Once the higher debt costs are factored in, unitholders will be worse off, says the group, which is the largest unitholder in the REIT.

“If the manager is removed, Sabana REIT’s borrowing costs are expected to increase, without the backing of a strong sponsor for its unsecured facilities. Each increase of one percentage point (100 basis points) will cost unitholders an additional $3.0 million in interest each year which will reduce distribution per unit (DPU) by 0.27 Singapore cents,” warns the group. The estimate is based on Sabana REIT's outstanding 1.102 billion units.

https://s3.ap-southeast-1.amazonaws.com/www.theedgesingapore.com/public/usr/283d5t/2a40b8-esr.jpg

This goes against Quarz’s July 20 statement that Sabana REIT’s unitholders “can potentially save more than $40 million of fees they need to pay to the external manager over the next 10 years”. The activist investor adds that unitholders would reap “[i]mmediate cost savings of [around] $2.4 million per year” with the internalisation of the REIT manager.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/news/reits/cost-running-sabana-reits-manager-are-savings-fees-worth-risk?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>This is the cost of running Sabana REIT’s manager; are savings from fees worth the risk?</a>

The removal of the REIT manager may also trigger “an unwinding of the existing interest rate hedges which have been put in place”.

“If this is the case, the actual impact of one percentage point (100 basis points) will be even higher at $8.3 million in interest each year which will reduce DPU by 0.75 Singapore cents,” adds ESR Group.

https://s3.ap-southeast-1.amazonaws.com/www.theedgesingapore.com/public/usr/283d5t/05827f-esr2.jpg

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/news/reits/capitaland-india-trust-prices-jpy4-bil-notes-due-2028?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>CapitaLand India Trust prices JPY4 bil notes due 2028</a>

In its letter, the group accused Quarz of gross overstating the net savings from the internalisation of the REIT manager, noting that the REIT manager only generated $1.26 million of profit in FY2021 out of the $5.14 million of fees it received from the REIT. This was from the “ongoing recurring operating cost of running the REIT”.

“Any potential cost savings out of the $1.26 million of profit generated by the Sabana REIT manager will be wiped out by the potential increase in borrowing cost and unitholders will be worse-off on an ongoing basis,” notes ESR Group.

“This further ignores the one-time costs associated with implementing the change which Quarz itself agrees is between $3 million – $5 million. This could be higher as according to the trustee, it will need to appoint professional advisers (including investment, legal, financial, tax, property and other advisers),” it adds.

ESR’s letter, dated July 28, comes a day after Quarz issued a response to the group’s July 25 letter. In Quarz’s letter, it highlighted the dismissal of ESR’s injunction by the court to stop Sabana REIT’s extraordinary general meeting (EGM). The court also confirmed that the removal of the REIT’s manager is the “fundamental right” of unitholders in Singapore.

“We highly recommend unitholders to directly refer to the court papers instead of listening to opinions of parties which are potentially conflicted. In particular, we strongly reject ESR's claim in paragraph 10 of its letter dated July 21 that the resolutions are not meant for the immediate implementation of internalization. The resolutions as tabled provide an unequivocal mandate for the trustee to execute the internalisation,” says Quarz.

Units in Sabana REIT closed flat at 41 cents on July 28.

Internalisation of Sabana REIT’s manager won’t result in cost savings, says ESR Group

MSCI boss warns of climate risks

Keppel to acquire 50% stake in European asset manager Aermont Capital for up to $517 mil

Local banks 'resilient' in 2023, but MAS warns of deteriorating asset quality, climate transition risks

The new kings and queens of content

Singapore’s headline and core inflation figures increase to 4.7% and 3.3% in October

Internalisation of Sabana REIT’s manager won’t result in cost savings, says ESR Group

Related News

Highlights

MSCI boss warns of climate risks

Related News

Sabana REIT files $2.1 mil claim against tenant Kleio One-Solution

Sasseur REIT takes overall sector win with outlet mall focus

DBS keeps 'buy' call on ESR-LOGOS REIT following sale of Tuas property at above valuation