Sabana’s exit should inspire smaller Reits whose unit prices have fallen to a low level
Having no scale
Sabana Reit will be hindered by its size, regardless of whether it’s managed externally or internally. Sabana Reit holds industrial properties across Singapore, divided into four main categories – high-tech industry, warehouse and logistic, chemical, and general.
Sabana Reit was valued at S$1billion by the end of 2023. This pales in comparison with trusts who own industrial or logistics properties such as CapitaLand Ascendas Reit, A17U 0% MIT and Mapletree Logistics Trust, M44U 0% MLT which have total assets of S$18.3Billion.
Clar, MIT & MLT comprise the benchmark Straits Times Index. Sabana Reit is not included.
Some larger trusts may have better trading liquidity or attract greater interest from institutional investors. Some larger companies may also be able to access credit more easily or receive cheaper financing.
Sabana Reit, as of Mar 18, traded at a 30% discount to its Net Asset Value (NAV), per unit, at S$0.52. Clar, MIT, MLT and others traded at premiums to the NAV per share of end-2023 by 18% each, 23 % and 2 % respectively.
It is possible that some unitholders may experience regret if they voted to remove Sabana Real Estate Investment Management : M1GU (Sabana Reit), as the trust’s management, and begin the process for internalising the Reit on Aug 7,2023.
Internalisation of management, where the Reit’s Trustee owns the manager as opposed to outsourcing management to external parties, seems to be a costly and messy path.
Sabana Reit recorded a growth of gross revenue (yoy) and net income from property for H2 2020. However, the board declared that distributions per unit (DPUs) for the second quarter fell by 21 per cent year-on-year.
The DPU decreased largely because 10 percent of the income was retained to pay for internalisation costs. The future may require further retentions of distributed income.
A manager for the Reit will also face difficulties in attracting and keeping talent because of the uncertainty that comes with the internalisation process. Some Sabana Reit unitholders were recently dissatisfied and worried by the lack progress of internalisation made by the trustee HSBC. An extraordinary general meeting was called on March 8th.
The EGM was ill-tempered and eight of the ten proposed resolutions passed. Unitholders were in favour of directing the trustee form an internalisation team, which would include some employees from activist investor Quarz Capital Asia. They also supported setting an upper limit of S$10m for the price to be paid by the unitholders in order to purchase the existing external manager a month following the EGM.
Sabana Reit’s closing price on Monday (Mar. 18) was S$0.365. That is a 9 percent drop from its previous close, which was S$0.405. Prior to the meeting at which unitholders decided to remove SREIM, and start the internalisation process, the stock closed S$0.405.
Internalisation
Internalising management in a Reit is a good idea. Unitholders can potentially save money. Unitholders and management may have a more aligned interest.
Many of the investors with whom worked in Hong Kong’s Link Reit said that they appreciated the trust’s internal model. Singapore’s stock exchange benefits from the fact that investors can choose between Reits managed by external and internal managers.
Could regulators smooth the way for Reits which are externally managed and want to internalise? Sabana Reit’s move to internalise the management of its trust could encourage some Reits managed by externally to take a look at internalisation.
Sabana Reit might be able save on management fees if it becomes self-managed. Savings in management costs may lead to higher DPUs, and unit prices.
Having no scale
Sabana Reit will be hindered by its size, regardless of whether it’s managed externally or internally.
Sabana Reit holds industrial properties across Singapore, divided into four main categories – high-tech industry, warehouse and logistic, chemical, and general.
Sabana Reit was valued at S$1billion by the end of 2023. This pales in comparison with trusts who own industrial or logistics properties such as CapitaLand Ascendas Reit, A17U 0% MIT and Mapletree Logistics Trust, M44U 0% MLT which have total assets of S$18.3Billion.
Clar, MIT & MLT comprise the benchmark Straits Times Index. Sabana Reit is not included.
Some larger trusts may have better trading liquidity or attract greater interest from institutional investors. Some larger companies may also be able to access credit more easily or receive cheaper financing.
Sabana Reit, as of Mar 18, traded at a 30% discount to its Net Asset Value (NAV), per unit, at S$0.52. Clar, MIT, MLT and others traded at premiums to the NAV per share of end-2023 by 18% each, 23 % and 2 % respectively.
Selling
JTC’s data indicates that the rents and prices for industrial space in this city will both rise by 5.1% yoy and 8.9% yoy respectively, between 2023 and 2024.
Sabana Reit’s property portfolio may attract interested buyers due to the good prospects for industrial properties in this region.
Sabana Reit Unitholders are rewarded if a trust merges with Clar MIT MLT or sells assets for a value around the NAV.
Other trusts who own Singapore assets, especially in segments that have strong future prospects, should also put up the sign for sale.
Far East Hospitality Trust: Q5T 0.0% (FEHT), for example, had assets of S$2.6bn by the end of 2023. As of March 18, it was trading at 33.3% below its end-2023 net asset value per stapled security.
FEHT operates a range of hotels and residences throughout Singapore. For H2 2020, the trust saw its hotels’ revenue per available bedroom rise by 19.9 percent yoy. Its serviced apartment units also posted yoy increases of 10.7 percent.
Singapore’s Reit market has grown rapidly ever since the first Reit in 2002 was listed. Low interest rate helped to fuel the rapid expansion of Reits.
Reits made it easy to finance yield-adding acquisitions with debt when interest rates fell. Investors also flocked to Reits as they were in demand for high-yield instruments.
Today, interest rate are higher today than pre-Covid pandemic times and could stay high amid persistent inflation.
Reits therefore struggle to deal with the increased borrowing costs. Reits are also valued at higher discounts by investors, which results in lower unit prices.
Many Reits, and business trusts that are linked to property, should seriously consider their exit strategies in the context of the above.
Sabana Reit is a leader if it abandons its internalisation journey and works on an exit.
