THE manager of Sabana Industrial Reit : M1GU 0% will no longer be able to issue new units without the express approval of unitholders. Managers at other Singapore-listed real estate investment trusts (S-Reits) should take note.

 

On Apr 25, at the Reit&rsquo s annual general meeting (AGM), a resolution to allow the manager to issue units and to make or grant convertible instruments failed to get through. Votes against the resolution represented 57.86 per cent of total units voted at the AGM.

 

Among those who have been following Sabana Reit&rsquo s ups and downs, the conclusion of the AGM may have been unsurprising. It had also lost its general mandate in 2017, and it had lately been the target of a campaign by an investor &ndash Quarz Capital &ndash that wants to see some changes at the Reit.

 

In the Singapore investment scene, however, it is rare that AGM resolutions do not pass. In fact, some resolutions are passed with a favourable voting share of 100 per cent. Most pass with votes of 90 per cent or more in favour.

 

One reason for this voting pattern is that many Singapore-listed entities are controlled by a family, an entrepreneur or a large state-backed investor. These controlling shareholders tend to support resolutions put forth by the board, and few minority shareholders can be bothered to cast their votes in AGMs.

 

For that reason, voting percentages that are anything less than 90 per cent are worth some attention. No doubt, a small group of shareholders should not, on their own, set the course for a board. But questions can be asked about why this is the case.

 

In the case of Singapore&rsquo s real estate investment trusts, boards should be asking themselves why the general mandate is unpopular.

 

Data compiled by The Business Times (BT) shows more unitholders voting against giving Reit managers the authority to issue new units via rights issues or placements as well as to make or grant convertible instruments. This is also known as the general mandate.

 

Of the 40 actively traded S-Reits, 29 held their AGMs over the past month. On average, only 92.8 per cent of the share of votes at these AGMs were in favour of the general mandate resolution.

 

In contrast, close to 100 per cent of unitholders typically vote in support of other resolutions tabled at these AGMs &ndash such as to adopt the audited financial statements and for the appointment of external auditors.

 

Seven S-Reits &ndash or nearly a quarter of those that held their AGMs in April &ndash saw more than 10 per cent of unitholders present vote against giving the Reit managers the general mandate.

 

Another example of an S-Reit that received low unitholder support for its general mandate is Keppel Pacific Oak US Trust : CMOU +1.39% (Kore). Only 64.9 per cent of unitholders at the AGM voted in favour of the resolution &ndash a steep decline from the 96.11 per cent of favourable votes garnered the previous year.

 

Kore&rsquo s US office peers Manulife US Reit : BTOU 0% and Prime US Reit : OXMU -1.92% were also among the seven S-Reits that received low unitholder support for the issuance of new units.

 

This is understandable. Investors are less likely to be happy about the Reit managers offering new units &ndash often at a discount to the current trading price &ndash when the counter has been hammered down.

 

Apart from being highly dilutive, new issues have tended to depress valuations further.

 

Already, units of the trio of US office Reits have fallen by between 49 per cent and 71.4 per cent over the past 12 months.

 

Most Reit managers would argue that taking away the authority to issue new units could be detrimental to a Reit. The inability to conduct equity fundraising until the next AGM a year later could see the Reit hamstrung and unable to capitalise on opportunities &ndash or worse, save itself from ruin.

 

&ldquo I&rsquo ve not had to issue new units in the past two years,&rdquo one S-Reit manager told BT in an informal meeting. &ldquo But it&rsquo s still good to have (the general mandate).&rdquo

 

&ldquo Just because I can drive a car with one hand doesn&rsquo t mean I want to do so with one arm tied behind my back,&rdquo the manager added.

 

But investors, in these uncertain times, are starting to question the motivations of managers.

 

In an open letter to Sabana Reit&rsquo s management and board of directors before its AGM, activist investment firm Quarz Capital suggested Sabana Reit could finance future acquisitions internally given its available debt headroom and low aggregate leverage. Quarz therefore argued that the general mandate is not necessary.

 

A mandate makes it easier for a manager to buy assets without going to unitholders for approval, which may put unitholder interests at odds with the interests of managers. Managers are paid a fee just to acquire a property, whereas unitholders only see a return if the acquisition is accretive to distributions on a per-unit basis post any equity fundraising.

 

Would S-Reit investors be better served under an internally managed model? Perhaps. But there are no internally managed Reits listed in Singapore.

 

Meanwhile, would you voluntarily hand your wallet to someone you do not trust? Or get into a car with a driver you believe is out to hurt you?

 

If investors do not have conviction that a Reit manager&rsquo s interests are aligned with their own, perhaps they ought to put their money somewhere else.

 

Sabana Industrial REIT&rsquo s AGM was a lively affair but not as lively as Great Eastern Holdings&rsquo AGM. Questions from unitholders centred around some operational metrics such as vacancies, occupancies, 1 Tuas Avenue 4, and 9 Tai Seng Drive.

 

The problem with 1 Tuas Avenue 4 is that the cost of the AEI is too high, grumbled a dissatisfied unitholder. The same unitholder highlighted that the manager divested 9 Tai Seng Drive and it is now valued at more than $200 million, or $280 million depending who was describing the property.

