Quarz’s internalisation proposal is an opportunity for Sabana Reit’s manager to show independence

THE manager of Sabana Industrial Reit has struggled to convince investors that it is independent of ESR Group ever since it tried and failed to push through a lopsided merger with ESR-Reit in 2020.

This matter has cropped up yet again, amid a controversial proposal by activist investor Quarz Capital to internalise the manager of Sabana Reit. In its Jun 7 requisition for an extraordinary general meeting (EGM) to approve its internalisation proposal, Quarz said – among other things – that ESR Group’s ownership of the managers of Sabana Reit and ESR Logos Reit (formerly ESR-Reit) creates potential conflicts of interest.

On Jun 22, in a lengthy rebuttal to “misleading assertions” made by Quarz in the requisition letter, the manager of Sabana Reit insisted it operates independently of ESR Group.

Sabana Reit’s manager pointed out that all its directors comply with the criteria of independence set out in the Singapore Code of Corporate Governance, the Securities and Futures (Licensing and Conduct of Business) Regulations, and the Singapore Exchange Listing Manual.

ESR Group itself reiterated in a letter dated Jun 30 that its interest in Sabana Reit’s manager is held through an independent trustee with full discretion to make all decisions. ESR Group further stated it does not have any nominee directors on the board of Sabana Reit’s manager.

Given the novelty and possible risks of Quarz’s internalisation proposal, the next few weeks could offer the manager of Sabana Reit an opportunity to demonstrate some real independence – not the mere form of independence that regulators and academics obsess over, but the substance of independence that investors with real skin in the game will appreciate.

Clarity needed from lenders

For starters, it is insufficient for Sabana Reit’s manager to merely warn unitholders that Quarz’s internalisation proposal would constitute a “review event” that might result in the Reit having to immediately repay its outstanding loans.

Indeed, it is rather disappointing that Sabana Reit’s manager announced last Friday (Jun 30) that the Reit is taking on a S$100 million facility from UOB that places restrictions on any change in the manager.

Sabana Reit’s manager was careful to say this latest facility agreement is “business as usual” and that its existing loans have the same provisions. But this is exactly the problem.

If Sabana Reit’s manager is concerned that Quarz’s internalisation proposal will trigger a “review event” that threatens the Reit’s financial viability, why is it still conducting “business as usual” with lenders?

Bankers understandably insist on “review event” clauses to protect themselves from nasty surprises. But Sabana Reit’s manager is already fully aware of its possible removal. Would it not make more sense to work with lenders prepared to support Sabana Reit through the internalisation that Quarz is proposing?

At a minimum, Sabana Reit’s manager ought to obtain clarity from UOB and other lenders on whether they plan to pull back their credit facilities or reprice their loans in the event the Reit’s unitholders vote for internalisation.

This is something that even ESR Group is requesting. In a letter dated Jun 25, it said: “We respectfully suggest that the lenders of Sabana Reit be invited to provide their views on this issue so that all unitholders are aware of the potential consequences of the resolutions being passed, especially since the requisition for the proposed actions are not accompanied by a comprehensive and credible refinancing plan.”

Talk to the trustee

ESR Group has also called for Sabana Reit’s trustee to provide its views as to whether it has the capability and resources to cope with the potentially onerous duties it might have to take on, in the event unitholders vote for Quarz’s internalisation plan.

Quarz wants to put forward two resolutions at the EGM. The first is for Sabana Reit’s manager to be removed. The second is for Sabana Reit’s trustee to be directed to create a new internal manager, and bring in suitably qualified candidates as directors and staff.

In its Jun 25 letter, ESR Group questioned the capacity of Sabana Reit’s trustee to carry out the second resolution. ESR Group also said the second resolution should be put forward at the EGM as an extraordinary resolution requiring 75 per cent of votes cast to pass.

This is because the second resolution represents a fundamental change in the relationship among the manager, the trustee and unitholders; and amounts to an amendment to the trust deed.

ESR Group went on to say this internalisation resolution ought to be voted on first at the EGM, and that the resolution to remove the current manager should be conditional on its passing. This is to ensure that Sabana Reit does not face the risk of being left without a manager.

This was followed by an exchange between Quarz and ESR Group that generated more heat than light.

Quarz said on Jun 28 that it was not proposing any changes to the trust deed, and accused ESR Group of trying to stymie its internalisation initiative. ESR Group countered on Jun 30 that Quarz was trying to shift its position, and that its true intention is to involve itself in the management of Sabana Reit.

The views of Sabana Reit’s trustee could go some way in clearing up the doubts and concerns in the minds of investors following the war of words between Quarz and ESR Group.

Alternative routes to internalisation

Perhaps Sabana Reit’s manager should also explore alternative routes to the internalisation that Quarz and other investors are craving.

While ESR Group is plainly not in favour of the internalisation proposal put forward by Quarz, it may not be against the idea of internalisation per se. Intriguingly, ESR Group said in its Jun 25 letter that the value of its 20.6 per cent stake in Sabana Reit “far outweighs” the value of its investment in the Reit’s manager.

“As such, there is no reason for ESR to prioritise and protect the value of our stake in the Sabana manager, at the expense of or to the detriment of Sabana Reit,” it added.

Sabana Reit’s manager should perhaps take this as a cue to begin a dialogue with ESR Group about an alternative internalisation proposal – one that simply involves injecting the current manager into the Reit for a nominal price.

My own view is that Sabana Reit would probably garner a certain cachet among investors if it were to internalise its manager – one way or another. But unitholders should be prepared to shoulder some cost and risk, whether they choose to set up a new internal manager or simply acquire its existing manager.

Sabana Reit’s manager should avoid becoming preoccupied with responding to Quarz’s chaotic internalisation proposal, and focus instead on providing all unitholders with helpful information about the potential costs and benefits of different routes to internalisation. With some luck, the manager may be remembered for getting Sabana Reit on the right side of history instead of backing a bad merger deal.