SINGAPORE, June 9, 2023 /PRNewswire/ -- Quarz Capital and Unitholders holding more than 10% of the total units of Sabana Industrial REIT (SSREIT SP Equity) are requisitioning to convene an Extraordinary General Meeting ("EGM") for unitholders to VOTE FOR replacing the current External REIT Manager with a newly set-up Internal REIT Manager owned by and aligned with all unitholders.
The removal of the External Manager is projected to increase the dividend paid to unitholders by more than ~7.2% (~7.6% Dividend Yield) due to cost savings from the elimination of all fees currently paid.
With the complete alignment of interest and improved corporate governance, the new Internal Manager's execution of key strategies can potentially increase DPU by ~30% and unit price to more than ~S$0.55 (potential dividend yield of >9.2% at current price).
The requisition letter is as follows:
Date: Wednesday 7 June 2023
Attention: The Board of Directors
Sabana Real Estate Investment Management Pte. Ltd.
(As Manager of Sabana Industrial REIT)
151 Lorong Chuan
2-03 New Tech Park
Singapore 556741
Dear Sirs,
RE: REQUISITION TO CONVENE AN EXTRAORDINARY GENERAL MEETING FOR REMOVAL OF MANAGER PURSUANT TO CLAUSE 24.1.4 READ WITH SCHEDULE 1, PARAGRAPH 2 OF THE SECOND AMENDING AND RESTATED DEED DATED 24 MARCH 2016
1. We are unitholders holding more than 10% of the total units of SGX-listed Sabana Industrial Trust ("Sabana REIT", "Sabana" or "Trust") managed by Sabana Real Estate Investment Pte Ltd ("Sabana REIT Manager", "SREI", "Manager" or "Sabana Manager").
2. We hereby give you notice pursuant to Clause 24.1.4 read with Schedule 1, paragraph 2 of the Second Amending and Restating Deed dated 24 March 2016 ("Deed") to convene an Extraordinary General Meeting ("EGM") and table the following resolutions to unitholders for the purposes of passing the following resolutions: -
ORDINARY RESOLUTIONS
RESOLVED:
RESOLUTION 1: That Sabana Real Estate Investment Management Pte. Ltd. be removed as the Manager of Sabana Industrial REIT as soon as practicable after this resolution is passed.
RESOLUTION 2: That the Trustee of Sabana Industrial REIT, HSBC Institutional Trust Services (Singapore) Limited, be directed to:
i) effect the internalization of the REIT Management function by incorporating a subsidiary ("Internal Manager") wholly owned by the Trustee and appointing such a subsidiary to act as the manager of Sabana Industrial REIT (the "Management Subsidiary");
ii) hire and appoint qualified candidates as directors and staff of the Internal Manager in accordance with the applicable requirements of the Securities and Futures Act 2001;
iii) consider the retention of Sabana REIT's existing staff in order to maintain the continuity of Sabana REIT's operations;
iv) amend the provisions of the Deed such that each director of the Internal Manager may be appointed and/or removed by a simple majority of unitholders;
v) amend the provisions of the Deed such that each director of the Internal Manager must be endorsed or re-endorsed by unitholders at every 3rd annual general meeting of Sabana REIT; and
vi) amend the provisions of the Deed such that any change of control in the Internal Manager may only be effected upon approval of a simple majority of unitholders.
3. Our reasoning for the proposed resolutions is outlined in the following pages:
IMPORTANT: You will be making a binary decision. Remove the Manager or Keep the Manager. It is your choice. Not Voting is a Vote to Keep the Manager. Do nothing and you will continue to lose. Please attend the meeting and VOTE FOR the adoption of all the resolutions.
Please register at: www.savesabanareit.com
Join Telegram Group: https://t.me/savesabanareit for more updates and information.
Quarz will hold a webinar for all unitholders on Thursday 6th of July 2023 at 8.00pm
Link to webinars is: https://us02web.zoom.us/j/88970799227 (Meeting ID 889 7079 9227)
YouTube link to video: https://youtube.com/@quarzcapital2614
Please contact us: +65 8684 6968 for any assistance.
HOW DO UNITHOLDERS BENEFIT FROM REPLACING THE CURRENT EXTERNAL MANAGER WITH A NEW INTERNAL MANAGER?
Unitholders are proposing to remove the current External REIT Manager ("External Manager"), Sabana Real Estate Investment Pte Ltd, and to replace it with a newly set-up Internal REIT Manager ("Internal Manager") owned by all unitholders. This process is known as "internalization".
The internalization is projected to increase the dividend paid to unitholders by more than ~7.2% to S$0.0327 per unit (~7.6% Dividend Yield[1]) once the External Manager is removed.
