ESR Group, the largest unitholder of Sabana Industrial REIT, and the owner of Sabana REIT’s manager has written an open letter to all the REIT’s unitholders. In it, ESR has clarified that the monetary value of its stake in the REIT is a lot more than that in the manager.
Moreover, a back of envelope calculation shows that ESR's distributions from its investment in Sabana REIT are significantly higher than the management fees it receives from owning the manager.
ESR’s 20.6% stake in Sabana REIT is valued at around $99 million. This compares with around the $25 million ESR is reported to have paid for the manager.
In FY2022, ESR’s distributions from its investment would have amounted to $7.9 million. According to Quarz Capital Asia, Sabana REIT’s management fees in FY2022 were $4.4 million. Quarz also says unitholders would “save $2.4 million” if the manager was internalised.
Would the change of control covenant kick in or would the new internal manager have negotiated a competitive cost of debt? In FY2022, all-in cost of debt was 3.86%. Every potential 50 bps increase in interest rates may result in a $0.25 million decrease in distributable income or 0.8% reduction (equivalent to 0.02 cents) on DPU per annum, Sabana REIT's FY2022 presentation indicated.
More than just debt and banks, the new internal manager would have to negotiate with Sabana REIT’s tenants as 84.9% of the portfolio by gross rental income in FY2022 was contributed by multi-tenanted properties. Or would the new manager appoint property agents (a cost) to negotiate with the tenants. This is a different situation from 2017, when a bunch of unitholders requisitioned an EGM to remove the manager. In FY2016, out of 21 properties, 11 or 44% of the portfolio by NLA were master leased.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
On June 26, ESR said in its open letter “while much ado has been made about our interest in the Sabana Manager, the value of our Sabana REIT unitholdings far outweigh the value of our investment in the Sabana Manager. There is no reason for ESR to prioritise and protect the value of our stake in the Sabana Manager at the expense of, or to the detriment of Sabana REIT.”
