10 REASONS TO REMOVE THE SABANA MANAGER
by Activist (a close group of FB) ... all is welcome to join in.
1. MAS imposes a statutory duty on a REIT Manager and its individual directors to prioritise the interests of unitholders over those of the REIT Manager and its shareholders in the event of a conflict of interest. On 15 Dec 2016, the Manager directed the Trustee to enter into a conditional put and call option agreement with the Sponsor (also the controlling shareholder of the Manager) in relation to the proposed acquisition of 47, Changi South Property. The Manager directed the Trustee (buyer) to pay an option fee of 1% ($246,100) to the Sponsor’s solicitors but the Manager did not require the Sponsor (seller) to pay to the REIT any fee for their put option. This is unfair under normal circumstances, let alone this is an obvious “conflict of interest” scenario. The Manager not only did not prioritise unitholders interest over those of the Sponsor, it did the exact opposite by protecting the Sponsor’s interest over those of unitholders. The Manager violated this statutory obligation and it must face criminal liability.
2. In the Rights Offer Information Statement dated 30 Dec 2016, the Manager deliberately rounded off its acquisition fee to read $0.2m, $0.3m and $0.2m totaling $0.7m. The actual fee paid to the Manager was $200,000, $345,000 and $230,000 totaling $775,000 which is a significant 10.7% more than what is stated by the Manager. Taking into consideration the rent payable figures (by the vendor) were presented to the cent in the offer statement, this seemingly innocent act is the Manager’s continuous deliberate effort to suppress the actual financial impact on unitholders.
3. The Manager also presented a wrong interpretation of Clause 15.2.1 of the Trust Deed where it said that it is allowed to receive the acquisition fee units at the issue price of $0.258 per unit. It then announced that it will instead elect to receive the fee at $0.432 per unit.
“When paid in the form of Units, the Manager shall be entitled to receive such number of Units as may be purchased for the relevant amount of the Acquisition Fee at the issue price of Units issued to finance or part finance the acquisition in respect of which the Acquisition Fee is payable” excerpts from Clause 15.2.1 of Trust Deed.
The acquisition was paid in cash and not units. The Manager lied that it is allowed to issue acquisition fee in units at $0.258. The Manager again lied to demonstrate its alignment of interest with unitholders by saying it elected to receive the acquisition fee at $0.432 per unit.
4. In Nov 2012, LHN Group (before IPO) bought Singapore Handicrafts Pte Ltd, effectively paying $11m for 72, Eunos Ave 7. In Dec 2016, LHN Group sold 72, Eunos Ave 7 to us at $20m. Knight Frank valued this HDB industrial building with remaining lease of 24 years at $20m. This sale is pending HDB’s approval. Once approved, we are destined to lose big.
In Aug 2012, the Manager bought 23 Serangoon North Ave 5 at $61m. Knight Frank independently valued the property at $61m. Today, Knight Frank tells us this property is only worth $41m.
For the same period, Knight Frank says our Serangoon North Property is worth 33% less, they say LHN Group’s 72, Eunos Ave 7 is worth 82% more. The Manager says this acquisition is good for us.
5. The Sponsor (Vibrant Group) acquired Changi South Property at $10.9m in 2011. The Sponsor sold the same property at $23m to the REIT in 2016. SGX queried the Manager whether this Changi South Property can be easily disposed at the market price of $23m in the open market. The Manager could not answer a simple yes or no question and ended up not wanting to speculate whether or not the property can be easily disposed of by the REIT at $23m. The Manager explained the massive loss in our capital value of our property portfolio was inevitable and unavoidable due to “continuing weakening industrial property market”. Yet the Sponsor’s property enjoyed a 111% appreciation in value over the same period when Vibrant sold Changi South Property to the REIT at $23m. The Manager says this acquisition is good for us.
6. In Aug 2012, the Manager bought 23 Serangoon North Ave 5 at $61m. The property was 100% occupied. Knight Frank independently valued the property at $61m using Investment and Discounted Cash Flow Analysis. The Vendor agreed to lease back the premise for a term of 3 years with an option to renew a further term of 3 years. Today, this property is 55% occupied. The Vendor did not renew the lease after the first 3 years. Knight Frank values it at $41m. The day the vendor did not renew their master lease, the Manager left it half empty. The Manager collected $610,000 as acquisition fee and its annual management fee increased by $305,000.
