NetLink NBN Trust continues to hold on to number 1 spot in Governance Index for Trusts (GIFT) 2022 and achieves a new high score; overall governance has improved in sector despite challenges
By Mak Yuen Teen and Chew Yi Hong
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 another four points, achieving a score of 99.
Keppel Pacific Oak US REIT, Cromwell European REIT, CapitaLand Integrated Commercial Trust and Keppel DC REIT round up the top five in that order. We are pleased that Sabana REIT, which had been under heavy scrutiny from unitholders, market watchers and regulators, and which failed in its controversial merger with ESR-REIT in 2020, has significantly improved its score and ranking. It moved up from 38th last year to joint 14th this year as it revamped its board and focused on its core business.
The six lowest-ranked trusts are the same as last year, with some minor changes in position. They are, from the lowest-ranked, Dasin Retail Trust, Hutchison Port Holdings Trust, EC World REIT, Lippo Malls Indonesia Retail Trust, and Asian Pay Television Trust and First REIT which are joint fifth from bottom.
The governance and business risk of 43 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).
This year, 36 out of 43 trusts, or 84%, participated in the self-assessment. This compares to 80% last year and is the highest participation rate since the self-assessment was introduced in 2018.
After increasing between 2017 and 2019, the average GIFT score fell in 2020, largely due to changes to the scorecard and scoring methodology although we felt there was a stagnation or even decline in standards. Last year, the average combined governance and business risk score slipped slightly from 64.3 to 64.1.
We are pleased that this year, the average GIFT score reversed the decline and increased from 64.1 to 66.0. The overall average score for those trusts that were in the 2021 and this year’s edition increased from 64.0 to 66.0.
While business risks have crept up given the market conditions, the sound regulatory framework established by MAS has helped ensure that there is no distress in the sector.
Based on our observations of trusts’ practices and actions, we remain unconvinced that managers are set up with proper safeguards, incentive systems and balance of power to always put the interests of unitholders before their own, a statutory duty of managers under the Securities and Futures Act and Business Trusts Act. Many of the problems we see in trusts are due to the externally managed model used by all trusts, except for one, which happens to be the most highly-ranked trust since it was listed.
We believe more trusts, especially the larger ones, should consider moving to an internally-managed model.
With recent cybersecurity breaches in Singapore and around the world, we did a simple review of website security of the 43 trusts covered this year, even though this is not specifically covered in the GIFT scoring guidelines. We found that five trusts use “http” rather than “https” for their website, which indicate relatively weak website security and possible low cybersecurity awareness. Audit committees of trusts should consider undertaking a cybersecurity risk assessment and a cybersecurity audit if the trusts are not already doing so.
Recommendations
We put forward the following recommendations for trusts and regulators to consider:
Recommendation 1: The Business Trusts Act to set a 9-year limit for independent directors, similar to REITs.
Recommendation 2: The disclosure of the trust deed in the trust website should be mandatory.
Recommendation 3: The disclosure of Interest Coverage Ratio (ICR) and Adjusted ICR should be mandated for both REITs and business trusts.
Recommendation 4: Remuneration policies, including share plans, should be based on the performance of the trust, and not the manager and not the holding company/group. If this is not the case, the risks and how they are mitigated should be clearly explained as expected by MAS.
Recommendation 4a: An independent vote by unitholders should be required if key executives are given shares of the holding company/group with vesting conditions linked to the holding company/group.
Recommendation 5: As a policy or at least in advance for the financial year, the manager/trustee-manager should state how it is receiving its fees in terms of the proportion of cash and units.
Recommendation 6: If a director is deemed independent by the manager despite he/she being deemed not to be independent under the Securities and Futures (Licensing and Conduct of Business) Regulations, an endorsement by independent unitholders should be required.
The full report and scoring guidelines are available for download below.
Governance Index For Trusts – 2022
|
Ranking |
REIT/BT | Governance risk Score | Business risk Score | GIFT
2022 |
| 1 | NetLink NBN Trust | 75 | 24 | 99 |
| 2 | Keppel Pacific Oak US REIT | 66 | 21 | 87 |
| 3 | Cromwell European REIT | 65 | 20 | 85 |
| 4 | CapitaLand Integrated Commercial Trust | 56 | 24.5 | 80.5 |
| 5 | Keppel DC REIT | 58 | 20.5 | 78.5 |
| 6 | Frasers Centrepoint Trust | 53.5 | 23.5 | 77 |
| 7 | Far East Hospitality Trust | 54.5 | 22 | 76.5 |
| 7 | Keppel REIT | 58.5 | 18 | 76.5 |
| 7 | Mapletree Pan Asia Commercial Trust | 56.5 | 20 | 76.5 |
| 10 | Manulife US REIT | 57 | 19 | 76 |
| 11 | Parkway Life REIT | 53 | 22 | 75 |
| 12 | CapitaLand Ascendas REIT | 58.5 | 15.5 | 74 |
| 12 | United Hampshire US REIT | 57 | 17 | 74 |
| 14 | Elite Commercial REIT | 56.5 | 15 | 71.5 |
| 14 | IREIT Global | 48.5 | 23 | 71.5 |
| 14 | Sabana REIT | 47 | 24.5 | 71.5 |
| 17 | Mapletree Industrial Trust | 51 | 20 | 71 |
| 17 | Prime US REIT | 50 | 21 | 71 |
| 19 | AIMS APAC REIT | 50.5 | 18 | 68.5 |
| 20 | Frasers Logistics & Commercial Trust | 51.5 | 16.5 | 68 |
| 21 | Sasseur REIT | 49 | 18.5 | 67.5 |
| 22 | Starhill Global REIT | 49.5 | 17.5 | 67 |
| 23 | CapitaLand China Trust | 51 | 15.5 | 66.5 |
| 23 | CapitaLand India Trust | 46.5 | 20 | 66.5 |
| 25 | ARA US Hospitality Trust | 51 | 14.5 | 65.5 |
| 26 | BHG Retail REIT | 52 | 12 | 64 |
| 27 | Keppel Infrastructure Trust | 48 | 15 | 63 |
| 28 | Lendlease Global Commercial REIT | 46 | 16.5 | 62.5 |
| 28 | Mapletree Logistics Trust | 47 | 15.5 | 62.5 |
| 30 | SPH REIT | 43 | 19 | 62 |
| 31 | Frasers Hospitality Trust | 45.5 | 15.5 | 61 |
| 32 | ESR-LOGOS REIT | 40 | 19 | 59 |
| 32 | First Ship Lease Trust | 44 | 15 | 59 |
| 32 | OUE Commercial REIT | 45 | 14 | 59 |
| 35 | CapitaLand Ascott Trust | 44.5 | 13.5 | 58 |
| 35 | Suntec REIT | 50 | 8 | 58 |
| 37 | CDL Hospitality Trusts | 44 | 12.5 | 56.5 |
| 38 | Asian Pay Television Trust | 34 | 14.5 | 48.5 |
| 38 | First REIT | 42 | 6.5 | 48.5 |
| 40 | Lippo Malls Indonesia Retail Trust | 46.5 | -0.5 | 46 |
| 41 | EC World REIT | 40.5 | 2.5 | 43 |
| 42 | Hutchison Port Holdings Trust | 33 | 5.0 | 38 |
| 43 | Dasin Retail Trust | 17.5 | 9.5 | 27 |
