Sabana Reit better off if major unitholders not represented on board of new internal manager

UNITHOLDERS of Sabana Industrial Real Estate Investment Trust (Sabana Reit) are to vote at yet another extraordinary general meeting (EGM) on Friday (Oct 18).

This time, the matter at hand is the appointment of directors to the board of the internalised manager of the Reit – subject to the requisite approvals from the Monetary Authority of Singapore being obtained.

The requisitionists of the EGM, led by Quarz Capital, have proposed six names.

The trustee of Sabana Reit, which was tasked by unitholders last year with setting up a new internal manager, has put forward three names.

Judging from the series of sharply worded letters between the requisitionists and the trustee in recent weeks, the EGM is shaping up to be a contest of sorts between the two slates of candidates.

Notably, the requisitionists said in a letter dated Sep 18 that the trustee’s director candidates had been “unilaterally” put forward with “zero input” from unitholders.

“As the trustee’s process to select its director candidates has zero oversight from Sabana unitholders, Sabana unitholders have zero confidence that the director candidates proposed by the trustee are fully prepared to act in the best interest of Sabana unitholders,” the requisitionists said.

In the same letter, the requisitionists called on the trustee and its proposed directors to publicly commit to the same terms as their proposed slate of directors.

After being asked to clarify these conditions, the requisitionists said in a letter dated Oct 1 that their slate of candidates had each agreed to be paid director’s fees of less than S$45,000 per year, receive at least 25 per cent of those fees in Sabana Reit units, and maintain a meaningful stake by not selling the units they receive as director’s fees for at least a year.

The requisitionists also sparred with the trustee over the need for background checks on their proposed directors; and accused the trustee of wasting time and money on matters that “have been shown to be needless and irrelevant for internalisation”.

For its part, the trustee said in a letter dated Sep 25 that there were unanticipated developments and complexities in the internalisation process, and that the “piecemeal, unclear or contradictory actions” taken by the requisitionists had caused more delays and costs.

The trustee noted that the requisitionists had proposed their six director candidates belatedly, which made further consultations with regulators necessary.

“It is also not helpful to the identification of key management candidates if the state and composition of the intended board of the new internalised manager is in a perpetual state of flux,” the trustee said.

Quarz, Volare voting bloc

All the acrimony aside, the requisitionists seem to be in a strong position to install their proposed slate of directors on the board of Sabana Reit’s new internal manager.

Among the six names they have put forward are Jan Frederic Moermann and Havard Chi, who are, respectively, the chief executive and head of investments at Quarz Capital.

Another candidate the requisitionists have put forward is Konrad Duttwiler, the chief financial officer of Volare Group.

Quarz Capital owns 154.5 million or 13.73 per cent of Sabana Reit’s units. Volare has an interest in 191.4 million units, equivalent to a 17.01 per cent stake.

This combined voting bloc has proven sufficient to prise Sabana Reit from the grasp of its sponsor group, Hong Kong-listed ESR Group – which holds nearly 235 million units or a 20.88 per cent stake.

In May this year, the courts ruled that amendments to Sabana Reit’s trust deed were required to effect the internalisation of its management function. This would require a special resolution, with a 75 per cent approval threshold.

The courts also ruled, however, that ESR Group was prohibited from voting on the trust deed amendment. This contradicted an earlier statement by Singapore Exchange Regulation that ESR Group was not required to abstain from voting.

At an EGM on Aug 6, the extraordinary resolution to make the necessary amendments to the trust deed was passed. Of the 466.3 million units that voted, more than 422.1 million – or more than 90.5 per cent – voted in favour.

Even when ESR Group was not barred from voting, Quarz Capital has managed to get its way. Most of its key ordinary resolutions at recent EGMs have passed with the support of between 55 per cent and 60 per cent of votes cast.

For instance, the resolution to remove Sabana Reit’s external manager at the EGM in August last year was passed with a total of 397.4 million units voting in favour, equivalent to 57.5 per cent of all the units voted.

At the same EGM, the resolution directing the trustee to set up a new internalised manager was passed with nearly 384.5 million units voting in favour, amounting to 55.6 per cent of all the units voted.

Alignment of interests

The big question is whether some minority investors will choose to vote differently now that the biggest obstacles to internalisation have been overcome.

Will they go along with Quarz Capital and Volare Group once more? Or will they demonstrate a preference for a board that is independent of them?

My own view is that Sabana Reit would be better off if its three largest unitholders were not directly represented on the board of its new internalised manager.

For one thing, Quarz Capital’s activist approach might hamper the new internal manager’s ability to hire the best talent in the market. Many top executives would baulk at the risk of being constantly second-guessed by their own board members in public.

Conflicts among the board representatives of Sabana Reit’s major unitholders might also detract from the smooth running of its operations.

Yet, many small investors find the idea of boards and top executives having some skin in the game appealing. This is why the director candidates put forward by the requisitionists have pledged to maintain some exposure in Sabana Reit.

Their commitment to not selling any units received as director’s fees for at least a year is a rather low bar, though.

It would be far more convincing if all the individuals who have been put forward by the requisitionists and the trustee made a much more significant gesture – such as publicly committing to purchasing S$1 million worth of Sabana Reit units in the market within one month of their appointment and holding on to them until at least the end of their tenure.

This is not a big ask. Sabana Reit is currently trading at an annualised H1 2024 distribution per unit yield of 7.1 per cent, and a nearly 28 per cent discount to its net asset value. This seems undemanding for a Reit with a property portfolio focused on Singapore, and an aggregate leverage of 35.8 per cent.

With the potential cachet that could come with being the first internally managed Reit in the local market, at a time when global interest rates are easing, it could be just a matter of time before it draws a wider investor following.

That is assuming, of course, that the board of its internal manager focuses on creating value with as little drama as possible.