Sabana should be leading smaller Reits to exit if their unit prices are underperforming
Selling
JTC data shows that industrial rents will increase by 5.1% and 8.9% respectively in 2023. Sabana Reit could be a good investment given the demand for industrial property in this area. Sabana Reit’s unitholders can be rewarded if their trust is merged with Clar, MIT or MLT. Or if it sells its assets.
Other property trusts with Singapore assets that are in segments where there is strong potential should consider posting the for sale sign.
Far East Hospitality Trust Q5T 0%, for example, which had assets totalling S$2.6bn at end-2023 was traded at a 33 per cent discount to the NAV of end-2023 per stapled securities as of Mar 18.
FEHT has a variety of hotels in Singapore and also owns serviced residences. In H2 of 2023, revenue per available room in the trust’s hotel properties increased by 19.9% year-on-year. Revenue per available unit for its serviced apartments grew by 10.7%.
Singapore’s Reit industry has grown rapidly since 2002 when the first Reit went public. Low interest rates fueled Reits’ rapid growth.
Reits were able to make easy debt-financed acquisitions that would increase their yield, and investors were looking for instruments with high yields such as Reits.
There may be a feeling of regret among some unitholders in Sabana Industrial Real Estate Investment Trust: M1GU 0.0% (Sabana Reit), who voted on 7th August 2023 to remove Sabana Real Estate Investment Management from the role of trust manager. This will begin the process of internalising Sabana Reit as its manager.
It appears that the path of internalising management, in which the Reit’s trustee is the manager and not an external company, would be costly and messy.
Sabana Reit has reported an increase in net property income and gross revenue year-over-year for H2 of 2023. But the board of directors declared that the distribution per unit for the second halves fell by 21% yoy.
Lacking scale
The DPU declared declined in part due to the retained 10% of distributable revenue to fund internalisation-related costs. Further retention of the distributable income could be needed in future.
In addition, the Reit manager will face challenges in retaining and attracting top talent due to the uncertainty created by the internalisation effort.
Recent unitholders from Sabana Reit who were unhappy and worried about the lack of progress in internalisation by the HSBC institutional trust services trustee requested an extraordinary general meet (EGM), held on Mar 8,
Eight out of ten resolutions were approved at a heated EGM. Unitholders backed the directive to instruct the trustee to set up an internalisation panel whose members would include employees of activist investor Quarz Capital Asia. The unitholders also supported a price cap of S$10,000,000 for the purchase of the current external manager in a month after the EGM.
Sabana Reit closed at S$0.365 on Monday, March 18, down 9 per cent compared to its closing price of S$0.405 before the unitholders’ meeting, where they voted to remove SREIM from the company and begin internalisation.
Internalisation
The internalising the management of Reits has merits. Unitholders could benefit from potential cost savings. It is possible that there will be better alignment between management and the unitholders.
As part of my role as the manager of Hong Kong’s Link Reit Trust, I dealt with many investors who told me that they liked the trust’s internal management system.
Singapore bourse benefits if there are a variety of Reits, both internally and externally managed.
Could regulators do anything more to ease the way for Reits with external management that want to internalise their Management?
Sabana Reit’s total assets were S$1 billion as of end-2023. Sabana Reit’s assets pale in comparison to other trusts with industrial or logistic assets like CapitaLand Ascendas Reit, ME8U +1.3%(MIT), and Mapletree Logistics Trust, M44U 0%(MLT), who had total assets of S$18.3billion (Clar), S$9billion (MIT), and S$13.9billion (MLT).
Clar, MIT & MLT are not part of the Straits Times Index.
The larger trusts might have a better trading liquidity, and attract more institutional investors. Some larger trusts might also have better access to financing or credit.
Sabana Reit’s unit value of S$0.52 was 30 per cent lower than its net asset value (NAV), which is expected to be S$0.52 by the end of 2023. Clar, MIT and MLT were trading at a premium of 18%, 23.3% and 2.2% to the end-of-2023 Net Asset Value (NAV) for each unit.
