Will Volare supplant Quarz as Sabana Reit’s key minority unitholder after its partial offer?

UNITHOLDERS of Sabana Industrial Real Estate Investment Trust (Sabana Reit) who voted against its merger with ESR-Reit in December 2020 might be feeling rather pleased with themselves.

Since that controversial merger was scuppered, Sabana Reit has quietly delivered a total return of 49.2 per cent (distributions reinvested). During the same period, the iEdge S-Reit Index returned just 5.5 per cent.

Sabana Reit has also outpaced leading industrial real estate investment trusts (Reits) CapitaLand Ascendas Reit and Mapletree Industrial Trust – which chalked up total returns of 7.3 per cent and minus 4.5 per cent, respectively.

Sabana Reit’s would-be suitor ESR-Reit, which merged with ARA Logos Logistics Trust last year and is now called ESR-Logos Reit, has returned 5.3 per cent since December 2020.

Now, even as rising interest rates and slowing economic growth are weighing on the whole market, unitholders of Sabana Reit have been presented with an opportunity to monetise a portion of their investment.

On Jan 20, an offer from Volare Group was unveiled for 10 per cent of Sabana Reit’s outstanding units. The offer price of S$0.465 per unit was a 9.4 per cent premium to Sabana Reit’s closing price of S$0.425 that day.

Unitholders of Sabana Reit will be entitled to accept the partial offer in respect of 10 per cent of the units they hold. They may also tender additional units, which may be accepted in the event that other unitholders do not use their full entitlement.

The partial offer is conditional upon, among other things, the offeror obtaining at least 10 per cent of Sabana Reit’s nearly 1.1 billion units – that is, just over 109.6 million units.

Volare already owns nearly 59.5 million units of Sabana Reit, representing a 5.4 per cent stake. Assuming the partial offer is successful, Volare would end up with more than 169.1 million units – representing a 15.4 per cent stake.

Sabana Reit’s sponsor, ESR Group, is the largest holder of its units. It holds a direct interest of 1.2 per cent and a deemed interest of 20 per cent. Meanwhile, Quarz Capital Asia (Singapore) has a deemed interest of more than 13 per cent in Sabana Reit.

Sabana Reit closed Friday (Jan 27) at S$0.45, up 5.9 per cent since the partial offer was announced.

Decent performance

On Jan 21, Sabana Reit’s manager said its recommendation on the partial offer will be included in a circular to unitholders within the next few weeks. This recommendation is bound to be closely scrutinised by investors who opposed the merger of Sabana Reit and ESR-Reit back in 2020.

Sabana Reit’s manager had actively promoted that merger – arguing that its unitholders would end up being invested in a Reit that was much larger, more diversified and better positioned to grow.

But Quarz and other minority investors baulked at the deal, which effectively valued Sabana Reit at a more than 29 per cent discount to its book value (based on the unit prices of ESR-Reit and Sabana Reit just before the extraordinary general meeting).

With hindsight, the dissident unitholders were right to reject the merger. Sabana Reit’s outperformance over the past two years has been underpinned by low valuations and fairly decent operational performance.

For 2021, Sabana Reit reported a 14.2 per cent increase in revenue to S$81.9 million and a 16.4 per cent rise in net property income (NPI) to S$52 million. Distribution per unit (DPU) was up 10.5 per cent to 3.05 Singapore cents.

Sabana Reit went on to report a 14.7 per cent increase in revenue for H1 2022 to S$44.9 million. NPI climbed 5.2 per cent to S$27 million. Its DPU for the half-year was 1.59 cents, up 7.4 per cent.

Sabana Reit’s manager said it achieved positive rental reversion of 9.1 per cent during the six months, and ended the period with a portfolio occupancy rate of 88.2 per cent – the highest since Q3 2017.

In its Q3 2022 business update, Sabana Reit’s manager said its portfolio occupancy improved further to 89.1 per cent. It also achieved rental reversion of 10.2 per cent during the quarter, its 10th positive quarterly reversion in the past 11 quarters.

Sabana Reit’s manager was due to report its full-year 2022 results on Jan 26, but called this off at the last minute to clarify certain matters with the offeror and regulators. It noted the partial offer is conditional on there being no announcements of “material transactions”, which could include payments of distributions.

The full-year results will be released on Monday, Jan 30, before the market opens.

Volare versus Quarz

So, should unitholders of Sabana Reit accept the partial offer from Volare?

On the face of it, the deal is not particularly compelling from a valuation standpoint. The offer price of S$0.465 reflects an annualised yield of 6.8 per cent, based on Sabana Reit’s reported DPU for H1 2022.

The offer price is also a more than 12.2 per cent discount to the Reit’s book value as at Jun 30 of S$0.53 per share.

On the other hand, Sabana Reit is not a leading player in its field and a lot could depend on how the partial offer changes its unitholder base.

This column has previously said Quarz was justified in adopting an adversarial approach to stop Sabana Reit’s manager from pushing ahead with the merger in 2020, and refocus its attention on the Reit’s operational performance.

But the continued state of conflict between Quarz and the Reit’s manager will probably make it hard for the Reit to ever function as an effective asset securitisation platform for its sponsor group.

The big question now could be whether the partial offer sees Volare supplanting Quarz as Sabana Reit’s most influential minority unitholder, and whether that results in a less fraught relationship between the Reit’s manager and its unitholders.

If Volare proves to be just as difficult to handle as Quarz, it could be a matter of time before ESR Group simply decides to sell its interest in Sabana Reit and its manager. This would also address the unresolved problem of Sabana Reit and ESR-Logos Reit having overlapping mandates.

On the other hand, if Volare turns out to be easier to deal with than Quarz, it may make sense for the managers of Sabana Reit and ESR-Logos Reit to revisit the idea of a merger – especially since units in Sabana Reit are now trading at a much narrower discount to book value than in 2020.

Quarz’s head of research Havard Chi told The Business Times on Jan 20 that the partial offer from Volare is “attractive”, and that it might make sense for Sabana Reit unitholders to monetise some of their units.

When asked last week if Quarz plans to offload any of its Sabana Reit units, Chi said: “We are waiting for the circular and will evaluate our options.”