Activist investor Quarz Capital, Black Crane, and over 50 unitholders of Sabana Shariah Compliant Industrial REIT (Sabana REIT) have, on August 17, written to the Monetary Authority of Singapore (MAS) and the Singapore Exchange Regulation (SGX RegCo) to seek MAS’s “guidance, clarity and support” on the “potential severe conflict of interest issues” concerning Sabana REIT.

The letter touched on issues such as the merger’s potential conflict of issues due to the similarity in both Sabana and ESR REITs’ portfolios, ESR Cayman being the overall manager of the two REITs, and ESR Cayman’s “significantly higher fees from and value of stake” in ESR-REIT compared to Sabana REIT.

The unitholders have been invested in the REIT before the change in the ultimate controlling shareholder of the manager of the REIT.

In the letter, Quarz, Black Crane, as well as the other unitholders expressed concern at the “critical corporate governance issues” pertaining to the merger between ESR-REIT and Sabana REIT under ESR Cayman, the controlling shareholder of both the managers of the REITs.

Citing the fact that there is a “full overlap” in the investment portfolios of both REITs – in that they both invest in industrial properties and have 100% of their portfolios invested in Singapore, the unitholders says the issues, especially relating to acquisitions and divestment of assets, can have “detrimental effects” on the unitholders.

The unitholders also took issue with the implied value of 37.7 cents per Sabana REIT, which is at a “substantial and unprecedented” discount of around 26% and 34% to Sabana’s net asset value (NAV) at June 30, 2020, and Dec 31, 2019, respectively.

“In the 18-year history of the SGX-listed REIT market… there has never been a takeover/merger of a REIT target at such a substantial discount to book value,” write the unitholders in the letter dated August 17, comparing the merger offer with other similar offers including Viva Industrial Trust (at a 23% premium), Cap Com Trust (17%), and Ascendas-H Trust (7%).

“The proposed terms of the said merger… is appalling as it substantially undervalues Sabana REIT and destroys value for Sabana unitholders… We are deeply concerned that the Sabana REIT Manager may have been conflicted and is not acting in the best interest of Sabana unitholders,” they add.

According to the letter, Sabana REIT currently has a market cap of an estimated $400 million, while ESR-REIT has a market cap of an estimated $1.36 billion.

The letter also alleged that the manager of Sabana REIT, Donald Han, has been reluctant to communicate with the unitholders since late 2019, prior to the announcement of the proposed merger. It was only following the announcement of the merger that Han “tried to reach out” to key independent unitholders, said the letter.

The unitholders, through the letter, have also proposed to MAS and SGX RegCo that ESR “immediately” divest its controlling stake in the manager of Sabana REIT.

REIT managers and their directors are required to act in the best interests of unitholders, and prioritise their interests over those of the REIT manager and its shareholders. In this regard, MAS and SGX RegCo require REIT managers to have in place measures to address any conflicts of interest that may arise and to manage the REIT with unitholders’ interests in mind. MAS and SGX RegCo will review the letter from Quarz Capital and Black Crane Capital and engage the relevant parties as necessary," say spokespersons from MAS and SGX.

ESR-REIT's manager says it has nothing to add to its previous statements.

ESR Cayman declined comment.

Units in Sabana REIT and ESR-REIT closed 0.5 cents higher, or 1.4% up at 37 cents, and 0.5 cents higher, or 1.3% up, at 39 cents, respectively on August 17.

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