Friday, December 9, 2011

Comments on BT's interview with KReit's CEO

Today's BT, 9th Dec has 2 Letters to the Editor that gave very good rebuttals to Ng Hsueh Ling, CEO of KReitAsia regarding the remarks she made in interviews in 2 articles on Dec 6, as reported by Jamie Lee.

The 1st article was titled " K-Reit nudged parent to get hands on OFC" and the 2nd article
"K-Reit voting prompted query from MAS"

To make the whole discourse meaningful, I excerpted from BT with minimum cropping.....

1st Article excerpts...

It was K-Reit Asia that approached its sponsor Keppel Land to snap up Ocean Financial Centre (OFC). This was to have a say in rental negotiations now underway, get tax exemption and to lower the average age of its property portfolio.

The dynamics behind the deal were revealed by K-Reit's chief executive officer Ng Hsueh Ling yesterday, even as the real estate investment trust faces criticism that the deal is too expensive at a time when the office market may soften.

Ms Ng also rejected suggestions that Keppel Land got the sweeter deal. She noted that the $1.57 billion that K-Reit paid for Keppel Land's 87.5 per cent stake in OFC is still well short of the peak.

'If you look at the historic peak of the market, the highest transaction was about $3,120 (per square foot) for a plot of land along Robinson Road. We figured that $2,380 psf is very far from the peak, and it's one of the best buildings in Singapore,' said Ms Ng.

'How do we know the bottom? And to go out and get money in a bad market, people will say 'no'.'

Ms Ng added that Keppel was not urgently looking to offload the property.

'They are in no hurry to sell,' she said. 'A lot of people have asked me who started the negotiations first. I wanted to buy OFC because I don't want it to be fully leased.'

Some 20 per cent of the space in OFC is having its rental negotiated. She wanted to fill this space with tenants who wanted long-term leases, took up large amounts of space, and had a good credit backing.

'I didn't want Keppel to fill up the extra 20 per cent because Keppel is a developer. I want to fill up with Reit-like tenants,' she said.

'I can also wait for Keppel to fill up the space but you can't control the tenants and you will have to pay for a fully valued asset. If the market goes down, sorry, you would have paid at that price.'

She remains very confident that the space will be taken up by such tenants. And despite the grim economic outlook, customers have not asked for cuts in the rent rates, with Ms Ng saying these are large firms and long-term players.

Touching on the 17-for-20 rights issue to be used to foot the bill - a move that would be dilutive for existing shareholders - Ms Ng said cash calls are inevitable in order to grow the portfolio size, especially since purchases in the office space are big.

'Now that K-Reit is large in size, the chances of going out to do another rights issue will be much lesser than when it was smaller.'

Early this year, the Reit asked the Inland Revenue Authority of Singapore (IRAS) whether all income coming from OFC could be exempted from a 17 per cent tax payment if the corporate ownership structure was changed to a limited liability partnership from a private limited structure, under which a company has to pay that amount of tax.

The property trust was told by IRAS around June that this would be possible - making it the first time an office building here has been allowed such a tax exemption under this structure. This prompted the Reit to begin serious negotiations, Ms Ng said.

With the purchase of OFC - which will not require K-Reit to spend money on asset enhancement initiatives - the average age of the properties in the portfolio will be lowered to 4.4 years, she added. 'No other Reit has that kind of age. It doesn't mean that being young alone is good. You must be young and in the right location,' she said, though she had no figures on the industry average.

As for the compensation of Reit managers, Ms Ng argued that her remuneration is based on the performance of the Reit, noting that she needs to meet targets set for the managers.

Acquisition fees paid to the manager are in the form of units that can be sold only after a year, which means that the manager has to watch the units' market performance.

Ms Ng also defended the sponsor model that Singapore Reits operate under, noting that a sponsor provides a supply of assets to refresh the Reit's portfolio.

K-Reit noted that sponsors are also aligned with the Reit as cornerstone investors, and that working under this model gives Reits access to bank funding.


