Sabana Shari'ah REIT

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https://www.businesstimes.com.sg/compani...nalisation

It is now clear that whatever Quarz previously said about the trust deed isn't true already...

I am not too surprised. Quarz tend to oversimplied things and tend not to focus on details. But they did help shareholders in the earlier proposed merger with Er reit. This compares with to ESR the sponsor

[ghchua]

I am not too surprised. Quarz tend to oversimplied things and tend not to focus on details. But they did help shareholders in the earlier proposed merger with Er reit. This compares with to ESR the sponsor

Well, now that the external manager had been removed, if indeed amendments of the trust deed is needed, it will need 75% approval at an EGM. Even if sponsor and concert parties are not allowed to vote (which I think might be impossible since amendment of trust deed is generic in nature in terms of language), it is not a certainty that it will be passed.

Frankly speaking, they should have sort this out with the regulatory authority and the trustee before even attempting to remove the manager. If trust deed changes is indeed needed and not carried at an EGM, unitholders might be left in limbo, with no manager in place since internalisation could not be carried out.

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I am not too surprised. Quarz tend to oversimplied things and tend not to focus on details. But they did help shareholders in the earlier proposed merger with Er reit. This compares with to ESR the sponsor

Well, now that the external manager had been removed, if indeed amendments of the trust deed is needed, it will need 75% approval at an EGM. Even if sponsor and concert parties are not allowed to vote (which I think might be impossible since amendment of trust deed is generic in nature in terms of language), it is not a certainty that it will be passed.

Frankly speaking, they should have sort this out with the regulatory authority and the trustee before even attempting to remove the manager. If trust deed changes is indeed needed and not carried at an EGM, unitholders might be left in limbo, with no manager in place since internalisation could not be carried out.

Agree with u.  But the external manager is still there, running in the interim until replaced.  But whether the manager is now committed and motivated, that is a separate question.

[weijian]

Misrepresentation? Over simplification? Sometimes, we need to do what is needed to move forward, in order to avoid "paralysis due to over analysis"? They had managed to get Volare Capital on board and I suspect it is no easy feat. With 2 "big minorities" representing and fully aligned with all OPMIs, the final destination may not be certain but the journey is. If internalization doesn't work, then maybe liquidation will. Or will it go full circle and ESR become the external manager again but with much better alignment to OPMIs?

So, I will cut Quarz Capital some slack. They have proven that OPMIs are better off with them, than not. While I am not a shareholder of Sabana REIT, but Quarz Capital will be welcomed by me if they are ever vested in companies that I have invested in.

[r0n]

Misrepresentation? Over simplification? Sometimes, we need to do what is needed to move forward, in order to avoid "paralysis due to over analysis"? They had managed to get Volare Capital on board and I suspect it is no easy feat. With 2 "big minorities" representing and fully aligned with all OPMIs, the final destination may not be certain but the journey is. If internalization doesn't work, then maybe liquidation will. Or will it go full circle and ESR become the external manager again  but with much better alignment to OPMIs?

So, I will cut Quarz Capital some slack. They have proven that OPMIs are better off with them, than not. While I am not a shareholder of Sabana REIT, but Quarz Capital will be welcomed by me if they are ever vested in companies that I have invested in.

Going to be a long journey ahead anyway with multiple EGMs I assume coming up. For those who believe in them, can just enjoy the ride...

[weijian]

Let's check out how ESR Group is profiting from Sabana REIT. As largest shareholder of Sabana, it collects the largest share of dividends declared by the REIT. In addition, it also collects fees for providing AUM and property mgt services to the REIT.

FY22
Dividends collected by ESR = share count x DPS = 226.8mil x 0.0305 (DPS) = 6.9mil
Fees collected by ESR (mgt + property) = 4.4mil + 2.8mil = 7.2mil

FY19
Dividends collected by ESR = share count x DPS = 220mil x 0.0292 = 6.4mil
Fees collected by ESR (mgt + property + divestment) = 4.5mil + 2.2mil + 0.5mil = 7.2mil

- For simplicity sake, just 2 snapshots were taken - a pre covid (FY19) and post covid (FY22). Out of total dividends/fees for this 2 years, 53% are from fees and 47% from dividends. So on aggregate, ESR is taking home slightly more in fees than it collects from dividends.

- Fee related business: One could argue that for what it takes in fees, it needs to account for its overhead expenses and so the "net profit" will be lower. If we assume a robust 25% NPM for its fee-related business (with a 5mil setup capital), that will mean NP = 0.25 x 7.2mil = 1.8mil (FY22) or 36% ROE.

