Commentary: Sabana REIT EGM – Is dismissing the Manager the panacea?

Date: April 22, 2017

Singapore’s REIT sector is celebrated around the world providing investors with stable returns and dividend income. In recent months the sector has faced difficult times with a challenging leasing environment and prevailing macroeconomic conditions and Sabana REIT has not been immune from these market factors.

Unitholders in every business have every right to be concerned about their investments and how they are managed. In the case of Sabana REIT their concerns were raised at a dialogue session with SIAS, the Board listened, and they must be comforted to know that their issues are being addressed. Largely, the unitholders’ unhappiness was about the failure of the REIT Manager to preserve share value, in fact, a 50 percent loss since IPO. Beyond raising their concerns, Unitholders need to be cognisant that the Resolutions tabled before them may adversely impact their investments. The Board has a fiduciary duty to put forth their recommendation based on the analysis of the situation. Unitholders need to understand the implications to the REIT, impact of their decisions so as not to undermine the value of their units. This value must be preserved. The following is what the unitholders took home after the two-hour session.

The first Resolution – Changing the Manager – they heard will not be easy; it is fraught with uncertainties. There are a number of financial arrangements in place, and breaches will likely be triggered should the Manager be removed. Should a suitable replacement manager be found they will also need MAS approval, both of which are not to be assured.

Internalisation has long been debated in the REIT industry but has yet to be implemented in Singapore. While it may sound simple, given the fact that none of the REITs have implemented it suggests that it might be more difficult than it appears. The Trustee will have to do a lot of the work and get agreement through various resolutions that Unitholders will need to approve. Ultimately, time and costs will be incurred searching for appropriate Directors and employees. It is a task for the trustee, who may not likely to find one quickly.

Winding-up any listed company is fraught with complexities. In this case, given the structure, Sabana REIT will need to be delisted before it is wound-up. This will not guarantee a specific pay-out to Unitholders and will occur over a prolonged period exceeding two years. The forced sale of any assets, especially in a difficult market, tends to come at a substantial discount as buyers are aware of seller’s need to sell.

The Directors have acknowledged that it hasn’t been plain sailing but they are undertaking a Strategic Review with a view to changing course and delivering further value for Unitholders. The Strategic Review Committee will consider all options available for Sabana REIT and, in particular, look for potential strategic partners who can enhance the performance in terms of the pipeline of assets, borrowing facilities and the capability of the management team. I am certain the Board will also entertain proposals from unitholders to the Strategic Review Committee that meet the brief. Progress has been made with a number of non-binding proposals. Unitholders must have been encouraged on learning from the Chairman that the proposals have been received and the Board is not averse to even mergers with the right party.

I am of the view that Unitholders would be wise to wait for the recommendations of the Strategic Review to understand the future direction of the business and then make an informed decision. Unitholders should be aware that voting out the Manager at this stage would put an end to the Strategic Review. The Board is cognisant of the emotions and demands of Unitholders and are taking steps to put things right. In addition, Unitholders can also seek Board representation to ensure and reassure themselves that the manager acts in the interest of all stakeholders.

Unitholders now have a decision to make – you can either vote for or against the Resolutions but understand the pros and cons. In such a situation, it is important to put aside the emotions and evaluate the resolutions based on the merits, understand the risks of the decisions, looking forward, not backwards. Could there be other ways to resolve the issues? If there is a will, there is a way.

David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)