In Aug 2013, the Manager bought 508, Chai Chee Lane at $68.2m. The property was 100% occupied. CKS Property Consultants independently valued the property at $67.75m using Capitalisation Approach and Discounted Cash Flow Analysis. The Vendor agreed to lease back at least 50% of the premise for a term of 10 years. Today, this property is 56.4% occupied. Suntec Real Estate values it at $56.8m. The day the Manager signed on the dotted line to buy this property, it left it half empty. The Manager collected $595,000 as acquisition fee and its annual management fee increased by $341,000.
The revaluation loss on 23 Serangoon North, 508 Chai Chee Lane and the rest of the overpriced properties acquired by Sabana Manager were not due to “the trend of revaluation loss in line with the performance of other Industrial REITs”. The revaluation losses on Sabana’s property portfolio were arithmetic certainties scheduled to happen.
7. I lodged a complaint to CAD against three valuation houses, Colliers, Savills and Knight Frank. This is in relation to the reports they were paid to give an objective and independent valuation of a property, 47 Changi South Ave 2 for the Vendor (Colliers for Vibrant Group Ltd) and the REIT Manager (Knight Frank for REIT Manager and Savills for HSBC Trustee) on behalf of Sabana REIT.
Colliers, Savills and Knight Frank 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 Sabana REIT. The price $23m was arrived at on a willing-buyer and willing-seller basis, taking into consideration the independent valuations done on the Property. 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 upfront land premium 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 agreed that the Changi South Property was worth exactly $23m. I can only hypothesize that they were given the same exact figures and the same assumption to value the property. If this is true, it begs the question of objectivity and independence of these and past valuation reports. In fact, Savills went one step further. They did a Direct Comparison Method and still arrived at $23m. It appears that the figure $23m is so deeply entrenched that any other valuation method used by all these Licensed Appraisers would probably yield the same figure… $23m.
In appraising 47 Changi South Ave 2, both Knight Frank and Savills are of the opinion that “the rental support is not unreasonable and is in line with general market practice where rental support is given to compensate for lower passing rents as compared to current market rents”. In Sep 2016, 26% of the LFA was let to a third party tenant at $1.35 psf. The tenancy was at arm’s length. Vibrant Group Ltd (the owner) also has a fiduciary duty to ensure this tenancy is fair to the listed company’s shareholders. Logically, we can conclude that $1.35 psf per month was the prevailing market rent for Changi South Property then. Strangely, in Dec 2016, Savills opined that the current market rents for comparable class of property was in the range of $1.80 to $2.10 psf per month when a significant portion of the exact property was just rented out to a third party tenant at $1.35 psf per month. Savills then justified the jacking up of the monthly rent to above $2.00 psf and concluded that this rental support arrangement was in line with general market practice. With the inflated rent as one of the main inputs into the mechanical Discounted Cash Flow Valuation Methodology, Savills arrived at an inflated valuation of $23m for Changi South Property. It is questionable why Savills preferred to look at the rent rate of “comparable class of property” but at the same time, chose to ignore the actual rental rate in the exact property it is doing the valuation. It became absurd when Knight Frank must have also ignored the same $1.35 psf per month rental rate in Changi South Property when they arrived at the same $23m. And the situation became downright criminal when the third valuer, Colliers also ignored the actual rental when they too valued the Changi South Property at $23m.
8. Savills valued 107 Eunos Ave3, 133,946 sq ft 6 storey light industrial building (with remaining HDB lease of 24 years) at $34.5m or $258 psf using Income Capitalization Approach and the Discount Cash Flow Analysis Valuation Method. They also applied the Direct Comparison Method. On completion of the acquisition, the vendor will lease back 34% of the property for five years. The Vendor will provide rental income support for the initial five years.
Knight Frank valued 72 Eunos Ave 7, 67,977 sq ft 6 storey light industrial building (with remaining HDB lease of 24 years) at $20m or $294 psf using Income Capitalization Approach and the Discounted Cash Flow Analysis Valuation Method. On completion of the acquisition, the vendor will lease back 71% of the property for a term of 10 years. The Vendor will provide rental collection arrangement to compensate for any potential lower passing rent for the ten years.
