GEORGE TOWN, Cayman Islands, Aug. 7, 2020 /PRNewswire/ -- Quarz Capital Management and Black Crane Capital issued an open letter to the Management and Board of Sabana REIT.
QUARZ CAPITAL MANAGEMENT AND BLACK CRANE CAPITAL ISSUE OPEN LETTER TO THE MANAGEMENT AND BOARD OF SABANA REIT (SGX: M1GU)
ALL RECIPIENTS ARE ADVISED TO READ "IMPORTANT DISCLOSURE INFORMATION" AT THE END OF THE ATTACHED LETTER
August 7, 2020
QUARZ CAPITAL AND BLACK CRANE CAPITAL INTEND TO REJECT PROPOSED MERGER OF SABANA AND ESR REITS AT CURRENT TERMS (0.94 ESR REIT UNIT FOR 1 SABANA REIT UNIT)
Dear Mr. Han, Management and Members of the Board of Sabana REIT,
Quarz Capital and Black Crane Capital advise entities that hold long-term investments on behalf of institutions, foundations, and families. These entities collectively own more than 10% of the units of Sabana Shari'ah Compliant REIT (the "Sabana REIT", "Trust", "Sabana", or "SSREIT SP").
The previous letter from Quarz Capital addressed to Sabana in Nov 2019 detailed the multiple levers that Sabana had which could potentially increase its normalized DPU[1] by more than ~50% in the mid-term (Dividend Yield of ~9.7%[2]), namely:
The redevelopment of 240,000 sqft of prime business park space at 151 Lorong Chuan and 1.3million sqft of industrial space at key assets such as Nr. 33&35 Penjuru, Nr. 51 Penjuru, 3A Joo Koon Circle and 26 Loyang Drive can yield further growth in rental income. All these drivers provide a long runway to potentially increase value for unitholders and close the substantial discount at which the REIT is trading to its NAV. Additionally, the commencement of the retail space will provide a NAV and income uplift from early 2021.
The letter also highlighted the corporate governance concerns and potential conflicts of interests due to ESR's controlling ownership of the managers of Sabana and ESR REITs and the overlapping investment mandate of the two REITs. As such, we proposed a merger by way of a Trust Scheme between ESR and Sabana REITs around Book Value to resolve these potential key issues.
Black Crane Capital has also raised similar concerns with Sabana REIT before, including via a private letter to the Board of Sabana REIT in June 2019 that expressed concerns about a) the large valuation gap between Sabana's unit price at the time and NAV/fundamental value, b) the prospect of an ESR REIT approach to acquire Sabana, c) the potential conflict of interest faced by Sabana REIT's manager especially in that context but also more generally, d) the need for Sabana to appoint a financial advisor to explore all options to optimize value including a breakup, in order to act in the best interests of all unitholders.
It is therefore truly appalling that the management and board of Sabana REIT have, on 16th July 2020, proposed to merge Sabana REIT with ESR REIT at 1 Sabana REIT unit for 0.94 ESR REIT unit, implying a value of S$0.377 per Sabana REIT unit.
We intend to vote against the proposed merger for the following reasons:
Firstly, the merger is at a substantial discount of ~26% and ~34% to Sabana's NAV at 30th June 2020 and 31st Dec 2019 respectively. In the 18-year history of the Singapore REIT market with multiple takeovers/mergers, there has never been a single takeover/merger of a REIT target at such a substantial discount to book value.
Secondly, based on FY19 distributions after adjusting for Sabana's lower gearing, the proposed merger is potentially DPU dilutive for Sabana unitholders. However, Sabana and ESR claim that the proposed merger is DPU accretive, based on the comparison of 1H20 distributions which have been significantly adjusted to account for COVID-19, although the basis of such adjustments have not been disclosed and may not necessarily be consistent.
Thirdly, Sabana properties have significantly higher potential upside in terms of increased occupancy and undeveloped GFA versus ESR. The proposed merger terms do not reflect this.
Fourthly, there are two simple initiatives that the Sabana Manager should have undertaken and could still undertake to enhance DPU namely, removing Shariah compliance to reduce interest costs and increasing leverage to fund unit buybacks or make further investments.
Finally, the approach from ESR REIT is opportunistically timed during the COVID-19 crisis. Given Sabana's strong balance sheet there is no imperative for Sabana to undertake a merger at this time. The merger should not proceed unless it is on terms that reflect the value of Sabana's underlying properties and are fair to Sabana REIT unitholders.
Coincidentally, the merger offer was made exactly one year after ESR had bought a substantial stake in Sabana REIT at S$0.48 per unit in cash as well as the controlling stake in Sabana REIT's manager at an estimated rich premium of P/E 2017 and 2018 of ~33.6x and ~26.1x respectively from the same vendor.
