Sabana Industrial REIT’s unit price has fallen some 12% since May 24, when the High Court said that ESR Group entities are prohibited from voting on amendments to Sabana REIT’s trust deed. Since then, the unit price has fallen from 36.5 cents to 32 cents as at July 10.
Since May 24, the Straits Times Index (STI) has risen 1.3%. From the start of the year to July 11, Sabana REIT has lost 21.9% while the STI is up 4%. The largest components of the STI, such as the banks, have made new post-Covid highs.
Technically, short-term indicators have not formed positive divergences with Sabana REIT’s unit price. A positive divergence happens when momentum indicators start to rise as prices fall. Technically, the only mitigating factor is that the smoothed RSI is at an oversold low of 23 points, the lowest level since Sabana REIT’s EGM on Aug 7, 2023.
A positive divergence could appear at some point in the future when RSI is sufficiently oversold and Sabana REIT’s prices have stopped falling. For the time being, though, traders and investors appear to be giving the REIT a wide berth.
In 2023, Quarz Capital Asia requisitioned an EGM to remove Sabana REIT’s manager and internalise the REIT with two resolutions. The first resolution was to remove the manager, and the second was to direct Sabana REIT’s Trustee, HSBC Institutional Trust Services, to look into the internalisation of the manager, which means appointing a new one.
Prior to the EGM on August 7, 2023, the trustee warned that the process would take time (at least 12 months) and that costs were indeterminate at the time. For some reason, Quarz Capital Asia requisitioned a second EGM, which took place on March 8. As of March 31, the internalisation costs are $5.4 million plus $1.84 million.
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On June 6, Quarz Capital and a few other unitholders with some units requisitioned a third EGM. Since Sabana REIT’s manager has agreed to hold it, it will likely occur by Aug 6.
For the time being, market observers are attributing the decline in share price to the uncertainties surrounding Quarz Capital’s additional EGM and resolutions. An additional reason could be concern about the possibility of Sabana REIT’s banks triggering their change of control covenants.
Furthermore, the steps and costs of internalisation were not clearly articulated before the EGM on Aug 7, 2023.
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In addition to the high cost of internalisation, Sabana REIT issued a $100 million sustainability bond, guaranteed by the Credit Guarantee and Investment Facility (CGIF), a unit of the Asian Development Bank. The bond is widely believed to be used to refinance a $93 million loan, which matures in 4Q2025.
Market watchers have suggested that the REIT’s financiers could accelerate the maturities of their loans, citing certain covenants, or they may restructure their loans along with the ability to access the collateral.
The issue of challenges around capital management was originally cited in a report dated Aug 8, 2023, by DBS Group Research. In it, the analysts pointed out that Sabana REIT could fall towards 30 cents (the REIT is 2 cents away). In January, DBS headlined a report titled “Internalisation comes with a cost”.
Interestingly, the announcement of the $100 million bond issuance was accompanied by several risks. For instance, an event of default under the bonds occurs if the manager resigns or is removed “pursuant to the terms of the REIT trust deed and no replacement or substitute manager of Sabana Industrial REIT is appointed in accordance with the terms of the REIT trust deed or any relevant order(s) passed by a court of law in Singapore concerning the manager of Sabana Industrial REIT”.
Secondly, a change of control in a manner or to an extent that would result in a material adverse effect is an event of default under the reimbursement and indemnity agreement if CGIF has not provided its consent to such change of control within the review period. In other words, the CGIF may need to approve the new manager.
“If an event of default occurs under the reimbursement and indemnity agreement, the guarantor may require the issuer to pay an increased guarantee fee, or require the issuer to provide additional support in the form of guarantees”, including other forms of collateral.
Following the appointment of Donald Han by previous sponsor, Vibrant Ltd, and after ESR Group acquired the manager in 2019, the REIT has had access to lower-cost, unsecured bank debt. This is likely to be reversed with the new internalised manager, and market players could be selling out ahead of the uncertainties.
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A unitholder who owns several million units suggests that the best form of action is for the Sabana REIT’s manager to include a resolution in the EGM to be held by Aug 6 requiring the REIT to divest its properties, rest its debt and return any remaining capital to unitholders. Such action could net unitholders as much as 43 cents, he estimates.
With these uncertainties, it is no surprise that Sabana REIT has underperformed the STI this year and may continue to do so despite oversold pressures building on the chart.