 2nd Article excerpts......

K-Reit Asia had conducted the voting over the purchase of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre via a show of hands to avoid the ire of minority investors, chief executive Ng Hsueh Ling told BT yesterday.

This has prompted a query from the Monetary Authority of Singapore (MAS) - which regulates property trusts - on the proceedings of the unitholders' meeting, she revealed, though no subsequent questions have been posed since then.

About a year ago, K-Reit had gone through a similar voting process to gain unitholders' approval for an asset swap with its sponsor Keppel Land.

This had Keppel Land selling its one-third stake in Phase One of Marina Bay Financial Centre to K-Reit, while K-Reit selling Keppel Towers and the adjacent GE Tower in Tanjong Pagar to Keppel Land.

But during last year's meeting, minority unitholders were upset with the decision to have voting done by poll, arguing that this voting method would silence the unitholders since institutional investors often hold a larger block of units.

With poll voting, each share translates to one vote, whereas under a show-of-hands system, each person gets a single vote, regardless of the number of shares he holds.

This year, about 350 unitholders present at the extraordinary general meeting were given the option to vote by poll or by show of hands.

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 - as stipulated in the Reit's trust deed.

But the poll request, led by an institutional unitholder and supported by a few retail unitholders, did not meet the requirement.

To compound matters, K-Reit's chairman Tsui Kai Chong told unitholders there were proxy votes representing 46 million units that favoured the deal, before calling for unitholders who wanted a poll to register with the company.

The 46 million units included votes from institutional investors whom K-Reit had met to discuss the deal during its roadshow, Ms Ng noted.

'Even if every single person present at the meeting had voted against, what the chairman had in terms of the positive proxies would have (seen the deal) more than comfortably passed through the poll,' she said.

'Since people who called for the poll didn't meet the requirements, we thought, 'why should we go against the trust deed and have our discretion?' People might say, why did you use your discretion?

'I guess we could never win it,' she added.

The deal also won overwhelming support via a show of hands, with Ms Ng noting that the hands in favour were 'too many to count'. By Ms Ng's account, there were just six to seven hands raised to show disapproval of the deal.

Voting through a show of hands is a practice that the Code of Corporate Governance no longer accepts as sound governance.

This was reflected in the recent review of the Code, though the findings were announced two weeks after the deal was approved.

Click Read More to go to the Letters to the Editor

The 1st  letter from reader Vincent Tan, titled "Timing of  KReit's OFC deal was problematic" ....

I REFER to the two articles by Jamie Lee, 'K-Reit nudged parent to get hands on OFC' and 'K-Reit voting prompted query from MAS' (BT, Dec 6).

I found K-Reit CEO Ng Hsueh Ling's arguments on the issues of who gains and the timing of the sale very clever and persuasive. But I would still like to share my own views.

I own both K-Reit and Keppel Land (KepLand) shares and am one of the many who attended both extraordinary general meetings (EGMs).

Those who attended KepLand's EGM in the morning, at the same venue, and were attentive during the proceedings would have left without a doubt that the deal was sweeter for KepLand.

On the timing of the sale, the overall impression one gets from reading both the articles is that K-Reit was the one which decided on the timing, and that KepLand was a somewhat reluctant seller.

That is odd. As a Reit, K-Reit's business model ought to be concerned with investing long term in high-quality properties that have a stabilised tenant profile, so as to minimise risks. K-Reit should not be involved in trying to time the market for its purchase of Ocean Financial Centre (OFC) because it is difficult to call the bottom.

The risks involved in timing and trading of property assets should reside with the sponsor who should also incubate these properties until they have a stabilised tenant profile before selling the assets to a Reit.

OFC was officially guided to be sold to K-Reit only in late 2012 or end-2013. Bringing the sale forward would suggest that there was a change in KepLand's outlook and calculations.

