Sabana Shari'ah REIT

[ACTIVIST SPEAKS]

WHY DO WE WANT AN INTERNALISED MANAGER?

1. WE ARE PAYING TOO MUCH!!!

Under the present structure, the following fees are payable to the external manager/property manager:
a. Management Base Fee (0.5% of the Property Value)
b. Management Performance Fee (0.5% of Net Property Income)
c. Acquisition Fee (1% of Acquired Property Value)
d. Divestment Fee (0.5% of Divested Property Value)
e. Property Management Fee (2% of Gross Property Revenue)
f. Lease Management Fee (1% of Gross Property Revenue)

The Total Fees paid to the External Manager/Property Manager was $8,513,000 in 2013, $9,683,000 in 2014, $9,288,000 in 2015 and $8,333,000 in 2016!!!

2. .........AND WE ARE GETTING LESSER AND LESSER!!!
On the other hand, the Annual Distribution per Unit paid to us DROPPED FROM 9.38 CENT TO 5.01 CENT in the same period. We need to do something fast!!!

3. WE WILL GET MORE!!!
With an Internalised Manager, day-to-day management of Sabana REIT will not be contracted to external parties. The cost of an Internalised Manager is significantly lower than the operation of an External Manager. This expected cost savings and the dividend distribution from the Internalised Manager will immediately increase our DPU. In the longer term, DPU is expected to be stable with in-house management.

4. WE WILL BE IN THE SAME BOAT!!!
Under the new model, we will have effective control to appoint or remove the directors of the Internalised Manager. This ensures complete alignment of interest between the Manager and us. Our rights to select the directors will enhance the level of corporate governance.

5. IF WE CANNOT DO IT, LET'S SELL IT ALL!!!
If our internalized manager is not approved by MAS for whatever reason, we must liquidate the trust. Sabana REIT has consistently traded at a steep discount. Liquidation enables us to realise the value of our units immediately, compared to the realization of value through potential future price appreciation, which may or may not materialize.

[ACTIVIST SPEAKS]

STILL UNDECIDED??? MAYBE THIS WILL HELP

1. Our company’s mission statement is to seek yield accretive initiatives to strengthen and grow Sabana REIT’s portfolio and to satisfy Unitholders by delivering attractive DPU. The recent purchases made by the Manager are not yield accretive and they lower the DPU yield by almost 10%.

2. We bought the Changi South Property from our sponsor (who also owns our Manager), Vibrant Group Ltd for $23 million. This same property sits in the Vibrant Group’s book at only $9,935,000. The work done by the Manager is merely administrative in nature but they want $200,000 for their effort.

3. Colliers (for Vibrant), Savills and Knight Frank (for Sabana) separately and independently did a valuation on the Changi South Property using the Capitalization Approach and Discounted Cash Flow Analysis (DCF). All three concluded that the property is worth exactly $23m, which is also the price sold to us. DCF is merely a mechanical valuation tool, which makes it subject to the principle “garbage in, garbage out”. In order for all three to come up with the exact valuation figure, they must have used the same future rental income, same assumed discount rate, same forecasted 30 years rent renewal payable and the same estimated terminal value etc. Small changes in inputs can result in large changes in the value of the property. Colliers, Savills and Knight Frank all agree that the Changi South Property is worth exactly $23m. We can only hypothesize that they were given the same exact figures to value the property. If this is true, it begs the question of objectivity and independence of these and past valuation reports.

4. The Manager of Cambridge Industrial Trust sold their 141,135 sq ft Ubi Ave 3 property (39 years remaining) at $157 psf. In the same month, our Sabana Manager bought 69,977 sq ft Eunos Ave 7 (24 years remaining) at $294 psf, 133,946 sq ft Eunos Ave 3 (24 years remaining) at $258 psf and 91,573 sq ft Changi South (10 years remaining + 30 years renewal) at $251 psf. The price we paid is a whopping 60 – 88% higher than the price Cambridge sold their property. And I wish to remind you that one of the valuation approach used by Savills to justify our price tag, is the Direct Comparison Method.

5. At IPO, we bought the high-tech industrial building at 15 Jalan Kilang Barat for $34.5m. Today it is valued at $23m. We also bought the warehouse and logistic building at 34 Penjuru Lane for $60m. Today it is worth $40.7m. Subsequent to the IPO, we bought 23 Serangoon North at $61m in Aug 12 (today $41.0m), 508 Chai Chee Lane at $68.2m in Aug 13 (today $56.8m) and 10 Changi South at $55,1m in Aug 14 (today $52.1m).

