HSBC Instititional Trust Services (HSBC Trustee) has issued a draft letter - subject to change - and conveyed it to the manager and unitholders highlighting the steps and as yet undetermined costs associated with the resolutions for the EGM requisitioned by Quarz Capital Asia for Sabana Industrial REIT and its manager, Sabana Real Estate Investment Manager (SREIM).
In a nutshell, Quarz has requisitioned an EGM to pass two ordinary resolutions. Resolution 1 is to remove SREIM, the external manager, and resolution 2 for ease of understanding, is to vote for internalisation. Internalisation itself requires a number of steps including an EGM to change the trust deed which will be an extraordinary resolution according to HSBC Trustee.
Since Quarz and Volare - although not concert parties - voted together at the AGM in April, they could (or perhaps not?) vote together in the EGM for the ordinary resolutions. Together Quarz and Volare hold a tad above 30% of Sabana REIT.
If both resolutions are passed, HSBC Trustee says that the trustee will be required to set up an internal manager without an internal manager having been identified, or an internalised management structure in place to transition the management of Sabana REIT.
The time to identify a new manager and have it approved, and the transition process could take months. The trustee says it can't estimate the time and cost of the internalisation process. "Unithohlders should be aware that a considerable amount of time (it is not possible to estimate, however it is expected to be at least 12 months) and cost will be required to internalise the REIT management function," the trustee says.
HSBC Trustee points out that fees, costs and expenses (a recurring phrase in its draft letter) will be charged to the REIT. “The Trustee will appoint professional advisers which may include investment, legal, financial, tax, property and other advisers to provide guidance and support on the ongoing management of Sabana REIT. The fees, costs and expenses of the professional advisers will be reimbursed out of the assets of Sabana REIT,” the draft letter says.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
If the resolutions are passed and cannot be implemented at all, or within a reasonable timeframe, the trustee will, with its professional advisers, explore all options including the option of winding up the REIT. At least one of the additional EGMs requires unitholders to vote on an extraordinary resolution, for change of trust deed, which needs to be passed with a super majority.
The Edge understands that the trustee’s draft letter is shared with all parties of the originating application and posted on SGXnet for all to read.
Internally managed REITs may indeed be more efficiently run. (Watch out for our story on LInk REIT). However, Link REIT and Netlink Trust, a business trust, were "born" internal. Moreover, Link REIT's size allows its internal manager to reap efficiences not afforded to smaller REITs, including lower cost of capital and available funding because of its stated goal of having a low aggregate leverage. Internalised REITs would generally cap their aggregate leverage at 28% or thereabouts because of the lack of a sponsor to provide financial support.
Whether Sabana REIT's unitholders, now aware of the costs of internalisation, would or could reconsider their votes in favour of the two main resolutions tabled, remains to be seen.