KepLand's willingness to provide rental support shows that it had a beneficiary interest in the timing the sale as is, and reveals the motivations involved in this close family transaction.

I do hope that with MBFC (Marina Bay Financial Centre) Tower 3, the next phase of the MBFC development, K-Reit will take measures to reassure investors so as not to spring any other nasty rights issue surprises.

On the issue of voting, how could the chairman pre-empt a poll by saying he had enough proxy votes that will outvote everybody present?

The purpose of the EGM was to vote on the OFC transaction. If indeed there were proxy votes representing 46 million units that favoured the deal, then that should only be revealed after due process of the poll of those present and during counting by the scrutineers.

As a long-term investor in K-Reit and KepLand, I wish to reiterate that other than the timing and the voting issue at the EGM, I support the OFC transaction as it is indeed a good prime-quality asset.

My purpose in bringing up these issues is to clarify and improve corporate governance in the Reit asset class, not to criticise K-Reit or KepLand in which I remain invested.

With 23 listed Reits and a market cap of about S$34 billion, it is very important that managements of this asset class, which is viewed by many retirees and defensive investors as a dividend play for regular cash disbursements, do not end up taking undue risks due to a desire to time the market.
            Vincent Tan

 2nd Letter from James Morton, titled "IDs need to be truly independent".....

I REFER to recent discussions of the role of independent directors in companies that encounter controversy and questionable transactions, particularly in the real estate investment trust (Reit) sector. The problem is simple. There are few truly independent directors.

Candidates may start out independent but consider how they are chosen. Shareholders do get to vote, but only to ratify - in the vast majority of cases - directors nominated by the company. Companies rarely nominate directors who are going to rock the boat. Independent directors face the challenge of group dynamics. I have sat on a number of boards and observed this first hand. Management controls board agendas and select what information is provided. There is then pressure to achieve consensus and conform.

This is not easy to change. Yet it is critical that independent directors act, and act decisively, to safeguard shareholder interests, especially in circumstances such as related party transactions when they will be under the greatest pressure to toe the 'party line.' Thus their interests need to be linked as closely as possible to those of shareholders, which they are supposed to protect. Here are some proposals that could help.
*   AGM ballot papers should provide space for write-in nominations. Any name receiving over 3 per cent of shareholder support should be put forward for possible election.

*   Neither affiliated nor controlling shareholders nor management should be allowed to vote on the election of independent directors.

*    The role should be limited to a maximum of six years.

*     No one should be appointed as an independent director who does not, within six months, purchase out of their own funds an amount of stock that is meaningful. I suggest a minimum of $50,000.

*     Independent directors should be paid in part through stock options with strike prices above market. Fifty per cent of compensation should be in options rather than cash.

*     Independent directors at companies that breach regulations or fail financially should be barred not just for a period of time, but for life.

Asking more from independent directors may reduce the supply, and there is already a shortage of qualified people with the right attitude, strength of character and sufficient time. The solution must be to pay properly for this important work. Along with additional responsibilities and requirements, compensation will have to rise to make the role attractive.

Some change can be achieved by pressure from institutions and organisations that follow these matters. Sadly, companies that need better governance are the least likely to improve without formal regulatory requirements. Unless action is taken, we will continue to experience failures of independent thought and oversight. Independent directors may often be the only people in a position to know about, and so prevent, action that could be damaging and even abusive to minorities. They must be truly independent and incentivised to act accordingly.

R James P Morton
Chief Investment Officer
Santa Lucia Asset Management Pte Limited


My Thots......

1)  By questioning Kepland’s competence in the picking of the tenants in the remaining 20%, Ms Ng left open a bigger question----- Kepland’s picks of the first 80%  !!
So her argument is clever but self-defeating. The more likely scenario is that Kepland and KReit's property management staff and resources are shared and pooled. James  Morton had earlier brought up the issue of conflict of interests and questioned the manner in which the fees are charged.
2) The other observation  that cast doubts on the above version by the CEO is the exceptionally long Proxy queue consisting of Keppel-related staff at the EGM. BT should ask Ms Ng if it is true that that the majority (2/3?) of the 350 in the EGM were such proxies. To the observant, at the KReit EGM, KReit ostensibly planned for a vote by "show of hands". It is disingenous of Ms Ng to imply that the vote via a "show of hands" was to avoid the ire of minority shareholders!!  Shareholders do read up and keep in tune with the evolving Corporate Governance.

