Quarz, Black Crane to vote against Sabana-ESR merger

FUND managers Quarz Capital Management and Black Crane Capital said in an open letter on Friday that they intend to vote against the proposed merger of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) and ESR-Reit.

The funds and entities that both Quarz and Black Crane act for and advise collectively own more than 10 per cent of the units of Sabana Reit.

At the current transaction terms of 0.94 ESR-Reit unit for one Sabana Reit unit, both managers argued that Sabana Reit is undervalued. They added that they are working on alternative options to the merger, and intend to present them to fellow unitholders shortly.

"As the biggest independent unitholders who are not conflicted in the transaction, we are open for constructive negotiation with the bidder for a proposed takeover price in line with Sabana's NAV (net asset value)," they added.

ESR-Reit's manager had on Thursday said it does not intend to increase the scheme consideration for its proposed merger.

In their letter on Friday, Quarz and Black Crane said the merger is being executed at a "substantial" 26 per cent discount to Sabana's NAV as at June 30 and a 34 per cent discount to its NAV as at December 2019.

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"The historical discount to NAV can potentially be attributed to poor management decisions both under the sponsorship of the Vibrant Group and now under the conflicted sponsorship of ESR," they said.

As ESR Cayman is the controlling shareholder of both the managers of Sabana Reit and ESR-Reit, the proposed merger "appears to be a bold attempt by ESR to potentially solve the conflict of interest issue at the expense of Sabana unitholders," they added.

Describing the merger as "opportunistically timed during the Covid-19 crisis", the firms pointed out that the merger offer was made a year after ESR Cayman had bought a substantial stake in Sabana Reit and a controlling stake in the Reit's manager at a "rich" premium from the same vendor.

They noted that Sabana Reit's rental income in H1 "demonstrated resilience", declining just 7 per cent on a year-on-year basis despite providing rental rebate to its tenants.

"Given Sabana's strong balance sheet, there is no imperative for Sabana to undertake a merger at this time," the firms said.

"It is thus hard to comprehend why Sabana's board and management would propose to 'panic-sell' at a substantial discount to book value, which has been very conveniently and temporarily reduced from S$0.57 to S$0.51 per unit by the weaker market sentiments due to Covid-19.

"If Sabana's board and management had intended to sell Sabana Reit and intended to act in the best interest of all unitholders, shouldn't there have been a rigorous, fair and transparent public sale process in an appropriate market environment where third parties such as other Reits, investment funds, corporate entities and individuals are able to undertake proper due diligence, prepare and bid to purchase all or part of the portfolio at a price which is equal or higher than its book value?" they asked.

They added that the proposed merger terms also did not reflect that Sabana Reit's properties had a "significantly higher" upside compared to ESR-Reit's properties in terms of increased occupancy and undeveloped gross floor area.

Incidentally, the merger of Sabana Reit and ESR-Reit had been mooted by Quarz back in November last year as a means of resolving governance concerns and conflicts of interest. Black Crane, meanwhile, had in June last year raised with Sabana Reit's board the prospect of an ESR-Reit acquisition of Sabana and the appointment of a financial advisor to optimise Sabana Reit's value possibly through a breakup.

Units of Sabana Reit ended Thursday at S$0.37, down S$0.01 or 2.6 per cent. Units of ESR-Reit closed at S$0.39, down S$0.01 or 2.6 per cent.