- Dividend collection business: Let's assume ESR uses loans for 95% of the capital outlay (LTV=95%) to own Sabana stake = 226.8mil x 0.45 (share price)  x 0.95 (LTV) ~ 97mil in loans. If financing cost is ~5% by pledging all the securities, the annual cost would be 0.05 x 97mil = 4.85mil. The profit would be 6.9mil - 4.85mil = 2.05mil based on 5mil capital (102mil - 97mil loan) or 41% ROE.

- Assuming the above assumptions are relatively robust, the fee collection business and dividend collection business are "similar" in terms of ROE and profit. But in terms of ROIC (which accounts for debt), the fee collection business will be superior and because of this, it is probably more scalable and durable. ESR, been a publicly listed entity, will also be more highly valued for its earnings as a result.

[CY09]

Dont forget Sabana REIT acts like an option for ESR to offload assets anytime. ESR would be profitting from selling its properties to a "willing buyer" anytime at the heights of a property cycle

[weijian]

https://www.businesstimes.com.sg/compani...nalisation

It is now clear that whatever Quarz previously said about the trust deed isn't true already...

The full letter from the committee.

I do disagree with some of the points below because external managers of S-REITs are NOT fully entrenched, as they can be voted off with simple majority, and replaced with ANOTHER external manager. So there is accountability, there is recourse.

Sabana unitholders respectfully urge MAS and SGX RegCo to safeguard the fundamental key pillar of investor protection by providing clear guidance on the Trustee's position on internalization and whether the sponsor is prohibited to vote in a resolution where it is a related party (as the vote will directly affect its fee income)


6.  About 80% of sponsors and their concert/related parties hold ~21% or more unitholdings in the S-REITs they manage. If the sponsor and their concert parties are permitted to vote in an extraordinary resolution to amend the Trust Deed to effect internalization (if any) despite them being interested in the matter as it would directly impact their fee income, it is clear that they would vote against this resolution.

7.  Due to the impossibly high threshold to pass this resolution if they vote (requires more than 80% of all remaining unitholders to both turn up and vote for the resolutions), this will mean that the removal of the external manager by unitholders and Internalization is effectively impossible. There is essentially no fundamental pillar of protection for unitholders.

8.  If this is so, it will send a shocking signal to all investors: External managers of S-REITs are fully "entrenched" however bad their performance is, with zero accountability and no recourse for unitholders. This will represent a severe regression in corporate governance standards and unitholder protection in S-REITs to a level which is substantially below international norms and will consequently make the entire sector 'uninvestable'.

https://www.prnewswire.com/apac/news-rel...06569.html

[r0n]

https://www.businesstimes.com.sg/compani...nalisation

It is now clear that whatever Quarz previously said about the trust deed isn't true already...

The full letter from the committee.

I do disagree with some of the points below because external managers of S-REITs are NOT fully entrenched, as they can be voted off with simple majority, and replaced with ANOTHER external manager. So there is accountability, there is recourse.

Sabana unitholders respectfully urge MAS and SGX RegCo to safeguard the fundamental key pillar of investor protection by providing clear guidance on the Trustee's position on internalization and whether the sponsor is prohibited to vote in a resolution where it is a related party (as the vote will directly affect its fee income)


6.  About 80% of sponsors and their concert/related parties hold ~21% or more unitholdings in the S-REITs they manage. If the sponsor and their concert parties are permitted to vote in an extraordinary resolution to amend the Trust Deed to effect internalization (if any) despite them being interested in the matter as it would directly impact their fee income, it is clear that they would vote against this resolution.

7.  Due to the impossibly high threshold to pass this resolution if they vote (requires more than 80% of all remaining unitholders to both turn up and vote for the resolutions), this will mean that the removal of the external manager by unitholders and Internalization is effectively impossible. There is essentially no fundamental pillar of protection for unitholders.

8.  If this is so, it will send a shocking signal to all investors: External managers of S-REITs are fully "entrenched" however bad their performance is, with zero accountability and no recourse for unitholders. This will represent a severe regression in corporate governance standards and unitholder protection in S-REITs to a level which is substantially below international norms and will consequently make the entire sector 'uninvestable'.

https://www.prnewswire.com/apac/news-rel...06569.html

Feels like more of the same playbook they used during EGM to me, but don't think MAS or SGX will give them the answer that they need to move on...

[ghchua]

[I do disagree with some of the points below because external managers of S-REITs are NOT fully entrenched, as they can be voted off with simple majority, and replaced with ANOTHER external manager. So there is accountability, there is recourse.

Exactly. Now that the external manager related to ESR had been voted out, where is the conflict of interest they are talking about to prevent ESR and related parties from voting on changes in trust deed to implement internalization?

Unless they are saying that the external manager model for REITs represents corporate governance issues across the board. Then, it will be better to mandate that all REITs listed to SGX should change to the internal manager model.