Sabana REIT – Poor Performing REIT Faces A Rebellion

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Many would say Sabana REIT is one of the worst performing REITs listed on the SGX. It is difficult to disagree when we look at the share prices – The FTSE ST REITs Index (performance of a composite of Singapore REITs) has risen 20% in the past 5 years while Sabana REIT has plunged 51%:

Chart from ShareInvestor

You must have asked why, since REITs are believed to be relatively ‘safer’ instruments than other kind of stocks. Below are the likely reasons for the poor performance of Sabana REIT.

1) Distributions Per Unit (DPU) has been declining.

REITs investors want dividends and it is a principal criteria they look out for. Sabana REIT has declining DPU over the past few years. Investors would generally avoid the REIT and Unit Holders would even dump it to deploy their capital to REITs with better outlook. This creates selling pressure on Sabana REIT and prices get transacted lower.

Image from Sabana REIT presentation slides for 31 Dec 16 results

2) Property valuation has been falling

The Net Asset Value (NAV) of the REIT is an aggregate valuation of the properties in their portfolio. The valuations are conducted by professional valuers based on a few factors such as rental income, market comparison and outlook.

The NAV for Sabana REIT has fallen by 16% from 5 years ago – the underlying assets are worth less than before and share price should decline to reflect reality.

Moreover, you would notice that the gearing ratio has been creeping up to 43.2%. The debt-to-asset ratio climbed because the asset valuation has declined, not due to higher borrowings. As Sabana REIT’s gearing ratio is very close to the gearing limit of 45%, the REIT is more likely to do rights issue to raise capital.

3) Poor outlook for industrial properties

The outlook for industrial properties was bad and most industrial REITs have had poorer than desired performance in the past 1 year. The industry has to contend with lower economic growth (leads to less rentals), and a growing supply of new spaces.

What are Unit Holders unhappy about?

The unit holders are attributing the poor performance to the incompetence of the Manager. Here are a couple of complains they have.

1) Poor occupancy rates

The Unit Holders are unhappy about the way the Manager had handled the transition, when numerous master leases expired. Unable to renew them, the manager cut up the spaces and with the intention of attracting smaller tenants.

However, the transition was not as successful as many wish to, especially since the demand is waning and supply is increasing. Some even questioned if being Shari’ah compliant could result in a limited choice of tenants for Sabana REIT, thus worsening the occupancy levels.

2) Paying themselves well

Despite the poor performance, the Unit Holders felt that the management were still being remunerated well.

The argument from the management is that they were paid in terms of units and not cash. They are aligned with Unit Holders as falling unit prices mean their wealth is eroded too.

However, Unit Holders feel that the rising remuneration is unfair as management doesn’t seem to ‘suffer’ while the Unit Holders do.

Sabana Manager Fees

3) Asking for more money

The Unit Holders felt that they were shortchanged and did not have much gain from their investment in the REIT. Recently, the Manager had called for a rights issue, asking Unit Holders for money to buy 3 properties. It is expected as the gearing ratio is too near the limit of 45% and a rights issue is the only way to raise the capital.

Although Unit Holders aren’t happy, the rights issue was oversubscribed. The Unit Holders who were willing to subscribe, went on to bid for excess rights. Could the dissent be among a small group of the Unit Holders?

Sabana REIT rights subscription results

What are some Unit Holders doing about it?

There was a call to remove the Manager. A Facebook Group, REMOVE SABANA REIT MANAGER, was set up to gather Unit Holders. Their aim is to requisite a general meeting to effect it. They need to gather at least 50 Unit Holders representing not less than 10% of the issued units, and a simple majority to pass the resolution during the general meeting.

The principal-agent problem exists in public listed companies just as much as many other things in life. The shareholders are the principal while the manager is the agent in this case. Although shareholders own part of the REIT, they typically have no control of the entity. The agent on the other hand, makes a lot of important decisions on behalf of the shareholders, and they may or may not own part of the REIT. In this case, clashes happen when expectations are not met.

It is a big challenge to unite many small Unit Holders together. Luckily the use of social media has enabled Unit Holders to gather a group that could possibly lead to the general meeting. It is heartened to see shareholders take an active role to change things they do not like. It is unusual given our harmony-seeking culture in Asia. I believe this is the right direction to provide a check and balance on the agency problem.

However, the odds of success is not in favor of them.

Challenges to overcome

1) Too many ideas, too little unity

Sadly, the Unit Holders who came together were not united in their resolutions. There are 2 leaders who do not agree with each other. Koh Yee Kan is leading one faction and he started the Facebook Group that was mentioned above. Jerry Low, a semi-retired stockbroker, is leading another. Both have the key resolution of removing the Manager. The main difference was that Koh went one step further to nominate a management team to takeover should the oust be successful.

How do you mount an attack if there are internal conflicts?

2) Need a credible lead

The only way to unite the Unit Holders is to have a credible lead who has the money and the expertise to manage a REIT. Without this alpha, there will just be too much ideas floating around. The main Unit Holders are the Vibrant Group and Tong Jinquan, collectively about 18% while the CEO of the REIT Manager owns another 2%. They seem to be happy with one another.

Retail Unit Holders represent 80% of the votes and most of them are passive. A credible voice is needed to gather tens of thousands of Unit Holders to vote. The best way is to have a credible corporate raider or shareholder activist who can use this opportunity to accumulate the units to gain a significant share of the REIT and get on the board to change things.

Drawing parallel to the IHC meeting which ousted the board, they had Oxley directors to lead the activism. They have the capital and expertise. This made the movement credible. The Sabana rebellion needs a leader.

3) A competent manager for replacement

The leader of the rebellion would have the expertise to appoint the right manager for the REIT. It is difficult for Unit Holders to identify a competent manager because most do not have the contacts and the ability to tell. Worse is that some Unit Holders have their own nominees. The disagreements and fight could go on endlessly.


Sabana REIT is the worst REIT listed on the SGX. Falling share price and dividends while the Manager continued to receive the same amount of fees made Unit Holders very unhappy. I wish to see the rebellion succeed but the odds is highly against them if there are no credible shareholder activist is leading them. It is not impossible though. Never say never.

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Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.
  • Hi. I am jerry low. I love what you wrote and the guys are linking them onto our FB., VOTE OUT SABANA MANAGER. However, I need to correct you on one fact. There was never an internal conflict simply because he was never internal. Mr Koh was a participant who did not agree with us and he went on to start another activist movement. He believes in setting up a transition team. I know, as you have correctly pointed out, we have neither the ability nor the contact to be able to assemble a credible team. We now know that we are right all along and Mr koh was wrong from the start. MAS has confirmed that in the event the Manager is removed, Hsbc Trustee will appoint a new manager with the approval of the unitholders. I do hope you can write more on this subject esp the comical slideshow and link it onto our FB for all Sabana unitholders to see. Cheers and stay happy.

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