Quarz Capital's interest fully aligned with independent unitholders of Sabana Reit

WE refer to the letter by Sabana Industrial Reit chairman and independent non-executive director Tan Cheong Hin, "More than one side to story about concerns of director independent" (BT, Apr 5, 2022).

Our response is structured in two parts. In Part 1, we outline how Tan failed to tell the full story. In Part 2, we have doubts about whether Tan is the right person to defend the "independence" of Chan Wai Kheong given the string of decisions made by the board of directors, which have turned out to be detrimental to the interests of unitholders of Sabana Reit.

Part 1 - Tan's omission of key facts can be construed as potentially misleading.

As Tan highlighted, Chan sold his unitholdings in the then Cambridge Industrial REIT (now ESR-REIT) and received about S$20 million premium over market price from ESR Cayman.

However, at no point in his letter does Tan mention the fact that Chan is also a significant unitholder of and has a substantially larger economic interest at AIMS APAC REIT, a key competitor of Sabana REIT. As a director, Chan is privy to key confidential information of Sabana REIT; this can be highly beneficial to AIMS APAC REIT and his economic interest, while potentially damaging to Sabana REIT.

Tan also seemed to have left out the fact that ESR Cayman is also a significant unitholder with a 13 per cent stake in AIMS APAC REIT and has a history of consolidating smaller S-REITs. This can potentially result in a "quid pro quo" situation which can be highly detrimental to Sabana unitholders.

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Put together, the full story throws Chan's independence into doubt. We would like to repeat how Sias chairman David Gerald phrased it aptly: "Notwithstanding Sabana's justifications, the key issue here is that although Chan fits the definition of an ID on paper and in terms of form, a good case can be made against his independence if substance is the defining criteria. Receiving a substantial payment from the controlling shareholder of Sabana's manager, as well as holding a significant stake in a competitor clearly calls into question his independence - even if the rules have been followed."

As an independent director of Sabana REIT, Tan's omission of key facts on the independence of Chan is deeply troubling and raises serious doubts about Tan's own independence.

Part 2 - Tan's "track record" as a director of Sabana REIT is still fresh in the minds of unitholders as he:

• approved the appointment of Ng Shin Ein as an independent director of Sabana REIT despite her prior significant business transactions with ESR Cayman;

• recommended and actively promoted the proposed value-destructive merger with ESR-REIT which is now clearly evident to have mainly benefited ESR Cayman and ESR-REIT, at the expense of Sabana unitholders;

• made unitholders bear the full cost of the failed merger despite it being proposed by the manager;

• consistently tabled resolutions such as new unit issues and dividend reinvestment plans, which were overwhelmingly rejected by independent unitholders (resolutions were passed mainly due to ESR Cayman's votes)

Tan is now vehemently defending the "independence" of Chan despite the clear corporate governance and potential conflict of interest issues.

Just last year, ESR Cayman-owned Sabana manager gave the board of directors and the CEO a substantial pay and fee raise when Chan was appointed as an independent director. In particular, Tan's director fee was increased by some 60 per cent.

Is Tan eager to please ESR Cayman-owned Sabana manager who has made him one of the most highly paid directors among smaller S-REITs?

Tan's actions seem to reflect a failure to prioritise unitholders' interests over those of the REIT manager and its shareholders in accordance with the Securities and Futures Act.

Sabana REIT manager's seemingly concerted effort to retain Chan as a director regardless of the corporate governance and potential conflict of interest issues with ESR Cayman raises serious questions.

It is a painful walk down memory lane as it reminds unitholders of the appointment of Ng in November 2019 as an independent director despite her prior business dealings with ESR Cayman. The proposed lowball and value-destructive merger with ESR-REIT followed shortly after.

As clearly pointed out by Adrian Chui, the CEO of ESR-REIT in the merger with ARA Logos Trust, the sharing of a common sponsor with existing overlapping investment mandate can create uncertainties arising from the conflict of interest which are likely to negatively impact the growth potential of both REITs.

Sabana unitholders already face the overlapping investment mandate and potential conflict of interest issues due to ESR Cayman's majority shareholding in the managers of both Sabana REIT and ESR-REIT.

It is thus critical that unitholders vote against the endorsement of Chan's appointment as an independent director of the manager as it can potentially create more corporate governance and conflict of interest issues.

Quarz's interest is fully aligned with all independent unitholders of Sabana REIT. We urge all unitholders to vote against Resolutions 3, 4 and 5 at Sabana's Apr 26 AGM to protect all our investments.

Only when unitholders send a strong statement to the manager will they finally "wake up" and focus solely on improving Sabana unitholders' interest, DPU and unit price.

Jan F Moermann CIO, Quarz Capital

Havard Chi Portfolio Manager, Quarz Capital