Sabana Reit’s manager should state if it will work with the trustee on internalisation plan

THE trustee of Sabana Industrial Real Estate Investment Trust (Sabana Reit) indicated last week that it “will expect” the current manager of the Reit to serve as interim manager in the event unitholders vote for a controversial internalisation proposal.

This could assuage concerns among some unitholders that the internalisation plan will leave Sabana Reit without a manager for a lengthy period of time, and potentially in breach of its loan covenants.

More to the point, Sabana Reit’s manager may now be in the awkward position of having to publicly state whether it plans to live up to the expectations of the trustee.

On Jun 7, activist investor Quarz Capital requisitioned an extraordinary general meeting (EGM) to vote on two resolutions.

The first is for Sabana Real Estate Investment Management (SREIM) to be removed as the manager of Sabana Reit.

The second is for HSBC Institutional Trust Services (Singapore) (HSBC Trustee) to be directed to create a new internal manager and bring in suitably qualified candidates as directors and staff.

Unsurprisingly, SREIM is against the whole exercise. On Jun 22, it said the internalisation proposal is rife with uncertainties and might destroy value for unitholders. Among other things, it warned that a change in Sabana Reit’s manager could trigger a mandatory prepayment of its loans.

On Jul 5, SREIM said it had written to Sabana Reit’s lenders to seek a waiver of this possible “review event” but the banks had refused. “The lenders will require more information before they can make a decision,” SREIM said.

ESR Group – which owns SREIM through an independent trustee – is also against the internalisation proposal. On Jun 25, it said the board and staff of Sabana Reit’s manager would have no incentive to remain in their positions if unitholders voted for the internalisation plan.

ESR also questioned the ability of HSBC Trustee to cope with having to actively manage Sabana Reit, and raised doubts about whether a newly incorporated internal manager would be able to immediately fulfil the necessary licensing requirements.

ESR subsequently applied to the courts for a declaration that Quarz’s EGM requisition is invalid, and a permanent injunction restraining Sabana Reit’s manager from convening an EGM. The hearing is scheduled for Jul 19.

A draft statement from HSBC Trustee made available last week ahead of the imminent court hearing casts a new light on the internalisation proposal, though. In particular, the trustee plainly stated it would look to ensure the stability of Sabana Reit’s operations with the help of the existing manager.

“The trustee will expect SREIM to continue to serve as interim manager until a replacement external or internal manager is appointed, including to engage with lenders and regulatory authorities, as required,” HSBC Trustee said.

“The trustee will have to rely on the existing property manager for continuity of the operational and day-to-day aspects of Sabana Reit,” it added.

HSBC Trustee went on to say: “If there is any actual or potential disruption to the management of Sabana Reit, the trustee will, together with its professional advisers, oversee the management of Sabana Reit in the interests of unitholders and work with SREIM (if possible) to seek to minimise such disruption risks.”

None of this means that Quarz’s internalisation proposal will not involve a prolonged period of uncertainty and upheaval, of course. HSBC Trustee warned it would take at least 12 months or more to internalise the Reit management function.

The trustee expects it will have to hold two or more additional EGMs to seek unitholder directions on specific matters. The fees, costs and expenses of engaging professional advisers to implement the internalisation will be reimbursed out of Sabana Reit’s assets.

In the event the internalisation resolutions are voted through but cannot be implemented – for instance, because subsequent EGMs do not pass the necessary further resolutions or because Sabana Reit’s financing does not remain in place – the trustee said it may have to consider winding up the Reit.

While SREIM has made it clear that Quarz’s internalisation proposal may destroy value for unitholders, it should now also state whether it plans to live up to the expectations of Sabana Reit’s trustee in the event unitholders vote for the internalisation plan anyway.

A statement from the board and senior management of SREIM that they are committed to working with HSBC Trustee to ensure as smooth a transition as possible would go a long way in reducing the anxiety of unitholders who support Quarz’s internalisation proposal despite the risks.

Even more importantly perhaps, it would also be a strong display of SREIM’s independence from ESR.