6. The CEO, Kevin Xayaraj told ST reporter, Marissa Lee recently that there are not enough suitable, qualified anchor tenants in Singapore and there is a mismatch in supply and demand in the current economic slowdown. That explains why our DPU has been on the decline for the last three years. The independent directors, Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon are aware that currently we have a few properties that are half empty. However, Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon did not object when the Manager went on to buy three more additional properties in Dec 2016, including one from the sponsor, Vibrant Group Ltd. They also did not question why the price we pay for these three properties are 60 – 88% higher than other market transactions.

5. We are officially the worst performing REIT in Singapore registering a total return of -25.4% in 2016 (source: dollarandsense.sg). Compared to our peers, Viva Industrial Trust (+16.0%) and Cambridge Industrial Trust (+3.6%), it is obvious they are doing it right and we are doing it wrong.

6. The Code of Collective Investment Scheme provides for the removal of the Manager by unitholders. Monetary Authority of Singapore has also confirmed that internally managed REIT structures are allowed in Singapore (Section 9(A) Response to Feedback Received – Consultation on Enhancements to the Regulatory Regime governing REITS and REIT Manager on 9 Oct 2014). Croesus Retail Trust is now operating with an Internalised Manager. We do not need an External Manager who charges multiple fees at a rate they insist is in line with “industry practice”.

7. If the Manager is removed, he will be required to serve out the remaining contract signed with the Trustee until a new Manager is installed. The Code of Collective Investment Scheme requires that at all time, there must be a Manager in Charge. There is no chaos as there will always be a Manager mandated by the law. MAS and HSBC Trustee oversee this transition process.

[ACTIVIST SPEAKS]

FINALLY…….

DO YOU KNOW THAT IN THE LAST 3 YEARS, THEY WROTE OFF $215 MILLION FROM OUR CAPITAL DUE TO PROPERTY REVALUATION LOSS BUT PAID THEMSELVES $27 MILLION IN FEES?

DO YOU KNOW THAT IN THE LAST 3 YEARS, OUR MANAGER INCURRED A $215 MILLION PROPERTY REVALUATION LOSS BUT VIVA INDUSTRIAL TRUST MADE A REVALUATION GAIN OF $75.4 MILLION IN THE SAME PERIOD?

DO YOU KNOW THAT THE MANAGER LOST $90.9 MILLION OF OUR CAPITAL BUT THEY STILL FORCED US TO GIVE THEM $80 MILLION TO BUY THREE PROPERTIES IN 2016?

DO YOU KNOW THAT OUR DPU HAS DROPPED BY 71% SINCE IPO BUT OUR BORROWING HAS INCREASED BY MORE THAN 100% IN THE SAME PERIOD? AND GLOBAL INTEREST RATE WAS LOW AND STABLE THROUGHOUT.

DO YOU KNOW THAT, UNLIKE YOU AND I, THE 5 DIRECTORS OF THE MANAGER HAS NEVER BOUGHT A SINGLE SHARE IN SABANA REIT FROM THE STOCK MARKET? INSTEAD, THE MANAGER WENT TO THE MARKET AND SOLD MILLIONS OF SHARES.

[ACTIVIST SPEAKS]

IMPORTANT: You will be making a binary decision. Remove the Manager or Keep the Manager. It is your choice. Not Voting is a Vote to Keep the Manager. Do nothing and you will continue to lose. Please attend the meeting and vote in favour of the adoption of all the resolutions at the general meeting.

[opmi]

Activist, you getting a lawyer/Corp Sec to draft the resolutions?

[Boon]

http://www.ey.com/Publication/vwLUAssets...report.pdf
 
Global Perspectives:
2016 Reit report
By EY
 
Page 22 – 23 on Singapore market:
 
………………………Two such issues that have witnessed continuous debate in recent years are the fee structure of REIT managers and whether Singapore REITs should be internally or externally managed.
 
Fee structure of REIT
managers
 
In Singapore’s context, the REIT manager is usually the party that sponsors the REIT listing. The attraction for the sponsor is the management fee paid to it as REIT manager.
 
The REIT manager typically earns a fee that is made up of a base fee calculated based on a fixed percentage of the value of the properties in the REIT, as well as a performance fee pegged to the REIT’s performance, such as gross revenue and net property income. This underscores a concern among investors that REIT managers may be motivated to acquire more properties to grow the REIT’s portfolio size and income and to earn higher fees. This is exacerbated by the current, extremely low interest rate environment that makes cheap financing available for such purchases. Attempts by REITs and REIT managers to address this investor concern may see more and more distribution-per-unit (DPU) accretion-based fees surfacing in the market and becoming the norm in time to come.
 
