Activist Investors Helping Unitholders Realise Value in Cromwell REIT, Weakness in SIngapore REITs regime

Cromwell REIT is the subject of activist investors pushing for share buybacks to enhance shareholder value. You can read the activist investor letter

For context, Quarz was part of the group that kicked out the old REIT manager in Sabana who was under performing and whose actions were questioned. 

Why Cromwell?

Cromwell has a low leverage profile of 36.8% and has most of its debts hedged at a fixed rate. Hence Quarz is of the view Cromwell should do share buybacks given its current share prices are at a low price book valuation and that it will enhance the dividends of existing unitholders.

A share buyback is projected to only increase the REITs leverage by only 2%

Will Cromwell Property Mangement Bite?

Personally I doubt so because the REIT manager/sponsor has other thoughts; that is to use (i) the low leverage ratio and (ii) when property cycle improves, to offload assets into the REIT. This has been the standard playbook for many REITs in Singapore as evident where its sponsors such as F&N, Keppel, Capitaland, Mapletree, SPH, CDL and Lippo Group have sold assets into REITs as part of their "asset recycling" plans.

Conflict of Interest of Many REIT Managers in Singapore

In my view, the indepence of REIT managers are in question given their close ties to the sponsor. We have seen many sponsors offload their properties at the top of the property cycle into REITs, realise value in it; and left its child REITs at a high leverage ratio when the down cycle occurs when forced to revalue property value downwards. As sponsors only own a small portion of the REITs, they are effectively selling a property in which they own a 100% stake, inject it into REITs where they own only a partial stake, earn management fee for running the property and have less capital at risk while offloading the proeprty at the peak of property cycles.

For US REITs, this problem is more pronounced where due to US regulatory rules REIT managers are only allowed to 9.8% of shares. Take for example Manulife US REIT, Manulife used to own all the assets in Manulife US REIT. It sold down to under 10% for the IPO as part of regulations. So when Manulife US REIT IPO'd, it only had less than 10% of its original capital at risk. In the meantime Manulife collected management fees, the leverage on other people's money was 10:1.

Due to the above and that many REIT managers have close ties to the sponsors, many REIT managers do not learn from mistakes. Due to the close ties of managers to their parents, it is more important to obey the sponsors and their plan for asset sale in exchange of career progression. It is difficult to say no when you know your career is at stake. 

Change To Come

Sabana had this issue with ESR and thanks to the work of Quarz and a few others, the old REIT manager was voted out. I look forward to more activism to occur and that unitholders band together to force REIT managers to be independent and make decisions benefical to unitholders. SGX is unlikely to step in to solve the problem because it is profitting from the situation; REIT unitholders have to be proactive and understand our votes in AGM is important. If you feel your REIT manager is not doing things in the best interest, question them. If they are going too far, vote them out of their work. Quarz has shown voting out the old Sabane REIT manager has not resulted in any adverse effect on Sabana.