REIT Governance: from Father to Son but at What Price?
As the recent K-REIT acquisition of 87.5 percent of Ocean Financial Centre from K-REIT parent company Keppel Land — and whether the deal was fair to minority shareholders — continues to hog the limelight, the Monetary Authority of Singapore (MAS) has weighed in on the growing debate. In a letter to the editor of the Business Times, MAS stated that it “will consider issuing further guidance to the industry as part of our ongoing effort to enhance corporate governance in REITs and other listed entities.” Although the regulator did not single out specific companies, it was clearly responding to concerns that current REIT rules fall short of protecting the interests of minority shareholders.
The main issue is whether related-party transaction rules are adequate under the current REIT regulatory framework in Singapore.
Regulations regarding related-party transactions (RPT) are found mostly in listing rules, and the rules that apply to listed companies in Singapore apply to REITs as well. Companies are required to produce two — not one — asset-valuation reports, an independent accountant’s report on the profit forecast, and an independent financial adviser’s (IFA) letter to the independent directors and audit committee. In the case of K-REIT, it has complied with the regulations, and the recommendation from the independent directors to the minority shareholders is to vote in favor of both the rights issue and the RPT.
So what does all this mean to investors? For example, should investors still read the 170 pages of the K-REIT circular? Yes, they can take some comfort that there are already a number of safeguards in REIT regulation to ensure that information provided in the circular, including profit forecasts and the asset valuation, are independently checked or verified by third parties. But investors also need to understand that most of these reports are not geared towards analyzing the long-term prospects arising from such a transaction.
Let’s take a closer look at the letter from the independent financial adviser. The role of the IFA is to advise the independent directors and the audit committee, not the shareholder. The IFA opinion is limited to determining whether the transaction is based on normal commercial terms and whether it is prejudicial to the interests of K-REIT and its minority shareholders. The IFA is not required to express an opinion on the future prospects of K-REIT. In this case, PricewaterhouseCoopers advised the independent directors to recommend that unitholders vote in favor of the acquisition.
Minority shareholders will have to make their own assessment of whether it is a good deal for them, and then vote accordingly. As connected persons are prevented from voting in a related-party transaction, the final say remains with the minority shareholders. And that is often not well understood. Minority shareholders can exercise their rights and vote against the rights issue and the deal. The K-REIT vote was carried out by a show of hands, and both resolutions to approve the rights issue and the purchase of Ocean Financial Centre were passed on 14 November. A request to have the vote carried out by poll was denied by the chairman, as reported in the Business Times. Although the chairman acted within his rights under Singapore’s existing rules, investors have long clamored for voting by poll on all resolutions. Would the results have been different if a poll was carried out? We don’t know.
New Rules to Tighten Corporate Governance in Singapore
What about the future? Well, the laws are about to be changed. On 22 November the Corporate Governance Council submitted its recommendations to MAS to revise the Corporate Governance Code in Singapore after 21 months of study and public consultations. The Council recommended that all resolutions be voted on by poll, with detailed results showing the number of votes for and against each resolution published. We said the same thing in our response letter filed in July 2011.
One final observation: In 2009, Fortune REIT had a rights issue of $HK1.9 billion to buy three shopping malls, two of which were owned by the sponsor, Cheung Kong. CLSA issued a research report that downgraded the REIT from buy to underperform. The analyst was in favor of acquisitions to grow the asset base, but in this particular case, the acquisition price should have been at a larger discount to current valuations for future yields to be attractive to shareholders. That’s the kind of analysis investors are looking for.
In the case of K-REIT, is the timing of the deal in favor of Keppel Land (the father) or the son? Is this at the peak of another property cycle? Are there other properties that do not belong to Keppel Land worth considering? I leave this as food for thought for REIT investors, as I believe that both regulations and governance will continue to evolve as this sector grows.