This increase would mainly come from cost savings of about ~S$7.25 million of fees[2] (of which S$4.4 million are management fees, equivalent to ~14% of distributable income) and net profit which unitholders currently pay to the External Manager and its shareholder, ESR Group ( 1821 HK ) .
The removal of the External Manager will also likely eliminate all other fees such as performance, acquisition, divestment, lease and property management fees which needs to be paid by unitholders to the External Manager.
As the Internal Manager will be fully owned by and aligned with all unitholders, its sole goal will be to increase dividend growth, unit price and corporate governance for unitholders as fast as possible.
MAIN GOAL OF THE NEW INTERNAL MANAGER IS TO INCREASE DPU AND UNIT PRICE ABOVE S$0.53 (NAV)
The new Internal Manager will be owned by and work for the benefit of all unitholders with the sole goal of increasing dividend and unit price above S$0.53 by quickly executing on key strategies.
The new Internal Manager can immediately execute on the following key strategies to potentially increase DPU and unit price by ~30% to more than ~S$0.55 (potential dividend yield of >9.2% at current price):
1. Immediate cost savings of ~S$2.4[3] million per year through the internalization of the REIT manager (Additional DPU of S$0.0022 with upside of ~7.2%);
2. Complete the asset enhancement of 1 Tuas Ave 4 and rent out ~90% of the asset at net rent of at least S$1.45psf/month (Additional DPU of S$0.0017 with upside of ~5.4%);
3. Increase occupancy rate at NTP+ to ~90% by capitalizing on excellent location (next to MRT) and innovative space usage e.g., subdividing space to increase rentability to technology (software development, electronics) and E-Commerce clients (Additional DPU of S$0.0032[4] with upside of ~10.5%); and
4. Undertaking S$~85m of acquisitions funded with yield of ~7.2% fully by debt (Additional DPU S$0.002 with upside of ~6.7%).
In addition, the Internal Manager can execute other attractive and executable mid-term strategies which can potentially further drive Sabana REIT's unit price beyond S$0.55, such as the following:
5. Develop ~200,000 square feet of new space at NTP+ (Additional DPU of S$0.0048[5] with upside of ~15.7%); and
6. Develop more than 1 million square feet of untapped GFA/landbank with focus on sizeable key assets such as 33&35 Penjuru Lane, 26 Loyang Drive which can be transformed into New Economy ramp up logistic hubs or data centres (Additional DPU of S$0.0039[6] with upside of ~12.9%).
The Internal Manager's complete execution of all the above catalysts in the short and mid-term can deliver a potential total DPU upside of almost ~60% to S$0.0483 (potential dividend yield of ~11.2%).
In addition, the resolution also seeks to empower unitholders to appoint, approve and re-elect directors to represent their interests. This results in the complete alignment of interests between the Internal Manager and unitholders.
By removing the current External Manager and appointing an Internal Manager, unitholders will finally benefit from a "win-win" solution which potentially results in higher DPU, unit price and better corporate governance!
UNDERPERFORMANCE OF SABANA REIT AND THE EXTERNAL MANAGER
Sabana REIT is the only SGX-listed REIT with predominately Singapore industrial properties that is trading at a substantial discount of ~20% to its NAV of S$0.53.
Since ESR Group (HK:1821) took control of the REIT manager in 3Q2019, the occupancy rate of Sabana REIT has constantly been below its REIT peers as well as the JTC national average.
Sabana REIT's Dividend per unit ("DPU") in 2H2022 has already declined by more than 7% and 8% when compared to 2H2021 and 1H2022, whereas its SGX-listed peers have either nearly flat or increasing DPUs.
Despite the favourable industrial market in 2022, occupancy rates in key buildings with higher rental rates in Sabana REIT's portfolio have fallen significantly in 4Q2022 (e.g., Frontech Centre 94%→66%, 8 Commonwealth Lane 100%→82%, 10 Changi South St 2 80%→74% and NTP+ (81%→77%).
Sabana REIT's NAV has also plummeted by ~8% from S$0.57 in 4Q2019 to S$0.53 in 4Q2023.
Due to these failures in maintaining occupancies, Sabana REIT's DPU and unit price are forecasted to further decline in 2023. The current performance of the REIT as described above is already costing unitholders substantial loss in terms of DPU and unit price.
If substantial unitholders have not increased their stakes over the last 2-3 years, Sabana REIT's unit price might have potentially decreased to <S$0.40 given the worsening DPU, NAV and continuing bad performance of the External Manager
If such performance continues, this may result in a further decline of DPU and unit price, especially when measured against the NAV of S$0.53.
POTENTIAL CONFLICTS OF INTEREST ON THE PART OF THE EXTERNAL MANAGER
ESR Group has 100% ownership in the External Manager of Sabana REIT. Yet at the same time, ESR Group is the 99% owner of the manager of ESR Logos REIT (SGX: J91U). It is also the largest unitholder in the REIT with a 16.4% stake.
