Reit’s substantial unitholders contained in the EGM circular, and a news report that Volare is believed to have voted in favour of the resolutions.

The EGM circular stated that ESR Group owns more than 226.8 million units in Sabana Reit, representing a stake of nearly 20.6 per cent. Quarz holds nearly 154.5 million units, equivalent to a 14 per cent stake. Volare owns 176.5 million units, or a 16 per cent stake.

Subtracting Quarz’s and Volare’s combined 330.9 million units from the 397.4 million units that voted in favour of Resolution 1, and subtracting ESR Group’s 226.8 million units from the 294.2 million units that voted against it, would imply that the majority of the remaining unitholders who voted were actually against it.

Only 66.5 million (or 49.7 per cent) of these residual units voted in favour of Resolution 1, while 67.4 million (or 50.3 per cent) of the residual units voted against it.

Repeating this calculation for Resolution 2 would suggest that only 53.6 million (or 40.1 per cent) of the residual units voted in favour of it, while 80.2 million units (or 59.9 per cent) voted against it.

This interpretation of how minority investors voted ties in with the recommendation of two proxy advisers, which many fund managers are likely to have followed.

Institutional Shareholder Services (ISS) recommended that unitholders of Sabana Reit vote for Resolution 1 but against Resolution 2. Glass Lewis recommended that unitholders vote against both resolutions.

So, the bottom line is that the majority of disinterested unitholders are against booting out Sabana Reit’s current external manager and installing a new internal manager. Right? Not so fast.

Analysing the votes

Quarz subsequently pointed out that ESR and a number of parties linked to it were required to abstain from voting on a resolution to endorse the appointment of Elaine Lim as an independent non-executive director at Sabana Reit’s annual general meeting in April – a resolution that failed to pass.

These associates of ESR are likely to have been inclined to vote against the two resolutions put forward at the recent EGM – and should not be counted as minority investors. Among them were businessman Tong Jinquan, and the chief executive of Sabana Reit’s current manager Donald Han.

With the inclusion of these parties, ESR’s “voting block” would expand from 226.8 million units to 265.9 million units. The number of units assumed to be held by small minority investors voting against the resolutions would be reduced by the same amount.

If this new assumption is applied, 66.5 million of the residual units would still have voted in favour of Resolution 1 but the number of residual units voting against would have been reduced to less than 28.3 million. In percentage terms, 70.2 per cent would have voted in favour while 29.8 per cent voted against.

On the same basis, Resolution 2 would still have seen 53.6 million units voting in favour but only 41.1 million units voting against – or 56.6 per cent in favour versus 43.4 per cent against.

Quarz was not satisfied with this implied support among small minority investors, though.

It went on to say that Volare’s units should not be lumped together with its own. After all, Volare did not propose the resolutions. Hence, it should be treated as just another minority investor – albeit a very large one.

If this assumption is applied, the implied support for Resolution 1 among minority investors would increase from 66.5 million units to nearly 243 million units while the implied opposition would remain at 28.3 million units. In percentage terms, 89.6 per cent would have voted in favour while only 10.4 per cent voted against.

On the same basis, Resolution 2 would have seen 230.1 million units voting in favour and 41.1 million units voting against – or 84.9 per cent in favour versus 15.2 per cent against.

Stop the bickering

Based on this analysis, it is probably fair to say that there was majority support among minority investors who voted at the recent EGM for the internalisation of Sabana Reit’s management function – despite the recommendations of proxy advisers ISS and Glass Lewis.

Yet, it is also worth noting that these small minority investors held a very narrow proportion of Sabana Reit’s 1.1 billion outstanding units. Excluding the blocks held by ESR Group, Quarz and Volare, only about 8.6 per cent of Sabana Reit’s outstanding units voted at the recent EGM.

More importantly, it seems clear that Resolution 2 had less support from minority investors than Resolution 1 – suggesting that some unitholders of Sabana Reit are less keen on the idea of setting up a new internal manager than they are on booting out the current manager.

This is not surprising, given the long and uncertain process. Sabana Reit’s trustee has said setting up a new manager could take 12 months or more and involve two or more additional EGMs.

Sabana Reit’s current manager has also raised the possibility of its staff quitting before the process is completed, and lenders demanding immediate repayment of their loans.

Instead of bickering about the level of support for the internalisation of Sabana Reit’s management function, ESR Group and Quarz ought to pledge that they will do everything possible to maintain the stability of the Reit as it seeks a path to this goal.

It may also be time for Singapore’s market regulators to look closely at how Reit managers work with their lenders, and ensure loans that restrict any change in the manager or its ownership are not a “poison pill” that entrenches sponsor groups and prejudices the long-term interests of unitholders.

There is no guarantee that changing a Reit’s manager or internalising its management function will necessarily lead to better performance. But unitholders ought to have the power to effect such change if they wish.

Mark To Market will take a two-week hiatus for the writer to clear some leave.