By Mak Yuen Teen
NetLink NBN Trust, one of the four new trusts included in the third edition of the Governance Index for Trusts (GIFT), has achieved the top ranking in its first year.
This year, the governance and business risk of 46 out of the 50 real estate investment trusts (REITs) and business trusts (BTs) listed on SGX were assessed.
Four trusts are new to GIFT in the 2019 edition, the other three being Cromwell European REIT, Keppel-KBS US REIT and Sasseur REIT. In general, the new trusts have fared well, with Keppel-KBS US REIT ranked joint sixth.
The trusts that are ranked in the top 5 in GIFT 2019 are Netlink NBN Trust, Mapletree Commercial Trust, Keppel DC REIT, AIMS APAC REIT and Mapletree North Asia Commercial Trust (joint fourth).
The average combined governance and business risk score has continued to improve since the first edition, increasing from 62.2 in 2017 to 65.6 in 2018 and now to 68.0 in 2019.
Far East Hospitality Trust showed one of the greatest improvements, gaining 15 points compared to last year and moving up from 29th last year to joint 6th this year. It was able to do so through improvements in many areas, including appointing independent directors with relevant experience to replace non-executive directors who retired from the board (83% of independent directors on board, highest of all trusts). In addition, the trust was more prompt in releasing its financial results and posted minutes of its AGM – simple gestures that go a long way to improve engagement with unitholders.
However, it was not all good news as some trusts have gone backwards.
The report also highlights some concerns and issues, such as the assessment of the independence of directors; independent directors being appointed to related trusts after reaching nine years of tenure; changes in risk profiles of trusts with more foreign listings and local players expanding overseas; consolidations and mergers in the sector; and the use of hybrid securities to mitigate leverage limits.
GIFT is supported by the Singapore Exchange (SGX). GIFT is a collaboration between Chew Yi Hong and me.
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.
As at 31 July 2019, there are 50 REITs and BTs with a primary listing trading on the Singapore Exchange (SGX), accounting for a total market capitalisation of $116 billion, up from $95 billion when we reported last year. Of these, seven are constituted as stapled securities (SS) (total market capitalisation of $8.7 billion), nine as pure business trusts ($11.5 billion) and 34 as REITs ($95 billion).
For this third edition of GIFT, 46 trusts were assessed including five 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. They were also invited to submit a self-assessment for consideration. 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.
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 following is the ranking of the 46 trusts in GIFT 2019:
The following is the full report:
Here are the scoring guidelines for GIFT 2019:
