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How should unitholders view the Sabana REIT and ESR-REIT merger?

The Edge Singapore
The Edge Singapore11/17/2020 09:55 PM GMT+08  • 4 min read
How should unitholders view the Sabana REIT and ESR-REIT merger?
Five reasons why a merger with ESR-REIT would be beneficial for its unitholders
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Sabana Shariah Compliant REIT has outlined five reasons why a merger with ESR-REIT would be beneficial for its unitholders.

Size clearly is important. A small REIT - and Sabana REIT is the smallest industrial REIT by assets under management (AUM) - has many challenges. As Sabana REIT has found, turning master leased properties into multi-tenanted properties has been a particular problem. A larger merged ESR-REIT would catapult Sabana REIT from the smallest REIT into the fifth largest by AUM.

With size comes liquidity. A larger REIT would inevitably have more unitholders and a higher free float market capitalisation. This in turn would get the enlarged ESR-REIT into important indices, which in turn would lead to greater recognition. As with a virtuous circle, being in an index could lead to lower cost of capital, of both equity and debt. If the enlarged ESR-REIT trades well, distribution yields would contract. Lower yields would enable the merged REIT to acquire yield accretive assets more easily.

Similarly, cost of debt would also fall. At present, Sabana REIT’s debt is secured leaving it very little debt headroom for asset enhancement initiatives. That leaves it with limited financial ability to undertake AEIs for the 1.2 million sq ft of unutilised gross floor area in its portfolio.

Larger REITs have a network effect by virtue of having more tenants, and the ability to offer tenants options. A larger size also means that AEIs can be more easily undertaken without significant lowering of distributions. Furthermore, the merger is distribution per unit accretive for Sabana REIT unitholders to the tune of 12.9%.

Now Quarz Capital and Black Crane are planning to vote against the merger because the merger is done at a significant discount to net asset value.

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Donald Han, CEO of Sabana REIT’s manager says, “While some have looked at the implied offer price and asked why there is a discount to NAV, the proposed transaction is not a sale but a merger. In this transaction, Sabana REIT unitholders will still have an interest in the current portfolio and a larger one that is more diversified and resilient. While NAV per unit may be pertinent in a sale it should not be the only criteria in a merger.”

In addition, Deloitte & Touche Corporate Finance, Sabana REIT’s independent financial adviser (IFA) says in the scheme document that the financial terms of the merger are fair and reasonable and has advised the independent directors to recommend that the Sabana REIT unitholders vote in favour of the merger.

Quarz Capital and Black Crane have focused on the independence of a director, and questioned the loyalty of certain staff at Sabana REIT’s manager. These issues are tangential to the merits of the merger.

See: An ESR-REIT rally to 55 cents would solve the discount to NAV offer for Sabana REIT

Ng Shin Ein, now an independent director of Sabana REIT’s manager, had previously owned a stake in Blackwood Investment which owned a 45% share in Sabana REIT’s manager, with the controlling 51% held by Vibrant.

In 2018, ESR Cayman acquired Sabana REIT’s manager and a stake in the REIT. Hence Ng was paid by ESR Cayman for her share in Blackwood. These payments were received in 2018 and the second payment was in August 2019. Ng was re-designated an independent director in November 2019.

The Monetary Authority of Singapore usually provides approval for - and is certainly made aware of - any change in CEO or board member of REIT managers.

At the end of the day, investors can make money or lose money. It’s like the US election. The loser should accept it graciously. In this case, the entity that has lost money should either sell and find another investment, or stay and hope that the merged entity delivers the value that is promised.

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