Sabana REIT plans DPU growth, underpinned by DRP and general mandate

“In 2018, we decided to prioritise Phase 1 to divest non-performing assets, Phase 2 is about AEIs and Phase 3 on accretive acquisitions,” Han says.

For Phase 2, Han and his team embarked on a substantial AEI for their flagship property, New Tech Park on Lorong Chuan. The additional 43,000 sq ft of unutilised GFA has been turned into NTP+ and is now 100% occupied. Rents of retail properties are considerably higher than rents of industrial properties although Han declines to give an exact figure.

In addition to 43,000 sq ft of F&B, a supermarket and other retail offerings, NTP+ encompasses 50,000 sq ft of outlying area. The second floor is an open-air deck and an open plaza with a fountain. “The whole NTP+ comprises a lot of open areas, landscaped gardens and a 25m high trellis that supports the architecture of the roof terrace,” Han describes.

With NTP+ fully operational by the second half of last year, Sabana REIT achieved positive rental reversion of 10.5% in FY2021 ended Dec 31, 2021, as compared to 0.9% in FY2020 and significantly improved since 2018, which was negative 3.6%. The positive 9.4% reversion in 4Q2021 is the seventh positive quarterly reversion in the past eight quarters.

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The successful AEI of NTP+ has provided Han with a template to redevelop 1 Tuas Ave 4. Back in 2018, Sabana REIT’s manager announced that it had revalued this property down to $11.18 million from $23.3 million and the manager was in the process of divesting it to a third party, Kim Soon Lee (Lim) Heavy Transport. However, the requisite approvals from the authorities were not received.

Han has decided to keep the property and it is now earmarked for extensive AEI to increase its GFA to 350,000 sq ft. The property is built up to a plot ratio of 1.16x and has a plot ratio allowance of 2.5x.

“We have repositioned 1 Tuas Ave 4 as an investment property. It’s next to Tuas MRT. This is an opportunity for us to build our first new property. It could be a sustainable building with a rampup. It will be a track record for us just like NTP+,” Han says.

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Use of DRP and general mandate

The ordinary resolutions unitholders will vote on include a general mandate, distribution reinvestment programme (DRP) and electing Charlie Chan Wai Kheong as director.

“To grow, we need financial flexibility and will evaluate various funding options. Hence the general mandate and DRP scheme can provide the necessary levers and flexibility to strengthen the REIT,” Han says.

Practically every S-REIT has a general mandate. Only two REITs have had the general mandate voted down in past years, the former Cambridge Industrial Trust, and Sabana REIT in 2017.

After Han joined Sabana REIT’s manager in 2018, its unitholders voted in favour of the general mandate. “Since the AGM in 2018 when we won back the general mandate, we had been disciplined and had not activated any share issuance other than for DRP purposes amongst others,” Han says. Under the general mandate, unitholders will give the REIT manager permission to issue units to fund growth. Han plans to redevelop 1 Tuas Ave 4. In Phase 3, Han would like to start expanding the portfolio to $1 billion and this would have to be funded by a mixture of equity and debt.

Tan Cheong Hin, chairman of Sabana REIT’s manager, says Chan’s name was put forward to the board by Quarz Capital, a Sabana REIT unitholder. “The board and CEO did not know Charlie personally when Quarz recommended his name to us. The board carefully considered and then accepted Quarz’s recommendation as a good-faith collaborative gesture. We have since found Charlie to be independentlyminded yet professional and reasonable to work with,” Tan says.

“We are moving into an expansionary phase in a challenging uncertain macro-economic environment and Charlie possesses the necessary experience as a seasoned investor and unitholder and can help to advise the management,” Han concurs.

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REIT with a chequered past

Indeed, Chan is viewed as speaking up for and acting in the interests of Sabana REIT’s minority unitholders because of the role he played to hold Sabana REIT’s manager to account in 2017.

In December 2016, Sabana REIT’s former manager announced an ill-fated rights issue at $0.258 per rights unit which at the time represented a discount of around 48.9% to the closing price of $0.505 as at Dec 19, 2016, which was the last trading day prior to the announcement. The rights price was also a 40.3% discount to the theoretical exrights price (TERP) of $0.432 per unit.

This was one of the most dilutive rights issues by an S-REIT up to that point. Since then, the market has experienced even more dilutive rights issues.

The rights issue was meant to raise $80 million of which more than $78 million would have been used to acquire three properties 107 Eunos Avenue 3, 72 Eunos Avenue 7, and 47 Changi South Avenue 2 at artificially high valuations obtained because of master leases with rents that were above market rents at the time.

Sabana REIT’s rights issue was so dilutive that its unitholders had no choice but to subscribe. However, one of the acquisition properties was owned by then sponsor Vibrant Group and required unitholders’ approval.

Jerry Low, a remisier who had held Sabana REIT units during this period, cobbled together sufficient units to requisition an EGM with the main purpose of removing the manager. That took place in April 2017 and while this goal was not reached, the manager called off the acquisitions and lost its general mandate.

Investors then realised that valuations of master-leased properties were often — but not always — the product of financial engineering and it turned Chan, who is now a director of Sabana REIT’s manager, into some kind of folk hero as he questioned valuer after valuer on how they had arrived at their valuations. “

The minorities back then idolised Charlie. It is difficult to find fault with him, especially on his independence,” says a Sabana REIT unitholder.

“I’ve been pro unitholders’ interests for the longest time. I invested in more than 70% of all Singapore-listed REITs,” Chan says in an interview.

To this day, Chan continues to champion the causes of minority investors. In 2020, during the depths of the Covid-19 crisis, ESR-REIT offered to acquire Sabana REIT. The transaction offered DPU accretion but the price was at a discount to NAV.

“As a unitholder of Sabana REIT, I voted against the merger with ESR-REIT as I felt the terms were not sufficiently in favour of Sabana REIT,” Chan says. He felt that the pandemic was not an ideal time for Sabana REIT’s unitholders to vote on the offer and that they could have held out for a longer time and waited for the market to recover.

All that is in the past. Although ESR Cayman owns Sabana REIT’s manager and around 21% of its units, it is a sponsor of ESR LOGOS Logistics Trust (E-LOG) and is committed to supporting E-LOG with pipeline and financial backing. Despite being the largest unitholder of Sabana REIT, ESR does not have a representative on the board of the manager. That leaves the manager — led by Han and supported by Chan and unitholders — to plan an independent strategy for Sabana REIT.

“We want to reach out to our many unitholders to encourage them to come out and vote. This AGM is very important for them to give us a clear indication that unitholders are supportive of our refreshed strategy and want us to take it forward to the growth trajectory in 2022 and beyond,” Han says.