The proposed merger offer appears to be a bold attempt by ESR to potentially solve the conflict of interest issue at the expense of Sabana unitholders. We are deeply concerned that Sabana's manager has also agreed to propose the merger. The actions of Sabana's manager have potentially highlighted the conflict of interest complication we raised previously - ESR being, 1) the controlling shareholder of both Sabana and ESR REITs managers, and 2) together with concert parties being the top unitholders of both REITs with overlapping investment mandates. A number of other actions do not put Sabana's manager in a favorable light in the context of a merger. These include a) the decision of Sabana management not to abandon Shariah compliance despite calls to do so over many years (but for ESR REIT to do so immediately following the proposed merger), b) Sabana's very high level of dividend retention in its 1H20 results, and c) Sabana not disclosing the level of provisions and allowances for impairments that was deducted from the gross revenue line in its 1H20 results.
Given the substantial undervaluation of the offer price to the NAV, it raises concerns on whether the fiduciary duty of Sabana's board and management to act and protect all unitholders' interest has been potentially compromised. If Sabana's board and management had intended to sell the Sabana REIT and intended to act in the best interest of all unitholders, shouldn't there have been a rigorous, fair and transparent public sale process in an appropriate market environment where third parties such as other REITs, investment funds, corporate entities and individuals are able to undertake proper due diligence, prepare and bid to purchase all or part of the portfolio at a price which is equal or higher than its book value? Would this process have potentially elicited a far superior offer as compared to the suboptimal offer from ESR REIT which Sabana REIT manager is now proposing to unitholders? We believe these are key questions that must be answered!
Sabana has one of the lowest gearing levels among S-REITs and has ample financial liquidity. Its rental income in 1H20 has also demonstrated resilience during this COVID-19 period by declining only 7% on a YoY basis despite providing rental rebate to its tenants. Sabana's rental income and NAV will further increase due to the completion of the retail component. It is thus hard to comprehend why Sabana's board and management would propose to 'panic-sell' at a substantial discount to book value which has been very conveniently and temporarily reduced from S$0.57 to S$0.51 per unit by the weaker market sentiments due to COVID-19.
We believe that the argument that Sabana has historically traded at a substantial discount to NAV for a prolonged period and thus should agree to a lower takeover price is not justifiable. The historical discount to NAV can potentially be attributed to poor management decisions both under the sponsorship of the Vibrant Group and now under the conflicted sponsorship of ESR. The Sabana manager has failed to timely execute on various strategies to improve the valuation of Sabana REIT. Besides the development of the retail component, Sabana has not executed on any strategic transactions since early 2019 despite substantial debt headroom. Additionally, occupancy rates have remained below market level for a prolonged period and have sharply worsened since ESR came on board. Other issues include Sabana running an inefficiently under-geared capital structure and its continuance of Shariah compliance which increases interest costs.
Quarz Capital and Black Crane Capital INTEND TO VOTE AGAINST THE PROPOSED MERGER OF SABANA AND ESR REITS AT THE CURRENT TERMS (0.94 ESR REIT UNIT FOR 1 SABANA UNIT WITH AN IMPLIED VALUE OF S$0.377 PER SABANA REIT UNIT).
As the biggest independent unitholders who are not conflicted in the transaction, we are open for constructive negotiation with the bidder for a proposed takeover price in line with Sabana's NAV. We remind the board and management of Sabana REIT of their fiduciary duty to act and negotiate in the best interest of all unitholders.
We are actively engaging with other unitholders who also share similar views that the current proposed price significantly undervalues Sabana REIT. We will share our views and engage with all unitholders to ensure that all parties are provided with the necessary information to make an informed decision.
We invite all unitholders to visit the website we have prepared for informational purposes at www.savesabanareit.com
We are currently working on alternative options to the merger and intend to present them to fellow unitholders shortly in order to potentially unlock substantial unitholder value.
The potential rejection of the takeover offer at the October EGM will be unprecedented, being the first time in the history of REITs in Singapore. More importantly, it will highlight a massive lack of confidence in Sabana REIT's manager and its proposals. It will also raise concerns about the corporate governance standards and fiduciary duty of the REIT manager to its unitholders. It is also a total rejection of the potential conflict of interest which now exists due to the ownership of the manager by ESR Cayman.
We and other unitholders intend to ensure swift action is taken to resolve the potential conflict of interest to avoid any further value destruction in Sabana REIT.
