SINGAPORE, April 14, 2023 /PRNewswire/ — Quarz Capital Management, Ltd today issued an open letter to the management and board of Sabana Industrial REIT, the full text of which is provided below.
QUARZ CAPITAL MANAGEMENT ISSUES 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
SIGNIFICANT CONCERNS OVER UNITHOLDER RIGHTS’ IN RESOLUTION 3
UNITHOLDERS TO VOTE DOWN RESOLUTIONS 3 & 4 AT APRIL 2023 AGM
TO IMPROVE CORPORATE GOVERNANCE AND PROTECT
VISIT AND REGISTER AT WWW.SAVESABANAREIT.COM FOR MORE INFORMATION
Friday, 14 April 2023
Dear Mr. Han and Members of the Board of Sabana REIT Manager,
Over the last years, the REIT Manager of Sabana Industrial REIT’s (the “Trust”, “Sabana REIT”, “Sabana” or “SSREIT SP”) has gained certain ‘notoriety’ for its weak corporate governance practices. We have observed instances such as the appointment of individuals with prior substantial transactions with the Sponsor as ‘independent directors’ and the recommendation of a merger at a significant 40% discount to book value, which primarily favored the Sponsor’s affiliate, ESR Logos REIT.
At the Sabana REIT 2023 AGM, we would like to express our serious concerns about Resolution 3 and Resolution 4.
In Resolution 3, unitholders are asked to vote on the endorsement of Mrs. Elaine Lim as an independent director. However, it is concerning that even if unitholders reject Mrs. Lim’s endorsement, the board has ensured that she will still remain on the board as a non-independent director.
This arrangement appears to blatantly undermine corporate governance and unitholders’ rights. In simple terms, the directors ensured that the candidate appointed by them will always be on the board, regardless of the outcome of the vote and independent unitholders’ intention.
The way the vote is structured is unprecedented in the more than 20-year REIT history in Singapore. In other REITs, any director who is not endorsed by unitholders has to resign to ensure that unitholders’ rights and corporate governance are upheld.
Importantly, the method Sabana REIT Manager structure the voting is also potentially in clear violation of their commitment to MAS to ensure the independence of ESR Logos REIT and Sabana REIT due to conflicts of interest arising from the overlapping investment mandate between the 2 REITs solely caused by ESR Group’s ownership of both REIT Managers.
If Mrs Elaine Lim is appointed as a non-independent director, it implies that she represents ESR Group on the board of Sabana REIT Manager. By extension, this potentially means that the business and affairs of ESR Logos REIT and Sabana REIT will NOT BE managed and operated independently of each other and there can be sharing of information between both REITs.
ESR Group’s stake in ESR Logos REITs is significantly larger and more valuable than its stake in Sabana REIT. Given the overlapping mandate of both REITs as both REIT Managers are owned by ESR Group, this creates an incentive for ESR Group to prioritize ESR Logos REIT over Sabana REIT. It also creates an incentive for the Sabana REIT manager to potentially act in the best interest of ESR Group rather than in the best interest of the Sabana REIT unitholders, which would result in a violation of corporate governance standards and the Sabana REIT manager’s legal duties.
Could the appointment of Mrs Elaine Lim through Resolution 3 possibly be a ‘back-door’ entry for ESR Group to have a representative on the board of Sabana REIT by potentially circumventing MAS’ safeguard measures?
We are highly concerned by the REIT manager’s intention to have a new unit issue mandate for undertaking rights and placements. Given Sabana REIT ( SSREIT SP Equity )’s low leverage and available debt headroom, it appears that all acquisitions can be financed internally. Sabana REIT has the 6th lowest leverage in the entire SGX-listed REIT market. It also has more than ~S$150 million of debt headroom which can potentially increase the portfolio by more than ~20%.
The performance of the REIT Manager has shown ongoing decline, as evidenced by properties such as 1 Tuas Ave 4, which has remained vacant for over almost ~7 years.
Occupancy in 4Q2022 was ~88.2%, falling below the industrial average as well as that of its industrial REIT counterparts, such as AIMS APAC REIT (97.8%) and ESR Logos REIT (92.7%). This has resulted in DPU to fall by more than 7% YoY, substantially underperforming its REIT peers as well which saw flat or increasing DPU.
The expensive AEI cost of approximately ~S$130psf (~S$20 million) for the single-story industrial building at 1 Tuas Ave 4 (where there is already an existing structure) is even more concerning. This is because the construction cost for a brand new single-storey or multi-storey industrial building ranges from around S$135psf to S$158psf.
The REIT manager’s only transaction is the sale of 9 Tai Seng Drive (Geo-Tele Centre) to Capitaland (previously Ascendas) in 2019 for ~S$99.6 million. After undergoing some asset enhancements, the property is valued at S$280 million. Consequently, Sabana REIT unitholders lose a potential gain of nearly ~S$100 million or about 20% of the book value (approximately S$0.10) if the asset had been retained until now instead of being sold by the REIT Manager.
Resolution 4 to issue placements and rights is therefore totally unnecessary. Given Sabana REIT’s low leverage, substantial amount of work to be done, and the weak transaction track record of the REIT Manager, the resolution serves neither the unit price nor the unitholders. As such, any rights and placements seem to be done solely to potentially increase the fees that unitholders have to pay to the REIT Manager as well as to increase the profitability of ESR Group.
We therefore urge the REIT Manager retract both resolutions as it weakens corporate governance, deprive unitholders’ rights and potentially violate MAS’s safeguard measures by the potential appointment of Mrs Elaine Lim as an non-independent director representing ESR Group on the board of Sabana REIT.
In view of the serious corporate governance flaws and the potential destruction of unitholder value, we call on all Sabana REIT unitholders to VOTE AGAINST BOTH RESOLUTIONS 3 AND 4 at Sabana REIT’s 25 April 2023 AGM
Given the corporate governance concerns, increasing economic uncertainty and high interest rates environment, the issuance of rights and placements at a discount to Sabana REIT’s market price can decrease the unit price and investment of unitholders. The downside can be potentially greater if the acquisitions do not work out.
We urge all unitholders to stand together protect all our interest and increase the DPU and unit price together!
VISIT AND REGISTER AT WWW.SAVESABANAREIT.COM FOR MORE INFORMATION
Join our Telegram Group: https://t.me/savesabanareit FOR UPDATES
Jan F. Moermann
Chief Investment Officer
Head of Research
For further information, please contact:
IMPORTANT DISCLOSURE INFORMATION
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF SABANA REIT’S (SSREIT SP EQUITY) 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. and its affiliates (collectively “Quarz”), 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 REIT (SSREIT SP) 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 effort 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.
CERTAIN STATEMENTS CONTAINED IN THIS LETTER ARE FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO, STATEMENTS THAT ARE PREDICTIONS OF OR INDICATE FUTURE EVENTS, TRENDS, PLANS OR OBJECTIVES. 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 REIT’S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31ST, 2021 AND PROSPECTUS. SUCH FORWARD-LOOKING STATEMENTS SHOULD THEREFORE BE CONSIDERED IN LIGHT OF SUCH FACTORS, AND QUARZ CAPITAL MANAGEMENT IS 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.
 Implied Merger Offer Price of S$0.305 (0.94 Sabana REIT unit for 1 ESR Logos REIT unit at S$0.325 currently)
 REIT Manager reported 91.2% of occupancy by excluding 1 Tuas Ave 4.
 Arcadis, Construction Cost Handbook Singapore 2022
 CapitaLand Scheme Document, 17 July 2021
SOURCE Quarz Capital Management, Ltd.