ESR Group: Removed as Sabana REIT’s manager; Immaterial Financial Impact on Earnings Is Expected

Sabana REIT’s unitholders have voted to remove ESR Group 01821 as its manager and internalize the REIT manager. Overall, we think the financial impact is low as we estimate the loss of annual fee income from Sabana REIT is immaterial, making up less than 1% of ESR Group’s 2022 revenue. Hence, our fair value estimate of HKD 24.50 is unchanged. We think the group is currently undervalued and we like its highly scalable and fully integrated real estate investment platform. We think that the likelihood of the other REITs, managed by ESR Group, calling for a similar vote and succeeding is currently low as the perceived conflict of interest no longer stands now that Sabana REIT has removed ESR Group as the REIT manager. However, we think there are bigger questions for ESR Group about a review of its REIT management strategy and whether it needs to increase holdings of the REITs it manages to protect its right to continue managing the REIT.

We originally saw its goal of removing the REIT manager as challenging given that it requires the approval of a majority of unitholders. Given that REIT managers generally hold significant interests in the REITs they manage, that helps to block such motions when they arise. Accordingly, we believed that dissatisfied investors would find it easier to sell the underperformed REITs than replace their managers.

In the case of Sabana REIT, we think this unexpected outcome occurred because an activist investor, Quarz Capital, has led a push to remove ESR Group as the REIT manager and internalize the REIT management function. As ESR Group only holds around 21% of Sabana REIT compared with Quarz Capital’s 14%, ESR Group only had a slight advantage in the vote. Ultimately, we think ESR Group lost as there are concerns over potential conflicts of interest where ESR Group is the sponsor of more than one industrial REIT in Singapore and also the perception that Sabana REIT has underperformed its peers due to poor management by ESR Group.