As both ESR Logos REIT and Sabana REIT primarily invest in Singapore industrial properties, ESR Group's significant ownership of the managers in both REITs results in the overlap of investment mandates which can potentially cause critical conflicts of interest issues relating to asset acquisitions, divestment, and strategic decisions between the REITs.
These potential conflicts of interest can seriously and negatively impact Sabana unitholders' unit price and DPU.
In addition, ESR Group's stake in ESR REIT at ~S$401m[7] is ~4.1x more than its ~S$98m stake in Sabana REIT. ESR Logos REIT's manager also earns nearly 5 times of the management fee as compared to Sabana REIT's External Manager.
As a HK listed company with fiduciary duties towards its own investors, it is unsurprising that ESR Group would prioritise the interests of ESR Logos REIT over those of Sabana REIT which, if true, would be to the detriment of Sabana REIT unitholders.
One such example was in 2020, when Sabana REIT had been offered what was, in our view, an unexpectedly low implied price of S$0.30[8] to merge with ESR Logos REIT, which potentially benefited ESR Logos REIT and ESR Group at the expense of Sabana REIT unitholders.
The potential conflicts of interest and corporate governance flaws can depress Sabana REIT's DPU and unit price.
The removal of the current REIT Manager and the setup of a new Internal Manager will immediately end this issue relating to corporate governance. With an independent mandate, an Internal Manager can make strategic decisions that would serve unitholders' interests and achieve a higher DPU and unit price for unitholders.
THE EXTERNAL MANAGER MODEL PRESENTS A POTENTIAL MISALIGNMENT OF INTERESTS BETWEEN THE EXTERNAL MANAGER AND UNITHOLDERS
More than ~97% and ~90% of REITs in the US and Australia with market capitalizations exceeding ~S$1.4 trillion[9] are managed by Internal Managers. By comparison, the Singapore-listed REIT market only started in 2002[10] and has a total market capitalization of ~S$100 billion[11].
As the REIT market in US and Australia have been in existence since 1970s, the general investors' sentiments backed by numerous academic studies is that the External Manager Model tends to underperform the Internal Manager Model, especially in terms of DPU and unit price.
This is because the External Manager Model suffers from a misalignment of interests between the External Manager in question and unitholders of a REIT.
While an Internal Manager works to increase the DPU and unit price of unitholders, an External Manager tends to serve the interests of its owner, namely the Sponsor, by increasing its profitability where possible.
An External Manager can increase the profitability of its Sponsor by:
A. increasing Acquisition Fees from doing more acquisitions;
B. increasing Management Fees by acquiring and enlarging the portfolio; or
C. acquiring the Sponsor's properties at a profit for the Sponsor's benefit.
The External Manager could increase its fees by acquisitions, which is funded by increasing borrowings and/or doing placements and rights to raise capital from unitholders and new investors.
However, excessive acquisitions financed by borrowings and higher leverage levels can put the REIT on a weaker financial footing.
Consistent placements and rights offerings, which are often done at a discount from the market price, may cause downward pressure on the unit price.
Both such options may lower DPU and unit price and, would be in direct conflict with unitholders' interests.
Due to the above and the preference of investors towards the Internal Manager Model, many REITs in the US and Australia have converted from External to an Internal Manager Model.
EXAMPLES WHERE THE EXTERNAL REIT MANAGER MODEL HAS NEGATIVELY IMPACTED THE UNIT PRICE AND DPU OF UNITHOLDERS
Manulife US REIT, Eagle Hospitality Trust and Dasin Retail Trust are three such examples of how the misalignment of interests between an External manager and unitholders can substantially reduce unit prices by more than 80%.
As pointed out in a BT article by Ben Paul[12], the current high leverage problem at Manulife US REIT can be attributed to its External Manager's persistence in acquiring properties despite the already high leverage of 41% in 2021. Since its IPO in May 2016[13], the External REIT Manager has collected more than S$80m[14] of management, performance, and acquisitions fees from unitholders. This is while unitholders suffered a plunge of ~80%[15] in their unit price.
Despite the distressed situation which the REIT is currently in, its External Manager, instead of supporting the REIT, is now currently in discussion with Mirae to enable the sponsor and the External manager's owner to cash out at a substantial profit.
Over at Eagle Hospitality Trust, the sponsor who owned the External Manager injected their hotel assets into the REIT at inflated valuations through the usage of master leases with the sponsor.
The sponsor subsequently defaulted on these master leases, which resulted in financial distress to the REIT and it was eventually wound up.
While unitholders' investments were completely wiped out, the sponsor and the owner of the manager of Eagle Hospital Trust benefited from monies used to purchase the properties even though the REIT closed down.
