ESR Group has hit back at activist investor Quarz Capital’s plan to remove Sabana Industrial Real Estate Investment Trust : M1GU 0%’s (Sabana Reit) manager and appoint an internal manager as a replacement.

The Hong Kong-listed asset manager holds a 20.6 per cent interest in Sabana Reit and ultimately owns its manager Sabana Real Estate Investment Management (SREIM).

In an open letter dated Jun 25, ESR Group said it was writing to unitholders to share a number of “grave concerns” it has regarding the internalisation. It also noted Quarz’s requisition letter contains numerous false and inaccurate statements, but reserved its position on those issues.

To recap, Quarz has requisitioned an extraordinary general meeting to pass a first resolution to remove SREIM as manager as soon as practicable.

The next resolution will effect the internalisation of the Reit management function by incorporating a subsidiary wholly owned by the trustee, and appointing such a subsidiary to act as the manager of Sabana Reit.

Quarz said in its letter that replacing the ESR Group-owned external manager with an internal one would resolve the potential corporate governance flaws and potentially result in higher distribution per unit and unit price to Sabana unitholders in the future.

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Addressing its ownership of the Reit’s manager, ESR Group said its unitholding in Sabana Reit “far outweighs” the value of its investment in the Reit’s manager. Therefore, there is no reason for ESR Group to prioritise and protect its stake in the manager at the expense of or to the detriment of Sabana Reit.

If the resolutions are passed, ESR Group believes Sabana Reit would be cast into a “prolonged period of uncertainty”, which could result in a loss of confidence in the Reit by investors and lenders. This, in turn, could cause “massive destruction of value” for unitholders.

ESR Group also argued that the removal of the manager would impose onerous duties beyond the usual scope of work on Sabana Reit’s trustee, as there would be no incentive for the manager’s board, management and staff to continue in their office or employment.

It has urged the trustee to provide its views to unitholders and the Reit manager on whether it has the capability and resources to undertake such a scope of work.

A change in manager could also lead to a breach in loan covenants, as Sabana Reit has entered into facilities or financing agreements which contain restrictions on manager change – including SREIM stepping down.

In response to this argument, Quarz said in an e-mail to The Business Times that some Singapore-listed Reits have seen their managers change hands with no publicly announced difficulties from lenders.

Quarz also noted that external managers are under the regulatory purview of the Monetary Authority of Singapore, and that the existing manager would act as a caretaker until the new manager is fully licensed and ready to take over the management of Sabana Reit.

Due to the consolidation of the Reit market in recent years, Quarz said, there is a ready pool of qualified personnel for a new manager. Some of these “have already indicated strong interest”, Quarz added.

ESR Group has suggested the following be put in place before the resolutions are put to vote: a new management team and board of directors, and approval for a capital markets services licence for the internal manager, as well as a comprehensive and credible refinancing plan.

Full and proper disclosures on the potential risks, considerations and implications of Quarz’s proposed actions should also be provided for unitholders to make an informed decision.

ESR Group has also proposed that the internalisation resolution be tabled as an extraordinary resolution instead of an ordinary one, as it effectively amounts to an amendment to the trust deed.

It believes the resolution for internalising the manager should also be voted on first, before unitholders vote on the resolution to remove the current manager. Doing otherwise would carry the risk that Sabana Reit would be left without a manager if the removal resolution is approved, but the internalisation resolution fails to pass.

“It bears noting at the outset that the proposed internalisation is unprecedented for a Singapore Reit and is not without risks to unitholders, and should therefore be proceeded with caution,” ESR Group said in its letter.

Quarz, however, noted that an extraordinary resolution would raise the bar required for shareholder approval – from a majority to at least 75 per cent of those voting.