At around the same time, Cambridge Industrial Trust sold its 55 Ubi Ave 3, 141,135 sq ft 5 storey light industrial building (with remaining HDB lease of 39 years) at $22m or $157 psf. Edmund Tie & Company valued this property with a significantly longer 39 years remaining HDB lease at $22m. Cambridge’s Trustee-Manager also has a fiduciary duty to ensure that the sale was fair to their unitholders. Cambridge’s sale of 55 Ubi Ave 3 was at arm’s length to an unrelated party so the market price at Ubi/Eunos area for “comparable class of property” must be $157 psf.
If Cambridge’s sale was the market price, then the two Eunos Properties sold to Sabana REIT were highly inflated. How could Savills and Knight Frank justify their valuation reports when another Licensed Appraiser from Edmund Tie had valued this “comparable class of property” 55 Ubi Ave 3 at $157 psf and Cambridge Industrial Trust sold the property to an unrelated party at $157 psf in the same month?
9. Mdm Ho Ching also told us in 2005 that in the event the Manager buys assets at highly inflated prices in exchange for inflated rents from the vendor, the unitholders would be sitting on a capital loss right from the start, as the purchase price consideration far exceeds the fair market or replacement value of the asset. Unitholders would also be unwittingly saddled with a much larger credit risk than appropriate. With Kevin Xayaraj admitting that the Manager is ready to pay higher price for vendor’s rent support arrangement, both Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon, the two independent directors knew or ought to know that we would be in a sitting on capital losses immediately after the Manager signed on the dotted line to buy. They also knew or ought to know that we would be saddled with overpriced assets which have to be written down immediately after the rent support expires like the 23 Serangoon property and 508 Chai Chee property. Both properties are now half empty and are written down by as much as 33%. Both the independent directors did not object to these acquisitions and neither did they object to all those similar acquisitions made in Dec 2016.
In Dec 2016, the Manager announced the purchase of Eunos Ave 7, Eunos Ave 3 and Changi South properties. All were transacted at significantly higher prices and the vendor agrees to lease back at inflated rent. Armed with the knowledge of the dire state of 508, Chai Chee Lane and 23, Serangoon North properties purchased in similar terms, Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon must know that unitholders will suffer big losses if we proceed with such acquisitions. Unfortunately, they still did not see anything wrong with such purchases and instead endorsed the Manager’s decision to call for a Rights issue to finance all these properties.
10. Ms Ng Shin Ein, the Non-Executive Director of Sabana REIT Manager, resigned on 16 Jan 17. Ms Ng expressed her inability to contribute as a result of certain internal dynamics within the company. She withdrew her resignation but reinstated her resignation again on 27 Feb 17 as her reason for the earlier resignation remains. Her earlier resignation on 16 Jan 17 and her reinstated resignation on 27 Feb 17 beg a few questions.
a. What is the nature of the “certain internal dynamics within the company” she is referring to?
b. Why did Mr Steven Lim Kok Hoon and Mr Yong Kok Hoon, the two independent directors, not discharge their statutory duties by informing MAS and SGX that there is “certain dynamics within the company” that render Ms Ng Shin Ein unable to contribute to Sabana REIT Manager?
c. Why did Mr Steven Lim Kok Hoon and Mr Yong Kok Hoon not resolve the “certain internal dynamics within the company” from 16 Jan to 27 Feb 17, that Ms Ng experienced that made her feel that she is not confident that she can contribute meaningfully on 27 Feb 17.
d. Is the “certain internal dynamics within the company” putting unitholders at a disadvantage? Does this “certain internal dynamics within the company” also render Mr Steven Lim Kok Hoon and Mr Yong Kok Hoon unable to discharge their duties? Are Mr Steven Lim Kok Hoon and Mr Yong Kok Hoon prioritizing the interest of the unitholders over those of the shareholders of the Manager when dealing with this “certain internal dynamics within the company”?
Both Mr Steven Lim Kok Hoon and Mr Yong Kok Hoon form the core of the Strategic Review Committee. If both of them cannot resolve the “certain internal dynamics within the company” comprising of only five individual directors, how are we, the unitholders, able to trust them to resolve our problem of the Sabana Manager losing hundreds of millions dollars?
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