 

Donald Han, CEO of Sabana REIT&rsquo s manager explained that the REIT had to divest the property because of the maturity of a $100 million sukuk at a time when the REIT&rsquo s aggregate leverage was 38%, and the regulatory ceiling was 45%.

 

One unitholder spent several minutes on the definition of independent and non-independent director. Eventually, Mrs Elaine Lim, who had been appointed an independent director in 2022, had to explain to this unitholder the difference between a non-independent director, and a non-independent director nominated by a major unitholder. (There are differences!)

 

" There is a lot of confusion between a nominee director and a non-independent director," Lim said. Non-independent directors can include lawyers and auditors who have had professional dealings with the company.

 

&ldquo Should resolution 3 not be passed, I will be staying on as a non-independent director. But that does not make me a nominee of ESR Group,&rdquo she explained somewhat patiently. " Our lawyer from Allen & Gledhill will explain the difference between a non-independent director and a nominee director," Lim added.

It appeared that the unitholder who was confused about directorships may have not been clear about the fiduciary duties of directors and boards especially pertaining to M& As and offers to unitholders. The board of Sabana REIT' s manager had, in 2020, recommended that unitholders vote for a merger with ESR-REIT. This continued to rankle with unitholders some three years later despite the merger not materialising.

 

Whatever the case, the lawyer from A& G patiently explained all that has to be explained about boards, directors, their fiduciary duties and so on.

 

At that point, a unitholder, unasked, blurted out, who does Mrs Lim represent? Why do you want to be on the board? The unitholder asked Lim.

 

Later during the AGM, a unitholder suggested that Quarz Capital should have a representative on the board. Quarz Capital had put forward Charlie Chan&rsquo s name in 2021 as a director, but did not vote for him in an ordinary resolution in Sabana REIT&rsquo s 2022 AGM.

 

At any rate, Lim was not endorsed by unitholders as an independent director of the board of Sabana REIT' s manager, with around 89.4% voting against the resolution. Sabana REIT also lost its general mandate, with 57.86% voting against it.

 

On the other hand, resolution 5, which authorises the manager to allot and issue units for the distribution reinvestment programme was passed with 95% of the votes.

 

SABANA Industrial Real Estate Investment Trust&rsquo s : M1GU +1.12% aggregate leverage ratio rose to 33.1 per cent in the first quarter of 2023, up from 32.4 per cent in the previous quarter, its manager said on Wednesday (Apr 19).

 

Meanwhile, the weighted average fixed-debt expiry of the real estate investment trust (Reit) fell to 1.8 years as at Mar 31, 2023, from two years as at Dec 31, 2022.

 

The manager said 80 per cent of borrowings were at fixed rates. It added that each potential interest-rate increase of 0.5 percentage points could lead to a 0.9 per cent reduction in distribution per unit (DPU) per annum.

 

This is slightly higher than what the manager guided for the previous quarter, when it said each potential rate increase of 50 basis points could result in a 0.8 per cent reduction in DPU per annum.

 

As at end-March 2023, the Reit&rsquo s total borrowings stood at S$303 million, up from S$293 million at the end of 2022. Out of its first-quarter borrowings, S$293 million remained as term loans, and the rest comprised revolving facilities.

 

In view of the high-interest-rate environment, the Reit&rsquo s manager said it intends to &ldquo manage the Reit&rsquo s funding sources and interest rates while exercising prudent capital deployment to enhance resilience of the capital structure&rdquo .

 

On Wednesday, Donald Han, chief executive of the manager, noted that the Reit has debt headroom of around S$151.5 million, and their focus is on asset-enhancement initiatives.

 

Sabana is undertaking its second asset-enhancement initiative in Tuas, which was announced earlier this month. Han added that the Reit is also hoping to make some announcements on New Tech Park, but this could take some time.

 

He added that the company always keeps a lookout for acquisition opportunities, though its focus is on asset enhancement.

 

On Apr 10, the Reit announced that its portfolio occupancy had increased to 92.6 per cent as at Mar 31, representing a new high since Q1 2021. It also reported positive rental reversion of 13.6 per cent, feeding into the trend of rental increases upon lease renewal, which emerged in Q1 2021.

 

&ldquo While (the) outlook for the industrial property sector remains mixed as we enter 2023, demand for our warehouse and logistics properties from third-party logistics service providers was strong, particularly during Q1 2023,&rdquo Han said.

 

But the Reit&rsquo s manager is also keeping a close eye on economic headwinds, with Singapore&rsquo s economy showing signs of slowing in the first quarter of this year.

 

Around a third of Sabana&rsquo s gross rental income comes from the warehouse and logistics segment. Han said: &ldquo I&rsquo m confident that the demand will continue to stay strong in the next 12 months. Of course, when the tide goes down, everything will come down, but it will be least impacted for the warehouse.&rdquo

 

Sabana&rsquo s high-tech industrial segment &ndash which accounts for more than half of its gross rental income &ndash may face greater competition.

 

&ldquo There&rsquo s quite a fair bit of high-tech industrial specification that&rsquo s coming up in the marketplace,&rdquo Han said, noting that there are projects including the Punggol Digital District and Perennial Business City coming up.

 

He said competition in the high-tech segment is heating up, and that Sabana&rsquo s manager has to watch the market, even as it tries to stay competitive while bagging new tenants.