SINGAPORE, 31 July 2018 – Keppel DC REIT has retained the top ranking for the second edition of the governance ranking specifically designed for Singapore-listed real estate investment trusts (REIT) and business trusts (BT), joined at the top by CapitaLand Commercial Trust which has moved up from number 8 in last year’s ranking.
Two other trusts made significant gains to enter the top 5, with Mapletree Commercial Trust moving from 15 to 4 to joint third position with Mapletree Greater China Commercial Trust (since renamed to Mapletree North Asia Commercial Trust), which made the biggest leap from number 26. Just half a point separated the top 4 trusts, making this GIFT ranking very competitive. Meanwhile, Frasers Logistics & Industrial Trust, which is ranked for the first time, enters the ranking at number 5.
Other trusts such as AIMS AMP Capital Industrial Trust and ESR REIT (formerly Cambridge REIT) have continued to fare well this year.
The trusts that have moved up the ranking this year have done it through improvement in their disclosure and governance practices, as some others that have done well last year have stagnated or lost some momentum.
There is some improvement in average scores across all areas, except for internal and external audit (which remained about the same) and business risk (which dipped slightly). Compared to last year, the mean total score improved by 3.5 points and median total score improved by 6 points. However, we note that the scores are not strictly comparable to last year’s since the index has been refined slightly.
GIFT, which recognises the unique features of REITs and BTs compared to listed companies, is produced by corporate governance advocate Associate Professor Mak Yuen Teen of the NUS Business School and active investor Chew Yi Hong, in collaboration with governanceforstakeholders.com. It is supported by the Singapore Exchange.
For this year’s assessment, some minor changes to the index and approach were made. This includes, inter alia, replacing volatility of returns as a business risk factor with a criterion relating to foreign assets and foreign currency risks; providing a separate breakdown of the governance and business risk scores; and inviting the trusts to submit a self-assessment. However, the independent assessment may not necessarily be the same as the self-assessment provided by the trust. Twenty-nine out of the 43 trusts we were able to contact by email submitted a self-assessment.
This year, GIFT is released slightly later in order to include the latest annual reports for trusts with a March year end. For these trusts, we used the annual reports released as late as July 2018. This allows us to use the most updated information possible for the financial year under review to assess the trusts.
Prof Mak said, “We are strongly encouraged by the effort put in by many of the trusts in improving their disclosure and governance practices this year. The excellent response to our invitation for the trusts to submit a self-assessment demonstrates their commitment to engage and improve.”
The assessment process in GIFT takes into account differences in business models of listed trusts, applicable regulatory requirements, the Code of Corporate Governance, and the Monetary Authority of Singapore consultation paper on proposed enhancements to the regulatory regime governing REITs and REIT managers.
REITS and BTs have become important features of the Singapore capital market. As at 30 June 2018, there were 48 such issuers with a primary listing on the Singapore Exchange (SGX) that account for about $95 billion in market capitalisation.
For this second edition of GIFT, 44 trusts were assessed including six stapled securities. Four trusts were excluded from the scoring as they are newly-listed and have not published their annual reports by our cut-off date.
The trusts were assessed using publicly-available information from annual reports, websites, presentations and other announcements made by the trusts to the stock exchange, and news media reports. Anonymous emails to investor relations contacts provided by the trusts were also used to assess actual responsiveness to investors.
GIFT is made up of a main section and a separate section comprising merit and demerit points. The total score, including merit and demerit points, is a more complete measure of the governance of a trust.
Mr Chew Yi Hong, who co-produced the GIFT ranking, said, “While we are delighted with the improvement in scores this year, we have highlighted some emerging issues that trusts and their investors should bear in mind. These include the change in control of the manager/trustee-manager, the expansion of the trust’s geographical mandate and the over-active management of the trust’s DPU.
Mr Tan Boon Gin, CEO of SGX Regco, said: “The GIFT rankings for 2018 complement other governance surveys and research as well as SGX’s Fast Track programme in highlighting how the REITs and Business Trusts sector is faring on the governance front. Strong advances have been made among the top-ranking trusts, which further underpin why this sector is a stand-out among investors in the Singapore market. For the sector to continue thriving, it must embrace even higher standards of transparency and communication including new initiatives such as sustainability reporting and in the conduct and reporting of valuations.”
How scoring is done
GIFT includes a main section carrying an overall score of 100 points. Eighty points are allocated to the following areas of governance: board matters (20 points), remuneration of directors and key management (10 points), alignment of incentives and interests (10 points), internal and external audit (10 points), communication with unitholders (15 points) and other governance matters (15 points).
Twenty points are allocated to business risk, assessed using leverage-related factors of overall leverage, debt maturity, percentage of fixed interest rate borrowing; and other factors relating to development limit, lease expiry, income support arrangements, and foreign assets and foreign currency risks.
In addition, there is a section comprising merit and demerit points. Merit points are given for certain practices that trusts should aspire to adopt in order to further improve their governance or to reduce their risks. Examples include putting trust deeds and loan agreements on websites and avoiding hybrid securities that are classified as equity but have debt-like features. Merit points ranged from one to three points per item and the maximum number of merit points is 25.
Demerit points are given for cases such as independent directors serving on boards of a related manager or on an excessive number of directorships in listed companies and managers. Demerit points generally range from minus one to minus three, although certain serious governance issues can incur as many as 10 demerit points per item.
The full index is shown below. The full GIFT report can be found under “Reports” together with the scoring guidelines.
