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 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.