Sabana is leading smaller Reits that have underperformed unit prices in their search for exit
Unitholders who voted for the removal of Sabana Real Estate Investment Management as the manager of the trust and the start of the internalisation of the Reit manager on August 7, 2023 may feel remorse. Internalising management, whereby the Reit trustee owns its manager rather than outsourcing management to a third party, appears to be a messy and expensive path.
Sabana Reit reported a year-on-year growth (yoy), in gross revenue, and net property income during H2 2023. The board of directors for the trust manager announced a distribution per share (DPU) that fell by 21 percent yoy in the second half.
The DPU has declined due in large part to the retention by the company of 10% of the distributable income to cover internalisation costs. It is possible that future retentions of distributable income will be necessary.
The manager of the Reit faces additional challenges to retaining and attracting talent, given the uncertainties that arise from the internalisation drive. Some unitholders in Sabana Reit were concerned and dissatisfied by the lack of progress made on internalisation of the trust fund by the trustee HSBC Institutional.
This led to a request for an extraordinary general (EGM) meeting, which took place on March 8.
Eight of the ten resolutions that were presented at a tense EGM passed. The unitholders voted to direct the trustee to create an internalisation group whose members included several employees of activist Quarz Capital Asia.
They also supported setting the maximum price at S$10m to purchase the external manager within one month of the EGM.
Sabana Reit, amidst the squabble over internalisation progress, closed Monday (18 Mar) at S$0.365. This is down 9 percent from its previous close of S$0.405, before the meeting in which unitholders voted for the removal of SREIM and to start internalisation of management.
Internalisation
Internalising the management of a Reit has its merits. Potential cost savings could be enjoyed by unitholders. There may be a better alignment of interests between the management and unitholders.
Many investors was managing Link Reit in Hong Kong said they liked the internal management model of the trust. Singapore’s stock exchange will benefit if it offers investors a choice of Reits that are managed both externally and internally. Can regulators do more for Reits managed by external managers who are seeking to internalise management?
It may be able to save management costs if it is managed internally. Such savings could translate to higher DPUs and unit prices.
Scale not present
Sabana Reit is likely to be hampered, either internally or externally, by its small size. The industrial properties in Singapore that fall into four categories: high-tech, chemical warehouse, logistics, warehouse, and logistics.
Sabana Reit had total assets of S$1billion as at the end of 2023. This is a small amount compared to trusts that own industrial assets or logistics assets, such as CapitaLand Ascendas Reit – A17U 0% – (Clar), Mapletree Industrial Trust – ME8U +1.3% – (MIT) and Mapletree Logistics Trust – M44U 0% – (MLT), which had assets totaling S$18.3 Billion, S$9 Billion and S$13.9 Billion respectively.
Clarify that MIT and MLT do not make up the Straits Times Index benchmark, but Sabana Reit does. Institutional investors may be more interested in larger trusts because they have better liquidity. Some larger trusts could also benefit from better credit or financing.
Sabana Reit was trading at a discount of 30 percent to its end 2023 Net Asset Value (NAV) unit price of S$0.52. Clar, MIT, and MLT, on the other hand, traded at premiums of 18%, 23%, and 2% respectively to their end-2023 net asset value (NAV) per unit.
Selling Out
According to JTC data, industrial space rents and prices will rise by 8.9 percent and 5.1% respectively in 2023. Sabana Reit’s portfolio of industrial properties could attract a lot of interest given the strong prospects and appetite for these properties. Sabana Reit unitholders will be rewarded if the trust can achieve a valuation around its NAV by either merging with Clar, MIT, or MLT or selling their assets.
There are certainly other trusts that own Singapore assets and segments with good prospects. They should also consider putting up the “for sale” sign. As of Mar 18, Far East Hospitality Trust (FEHT), with assets totaling S$2.6 billion by end-2023, was trading at a discount of 33 percent to its NAV at the end of 2023 per stapled security.
FEHT is a Singapore-based company that owns a number of hotels and serviced apartments. The trust’s hotels have seen revenue per room increase by 19.9% yoy for H2 2023 while serviced residences saw a 10.7% yoy revenue growth.
Many Reits are therefore struggling to meet the higher borrowing costs. Investors also apply higher discount rates when valuing Reits which lowers the unit price. Many Reits and property linked business trusts need to seriously consider their exit options in light of the above. Sabana Reit’s leadership can be demonstrated by abandoning the difficult journey of internalising management and focusing on an exit.
