The internationalisation of property management costs may be counter-productive for Sabana REIT M1GU , says the team at DBS Group Research.
On the morning of June 8, the REIT manager announced that it had received a letter from activist investor Quarz Capital Asia the day before.
The letter suggested that the REIT appoint an internal manager as well as “qualified candidates” of the internal manager.
Quarz Capital currently has a 13.19% stake in Sabana REIT after tendering some 29.4 million units – or a 2.67% stake – to Volare Group AG on April 5. Volare, a Swiss entity that took a 5% stake in the REIT in 2022, had made a partial offer for a 10% stake in the REIT at 46.5 cents per unit on Jan 20. Prior to its disposal, Quarz Capital held a 15.86% stake in Sabana REIT.
In its note dated June 8, the DBS team referred to the previous REIT, Croesus Retail Trust, that had internalised its own manager in 2016. The trust’s assets were gradually divested and it was eventually delisted.
“This could potentially happen again if the internalisation of manager does happen, and we question if such an option to dissolve its portfolio is indeed the ideal scenario to maximise returns for shareholders,” says DBS.
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“We also ask ourselves if this will spark a rethink for Singapore REITs (S-REITs) and the debate on whether internally managed S-REITs would work and if the benefits outweigh that of the current externally managed model,” it adds.
While the team acknowledges that there are some benefits to an internal REIT manager, it also notes that the move may be counter-productive to Sabana REIT considering its smaller portfolio size of $886 million of assets under management (AUM).
“The REIT currently lacks the scale to benefit from economies of scale. Especially on the onset, more costs may be incurred to create the necessary infrastructure for an internal manager,” the team notes.
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“Moreover, one of the major proponents of an internal manager is that the manager will be entirely focused on just the one portfolio and will benefit from the added focus. However, Sabana REIT currently does not have a sponsor or other subsidiary vehicles that they manage, and would already be exclusively focused on managing Sabana REIT,” it adds.
On whether an internally-managed REIT would work well for S-REITs, DBS sees that Sabana REIT is in a “more unique situation” compared to its peers as it is not backed by a strong sponsor. The REIT is not part of a bigger group that provides acquisition pipelines and management support either.
“As part of a larger group, the sponsor would be committed to grow the REIT and maximise returns for shareholders. We believe this is one of the major benefits of the externally managed REIT model that cannot be simply measured in cost savings derived from internalising the REIT manager,” says DBS. “The commitment and support from the sponsor provides the REIT with more intrinsic value over the finite dollar amount that could potentially be saved.”
DBS has kept its “hold” call with an unchanged target price of 48 cents on the REIT.
As at 4.15pm, units in Sabana REIT are trading 0.5 cents lower or 1.16% down at 42.5 cents.