At Dasin Retail Trust ("DRT"), Mr. Zhang Zhencheng, a minority shareholder of DRT's trustee-manager, and major unitholder of DRT filed a claim in the High Court against the lead independent director of the DRT's External Manager. Zhang alleged that the lead independent director pushed for a legally binding MOU which required DRT to buy assets in China from the foreign seller. This is when the REIT is potentially in distress with the unit price collapsing by more than 80%[16] since IPO and should be disposing assets to repay bank loans.
SUCCESSFUL EXAMPLES OF THE INTERNAL MANAGER MODEL IN SINGAPORE
Similar to Sabana REIT, Croesus Retail Trust's unit price had consistently traded at a sharp discount of ~20% to its book value of ~S$0.95 prior to their internalisation.
Croesus Retail Trust conducted the internalization of its manager in August 2016 to align the manager's interest with its unitholders and to increase DPU, unit price and corporate governance.
Croesus Retail Trust saw its 4Q2017 (Quarter end June 2017) DPU increase by more than 18% year-on-year as its internal manager worked hard to increase rental income and reduce interest cost.
In less than 10 months after the manager was internalized, Croesus Retail Trust sold itself to Blackstone at a premium of ~23% to its book value and a premium of ~38% to its VWAP in the last 12 months.
Another example is NetLink Trust, which also has an internal Trust Manager since its IPO. NetLink Trust has outperformed the benchmark FTSE ST REIT Index by more than 25% and has also successfully grown DPU without any need for acquisitions and with low net gearing level of ~20%.
The Trust has been ranked No. 1 in ASEAN Corporate Governance Scorecard as well as the Governance Index for Trusts.
ARE THE RISKS REGARDING THE CHANGE OF CONTROL PROVISIONS AND THE BANK LOAN "REAL"?
The current External Manager, in its desperation to make unitholders continue paying fees, may resort to 'scare tactics' such as 'change of control provisions' to preserve its own interest.
This is despite the Internal Manager being able to deliver dividend and unit price upside to unitholders fairly quickly in the near future.
Sabana REIT's leverage, at only 33.1%, is the 6th lowest leverage level among ~40 SGX-listed REITs. With the low leverage, it would take Sabana REIT less than 6 years to pay off the entire loan from Sabana's net property income ("NPI"). In comparison, it will take Keppel and Suntec REIT more than 11 years to pay off its entire loan from NPI[17].
The loans are backed by strong rental income from its property portfolio which is entirely in Singapore.
Singapore is a highly transparent and attractive market with a substantial number of institutional investors and sovereign funds looking to invest in attractive and high yielding industrial assets with similar attributes to properties owned by Sabana REIT.
All these further improve the high-quality collateral of Sabana REIT to UOB, HSBC and Maybank, which are the Trust's main financiers.
As such, we are highly confident that Sabana REIT's current financiers which strongly uphold ESG (Environmental Social and Corporate Governance), will choose to support good corporate governance and ~10,000 Sabana REIT unitholders (many of whom are Singaporeans and also their clients) over an External Manager, especially if the latter is removed by unitholders via the EGM due to potential corporate governance concerns and conflicts of interest.
Once an Internal Manager is appointed that solely focuses on quickly improving occupancy rate and dividend per unit above all else, this will be a win-win for the banks as they will be supporting a REIT with an even stronger portfolio and cashflow.
ESR GROUP IS THE "BIGGEST LOSER" IF A CHANGE OF CONTROL PROVISION PROBLEM OCCURS
If the "threat" of the change of control provision materializes, ESR Group, as the largest unitholder with a ~21% stake (valued at ~S$98million), would be the biggest loser as they have more than ~S$130million at risk including the Sabana External Manager.
The potential loss of Sabana REIT Manager will also cast serious doubts on ESR Group's entire REIT management business model where it and its associates own more than 13 REIT Managers.
It may also potentially result in ESR Group 'ESG hungry' capital partners such as GIC, OMERS and APG to reconsider and/or stop new and existing investments with the firm given the negative corporate governance implications.
This can potentially result in the further substantial loss of ESR Group's market capitalization and valuation. ESR Group's share price has already collapsed nearly -30% and -55% since its IPO and late 2021[18].
If ESR's share price was to correct severely due to the above, it could expose the board of directors to potential lawsuits from its shareholders.
RETAINING EXISTING STAFF AND HIRING BEST CANDIDATES IN THE MARKET
Once unitholders cease all payment of fees to Sabana's External Manager, it is very likely that the External Manager will have to terminate most of its employees. This is as 100% of all revenue and profits of the External Manager are contributed by Sabana REIT and unitholders.
The new Internal Manager welcomes all management and staffs who prioritise the interest of and are aligned with unitholders to join the refreshed team.
In addition, Singapore is the 3rd largest listed REIT market in Asia Pacific with a ready and deep talent pool of professionals. The ongoing consolidation in the SGX-listed REIT market with more than 10 mergers and the privatization acquisitions in the SGX-listed REIT space over the last 7 years have resulted in highly qualified personnel being let go due to duplicity, despite their substantial REIT expertise.
We look forward to the new Internal Manager hiring the best and the brightest from this strong talent pool, complemented by hires from the old External Manager, so that it is best placed to achieve the goal of increasing DPU and unit price with a target of at least S$0.53.
UPHOLDING HIGH STANDARDS OF CORPORATE GOVERNANCE VIA INTERNALIZATION
The MAS has previously affirmed that "high standards of corporate governance, characterised by strong accountability and transparency, are critical in upholding investor confidence in our Singapore's capital markets".
ESR Group has had nearly 4 years to resolve the potentially critical overlapping investment mandate which leads to conflicts of interest issues.
However, they seem to have shown little to no interest in resolving these issues besides a 'lowball' merger offer from ESR Logos REIT (EREIT SP Equity) at an implied price of S$0.30[19] which is at a ~42% discount to the NAV of Sabana REIT then.
The External Manager's board of directors actively promoted the offer to the benefit of ESR Group and ESR Logos REIT despite its hugely negative impact on Sabana REIT unitholders.
The External Manager then passed on the entire cost of the failed merger to unitholders. This is despite unitholders already publicly informing the Manager that the transaction will be overwhelmingly voted down by unitholders due to its inferior price.
In April 2022, the board of the External Manager attempted to appoint Mr Charlie Chan as an 'independent director' despite him receiving a substantial premium of ~S$22 million over market price from ESR Group. This appointment was rejected by more than 77% of unitholders at the AGM.
Additionally, in April 2023, even though about 90% of all unitholders at the AGM rejected the endorsement of Ms Elaine Lim, instead of respecting the votes of unitholders and upholding corporate governance, the board of the External Manager decided to go through a convoluted process of appointing her as a 'non independent director'.
The internalization of the Sabana REIT Manager will once and for all resolve the above corporate governance issues. It will also substantially improve accountability and corporate governance at Sabana REIT.
The regulators, by supporting this Internalization proposal, may also clearly demonstrate to existing External Managers of REITs listed on SGX that actions which damage unitholders' interest and confidence of investors, as well as lower the corporate governance standards and the reputation of Singapore's financial market, will no longer be tolerated.
We are confident that MAS and SGX RegCo will safeguard the interest of unitholders' interest and act swiftly if the board and the owner of the Sabana REIT's External Manager were to prioritise the interest of ESR Group and protect the value of their stake in the Manager over those of independent unitholders.
VOTE FOR THE REMOVAL OF THE CURRENT EXTERNAL MANAGER
VOTE FOR THE SETUP OF A NEW INTERNAL MANAGER THAT IS ALIGNED WITH ALL UNITHOLDERS' INTERESTS TO INCREASE DPU, UNIT PRICE AND CORPORATE GOVERNANCE
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Frequently Asked Questions on EGM Resolutions
1. What are the 2 resolutions to be voted on?
The first resolution is to remove the current External Manager due to its poor performance and potential conflicts of interest. Once removed, unitholders will not need to pay any fees to the External Manager.
The second resolution is to setup a new Internal Manager which will be owned by all unitholders. In addition, the resolution also seeks to empower unitholders to appoint, approve and re-elect directors to represent their interests. This results in the complete alignment of interests between the Internal Manager and unitholders.
If these resolutions are passed and implemented, we project that these would increase unitholders' DPU by more than ~7% to S$0.033 per unit (~7.6% Dividend Yield) through the elimination of fees paid to the External Manager.
The main goal of the new Internal Manager would be to increase DPU and unit price by more than 30% to above S$0.53 (NAV per unit).
The new Internal Manager will be able to achieve the above by executing on key strategies such as increasing occupancy rate, asset enhancements and development projects for the benefit of Sabana REIT unitholders.
2. What are the disadvantages of the current model of Sabana External Manager?
Sabana unitholders currently pay more than S$7.25 million per year, including S$4.4 million of management fees (~14% of annual dividend per unit), to Sabana REIT Manager which is 100% owned by ESR Group.
These fees from unitholders go toward paying the directors and CEO of the External Manager some of the highest salaries and fees among SGX-listed REITs. Even after paying these salaries, the External Manager makes another S$1.2 million in profit, which ESR Group benefits from as its 100% owner.
If Sabana REIT makes acquisitions, divestments and increases its portfolio size, unitholders will have to pay even more fees to the External Manager.
These fees paid to Sabana External Manager still have to be paid regardless of the performance of DPU and unit price.
This means that even if the unit price and DPU decreases after the acquisitions, unitholders will have to pay even more fees to the External Manager.
For example, the management fees paid by ESR Logos REIT unitholders to its External Manager (which is also owned by ESR Group, similar to Sabana REIT) increased by more than ~222% from S$6.5 million in 2013 to S$21.2 million in 2022.
However, the DPU paid to unitholders plunged by ~40% from 5 cents in 2014 to 3 cents in 2022. The unitholders' NAV per unit also declined by ~48% from S$0.681 to S$0.348 in first quarter 2023.
It is clear that this arrangement does not make sense for us as unitholders.
3. What is internalization and will I receive more dividend per unit?
Internalization means the end of the payment of management fees and profits to the Sabana External Manager owned by ESR Group. All other fees such as acquisition, divestment, performance and property management fees paid to External Manager will be eliminated, resulting in significant cost savings.
The Trustee will setup a new manager which is owned by and for all unitholders.
The CEO, directors and staffs will be employed in-house and directly by the REIT's Internal Manager.
It is also envisaged that the REIT will be able to control the salaries paid to the CEO and directors of the Internal Manager which, if implemented, will result in enormous cost savings.
4. How does internalization get unitholders' unit price back to Sabana REIT's NAV of S$0.53?
As the fees and profit paid to the External Manager would be eliminated and the cost of the CEO, directors and staff can be better managed, unitholders are projected to see a ~7% jump in dividend per unit from S$0.0305 to S$0.0327, increasing the dividend yield to ~7.6%.
The new Internal Manager can immediately execute the strategies below which, if implemented, may potentially increase DPU and unit price by another ~30% to more than ~S$0.55 (potential dividend yield of >9.2% at current price):
1. Immediate cost savings of ~S$2.4 million per year through the internalization of the REIT manager (Additional DPU of S$0.0022 with upside of ~7.2%);
2. Complete the asset enhancement of 1 Tuas Ave 4 and rent out ~90% of the asset at net rent of at least S$1.45psf/month (Additional DPU of S$0.0017 with upside of ~5.4%);
3. Increase occupancy rate at NTP+ to ~90% by capitalizing on excellent location (next to MRT) and innovative space usage e.g., subdividing space to increase rentability to technology (software development, electronics) and E-Commerce clients (Additional DPU of S$0.0032 with upside of ~10.5%); and
4. Undertaking S$~85m of acquisition funded with yield of 7.2% fully by debt (Additional DPU S$0.002 with upside of ~6.7%).
In addition, the Internal Manager can execute other attractive and executable mid-term strategies which can potentially further drive Sabana REIT's unit price beyond S$0.55, such as the following:
1. Develop ~200,000 square feet of new space at NTP+ (Additional DPU of S$0.0048 with upside of ~15.7%); and
2. Develop more than 1 million square feet of untapped GFA/landbank with focus on sizeable key assets such as 33&35 Penjuru Lane, 51 Penjuru Road, 26 Loyang Drive which can be transformed into New Economy ramp up logistic hubs or data centres (Additional DPU of S$0.0039 with upside of ~12.9%).
The Internal Manager's complete execution of all the above catalysts in the short and mid-term can deliver a potential total DPU upside of more than 58% to S$0.0483 (potential dividend yield of ~11.2%).
5. Are there any examples of internalization in Singapore? Did unitholders benefit from such an arrangement?
Yes. Croesus Retail Trust successfully internalized its Manager in August 2016.
Croesus Trust saw its 4Q2017 (Quarter end June 2017) DPU increase by more than 18% year-on-year as its Internal Manager worked hard to rental income and reduce interest cost.
In just a short 10 months after internalization, Blackstone offered to buy Croesus Retail REIT at S$1.17 in cash at a premium of 38% to its 12-month volume average price of S$0.85. The offer was also at a 23% premium to its NAV of S$0.95.
This demonstrates the potential benefit that unitholders can stand to gain under an Internal Manager who is fully devoted to increasing the DPU and unit price of unitholders.
The press and analysts were also highly supportive of the internalization undertaken by Croesus Retail Trust:
"The proposal is a 'good step in the right direction' and may also prompt smaller REITs to move towards a similar direction." Straits Times (14 June 2016)
"Good show of commitment to unitholders that they are keeping their "skin in the game"… Studies have shown that internal managed trusts tend to trade at a premium to externally managed ones." Business Time (24 June 2016)
"Higher valuations garnered by internally managed REITs reflect great investor confidence. The markets for stocks of REITs with better corporate governance tends to be more liquid and efficient than those for other REITs." The Edge (week of 20-26 June 2016)
6. How common is having an Internal Manager in the REIT sector?
In the US and Australia, which are more developed REIT markets when compared to Singapore, more than ~97% and ~90% of the REITs managing more than S$1.4 trillion of market capitalization are managed by Internal Managers. The Singapore REIT market only started in 2002 and only has a market capitalization of ~S$100 billion.
