Maybank Kim Eng Research 2015-07-03 (REIT): MAS Proposals No Negatives. Remain UnderWeight on SREITs. BUY SGREIT, MINT, CACHE, KREIT.

MAS proposals: no negatives 

  • None of three key potentially “negative” proposals implemented: periodic reappointment of managers, acquisition/divestment fees on cost recovery & interested party divestments. 
  • Most “positive” proposals implemented, so is “Neutral” proposal of 45% single-tier gearing. 
  • Overall no negative outcome for the sector. Remain UW on SREITs due to oversupply amid weak demand. 

None of three “negative” proposals implemented 

Periodic re-appointment of REIT managers. 

  • This proposal was the most feared by sponsored REITs as it could have deterred developers from injecting assets into their REITs given risks of losing control. 
  • MAS has decided that the current approach, where typically 10% of unitholders could convene an EGM and remove the manager by a simple majority, is sufficient. 

Acquisition/divestment fees based on cost recovery. 

  • We pointed out that this could dis-incentivise acquisition growth as it meant that a manager could not be compensated for the search process. 
  • MAS instead requires the manager to disclose that the fees align the manager’s interest with the long-term interests of the REIT. 

For asset divestments to an interested party (IP), audit committee to certify no other better offer available from non-IP. 

  • This implies a public tender has to be called, which is not even a requirement for listcos. 
  • We also pointed out that highest divestment gain may not mean the best long-term returns e.g. FCOT’s sale of GFA at China Square to FCL for hotel redevelopment will likely boost China Square’s long-term value. 
  • MAS confirmed no public tender required, only requiring ACs to confirm due processes to ensure that the offer from the IP would be in line with a non-IP’s offer.

Positive & neutral proposals implemented 

Development limit from 10% to 25% of deposited property. 

  • MAS will require unitholders’ approval each time the extra 15ppts is used, to guard against unilateral raising of the REIT’s risk profile. 

Income support to go beyond disclosure. 

  • Current practice is for the nature of support to be disclosed, but now MAS will require annual disclosure of the effect of the support on DPU. 
  • We interpret this as quantifying DPU with and without the support. 

Fees on a “per unit” rather than gross basis. 

  • MAS has agreed not to prescribe fee methodologies but reiterated that fees should be aligned with long-term unitholder interests. 

Single-tier 45% aggregate leverage. 

  • MAS noted that rated REITs have kept this below 45% despite being able to gear themselves to 60%. The 45% level being a good balance between over-gearing and a mechanistic reliance on credit ratings. 

No negative outcome, but still UW 

  • We do not expect any impact but remain UW SREITs on oversupply.

Peer Comparison

(Joshua Tan; Derrick Heng, CFA)

Source: http://www.maybank-ke.com.sg