Sabana shareholders urges for MAS' support against Sabana-ESR merger

Shareholders argued that the two REITs’ investment mandate will overlap.

Quarz Capital Management, Black Crane Capital and over 50 of Sabana REIT’s unitholders have issued an open letter to the Monetary Authority of Singapore (MAS) to stop the merger of Sabana REIT with ESR REIT.

In the letter, the concerned parties asked the regulator to provide “clarity and support on and to stop the potential severe conflict of interest issues” concerning Sabana REIT.

This follows after the fund managers’ previous open letter, where they said that they will vote against the merger. 

The letter stated that there is a full overlap in the investment mandate of the two REITs as they both invest in industrial properties and have 100% of their portfolios invested in Singapore. Both firms noted that Vibrant Group completed the sale of its 51% controlling stake in Sabana Investment Partners which owns 100% of Sabana REIT Manager to InfinitySub.

InfinitySub is 100% owned and controlled by ESR Cayman. The firm had previously purchased a 60% stake in Blackwood Investment, which owns 45% of Sabana Investment Partners.

As a result of the above, both the managers of ESR REIT and Sabana REIT are majority owned and controlled by ESR Cayman through InfinitySub. “This creates critical corporate governance issues especially relating to the acquisitions & divestment of assets and the strategic direction of both REITs which can have detrimental effects on unitholders,” the letter wrote.

“The proposed terms of the said merger with an implied value of $0.377 per Sabana REIT unit is appalling as it substantially undervalues Sabana REIT and destroys value for Sabana unitholders. Another troubling aspect is that the actions which Sabana REIT Manager has taken during the one-year prior to the proposed merger may have significantly depressed Sabana REIT's valuation and unit price,” its shareholders stated.

The shareholders raised their concerns over the implied price of $0.377 apiece, where they questioned whether the fiduciary duty of Sabana's board and management to act and protect all Sabana REIT unitholders' interest has been potentially compromised.

The letter also added that Sabana REIT has been inefficiently under-geared with a leverage level of 31-33%, one of the lowest amongst SGX-listed REITs. They blame it on the REIT’s failure to undertake any strategic transaction as compared to its industrial REIT peers.

One example is Sabana’s 43,000 sqft retail component, which is due to be completed in late-2020 and could potentially yield net property income of $4.4m pa in 2021.

Shareholders explain that despite its prominence in previous Sabana investor presentation materials and annual reports, the potential substantial increase in rental income, DPU and NAV uplift from this retail component was conveniently absent in nearly all the materials relating to the proposed merger, and excluded from the pro forma DPU calculation in the joint announcement of the proposed merger.

“This is despite the fact that the said retail component will contribute to rental income from early 2021. If included, it would potentially generate another more than 10% growth in normalised or pro forma DPU,” the letter said.

Another issue that they raised to MAS and SGX RegCo is Sabana REIT Manager’s reluctance to communicate with independent unitholders. Shareholders wrote that despite multiple attempts by Quarz to engage with the Sabana REIT manager since late 2019, Sabana REIT’s CEO Donald Han has repeatedly avoided any discussion, meeting requests were postponed or cancelled altogether with a plethora of excuses.

“It was only after the announcement of the proposed merger that the Manager tried to reach out to key independent unitholders. However, it was quite clear that there was no intention from Sabana Manager or ESR Manager to engage with the key independent unitholders on a suitable takeover price,” it noted.

After stating the issues above, the shareholders are urging MAS to question the merger, particularly on why they were permitted to acquire another REIT manager, when it would result in an overlapping investment mandate.

Secondly, in the event that the merger deal falls, shareholders are also seeking MAS’ guidance “to resolve this severe conflict of interest and disallow ESR Cayman to manage the two REITs through this questionable structure”.

Furthermore, the shareholders are also proposing an option where ESR is to divest its controlling stake in the Sabana REIT Manager, which can be purchased by the REIT at tangible book value or by other third parties who do not have similar overlapping investment mandates.

“Whilst ESR Cayman may argue that they bought the Sabana REIT Manager for more than S$21 million, we believe that this is not a justifiable excuse as firstly, they have invested with the full understanding about the substantial conflict of interest problems they will potentially create. Secondly, it has also been provided with a generous amount of time of more than a year to resolve these conflicts,” they wrote.