Updated on 12 November 2021 with Business Times report on GIFT 2021 by Michelle Quah
NetLink NBN Trust retains number 1 spot in Governance Index for Trusts (GIFT) 2021 and achieves a new high score; newer trusts have generally fared well
SINGAPORE, 11 November 2021 – NetLink NBN Trust has retained its top ranking in the latest Governance Index for Trusts (GIFT), a position it has held since its debut in 2019. It has also improved its previous high score by five points, achieving a score of 95.
Keppel Pacific Oak US REIT, Mapletree North Asia Commercial Trust, Cromwell European REIT and United Hampshire US REIT (the latter two in joint fourth place) round up the top five. Newer trusts have fared well, with two new additions to GIFT, United Hampshire US REIT achieving joint fourth and Elite Commercial REIT joint sixth. Two REITs which debuted joint 10th last year have jumped into the top five this year.
This year, the governance and business risk of 45 real estate investment trusts (REITs), business trusts (BTs) and stapled trusts (STs) listed on SGX were assessed. Two trusts which are currently listed (but suspended from trading) were excluded – RHT Health Trust and Eagle Hospitality Trust (EHT).
At the other end, the five lowest-ranked trusts are EC World REIT, First REIT, Lippo Malls Indonesia Retail Trust, Hutchison Port Holdings Trust and Dasin Retail Trust. Dasin Retail Trust’s score of 24 is the lowest since GIFT was launched in 2017.
The cut-off date for GIFT 2021 is the end of July 2021. However, for the two REITs which published their annual report and held their AGM in October, we used information from their 2021 annual reports and 2021 AGMs.
In 2018, we started providing an opportunity for trusts to submit a self-assessment which we take into account in our assessment. Since last year, trusts were able to do this online. We are pleased that this year, 36 out of 45 trusts, or 80%, participated in the self-assessment. This is the highest participation rate so far, surpassing last year’s high of 78%. We thank those who responded and look forward to their continuing engagement.
Minor changes made to the scoring guidelines this year include the addition of a criterion for live Q&A during the virtual AGM, a new merit item for live voting and the reduction of points (to one) for posting minutes of meeting online (previously two points). In addition, over the past year, we have had the opportunity to assess how trusts responded to the cessation of quarterly reporting – trusts that the provided updates for their first and third quarters received a point while trusts that continued with quarterly reporting received two points.
This year, the average combined governance and business risk score slipped slightly from 64.3 to 64.1. Excluding the three new trusts, the overall average score for those trusts that were in both last year’s and this latest edition decreased from 64.4 to 63.6. We should point out that had one point not been reallocated from the posting of minutes to having live Q&A at the AGM, there would have been a marginal increase in the total GIFT score in 2021.
Looking separately at the two components of GIFT, the average governance score decreased from 48.0 to 47.4 while the average business risk score improved slightly from 16.3 to 16.6.
Prof Mak said: “There are areas where trusts have improved although they are mostly gradual. Some areas where we would like to see more improvement include the independence, diversity and competencies of boards; better disclosure of senior management remuneration; and better alignment of interests with unitholders in terms of performance fees. Trusts should also better explain reasons for complex structures and how different entities within such structures are governed, and provide assurance that safeguards to mitigate risks of conflicts of interest and interested person transactions are implemented in practice. ”
Mr Chew Yi Hong, who co-produced the GIFT ranking, said, “It is encouraging to see certain trusts leading the way in adopting best practices. Seven trusts which held virtual or hybrid meetings allowed their unitholders attending virtually to ask questions “live” by chat function. We hope that “live” video Q&A and “live” voting during AGMs would have become standard practice for our next assessment. Trusts that held hybrid meetings, allowed “live” Q&A, continued with quarterly reporting and allowed unitholders’ endorsement of directors stand out in terms of their willingness to engage unitholders.”
Some key findings from GIFT 2021 in the governance and business risk areas include:
Governance
- There is a decline in number of trusts with an independent chairman, a majority of independent directors, independent directors with investment experience and experience in the sector, and having audit committees with a majority of independent directors with recent and relevant accounting/financial management experience and expertise
- The number of all-male boards remains at 11
- Twenty three trusts (up from 17 last year) disclosed the fee structure for non-executive directors (NEDs) and like last year, only one trust did not fully disclose the exact fees for NEDs. However, only 3 trusts disclosed the exact remuneration of the CEO
- More trusts (31 compared to 28 last year) disclosed the KPIs used to determine the remuneration of executive directors/senior management, with 20 disclosing return on equity and/or total unitholder return as KPIs, and 11 disclosing DPU and NAV as KPIs
- Twenty trusts base performance fees on distribution per unit (DPU) which results in better alignment of interest with unitholders than net property income (NPI), compared to 19 last year. However, the link between performance fees and DPU has weakened
- A business trust received an emphasis of matter in respect of material uncertainty related to the ability of the trust and its subsidiaries to refinance the existing borrowings by the external auditor
- Only 9 trusts continued the practice of providing unitholders with quarterly reporting (including financial statements) following the change to risk-based quarterly reporting. All but one of the remaining 36 trusts provided quarterly updates
- Only 3 trusts posted the trust deed on their website
- More trusts (16) held their AGMs during the peak period compared to 15 in the last review and 12 in the review before that
- Seven trusts offered unitholders attending their AGMs remotely the opportunity to ask questions “live” during the AGM using the chat function. Live voting was not implemented at any AGM (other than at two hybrid meetings for those attending in person)
- Six CEOs were found to be lacking in experience in the overseas geographical area that the trust has ventured into. Similarly, a third of the boards did not have any independent director with relevant experience in the foreign geographical area
Business risks
- Actual (non-weighted) leverage crept up from 34.9% to 35.7% to 36.0% between 2019 and 2021. On a like-for-like basis, comparing trusts that were scored in the past two years, the leverage went up marginally from 35.8% to 35.9%
- Of the 7 business trusts, 3 did not disclose the interest coverage ratio (ICR). For REITs, disclosure of ICR is mandated by MAS. 29 out of the 33 REITs received points for having ICRs of more than 2.75 times.
- Four out of 5 stapled trusts disclosed the ICR, with 2 having ICRs below 2.5
- Twenty out of 45 trusts (22 last year) had weighted average debt maturity of at least three years and 17 others had a weighted average debt maturity of between two and three years
- 38 out of 45 trusts had no more than 25% of debt maturing in the next 12 months.
- Fewer trusts (29 vs 31) had more than 70% of their borrowing costs fixed (including swapped to fixed rates).
- Eight trusts scored the maximum points for having low foreign currency risks, mostly due to them not having more than 30% in foreign assets earning foreign currency
- 14 trusts (from 12 last year) received the maximum points for having a higher Weighted Average Lease Expiry (WALE) or if WALE by GRI is at least five years. One trust, down from 3 trusts last year, received demerit points for having a lower WALE that was less than 2.5 years
- An additional 3 trusts (17 now) have hybrid securities (usually perpetual securities). Another REIT has since announced the establishment of a S$750 million multicurrency perpetual securities programme.
The report this year also includes an overall review of the sector which trusts and investors may be interested in. This review highlights some specific issues, often applicable only to a few trusts, but which may nevertheless impact the sector over time.
The full report can be downloaded here.
Read Business Times report by Michelle Quah on GIFT 2021