3) The over-riding criteria for the Chair to consider to decide whether a poll  should be called ---- should be  if proceedings conformed with the trust deed provisions as stated in the amendment dated 11th Nov 2009,   to the Code on CIS (Collective Investment Schemes) to allow for AGMs.
With that amendment, REITs have to follow the Code of Corporate Governance as spelt out in the Companies Act. Under Section 178(1)(b)(i)of the Companies Act, there is an original  alternative  5-member threshold that can trigger a request for the poll. See Recommendation 2.1 and 2.2 .

 11 of us, were on the queue that requested for a poll. So rightfully a poll should have been conducted if  the Chair had followed “Trust Deed” Provisions!!

Hence, the EGM did not conform to the rules in place since Nov 11, 2009!!

Further to the above, the proposed changes to the Code of Corporate Governance by SGX  on General Meetings were adopted 2 weeks after the EGM.
The recently adopted Code of Corporate Governance  recommends  that polling  be done  w/o the need for thresholds considerations----- i.e in effect makes polls mandatory, subject to a period of phasing- in!!
The odd thing is that an electronic poll gadget was issued by the scrutineers but the Chair rejected its use.

4) Reader James Morton identified the crux of the matter----- the independence of the IDs and gave suggestions to ensure such.

5)   KReits has demostrated  the outcome of a poorly executed rights issues
i)  a sharp plunge of share price to 83.5 cts ( below the rights issue price of 85cts) and way below NAV.
ii) Undersubscription as per SGX  announcement .

6) Will the KReit management learn from this episode?


qiaofeng said...

Outcome of the rights issue.....

December 14, 2011, 9.41 am (Singapore time)

Update: Keppel allotted 359.22m rights units in K-Reit


SINGAPORE - Keppel Land said on Wednesday its subsidiary had been allotted 539.38 million rights units in K-Reit Asia at 85 cents each.

K-Reit Asia, Keppel Land's real estate investment trust, held a 17-for-20 rights issue to raise money to pay for its purchase of Keppel Land's stake in Ocean Financial Centre.

Keppel Land sold its 87.50 per cent stake for $1.57 billion in October.

The property developer paid the rights units for S$458.5 million in cash. It now holds around 46.51 per cent of the total number of issued units in K-Reit Asia.

Meanwhile Keppel Land's parent, Keppel Corp, said on Wednesday it paid S$305.34 million for its allotment of 359.22 million rights units in K-Reit Asia.

Keppel Corp obtained the units through its wholly-owned subsidiary, Keppel Real Estate Investment Pte Ltd (KREI).

Keppel Corp said the total number of units in K-Reit Asia it held through KREI and Keppel Land has increased to 1.94 billion, representing approximately 76.88 per cent of the total number of issued units in K-Reit Asia as at Dec 13, 2011.

It added the above transaction is not expected to have any significant impact on the consolidated earnings per share and net tangible asset per share of the Company for the current financial year.



My Thots......

Together as a group, Kepland and Kepcorp paid SGD 763.84m and received SGD 1.57b for the monetisation of OFC.
Theoretically, Kepland sold 87.5% of OFC, now the combined deemed ownership under both is 76.88%.

By selling approx. 10% of deemed ownership the Group created of SGD 763m and bagged a recurrent cashflow of property management and trust fees.

What a good deal at the expense of KReit unitholders!!

And we have a KReit CEO who thinks that she did her unitholders a great favor by claiming that she initiated and nudged Kepland to do the sale.

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