The following BT article by Jamie Lee, dated 1/12/2011 and titled
"Sale of KepLand's Ocean Financial Centre stake to K-Reit surprises analysts.
They say it may have been disadvantageous to the Reit's unitholders" have higlighted some points that MAS must clarify...
(SINGAPORE) The sale of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion has raised eyebrows.
Several analysts who spoke to BT on condition of anonymity argued that the deal may have been disadvantageous to K-Reit unitholders.
For one thing, while the prime Grade A office building in Raffles Place has a tenure of 999 years, K-Reit will get the stake with only a 99-year lease for now, though it can exercise a call option to re-gain the property after 99 years.
Without the income support from Keppel Land of up to $170 million, the sale price of the office building translates to about $2,400 per square foot (psf), which K-Reit unitholders deem high at a time when the economic prognosis is grim.
In a third-quarter report, Colliers International noted that the office market has cooled further, with many companies taking a longer time to commit to new space amid caution over expansion plans.
The office market remains highly correlated to the country's economic performance and employment in business and financial services, CBRE said in a recent report.
'They should have left some meat on the table for both parties. Otherwise, what is the point of a Reit if the trusts are stuffed with assets at high prices,' said one analyst.
A second analyst said: 'Given the economic uncertainty, the deal is overpriced. The crux of the matter is that the deal was done when the office market is at an inflexion point.'
Another analyst noted that after stripping out the income support, the yield of about 3 per cent is not attractive. 'The price is at the top of the market. Granted that it's a Grade A office building but why now? Why acquire at a time when the macro-economic situation is deteriorating?' he said. 'The deal is skewed towards the parent.'
He also criticised the 17-for-20 rights issue that would raise about $976 million used to foot the bill, arguing that it is dilutive to existing shareholders. 'It's a good idea if it is being used to purchase depressed assets,' he said.
Still other analysts, while cautious, were more optimistic over the deal.
'It is too premature to pan the deal, especially when unit prices of office S-Reits have probably over-discounted the severity of the forthcoming downturn,' said a Daiwa report. The big concern is whether the income support is sustainable, it added.
Ocean Financial Centre has a committed occupancy rate of 80 per cent, with existing leases at about $9 psf. The income support, by Daiwa's estimates, should raise the overall current rent to $14 psf and be 'just enough' to last until 2016.
If in 2015 and 2016 - when nearly 30 per cent of the leases are up for renewal - spot rents hit $10.60 and $11.70 respectively, there would be 'significant decline' in Ocean Financial Centre's contribution in 2017, it said. 'However, if spot rents reach the mid-teens when the renewals take place, there might not be much drop-off, if any.'
In a client note, Credit Suisse said 'admittedly, market conditions are a little uncertain, and perhaps timing may not be perfect'.
But comparing with the Marina Bay Financial Centre transaction that involved K-Reit and Suntec last year, the acquisition price is fair from a long-term view, it added.
The approval from unitholders also came via a show of hands at the extraordinary general meeting - a practice that the Code of Corporate Governance no longer accepts as sound governance - and amid criticisms from minority unitholders over the price and timing.
'Given the size of the deal and the fact it was a related-party transaction, the vote should have been carried out by poll, with the results tabulated to include the percentages of voting for and against the acquisition,' said Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, in a blog post for the institute.
A K-Reit spokeswoman said minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present. But the poll request, led by one institutional unitholder and supported by a few retail unitholders, fell short of this number.
All interested parties that included Keppel Land were not allowed to vote.
BT also understands that a proxy voter holding a significant block of 46 million units had already been instructed to vote in favour of the deal.
Keppel Land said the sale would 'unlock part of its investment holding especially given the strategic commercial reasons and the volatile economic climate'.
As for K-Reit, the acquired Ocean Financial Centre will also provide strong branding, making it a key office landlord in the Marina Bay and Raffles Place areas, with the transaction boosting the size of its assets under management from some $3.9 billion to about $5.9 billion.
The deal is also expected to be accretive to the Reit's distribution per unit from the cash flows generated, and should improve K-Reit's lease expiry profile such that no more than 11 per cent of its portfolio by net lettable area will expire in any one year over the next five years.
Much of the issues raised in this article has been discussed.
The section highlighted in blue, however raises issues that MAS/MoF must clarify....
In June 2011, there was actually a Rule Change Proposal by SGX to mandate compulsory polling at all shareholder meetings; see proposal.
Unfortunately, after public consultations, the recommendations was that a poll was deemed NOT a necessity altho if U attend any CMA or Capitaland-related AGMs or SGX AGMs or SingTel AGMs (i.e. the more progressive and transparent listcos) , U will have been given a electronic polling device and polling would be conducted; irrespective. Remember all dual listed listcos (i.e HKEX and SGX) must comply with HKEX rules.
What happened, was that at the KReit Asia EGM, the electronic polling device was distributed and the expectation was that polling will be done. So at one stage there was confusion, when the Chairman said polling will not be done becos there was no requirement.
No explanation was given!!
So those who were more knowledgeable, guessed that they were invoking the 10% rule.
See Recommendation 2.2 and a few of us went to the back of the room to register our shareholdings with the scrutineers to see if we had 10% shareholdings.