When REITs started in the US and Australia in the 1970s, it was mostly managed by External Managers.
However, it soon became clear to investors that externally-managed REITs performed worse in terms of DPU and unit price than internally-managed REITs.
This is because External Managers may tend to serve the interests of its owners, namely the Sponsor, by increasing its profitability where possible.
To increase fees and profits, External Managers may resort to undertaking unnecessary acquisitions, increasing leverage, and purchasing the pipeline assets of its sponsor.
Eventually, most investors in these developed markets are not inclined to accept the External Manager Model anymore.
As a result, many externally-managed REITs had to adopt the Internal Manager Model due to its superior performance in unit price and dividend as well as robust corporate governance.
7. ESG (Environmental, social governance) and corporate governance is very important to me. Is the Internal Manager better in this?
Absolutely Yes. The Internal Manager will have a much higher level of ESG and corporate governance compared to the current structure for the following reasons:
Firstly, there is no potential or actual conflicts of interest as the Internal Manager is owned by all unitholders.
The resolutions envisage that a simple majority of unitholders will have the ability to vote in directors who can protect their interest and increase the DPU and unit price. As such, these would incentivise the management team and directors of the Internal Manager to work fully for the benefit of unitholders.
8. Internalization seems great for unitholders. Why is the directors and management of the External Manager saying no to this?
The ESR Group-owned External Manager has made its CEO and directors some of the most highly paid personnel among SGX-listed REITs despite the drop in DPU to unitholders and despite the unit price of the REIT trading at a ~20% discount to its NAV of S$0.53.
By contrast, almost all of Sabana REIT's industrial peers trade closer to their NAV.
If the External Manager is voted out, the directors and CEO might be terminated or otherwise might have to reduce their salaries or have them pegged to the share price and DPU of the REIT.
9. Do we have to pay ESR Group for the manager?
No. We do not have to pay ESR Group for the manager.
10. Are the risks regarding the change of control provisions and the bank loan "real"?
No. The External Manager may try to create "fear" in unitholders to prevent itself from being voted out.
This is because it knows that internalization is much more beneficial and increases DPU for unitholders, but is not in the interest of the External Manager.
If internalization happens, the External Manager will no longer be able to collect fees which are equivalent to more than ~15% of DPU from unitholders.
Firstly, Sabana REIT's leverage at 33.1% is the 6th lowest among SGX-listed REITs. It would take less than 6 years to pay off the entire loan from Sabana REIT's net property income. In comparison, it would take Keppel and Suntec REIT potentially more than 15 years to pay off their entire loans from NPI.
Sabana REIT's entire portfolio is in Singapore which is a highly developed market with substantial number of institutional investors and sovereign funds looking to invest in attractive and high yielding industrial property assets. These assets share similar attributes with properties owned by Sabana REIT. As such, the banks know that the loans are backed by these high-quality properties.
Sabana REIT's next financing is only due in November 2024.
Given the high-quality collateral in its portfolio, we are highly confident that the REIT's current reputable bankers such as UOB, HSBC and Maybank, which strongly uphold ESG, will choose to support good corporate governance and the more than ~10,000 unitholders (many of whom are Singaporeans and are also their clients) over an External Manager, especially if the latter has been removed by unitholders due to potential conflicts of interest, corporate governance flaws and underperformance as a result of the EGM.
Should the new Internal Manager focus on improving occupancy rate and dividend per unit above all else, this would be a clear win-win for these banks as the loans to the REIT will be backed by even stronger properties and cashflow.
11. Who will lose the most if there are any issues with the change of control provisions?
ESR has a ~21% stake in Sabana REIT valued at ~S$98 million, and it also bought the External Manager for more than S$30 million.
If there are any issues with the change of control provisions, ESR has potentially more than ~S$130 million of investment at risk.
This will also cast serious doubts on ESR Group's entire REIT management business model, considering ESR Group and its associates own more than 13 REIT managers.
ESR Group's capital partners such as GIC, OMERS and APG might potentially stop and/or re-consider new and existing investments with the firm given the negative implications that this would have on its corporate governance.
This could potentially result in further substantial loss of ESR Group's market capitalization and valuation. ESR Group's share price has already collapsed -30% and -55% since its IPO and since late 2021.[20]
If ESR's share price was to correct severely due to the above, it could expose the board of directors to potential lawsuits from its shareholders.
12. How do you find good people to run Sabana REIT after internalization?
In the event of an internalization, the External Manager will likely have to cease its operations once it is removed from managing Sabana REIT. As such, it is highly likely that the External Manager will terminate most of the staff.