The REIT manager also earns a fee when the REIT makes an acquisition and sells a property. The fee is typically charged at 1% and 0.5%–1.0% of the purchase price and sales price, respectively. This raises another worry that a REIT manager may constantly buy or sell from the property portfolio under its care to earn more acquisition and divestment fees. In the case where a REIT acquires a property from its sponsor, the scope of work performed by the REIT manager is likely to be more limited, and this again raises the question as to why it needs to be paid a fee based on the size of the transaction.
 
Despite regulators’ most recent bid to require disclosures on the various types of fees that a REIT manager charges to ensure they are “reasonable, informative and meaningful so that unitholders are provided with details of how the various types of fees co-exist and serve their respective purposes,” this appears to have done little to allay investors’ concerns about the size of fees charged by REIT managers for property transactions.
 
Externally vs. internally
managed REITs
 
In a report issued by the Asia Pacific Real Estate Association in June 2014, a survey of some 195 senior institutional investors and fund managers investing in real estate and REITs revealed that 94.1% of the respondents preferred internal over external REIT management.4 The result is a stark contrast to the reality, where the external management model is prevalent among REIT frameworks in the Asia-Pacific region, including Singapore. In Singapore, it is noteworthy to highlight that currently all REITs are externally managed, typically by the REIT sponsors.
 
Conflicts of interest and cost leakage are often cited as negatives of the external model. While external managers owe a fiduciary duty to act in the best interests of investors, separating ownership and control raises the risk that managers or related parties will use the assets for their own gains at the expense of investors.
 
In what may be the first action on this issue in Singapore, with the potential to reignite interest and discussion over this hot topic, a mainboard-listed property business trust, Croesus Retail Trust, obtained investors’ approval in June 2016 to internalize its trustee-manager and bring its overall management and day-to-day operations in-house. The business trust believes this would help facilitate a stronger alignment of interests and increase distributions to investors from resultant cost savings. While Croesus Retail Trust is not a REIT, this latest move in the market could potentially be the beginning of a time where we may see REITs, especially the non-sponsor- led REITs, considering a similar move to internalize their REIT managers. 
 
The last major review of the Singapore REIT regime by the regulator was concluded in July 2015. As a result of the review, changes were made toward fostering stronger governance practices and greater alignment of interests while providing REITs with more operational flexibility to enhance their portfolios to deliver stronger performances. Such improvements are crucial to instilling greater investor confidence and sustaining trust and growth and are expected to be an ongoing effort as the Singapore REIT market continues to mature.
_______________________________________________________________________________________________________________________________________

[VB Piglet]

in order to do some of the stuff discussed, like kick out the manager or liquidate the REIT, I think you would need approvals from various parties like JTC or lenders to Sabana.

[weijian]

in order to do some of the stuff discussed, like kick out the manager or liquidate the REIT, I think you would need approvals from various parties like JTC or lenders to Sabana.

hi VB piglet,
May i check which rule is it covered under (need JTC approval) and which loan covenants (lenders to Sabana) does it fall under?

[ACTIVIST SPEAKS]

We will submit the requisition letter to Sabana on Monday. I appeal to all to put aside our differences and work towards a common goal to remove the Sabana REIT Manager for one simple reason….. our Resolution 1 is exactly the same.

If we fail in Resolution 1, the rest of the other resolutions (both Mr Koh and mine) are meaningless. I am for Internalization. I see no merit in replacing an external manager with another external manager. Mr Koh is for a Special Committee to search for the best solution. Our disagreement centres mainly on the fact that I do not think MAS will allow a group of unlicenced people call the shots in a $800m REIT owned by 12,636 unitholders. Both Mr Koh and I have the unitholders’ best interest at heart.

The best performing REITS in Asia are the internalized model REITs. Until recently, Singapore is the only country in the World that does not have the internalized model. MAS endorse it, the Singapore REIT managers fear it. If we successfully remove the external manager, we must have the internal model.

We will vote to wind up if we cannot kick out the manager. By wind up, we are not doing fire sales. We are talking about orderly selling and no buying. It may even take up to a few years if we are not able to get the right price. If we cannot remove the manager and do not wind up, these people will bring our REIT to zero value. If you are still uncomfortable with winding up, you can vote against it!!!

Believe in MAS, follow the due process and have faith in the system, the same system that allow us to remove the manager if we are not happy with their performance.

JERRY LOW CHIN YEE

[newyorkcityboy]

The Australian and Japanese REIT markets are more mature and developed than Singapore. There are successful externally managed REITs in both markets. An example of a stable of externally managed REITs in Australia is the Charter Hall Group of REITs. For example, other than private funds, it manages the Charter Hall Retail and Long WALE REITs, both of which are listed on the ASX.

The issue, internally or externally managed, is to ensure proper alignment of interests between management and minorities.