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15-02-2017, 09:06 PM
Mr Steven Lim Kok Hoong was the Audit Partner of Ernst & Young and the Managing Partner of Arthur Anderson. Mr Yong Kok Hoon was the Managing Director of InnoTek Limited. Both are Chartered Accountants. They are also the Independent Non-executive Directors of the Sabana Manager.
According to MAS, the independent directors of a REIT Manager are responsible for overseeing the management’s performance. They provide objective judgment on whether transactions proposed for the REIT are in the interests of unitholders. The purpose of independent directors in a REIT Manager is to protect the interests of unitholders of the REIT and not to protect the shareholders’ interest in the REIT Manager.
Has Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon discharged their duties accordingly? It will not be fair to them if we judge them based on the benefits of hindsight. We will judge them based on their state of mind at the relevant time.
1. We start with the recent Rights Offer Information Statement where the Manager deliberately round off their acquisition fee to read $0.2m, $0.3m and $0.2m totaling $0.7m. The actual fee paid to the Manager was $200,000, $345,000 and $230,000 totaling $775,000 which is a significant 10.7% more than what is stated by the Manager. Taking into consideration that the rent payable figures (by the vendor) were presented to the cent in the offer statement, this seemingly innocent act is the Manager’s continuous deliberate effort to suppress the actual financial impact on unitholders. Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon, the two chartered accountants, did not object to this form of presentation. They signed the Rights Offer Information Statement.
The Manager also has a very “generous” interpretation of Clause 15.2.1 of the Trust Deed where they said that they are allowed to receive the Acquisition fee units at the issue price of $0.258 per unit. They then proudly announced that they will instead elect to receive the fee at $0.432 per unit.
“When paid in the form of Units, the Manager shall be entitled to receive such number of Units as may be purchased for the relevant amount of the Acquisition Fee at the issue price of Units issued to finance or part finance the acquisition in respect of which the Acquisition Fee is payable” excerpts from Clause 15.2.1
The Acquisition was paid in cash and not units. The cash came from the Right issue. It is a lie that the Manager is allowed to issue Acquisition fee in units at $0.258. Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon did not see the need to correct the Manager.
2. Mdm Ho Chin, in her speech in 2005, highlighted the perils of a Manager buying an assets at inflated prices and the vendor agreeing to lease back the same property at inflated rents well above market rates. She said the REIT’s investment hurdles are technically met and both the Manager and the vendor can claim to be “winners” in the deal. “The losers are the unitholders” she added. Since IPO, the Manager bought a total of 3 properties all at inflated prices and the vendors all agreed to lease back these properties at inflated rents well above the market rates. Today, these properties are valued significantly lower than our purchase price. In Dec 2016, the Manager again bought 3 more properties at inflated prices and the vendors again agreed to lease back these properties at inflated rent. Mr Kevin Xayaraj openly defended the high prices paid with the rental support arrangement agreed with the vendors. Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon knew or ought to know Mdm Ho’s warning about such transactions that can seriously hurt the unitholders. They did not object. In fact, they signed on the Right Offer Information Statement to ask unitholders for monies to finance these purchases.
3. Mdm Ho also told us a Manager without a sense of fiduciary duty and moral obligation to the unitholders, may ramp up the portfolio size indiscriminately without due care or regard for quality and sustainable value of its portfolio. This agency problem is even more acute if the trust manager is paid based on a percentage of the value of the portfolio it manages, and the size of acquisitions it makes.
In Aug 2012, the Manager bought 23 Serangoon North Ave 5 at $61m. The property was 100% occupied. Knight Frank independently valued the property at $61m using Investment and Discounted Cash Flow Analysis. The Vendor agreed to lease back the premise for a term of 3 years with an option to renew a further term of 3 years. Today, this property is 55% occupied. The Vendor did not renew the lease after the 3 years. Knight Frank values it at $41m. The day the vendor did not renew their master lease, the Manager left it half empty. The Manager collected $610,000 as acquisition fee and their annual management fee increased by $305,000. This purchase was bad for unitholders.
In Aug 2013, the Manager bought 508, Chai Chee Lane at $68.2m. The property was 100% occupied. CKS Property Consultants independently valued the property at $67.75m using Capitalisation Approach and Discounted Cash Flow Analysis. The Vendor agreed to lease back at least 50% of the premise for a term of 10 years. Today, this property is 56.4% occupied. Suntec Real Estate values it at $56.8m. The day the manager signed on the dotted line to buy this property, they left it half empty. The Manager collected $595,000 as acquisition fee and their annual management fee increased by $341,000. This purchase was also bad for unitholders.
Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon knew or ought to know Mdm Ho’s warning about such purchases that ramp up the size of property portfolio without regard for the quality and sustainable value of the asset. They also knew about the increase in both the Manager’s management fee and acquisition fee as a result of such purchases. They did not object to these acquisitions.
4. In the same speech, Mdm Ho also told us that in the event the Manager buys assets at highly inflated prices in exchange for inflated rents from the vendor, the unitholders would be sitting on a capital loss right from the start, as the purchase price consideration far exceeds the fair market or replacement value of the asset. Unitholders would also be unwittingly saddled with a much larger credit risk than appropriate. With Kevin Xayaraj admitting that the Manager is ready to pay higher price for vendor’s rent support arrangement, both Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon knew or ought to know that we would be in a sitting on capital losses immediately after the Manager signed on the dotted line to buy. They also knew or ought to know that we would be saddled with overpriced assets which have to be written down immediately after the rent support expires like the 23 Serangoon property and 508 Chai Chee property. Both properties are now half empty and are written down by as much as 33%. Both the independent directors did not object to these acquisitions and neither are they objecting now to all these similar acquisitions made in Dec 2016.
5. In Dec 2016, the Manager announced the purchase of Eunos Ave 7, Eunos Ave 3 and Changi South properties. All were transacted at significantly higher prices and the vendor agrees to lease back at inflated rent. Armed with the knowledge of the dire state of 508, Chai Chee Lane and 23, Serangoon North properties purchased in similar terms, Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon must know that unitholders will suffer big losses if we proceed with such acquisitions. Unfortunately, they still did not see anything wrong with such purchases and instead endorse the Manager’s decision to call for a Rights issue to finance all these properties.
So, has Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon discharged their duties accordingly? Is there a need for regulatory intervention at this point? Is it still tenable for unitholders to not say anything? They could have done a lot more for us but they did not. When things are not operating in accordance to how it was intended, it is time for MAS and SGX to intervene and review the roles of Sabana’s independent directors. And as Mdm Ho said in her 2005 speech, we have every right to question the board and management decisions and actions. It is time for us to stand up.
According to MAS, the independent directors of a REIT Manager are responsible for overseeing the management’s performance. They provide objective judgment on whether transactions proposed for the REIT are in the interests of unitholders. The purpose of independent directors in a REIT Manager is to protect the interests of unitholders of the REIT and not to protect the shareholders’ interest in the REIT Manager.
Has Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon discharged their duties accordingly? It will not be fair to them if we judge them based on the benefits of hindsight. We will judge them based on their state of mind at the relevant time.
1. We start with the recent Rights Offer Information Statement where the Manager deliberately round off their acquisition fee to read $0.2m, $0.3m and $0.2m totaling $0.7m. The actual fee paid to the Manager was $200,000, $345,000 and $230,000 totaling $775,000 which is a significant 10.7% more than what is stated by the Manager. Taking into consideration that the rent payable figures (by the vendor) were presented to the cent in the offer statement, this seemingly innocent act is the Manager’s continuous deliberate effort to suppress the actual financial impact on unitholders. Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon, the two chartered accountants, did not object to this form of presentation. They signed the Rights Offer Information Statement.
The Manager also has a very “generous” interpretation of Clause 15.2.1 of the Trust Deed where they said that they are allowed to receive the Acquisition fee units at the issue price of $0.258 per unit. They then proudly announced that they will instead elect to receive the fee at $0.432 per unit.
“When paid in the form of Units, the Manager shall be entitled to receive such number of Units as may be purchased for the relevant amount of the Acquisition Fee at the issue price of Units issued to finance or part finance the acquisition in respect of which the Acquisition Fee is payable” excerpts from Clause 15.2.1
The Acquisition was paid in cash and not units. The cash came from the Right issue. It is a lie that the Manager is allowed to issue Acquisition fee in units at $0.258. Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon did not see the need to correct the Manager.
