ESR-Sabana REIT Merger: Why It Still Sucks To Be Sabana REIT Unitholders But No Point Crying Over Spilled Banana Milk

Finally, the battered Sabana REIT (SGX:M1GU) can hope for a better future as a merger with ESR REIT (SGX:J91U) is pending.

Some investors have remarked that Sabana REIT was their worst REIT investment. Look at the stock chart of Sabana REIT and you know why – after hitting a high in 2013, the share price has been on a downhill ever since.

A short history of Sabana REIT

Sabana REIT was unique because it was the first ever Shariah compliant REIT to be listed in Singapore. The IPO was priced at S$1.05 and went public on 26 Nov 2010.

Unfortunately, the performance of the underlying properties began to deteriorate and new properties were suspected to be acquired at overvalued prices. Unitholders also saw lower distributions with each passing year. Jerry Low, a stockbroker and an unitholder of Sabana REIT, decided it was enough. He rallied another 65 unitholders to requisition an EGM in 2017. They wanted to remove the manager but couldn’t get enough votes to pass the resolution.

Kevin Xayaraj, CEO of Sabana REIT’s manager, eventually resigned a week after the EGM. The situation didn’t improve much after the new CEO was appointed, but at least the share price stopped declining and stayed flat. Unitholders probably felt some justice was done even though their losses have not been recouped.

Quarz Capital, a shareholder activist, has openly urged the merger of Sabana REIT and ESR REIT since 2019. The two REITs finally put this suggestion into motion.

Maybe it is time for Sabana REIT unitholders to put this unpleasant experience to bed.

Terms of the deal

The Offer: A Sabana REIT unitholder will receive 0.94 ESR REIT units for every Sabana REIT unit. There will not be cash payments but ESR REIT would create new units to ‘pay’ Sabana REIT unitholders for the acquisition.

Assuming an issue price of S$0.401 (based on the 1-month VWAP of ESR-REIT Units) and the gross exchange ratio of 0.940x, the implied Scheme Consideration is S$0.377 per Sabana Unit

Sabana REIT’s NAV per unit was S$0.51 as at 30 Jun 2020. A S$0.377 offer is a 26% discount from the NAV and a 5% premium to the last trading price of S$0.36.

ESR REIT is issuing more units at S$0.401 while its NAV was at S$0.41. That’s a slight discount of 2% off its NAV or a 3% premium to its last trading price of S$0.39.

This tells us that the deal was largely dictated by their stock prices more than their underlying property valuations. Sabana REIT unitholders would have received a higher offer if the deal was based on the latter.

I suspect the merger wouldn’t even happen if the deal was ‘fairer’. This deal is on the table because Sabana REIT is trading at a discount which ESR REIT is willing to pay for. This is why the deal is called a merger and not an acquisition. A merger is mutual. An acquisition is usually one sided and the unsolicited offer has to be higher and enticing for the receiving end to accept. ESR REIT has more bargaining power over Sabana REIT and it is reflected in the prices of the deal. So it sucks to be a Sabana REIT unitholder.

What ESR REIT unitholders need to do?

An EGM will be held in Oct 2020 and there will be two resolutions

1. Approve the merger
2. Approve the issuance of new ESR REIT units for the acquisition

These are ordinary resolutions and require more than 50% votes to pass. The resolutions are inter-conditional and both must pass for the merger to go through.

This should be easy for ESR REIT unitholders to decide – acquiring Sabana REIT at a good price and enlarge the size of the REIT is too advantageous to give up.

What Sabana REIT unitholders need to do?

An EGM will be held in Oct 2020 too but scheduled after ESR REIT’s EGM. There will be two resolutions

1. Amendment of the Sabana REIT trust deed
2. Approval for the Scheme

The first resolution requires at least 75% of the votes to pass while the second just needs over 50%. The second resolution would proceed if only the first resolution has passed.

Sabana REIT unitholders would need to do more thinking. Vote for if you want the merger to happen. Vote against if you don’t think this deal is worthwhile.

The race for size

There seems to be a consolidation trend among the REITs in Singapore.

• ESR REIT + Viva Ind Trust (2018)
• OUE Com Trust + OUE HTrust (2019)
• Ascott Residence Trust and Ascendas H-Trust (2019)
• Frasers Log & Ind Trust and Frasers Com Trust (2020)
• CapitaMall Trust + CapitaCom Trust (undergoing)

REITs want to get bigger because of several advantages. A sizeable REIT has a higher chance to be added to an index and the possibility of having institutional investors. The stock market valuations can be better as a result. It would be easier to raise more money if the REIT needs to do a rights issue. Credit ratings should also improve and drive down borrowing costs. The managers would benefit as they earn more fees due to a larger asset base. The race is on and every REIT is trying to get bigger. We should see more consolidation in time to come.

The merger between ESR REIT and Sabana REIT would increase their combined asset size to S$4.1 billion. It would be just S$1.1 billion smaller than Mapletree Industrial Trust and much bigger than EC World REIT of S$1.8 billion. Sabana REIT is too small and would be disadvantageous to stay that way. Sabana REIT needs ESR REIT more than ESR REIT needs Sabana REIT. But ESR REIT can buy Sabana REIT at a discount so why not?

Conclusion

I am NOT a Sabana REIT or an ESR REIT unitholder so don’t take my word for it. I just hope to give some angles for you to think about so you can make a more informed decision about your course of action.

I think this deal is good for ESR REIT and less favourable for Sabana REIT. That said, Sabana REIT unitholders must understand that this deal exists precisely because this is a good deal for ESR REIT. Otherwise, why would ESR be interested in this merger since it is in a much better position.

There’s a risk for Sabana REIT unitholders to wait for a better deal because it may take a long time to come. Sabana REIT unitholders can see this merger as a chance to get on the bigger boat and who knows, ESR REIT can continue to acquire the smaller REITs at good deals in the future and it will be time for you to benefit. Moreover, you can stop reminding yourself of an unpleasant experience if the Sabana REIT name is gone forever. You don’t need to gain back the way your lose it and there’s no point crying over spilled banana milk.