It was later announced that we did not satisfy the "requisite" holdings requirement and a show of hand voting commenced, immediately, to which those opposing were Out-Voted. But it was never clearly stated what was that % requirement, that we did not meet, during the EGM.
Later, I checked and found that the required % shareholdings threshold have been reduced from 10% to 5%!!!
After the EGM, I went to read Recommendation 2.2, again and it appears that there is a 5-members request rule---there are in effect two thresholds in section 178(1)(b)----- the 5 member rule in i) and the now effective 5% rule in ii) !!
In effect, a polling had to be carried out as there were more than 5 of us demanding a poll. We have been "robbed" of a fair poll which Kepcorp and Kepland as IPTs and together own 76.3% of votes, had to abstain.
Yet, we were denied!!!
A poll would be more favourable to dissenting unitholders, since we have some IIs (Institutional Investors) and some big unitholders amongst us!!
This BT article appears to imply that a 10% threshold was used; which does NOT conform to the Companies Act.
Will MAS or MoF, please clarify!!!
For completeness sake, I post the accompanying article in BT by Jamie Lee.
Business Times - 01 Dec 2011
Examining the house that Reits built
Recent property deals rekindle debate over fees, independence, minority protection
By JAMIE LEE
(SINGAPORE) Calls for reform in the real estate investment trusts (Reits) market here have taken on fresh urgency, as questions resurface about the possible conflict of interest when Reits acquire assets from their sponsors.
This comes after the Monetary Authority of Singapore (MAS) said last week it may offer more regulatory guidance to the industry and urged boards not to take 'an overly technical approach' in following governance rules.
The spotlight has swung sharply on the manager/ trustee model and fee structure that Reits operate under, as well as whether there is enough independence on Reits' boards.
The murmurs grew louder after the sale of Keppel Land's 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion was approved last month at the shareholders' meetings, despite criticism from minority unitholders over the price and timing.
Singapore and Hong Kong Reits tend to use the manager/trustee model, which has the Reit manager appointed by the sponsor - and often the controlling shareholder - of the property trust. The directors of the Reit manager are also appointed by the sponsor. Reits are managed by the managers, and managers are paid according to the size of the portfolio they take care of.
An earlier report by CFA Institute had already highlighted that one way to better protect Reit unitholders is to ensure most directors on the boards of Reit managers are independent. It noted that the inter- relatedness between the sponsor and the manager increases the risk that they would act in their own interest, at the expense of minority unitholders.
The bulk of Reits do not have independent directors making up the majority of their board, though this is in line with the practice of most listed firms here.
'The conflict of interest can be avoided if the sponsor appoints a Reit manager that is not related to the sponsor or its group of companies,' Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, told BT in an interview.
The other option is to use a corporation model that has investors voting for the appointment of the directors, including independent directors - a practice that is more common in Australia, he added.
Mak Yuen Teen, associate professor at NUS Business School, called the governance of Reits 'problematic', since the board of directors is the board of the Reit manager and owes fiduciary duties to the manager, not the unitholders.
Under recent revisions of the Code of Corporate Governance, a director is not independent if he is or has been directly associated with a substantial shareholder of the company in the current or any of the past three financial years.
Professor Mak noted that K-Reit manager's chairman Tsui Kai Chong is classified as an independent director, though he has been an independent director of Keppel Land since 2001. Another K-Reit independent director, Lee Ai Ming, is also an independent director of Keppel Land.
At Reits such as CapitaMall Trust, CapitaCommercial Trust and CDL Hospitality Trusts, the chairmen - who have links to the sponsor - are not labelled independent.
BT reader Bobby Jayaraman recently wrote that Reit managers should be paid based on a combination of growth in distribution per unit and market valuation of the Reit.
He argued that current rules are not robust enough to 'prevent unscrupulous Reits from taking advantage of minority shareholders'. 'The major culprit is the incentive system for Reits, which does not always align with shareholder interests,' he added.
Mr Lee noted that in Singapore, the fee structures of S-Reits are skewed towards performance fees paid based on net property income. Of the 22 S-Reits that the CFA Institute reviewed in January, 64 per cent of them used this approach.
'This excludes interest charges; therefore gearing charges have not been deducted in computing performance fees for the manager,' said Mr Lee.
'A more equitable form of compensation would be a combination of factors, based on an index and growth in distribution per unit.'
Also, independent financial letters issued to minority shareholders of both Keppel Land and K-Reit do not express an opinion of future prospects, Mr Lee noted. Analysts have noted the deal came at a time when macroeconomic conditions are turning grim.
In addition, Mr Jayaraman noted that independent valuation reports - done in accordance with MAS rules to safeguard investors' interests - do not consider potential changes and risks to the commercial property market.
Mr Lee said: 'If there can be additional information that can help minority shareholders to evaluate the impact of the acquisition, it will be a research report issued by a research house. However, this will likely happen only if there is sufficient institutional ownership.'
An idea to have a tender process for such property transactions has also been mooted. One senior lawyer supported this but cautioned that sponsors could control the timing and know the information better, making it hard for third parties to have the same assessment of the values.
Reits are currently excluded from the annual ranking for the governance and transparency index, which highlights the best and the worst among listed companies in corporate governance standards, noted Prof Mak.
'They are just a completely different animal.'