2. Mdm Ho Chin, in her speech in 2005, highlighted the perils of a Manager buying an assets at inflated prices and the vendor agreeing to lease back the same property at inflated rents well above market rates. She said the REIT’s investment hurdles are technically met and both the Manager and the vendor can claim to be “winners” in the deal. “The losers are the unitholders” she added. Since IPO, the Manager bought a total of 3 properties all at inflated prices and the vendors all agreed to lease back these properties at inflated rents well above the market rates. Today, these properties are valued significantly lower than our purchase price. In Dec 2016, the Manager again bought 3 more properties at inflated prices and the vendors again agreed to lease back these properties at inflated rent. Mr Kevin Xayaraj openly defended the high prices paid with the rental support arrangement agreed with the vendors. Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon knew or ought to know Mdm Ho’s warning about such transactions that can seriously hurt the unitholders. They did not object. In fact, they signed on the Right Offer Information Statement to ask unitholders for monies to finance these purchases.
3. Mdm Ho also told us a Manager without a sense of fiduciary duty and moral obligation to the unitholders, may ramp up the portfolio size indiscriminately without due care or regard for quality and sustainable value of its portfolio. This agency problem is even more acute if the trust manager is paid based on a percentage of the value of the portfolio it manages, and the size of acquisitions it makes.
In Aug 2012, the Manager bought 23 Serangoon North Ave 5 at $61m. The property was 100% occupied. Knight Frank independently valued the property at $61m using Investment and Discounted Cash Flow Analysis. The Vendor agreed to lease back the premise for a term of 3 years with an option to renew a further term of 3 years. Today, this property is 55% occupied. The Vendor did not renew the lease after the 3 years. Knight Frank values it at $41m. The day the vendor did not renew their master lease, the Manager left it half empty. The Manager collected $610,000 as acquisition fee and their annual management fee increased by $305,000. This purchase was bad for unitholders.
In Aug 2013, the Manager bought 508, Chai Chee Lane at $68.2m. The property was 100% occupied. CKS Property Consultants independently valued the property at $67.75m using Capitalisation Approach and Discounted Cash Flow Analysis. The Vendor agreed to lease back at least 50% of the premise for a term of 10 years. Today, this property is 56.4% occupied. Suntec Real Estate values it at $56.8m. The day the manager signed on the dotted line to buy this property, they left it half empty. The Manager collected $595,000 as acquisition fee and their annual management fee increased by $341,000. This purchase was also bad for unitholders.
Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon knew or ought to know Mdm Ho’s warning about such purchases that ramp up the size of property portfolio without regard for the quality and sustainable value of the asset. They also knew about the increase in both the Manager’s management fee and acquisition fee as a result of such purchases. They did not object to these acquisitions.
4. In the same speech, Mdm Ho also told us that in the event the Manager buys assets at highly inflated prices in exchange for inflated rents from the vendor, the unitholders would be sitting on a capital loss right from the start, as the purchase price consideration far exceeds the fair market or replacement value of the asset. Unitholders would also be unwittingly saddled with a much larger credit risk than appropriate. With Kevin Xayaraj admitting that the Manager is ready to pay higher price for vendor’s rent support arrangement, both Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon knew or ought to know that we would be in a sitting on capital losses immediately after the Manager signed on the dotted line to buy. They also knew or ought to know that we would be saddled with overpriced assets which have to be written down immediately after the rent support expires like the 23 Serangoon property and 508 Chai Chee property. Both properties are now half empty and are written down by as much as 33%. Both the independent directors did not object to these acquisitions and neither are they objecting now to all these similar acquisitions made in Dec 2016.
5. In Dec 2016, the Manager announced the purchase of Eunos Ave 7, Eunos Ave 3 and Changi South properties. All were transacted at significantly higher prices and the vendor agrees to lease back at inflated rent. Armed with the knowledge of the dire state of 508, Chai Chee Lane and 23, Serangoon North properties purchased in similar terms, Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon must know that unitholders will suffer big losses if we proceed with such acquisitions. Unfortunately, they still did not see anything wrong with such purchases and instead endorse the Manager’s decision to call for a Rights issue to finance all these properties.
So, has Mr Steven Lim Kok Hoong and Mr Yong Kok Hoon discharged their duties accordingly? Is there a need for regulatory intervention at this point? Is it still tenable for unitholders to not say anything? They could have done a lot more for us but they did not. When things are not operating in accordance to how it was intended, it is time for MAS and SGX to intervene and review the roles of Sabana’s independent directors. And as Mdm Ho said in her 2005 speech, we have every right to question the board and management decisions and actions. It is time for us to stand up.