Sincerely yours,
Jan F. Moermann
CIO, Quarz Capital Management
Peter Kennan
CIO, Black Crane Capital
For further information, please contact: info@savesabanareit.com
Or visit: www.savesabanareit.com
Contact:
Havard Chi
hch@quarzcapital.com
[1] Assume the exclusion of rental rebate due to COVID-19
[2] Assume unit price of S$0.38
[3] Net Rent of ~S$9psf per month at ~95% occupancy
[4] Assuming NAV of S$0.51-0.56 per unit
[5] Assume ~50% payment of management fees in units
IMPORTANT DISCLOSURE INFORMATION
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF SABANA SHARI'AH COMPLIANT REIT'S SECURITIES AND ACTION THAT SABANA REIT'S BOARD MAY TAKE TO ENHANCE THE VALUE OF SABANA REIT'S SECURITIES. OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. SABANA REIT's ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE, NOR DO WE INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. NOTHING HEREIN SHALL CONSTITUTE OR BE REGARDED AS INVESTMENT ADVICE. ALTHOUGH WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF SABANA REIT'S SECURITIES, THIS LETTER DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY PROJECTION, FORECAST OR PREDICTION AS TO THE PRICE AT WHICH SABANA REIT'S SECURITIES MAY TRADE OR MAY BE LIKELY TO TRADE AT ANY TIME. AS NOTED, THIS LETTER EXPRESSES OUR CURRENT VIEWS ON SABANA REIT. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF SABANA REIT SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING SABANA REIT WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING SABANA REIT AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED IN THIS LETTER.
As of the publication date of this letter, Quarz Capital Management Ltd. / Black Crane Capital and its affiliates (collectively "Quarz" and "Black Crane"), others that contributed research to this letter and others that we have shared our research with (collectively, the "Authors") have long positions in and own options on the securities of SABANA SHARI'AH COMPLIANT REIT and stand to realize gains in the event that the price of such securities increases. Following publication of this letter, the Authors may transact in the securities of SABANA REIT. All content in this letter represent the assumptions and opinions of the Authors as of the publication date of this letter. The Authors have obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented "as is", without warranty of any kind – whether express or implied. The Authors make no representation, express or implied, as to the accuracy, timeliness, reliability, fairness or completeness of any such information, opinions or conclusions expressed herein or with regard to the results obtained from its use and no liability whatsoever is accepted for any loss arising directly or indirectly as a result of any person acting upon any information, opinion or conclusion contained in this letter. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this letter, or any information, opinions or conclusions contained herein.
This letter is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this letter is based upon selected public market data and reflects prevailing conditions and the Authors' views as of this date, all of which are accordingly subject to change. The Authors' assumptions, opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. The estimated fundamental value of the securities covered herein as expressed in this letter only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.
This letter does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of the Authors. Also, this letter does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors' abilities and beliefs, all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company, entity or securities discussed in this letter at any time. As of the original publication date of this letter, investors should assume that the Authors are holding long position in SABANA REIT and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of SABANA REIT's securities is higher than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other companies, securities, or commodities (if any) discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors' operations and their affiliates. The compensation structure for the Authors' analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors' documents.
The information contained in this letter may include, or incorporate by reference, forward- looking statements, which would include any statements that are not statements of historical fact. Any or all of the Authors' forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the Authors' control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this letter and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS LETTER ARE FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO, STATEMENTS THAT ARE PREDICATIONS OF OR INDICATE FUTURE EVENTS, TRENDS, PLANS OR OBJECTIVES. UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS BECAUSE, BY THEIR NATURE, THEY ARE SUBJECT TO KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE OR ACTIVITIES AND ARE SUBJECT TO MANY RISKS AND UNCERTAINTIES. DUE TO SUCH RISKS AND UNCERTAINTIES, ACTUAL EVENTS OR RESULTS OR ACTUAL PERFORMANCE MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF THE FUTURE TENSE OR OTHER FORWARD-LOOKING WORDS SUCH AS "VIEW," "BELIEVE," "CONVINCED," "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE," "SHOULD," "MAY," "WILL," "OBJECTIVE," "PROJECT," "FORECAST," "BELIEVES," "CONTINUE," "STRATEGY," "PROMISING," "POTENTIAL," "POSITION" OR THE NEGATIVE OF THOSE TERMS OR OTHER VARIATIONS OF THEM OR BY COMPARABLE TERMINOLOGY.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS SET FORTH IN THIS LETTER INCLUDE, AMONG OTHER THINGS, THE FACTORS IDENTIFIED IN THE RISK SECTIONS IN SABANA SHARI'AH COMPLIANT REIT'S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31ST, 2019 AND PROSPECTUS. SUCH FORWARD-LOOKING STATEMENTS SHOULD THEREFORE BE CONSTRUCTED IN LIGHT OF SUCH FACTORS, AND QUARZ CAPITAL MANAGEMENT AND BLACK CRANE CAPITAL ARE UNDER NO OBLIGATION, AND EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION, TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY LAW.