The new Internal Manager will target to retain all competent staff and directors from the current External Manager who have the relevant expertise in managing and operating the REIT and are motivated to increase the unit price and DPU to all unitholders.
Additionally, there have been more than 10 mergers and privatisations in the SGX-listed REIT market which have resulted in highly qualified staff of REIT Managers being let go due to duplicity. Singapore also has a deep talent pool of real estate professionals as the 3rd largest listed REIT market in Asia Pacific and as a regional financial hub.
The new Internal Manager can hire the best and the brightest from this strong talent pool, complemented by previous hires from the External Manager, to continue running Sabana REIT with the goal of increasing DPU and unit price for unitholders.
13. Why is Quarz pushing for Internalization? Are they paid to do this?
No, we are not paid to do this. Our interests are aligned with all unitholders. If the DPU and unit price goes up, we and all unitholders win together.
Quarz has been an investor in Sabana REIT since 2019, before ESR Group's purchase of the controlling stake in Sabana REIT Manager.
We invested in Sabana REIT due to the multiple attractive catalysts such as the increase in occupancy rate, asset enhancement opportunities and development of more than 1 million square feet of untapped GFA/landbank which can together potentially increase dividend yield and unit price substantially to more than S$0.53 if the External Manager can execute well.
However, the External Manager's execution has continued to remain weak. This can potentially be attributed to the overlapping investment mandate and potential conflicts of interest due to ESR Group's ownership of the External Manager.
By removing the External Manager and replacing it with an Internal Manager, Sabana REIT can potentially increase its DPU and unit price for all unitholders.
14. Sounds good. How do I make sure internalization happens?
Please take action to VOTE FOR Resolutions 1 and 2 at the EGM.
ESR and its affiliates which hold more than 25% unitholding will most probably vote against the resolutions as they want to continue to benefit from the management fees and profits that unitholders pay to the REIT manager.
If all unitholders VOTE FOR Resolutions 1 and 2, and the internationalization occurs successfully, we will be able to increase our DPU and unit price all together.
Based on our projections, the internalization will increase the DPU of unitholders by more than 7%. Together with the prompt execution of the other strategies, the new Internal Manager may potentially increase DPU and unit price upside by ~30% to more than ~S$0.55 (potential dividend yield of >9.2% at current price).
15. Where do I get more information?
Sincerely yours,
Jan F. Moermann
Chief Investment Officer
Quarz Capital ASIA (Singapore) Pte. Ltd.
Havard Chi Cher Pan
Unitholder and Head of Research
Quarz Capital ASIA (Singapore) Pte. Ltd.
[1] Based on unit price of S$0.430. |
[2] Sabana Industrial REIT Annual Report 2022 |
[3] Assume Internal manager's cost structure is equivalent to External Manager with Operating Profit Margin of ~55% (Average Operating Profit Margin of ~64% achieved by External Managers in Chart 2 |
[4] Assume net rent of at least ~S$3.3/psf/month |
[5] Assume construction cost of ~$300psf and net rent of at least ~$3.5psf/month with occupancy rate of ~90% |
[6] Assume construction cost of ~$180psf and net rent of at least ~$1.4psf/month with occupancy rate of ~90% |
[7] Unit price of S$0.32 on 5 June 2023 |
[8] Merger offer of 0.94x ESR Logos REIT unit for 1 Sabana REIT unit (ESR Logos REIT unit price of S$0.32 on 5 June 2023) |
[9] NAREIT NYSE listed REITs equity market capitalization in April 2023 |
[10] First REIT to list in Singapore was CapitaLand Mall Trust in 2002 |
[11] REITAS Overview of the S-REIT Industry |
[12] Paul, Ben. "Manulife US Reit's manager and sponsor group need to deliver real value rather than just words" Business Times, 13 Feb 2023 |
[13] Manulife US REIT IPO price of USD0.83 per unit |
[14] USD61.6million of acquisition, management and performance fees from unitholders, annual reports 2016-2022 |
[15] Unit price of USD0.17 on 5 June 2023 |
[16] Unit price of S$0.127 on 5 June 2023 and IPO price of S$0.80 |
[17] 2022 Annual Reports of Suntec REIT and Keppel REIT |
[18] ESR Group's share price of HKD11.94 on 5th of June 2023, IPO price of HKD16.8 and 31st Dec 2021 price of HKD 26.35 |
[19] Merger offer of 0.94 ESR Logos REIT unit for 1 Sabana REIT unit. Assuming ESR Logos REIT price of S$0.32 as of 5th June 2023. |
[20] ESR Group's share price of HKD11.94 on 5th of June 2023, IPO price of HKD16.8 and 31st Dec 2021 price of HKD 26.35 |
For further information, please contact:
info@savesabanareit.com
Havard Chi
Email: hch@quarzcapital.com
