Sabana Reit unitholders shouldn’t push for asset sales before internalisation project is completed

MANY market watchers might have been surprised last month when a group of investors holding more than 10 per cent of Sabana Industrial Real Estate Investment Trust (Sabana Reit) requisitioned yet another extraordinary general meeting (EGM).

For one thing, these Sabana Reit unitholders did not include Quarz Capital, the activist investor that has repeatedly requisitioned EGMs in its campaign to internalise the Reit’s management function.

Instead, this EGM requisition was submitted by Chan Wai Kheong – better known as Charlie Chan – a former independent director of Sabana Reit’s existing external manager, who has been opposed to Quarz Capital’s efforts.

The three resolutions that Chan and the other requisitionists want to put forward at the EGM appear to be aimed at addressing any fear and frustration that exists among Sabana Reit unitholders regarding the lengthy, expensive and rancorous path that Quarz Capital has taken in pursuit of its goal.

Explaining the rationale for the EGM, the requisitionists said that Quarz Capital had promoted the idea of internalising Sabana Reit’s manager partly on the basis of cost-savings projections that the activist investor subsequently walked back.

They also noted that the market performance of Sabana Reit’s units has lagged its peers since Quarz Capital requisitioned an EGM in June 2023 to boot out the Reit’s external manager and begin the process of internalisation.

Most concerning perhaps, Chan and his fellow requisitionists suggested that Sabana Reit’s cost of debt might be rising as it moves towards manager internalisation. They also noted that the Reit’s properties have relatively short land lease tenures.

If interest rates stay higher for longer, Sabana Reit might find itself having to cope with more expensive debt and higher capitalisation rates for its properties. In other words, its distributions per unit (DPUs) and net asset value (NAV) might come under pressure.

So, what are Chan and the other requisitionists proposing?

The first resolution they want to put forward at the EGM calls for Sabana Reit’s trustee and manager to commence a price discovery process with a view to selling its properties.

The second resolution stipulates that an internationally reputable firm of property consultants with a track record of selling industrial properties in Singapore be appointed to conduct the price discovery process; and that it be paid on a success basis, with out-of-pocket expenses capped at S$8,000.

The third resolution directs the trustee and manager to complete the price discovery process within three months, with a possible extension of one month; and for unitholders to be informed of the outcome.

Will the requisitionists succeed?

Sabana Reit’s internalisation committee and the directors-elect of its internalised manager (ICDE) – which includes key Quarz Capital officials – have urged all unitholders to vote against the three resolutions if the EGM is held.

The ICDE pointed out that a routine valuation of Sabana Reit’s assets as at Dec 31, 2024, by Jones Lang LaSalle Property Consultants and CBRE has just been completed.

“To requisition an EGM to do the same valuation again less than one month later is a complete waste of unitholders’ money if we assume the requisitionists agree that any potential sale should be done at NAV or above,” the ICDE said in a statement dated Feb 3.

“Once the new internal manager is approved and takes over from the current manager, the ICDE plans to potentially consider a range of strategic options to maximise value for Sabana Reit unitholders, including the sale of the entire portfolio,” the ICDE added.

The ICDE also noted that key unitholders it has consulted plan to vote against the proposed resolutions.

“This is as they support the internalisation process which will improve corporate governance at Sabana Reit. They also trust the ICDE to execute plans to unlock value for all unitholders.”

The ICDE called on the requisitionists to carefully consider if they have sufficient support to pass their resolutions if an EGM is held; and suggested they instead table their resolutions at Sabana Reit’s annual general meeting in April, in order to save costs.

Mounting internalisation costs

Clearly, one factor that has contributed to Sabana Reit’s underperformance since June 2023 is the mounting cost of the manager internalisation project, and the lack of clarity on precisely when it will be completed.

Sabana Reit’s trustee said last month that a total of S$11.39 million had been incurred up to Dec 31, 2024.

There was never any doubt that the internalisation project was going to be costly, though. Sabana Reit’s trustee had explored the alternative of acquiring the existing manager from ESR Group for S$10 million, but nothing came of it.

The cost of the internalisation project also partly reflects the opposition and obstacles that Quarz Capital has been forced to overcome over the past two years. Notably, it obtained a crucial court ruling in May last year that prevented ESR Group from voting on the extraordinary resolution to amend Sabana Reit’s trust deed.

This came after the Singapore Exchange Regulation said that ESR Group did not need to abstain from voting.

Among the key challenges that still remain are obtaining a capital markets services (CMS) licence for the new internal manager, and engaging suitably qualified candidates to run it. The trustee said in its update last month that the ICDE is formulating the business plan required to update the CMS licence application.

Will Quarz Capital succeed in getting the new internal manager installed? Will Sabana Reit stop underperforming its peers at that point?

Here’s the thing: While the internal-management model may better align the interests of a Reit’s manager and unitholders, it does nothing to enhance the fundamentals of a Reit’s property portfolio or alleviate the operational challenges it may face.

Indeed, without the backing of a large sponsor group, a small Reit could find itself at disadvantage when it comes to raising funds or hunting for acquisitions.

Underscoring this point, Sabana Reit’s auditor included an “emphasis of matter” in its most recent review report, highlighting the possibility of the Reit’s loans being called once its current external manager is removed.

So, the requisitionists are not wrong to worry about Sabana Reit possibly facing higher borrowing costs, and a deterioration in the value of its portfolio.

Yet, it seems odd for independent unitholders of Sabana Reit to push for the liquidation of its property portfolio at this stage of the internalisation exercise.

The more appropriate time for such action would have been when Sabana Reit’s external manager was recommending a lopsided merger with ESR Reit back in 2020, or when Quarz Capital started down the perilous path to internalisation in 2023.

Given the progress that has already been made on the internalisation project, and the ICDE’s seeming willingness to consider selling the property portfolio to unlock value once the new manager is in place, it might make more sense for Sabana Reit’s unitholders to just see what happens next.

In the short term, there appears to be little downside risk. Sabana Reit is currently trading at a yield of 7.8 per cent, based on its 2024 DPU of S$0.0286; and a 27 per cent discount to its NAV as at Dec 31 of S$0.50 per unit.