Date: September 10, 2020
There has been much reaction in the media about the proposed merger between ESR and Sabana REITs. Vocal shareholders have also reacted strongly to this merger. They have raised concerns like the sale of Sabana’s assets at below NAV as well as accusations of conflict of interest with ESR as it owns substantial stakes in both ESR and Sabana REIT managers. Since then, MAS has come forth to reiterate that the MAS regulatory framework does not prohibit a shareholder group from owning substantial stakes in two REIT managers managing REITs invested in the same property class. In addition, under Securities and Futures Act, there are regulatory safeguards to mitigate potential conflicts of interest. Nevertheless, some shareholders have contacted SIAS to highlight their concerns.
SIAS has reached out to ESR and Sabana REIT and conducted a dialogue with Mr Adrian Chui, CEO, ESR REIT, Mr Donald Han, CEO, Sabana REIT together with an independent analyst Mr Justin Tang, Director, Head of Research, United First Partners. The following questions were put to the panel to help shareholders address their concerns.
The questions posed are as follows:
- Who proposed this merger and how did this idea come about? Why is the merger proposed conducted at this time, amid the COVID 19 pandemic? Why is ESR REIT proposing the merger barely two years after ESR-REIT’s merger with Viva Industrial Trust?
- What are the terms of the merger and what is the support from the investing community?
- The 3.5% and 12.9% DPU accretion figures that have been stated for ESR-REIT and Sabana REIT respectively have been calculated assuming both REITs distributed 100% of their first half (1H20) total distributable income. However, both REITs retained some of their 1H20 total distributable income. What would the DPU accretion figures be if the retained earnings were taken into account?
- Can you comment on the criticisms by two vocal hedge funds regarding merger in recent weeks, saying that the terms are not good enough and suggesting a number of initiatives the manager could have undertaken to grow Sabana REIT.
- The two hedge funds have likened the deal to you selling your house for about 25% – 26% discount to valuation. So why are you doing this?
- Why has Sabana REIT’s unit price consistently traded at a discount to NAV? Is it because its assets have not been effectively monetised? How does the management team plan to improve the REIT’s performance?
- Why has ESR REIT announced that you do not intend to increase your offer price for Sabana REIT?
- Why didn’t Sabana REIT run a public sale process to maximise value?
- Are you proposing the merger at the behest of ESR, which has stakes in Sabana REIT and ESR REIT, as well as both REIT’s managers? The suggestion is that ESR Manager took a stake in Sabana to run down the business. The suggestion is also that ESR Manager wanted to take Sabana REIT cheap. Is that true and isn’t there a conflict of interest?
- With the merger, the weighted average debt expiry (“WADE”), will increase from 1.6 years to 3.2 years, providing it with a more resilient capital structure. This is well and good but does not change the debt covenants, term structure and interest rate on existing debt. Can ESR and Sabana explain how it intends to lower its existing cost of debt with this merger?
- Could the removal of Sabana REIT’s Shari’ah compliance requirement to increase DPU and lower its cost of debt?
- Sabana REIT’s unit price closed at  cents on [Friday, 28 August], while ESR-REIT’s unit price closed at [38.5] cents. Given the 0.94x gross exchange ratio, aren’t Sabana REIT unitholders being asked to exchange  cents of value for [36.19] cents? Why should they do so when they can sell their units for a higher price in the open market?
- Is it still critical for Sabana REIT to merge with ESR-REIT? Will Sabana REIT be able to survive on its own? What challenges will it face as a standalone REIT?
- How does ESR REIT plan to grow the enlarged REIT if the merger is approved?
Please find the responses from Mr Adrian Chui, Mr Donald Han, and Mr Justin Tang, from the recording of the dialogue below:
Founder, President & CEO