Regulators should clear path for unitholders of trusts to push for manager-internalisation

WOULD Singapore’s real estate investment trust (Reit) and business trust sector be any more vibrant if these structures were internally managed rather than externally managed?

We might be about to find out. On Nov 23, a group of investors claiming to own more than 10 per cent of Dasin Retail Trust (DRT) requisitioned an extraordinary general meeting (EGM) to remove its existing trustee-manager and create an internal trustee-manager.

This came less than four months after unitholders of Sabana Industrial Trust (Sabana Reit) voted at an EGM on Aug 7 to remove its manager, and direct its trustee to set up an internal manager.

The process of internalising the manager of a listed trust at the behest of minority investors is uncertain, though.

The matter could also be complicated by the sponsor group behind the trust in question choosing to fight back. Moreover, the trust’s lenders might be uncomfortable with a change in manager, especially if the trust is under financial pressure.

Singapore’s market regulators should seize this opportunity to ensure that investors have the power – in practical terms – to remove the manager of a Reit or business trust.

This could re-energise one of the most successful segments of the local market, and lay the foundations for its next phase of growth.

Some of the weaker trusts that internalise their managers could gain a certain cachet with investors – given the widely held view that the interests of internal managers are more closely aligned with those of unitholders.

Minority investors are most likely to push for manager internalisation at trusts that have disappointed the market. For instance, DRT – which owns retail properties in China’s Greater Bay Area – has been hit by weak financial performance, a decline in the book value of its assets, and banks calling in their loans.

The group of unitholders requisitioning the EGM also highlighted signs of internal strife and operational shortcomings at the existing manager – including the fact that DRT’s annual report for 2022 has still not been issued.

Since the beginning of this year alone, DRT’s unitholders have suffered a negative total return of 81.4 per cent.

Over at Sabana Reit, the manager has been in a state of conflict with activist investor Quarz Capital since it recommended a lopsided merger with ESR-Logos Reit in 2020. The managers of Sabana Reit and ESR-Logos Reit are both owned by Hong Kong-listed ESR Group.

While Quarz managed to mobilise sufficient resistance to block that merger deal, it has continued attacking Sabana Reit’s manager – including by questioning its appointment of directors and withholding its authorisation to issue new units.

Sabana Reit has not performed too poorly recently, though – it has achieved a total return of minus 2.4 this year.

Sponsor opposition

While Quarz managed to push through its proposed internalisation resolutions at the Aug 7 EGM, it is still a long way from achieving its goal.

On Nov 7, Sabana Reit’s trustee published a list of frequently asked questions about the internalisation process that once more stated that its trust deed will need to be amended.

This will require the approval of unitholders by way of an extraordinary resolution.

A committee formed by Quarz pointed out in a letter dated Dec 5 that ESR Group and its allies hold more than 24 per cent of Sabana Reit’s units. This will make it nearly impossible for the extraordinary resolution to pass without the support of the ESR Group.

The committee, which calls itself the Sabana Growth Internalisation Committee (SGIC), insisted in its letter that the requirement for an extraordinary resolution can be avoided.

It called on the Monetary Authority of Singapore (MAS) and Singapore Exchange Regulation (SGX RegCo) to provide guidance on whether Sabana Reit’s trustee is interpreting the trust deed correctly, and proceeding with the internalisation process properly.

SGIC also asked MAS and SGX RegCo to weigh in on whether ESR Group and its allies should be barred from voting on any extraordinary resolution to amend Sabana Reit’s trust deed – given that the outcome of the vote would affect the fee income ESR Group receives.

On the other hand, the investors pushing for the internalisation of DRT’s trustee-manager do not seem to expect opposition to their internalisation plan.

They noted in their Nov 23 letter that Sino-Ocean Capital, which acquired a 70 per cent stake in DRT’s trustee-manager in 2021, is now facing a winding-up petition.

Zhang Zhencheng, who still holds 30 per cent of DRT’s trustee-manager, also has a deemed interest of 43.2 per cent in DRT itself.

“Given Mr Zhang’s substantial unitholding, we believe that his interests are very much aligned with the rest of the unitholders,” the investors said in their letter, adding that they expect Zhang to continue supporting DRT even after the trustee-manager is internalised.

Lender attitude

Another potential stumbling block to a trust successfully internalising its manager is the attitude of its lenders.

In the Sabana Reit case, much was made of its lenders possibly calling in their loans in the event of a change in manager. Quarz said that this was just a scare tactic.

On the other hand, DRT is in the process of selling some of its assets in order to pay down its debt. It has also been hit with notices of demand from some of its lenders in recent months.

The requisitioning investors said last month that DRT’s unitholders want the trust to restructure and reduce its borrowings, and that internalisation of the trustee-manager would be positive for its lenders.

“As the internal trustee-manager would be owned by unitholders, there would be fewer conflicting opinions and discussions with lenders would be able to progress more expediently,” they added.

DRT’s trustee-manager said on Dec 4, however, that one lender had expressed concern about the restructuring being delayed in the event the internalisation proposal goes through.

MAS and SGX RegCo should look closely at how Reit managers work with their lenders, and ensure that loans that restrict any change in the manager or its ownership are not a “poison pill” that entrenches managers and sponsors at the expense of unitholders.

It is also about time that a tried and tested pathway is developed for investors to replace the external manager of a failing trust with an internal manager.

This could staunch a proliferation of zombie trusts if interest rates remain high for several more months, and help breathe new life into the ones that are struggling.