Sabana REIT property at 23 Serangoon North Avenue 5. (Photo: REITsWeek)

Amid calls to vacate office, the besieged manager of Sabana REIT has scheduled for a dialogue session, and an extraordinary general meeting (EGM), to address demands of disgruntled unitholders who have issued the REIT with a requisition letter.

The EGM, which has been scheduled for 28 April 2017 at 10.30 a.m., will be conducted at Suntec City Convention & Exhibition Centre, Hall 404, Level 4.

All four resolutions drafted in a requisition letter received from 66 unitholders in February 2017, including one to remove the incumbent manager of Sabana REIT, will be tabled at the EGM, confirmed Kevin Xayaraj, CEO of Sabana REIT’s manager, in an exclusive interview with REITsWeek.

The last date and time for lodgement of proxy forms will be on 25 April 2017 at 10.30 a.m.

Prior to the EGM, Sabana REIT will also be working with the Securities Investors Association of Singapore (SIAS) to conduct a dialogue session with unitholders, which is currently scheduled for 21 April.

This will be done to provide investors with an update on the ongoing strategic review, and better explain the risks should the four resolutions be passed at the EGM, said the REIT.

“Morgan Stanley [which has been appointed as part of the strategic review exercise]is in touch with interested parties and strategic partners, and we are certainly making progress”, updated Xayaraj.

“We have spent a lot of time going through the four resolutions that the 66 unitholders have surfaced, and we are now in a position to give our response and explain why the resolutions present a significant downside risk to unitholders”, he added.

First Resolution: Removal of Sabana REIT’s current management

“We want to highlight that the 66 unit holders [that have signed the requisition letter], they don't have clear strategy of how to improve Sabana REIT’s performance and there is no visibility in terms of who the new management team will comprise of, including the directors”, said Xayaraj.

“You need MAS’ [Monetary Authority of Singapore’s] approval for the new management team and directors, and the appropriate licenses to manage a REIT”, he added.

“What the 66 unitholders have proposed is to remove the manager, and direct the trustee to look for qualified people, and that will certainly create a huge uncertainty, and it will take some time to bring in a new team".

“If the resolution is passed, it will trigger serious consequences especially with the banks”, explained Xayaraj who posited that Sabana REIT may then be in breach of loan covenants and bondholder obligations, and that these may then trigger early redemptions.

“We have four financial institutions who are lenders, and I don't think it's fair to assume that all the financial institutions will make the same decision to grant you waiver on loan covenant breaches. Those are huge potential fallouts and the downside risk is quite real".

Second Resolution: Internalisation of Sabana REIT’s management function

According to Xayaraj, the 66 unitholders have proposed for an internalisation of Sabana REIT’s management function to enjoy immediate gains in cost savings.

“But that may not be the case”, he warned, adding that the management team had enacted simulation model to see the effects, with certain assumptions, of what an internalisation might do.

“Our conclusion from running this model is that the internalisation may not generate immediate cost savings or DPU increases, and that is something unitholders need to take into consideration”, he said.

“If you were to go down the path of internalisation, that will also trigger all the potential breaches in loan obligations, and this will have an adverse impact to Sabana REIT”, posited Xayaraj, adding that the uncertainty may lead to the market reacting negatively.

Third and Fourth Resolutions: Divestment of Sabana REIT’s portfolio if internalisation is not approved, and winding up of Sabana REIT, respectively

According to Xayaraj, the existing trustee does not give the right to unitholders to wind up the REIT, and in order for resolutions three and four to stand as it is, Sabana REIT’s management is proposing for another resolution to delist the REIT instead.

“The threshold level to effect resolutions three and four are higher, you need 75% of the vote at the EGM”, said Xayaraj, explaining that this is in contrast to resolutions one and two, which are ordinary resolutions that need a simple majority of 50%.

“I like to highlight to unitholders the downside risk of resolutions three and four, and that is when you start winding up, unitholders may not get their NAV [net asset value]because you need to sell the assets”.

“And in today's market, probably at quite a discount”, warned Xayaraj, who added that there would also be additional costs in the sale, in the form of professional fees and expenses.

“Net proceeds after winding up will be lower than NAV”, he emphasised.

In conclusion, Sabana REIT reiterated that the strategic review with Morgan Stanley is making progress, and that they are currently identifying partners who can provide a pipeline of properties for future growth, give access to low cost of funds for borrowings, and enhance the capabilities of the REIT’s management team.

Xayaraj has however, not given an indication as to who these potential partners are.

“As unitholder I would rather wait for the completion of the strategic review, where the downside risk is relatively lower, than to remove the manager”, said Xayaraj.

When asked if he has a “feel” on whether the current management team will survive the EGM, Xayaraj replied that he is unsure, but indicated that he will respect the decisions that will be taken at the meeting.

Among unitholders that have built up a substantial stake in the REIT include e-Shang Redwood, which is backed by private equity giant Warburg Pincus.

A representative of the firm REITsWeek contacted earlier in the month did not comment on the requisition letter, or on issues pertaining to the EGM.

By Ridzwan Rahmat

Ridzwan has been analysing REITs and business trusts since 2008, and personally manages a portfolio comprising mainly of SGX-listed REITs. He founded REITsWeek in 2013.