SGX’s expectations of REITs at IPO stage and when negative media reports surface

When real estate investment trusts are at the IPO stage or newly listed, they are operating for the first time under the keen scrutiny of the market, including the media and regulators.

It is therefore important that we — as the frontline market regulator — clarify certain key issues and spell out our expectations of such a REIT.

Factors considered when evaluating suitability for listing

In addition to other requirements in the Listing Rules, some of the factors that Singapore Exchange Regulation (SGX RegCo) considers when evaluating the suitability for listing of a REIT are as follows:

• Sponsor’s track record including its experience in managing similar assets and the size of its assets under management;

• Quality of the IPO portfolio, which includes the location of assets, key tenants’ profile, tenancy/occupancy rates and, in the case of hospitality properties, whether they are managed by global brand-name hotel chains; and

• Financial performance of the IPO portfolio and whether the operations of the underlying portfolio assets cover the distribution per unit. Where a master lease is in place, a distinction should be made between one in which real earnings generated from the underlying portfolio assets flow through and meet or exceed the distribution to unitholders, and a situation in which there is income support from the sponsor because earnings cannot match the desired distribution.

Expectations on disclosures

Our focus when it comes to compliance with the Listing Rules has always been on substance rather than just form. The IPO portfolio of a REIT may comprise assets that are sponsor-owned or acquired by the REIT or sponsor from other parties shortly before the listing. The Listing Rules set out the circumstances in which a moratorium is applied, namely on parties that have received price or informational advantages such as the issuer’s promoters, pre-IPO investors and persons connected to the issue manager.

Consider the case in which a third-party vendor sells assets to the REIT or its sponsor for cash consideration, and these assets become part of the IPO portfolio. If the third party subsequently subscribes to the IPO at listing price, unless proven otherwise, the third party does not fall within the moratorium circumstances described under the Listing Rules. Nevertheless, we are aware that the market has signalled in at least one recent case that it would like disclosure of such an event. SGX RegCo expects to be informed of such circumstances in a timely manner in order for us to consider whether further disclosure of the transaction is necessary.

Valuation of assets at IPO

The Code of Collective Investment Scheme that the Monetary Authority of Singapore (MAS) administers requires two independent valuations for the IPO portfolio injected into a REIT by interested parties such as the sponsor. To aid SGX RegCo in enhancing valuation requirements and standards, we have existing arrangements with the Singapore Institute of Surveyors and Valuers and the Institute of Valuers and Appraisers, Singapore, such that we can consult and refer valuation matters or errant members to them for their consideration and action.

Dealing with negative media reports

SGX RegCo expects companies to treat with seriousness and to swiftly deal with negative media reports as they would a negative research, or short-seller, report. A recent situation has proven that negative media reports can have as devastating an impact on share price as a short-seller or negative research report. We have previously detailed in our Regulator’s Column on “Focus on clarity and transparency crucial for companies under siege” our expectations of actions a company should take when faced with negative research reports. Actions that may be considered include a halt in share trading pending clarification from the company.

Conclusion

A REIT that is newly listed needs to build credibility and a relationship with investors and other stakeholders. It is therefore contingent upon such a REIT, when it is assailed with negative news or research, to act swiftly and transparently to quell any doubts, including those to do with its disclosures. SGX RegCo is open to engagements with such a REIT in terms of our expectations and course of action.

While IPO prospectuses are normally comprehensive in their coverage of material matters, the depth and breadth of information in these documents mean that investors may have difficulty piecing together the relevant information that would address concerns raised by the media or research analysts. The onus is therefore on the REIT to clear any doubts and concerns and, where necessary, make timely clarification via SGXNet announcements in a holistic manner.