On Aug 6, ESR-REIT’s manager announced that it does not intend to increase the scheme consideration for Sabana Shariah Compliant Industrial REIT, announced on July 16. Sabana REIT’s unitholders are being offered 0.94x the price of ESR-REIT. Last month, this valued Sabana REIT at 37.7 cents. ESR-REIT closed at 39 cents on Aug 6, valuing Sabana REIT at 36.6 cents.

Quarz Capital Management which owns 5% of Sabana REIT, is not happy with the offer price, partly because it is now at a discount to Sabana REIT’s net asset value of 51 cents as at June 30, which in itself was lower than the NAV at Dec 31, 2019 of 57 cents. This was partly due to a 5% or $54.7 million decline in portfolio valuation. Appraisers and valuers assumed lower rental growth and lower occupancies for master lease properties that converted into multi-tenanted properties.

“Accordingly, the exchange ratio of 0.940x is final, except that the ESR-REIT Manager reserves the right to do so in a competitive situation,” the announcement by ESR-REIT says.

On Aug 7, Quarz Capital along with Hong Kong-based Black Crane Capital which also owns 5% of Sabana REIT, announced they intend to vote against the scheme proposal during the EGM in Oct. Together, Quarz Capital and Black Crane hold 10% of Sabana REIT.

In an open letter to the board and management of Sabana REIT’s manager, Jan Moermann, chief investment office of Quarz Capital Management and Peter Kennan, CIO of Black Crane Capital, outline five reasons for them to vote against the merger. The main rationale is the discount to NAV, which according to Quarz Capital is the highest among the mergers or takeovers that have occurred in the S-REIT space. For instance Viva Industrial Trust was acquired by ESR-REIT at a 23% premium to NAV.

Moermann and Kennan claim that Sabana REIT’s properties have significantly higher potential upside in terms of increased occupancy and undeveloped gross floor area (GFA) than ESR-REIT’s. The Edge Singapore has not independently verified this.

Moermann and Kennan reckon they could get sufficient support to scupper the merger. One of the conditions of the trust scheme is for the merger to be put to a vote by Sabana REIT’s minority unitholders at an EGM in October. ESR Cayman, which holds around 20.92% including its stake in Sabana REIT’s manager, and Tong Jinquan who owns 4.98% cannot vote. Under the scheme, more than 50% of unitholders present holding at least 75% of the units need to vote in favour of the resolution for it to pass.

If the transaction is scuppered, where does that leave Sabana REIT? ESR Cayman owns the manager. Under the S-REIT structure, the manager and sponsor, with a limited holding in the REIT are able to control the REIT. Sabana REIT’s future without the merger would appear less exciting as a relatively small REIT.

Interestingly, the REIT has experienced a tussle before. In 2017, following an extremely dilutive rights issue, and the prospect of acquiring three properties whose valuations were boosted by an unrealistic master lease, a number of minority unitholders led by Jerry Low managed to gather sufficient interest to requisition an EGM to remove the manager. While that did not materialise during the EGM, the sponsor and manager eventually changed.

Low no longer holds any units in Sabana REIT. “This time round, i really believe all parties are trying to do good for Sabana REIT. I hope they can come to a compromise,” he says.