Role of the Manager
AIMS APAC REIT (“AA REIT” or the “Trust”) is a real estate investment trust constituted pursuant to trust deed dated 5 December 2006 (as amended, varied or supplemented from time to time) (“Trust Deed”). AA REIT is listed on the Mainboard of the Singapore Exchange Securities Trading Limited (“SGX-ST”) and is externally managed by AIMS APAC REIT Management Limited (the “Manager”), who holds a capital markets services licence issued by the Monetary Authority of Singapore (“MAS”) to conduct real estate investment management activities. The sponsor of AA REIT is AIMS Financial Group (the “Sponsor”).
The Manager has general powers of management over the assets of AA REIT. The Manager’s main responsibility is to manage the assets and liabilities of AA REIT in the best interests of the unitholders of AA REIT (“Unitholders”). This is done with a focus on generating rental income and, where appropriate, increasing the value of AA REIT’s assets over time so as to enhance the returns from the investments, and ultimately distributions and the total return to the Unitholders.
The primary role of the Manager is to set the strategic direction in AA REIT and make recommendations to HSBC Institutional Trust Services (Singapore) Limited, in its capacity as trustee of AA REIT (the “Trustee”), on any acquisition, divestment and enhancement of the assets of AA REIT in accordance with the stated investment strategy of AA REIT.
Other main functions and responsibilities of the Manager include:
- using its best endeavours to ensure that the business of AA REIT is carried out and conducted in a proper and efficient manner and to conduct all transactions with or on behalf of AA REIT at arm’s length and on normal commercial terms;
- ensuring compliance with relevant laws and regulations, including the Listing Manual issued by the SGX-ST (“Listing Manual”), the applicable provisions of the Securities and Futures Act (Chapter 289) (“SFA”), the Code on Collective Investment Schemes (including Appendix 6 thereto on property funds (“Property Funds Appendix”)), written directions, notices, codes and other guidelines that may be issued by MAS from time to time, the Trust Deed and the tax rulings issued by the Inland Revenue Authority of Singapore on the taxation of AA REIT and its Unitholders;
- preparing annual business plans for review by the Board of Directors of the Manager (each, a “Director” or collectively, “Directors” or “Board”), including forecasts on revenue, net property income, capital expenditure, explanation of major variances to previous plan(s), commentary on key issues and relevant assumptions. These plans explain the performance of AA REIT’s assets;
- managing the finances of AA REIT, including accounts preparation, capital management, coordination of the budget process, forecast modelling and corporate treasury functions;
- attending to all regular communications with the Unitholders; and
- supervising the property manager, AIMS APAC Property Management Pte. Ltd. (“Property Manager”) which performs the day-to-day property management functions (including but not limited to lease management, property management, maintenance and administration) pursuant to the property management agreements in respect of the properties located in Singapore, and the Australian Investment Manager, AA REIT Management Australia Pty Limited, in respect of properties located in Australia.
The Manager also considers sustainability issues in key impact areas and integrates these considerations as part of its management of AA REIT. The sustainability efforts of the Manager and AA REIT are set out in the Sustainability Report section of this Annual Report.
AA REIT, constituted as a trust, is externally managed by the Manager and therefore, has no personnel of its own. The Manager appoints experienced and well-qualified personnel to run the day-to-day operations of the Manager and AA REIT. All Directors and employees of the Manager are remunerated by the Manager and not by AA REIT.
The Trust Deed outlines certain circumstances under which the Manager can be removed by notice in writing given by the Trustee upon the occurrence of certain events which includes by way of a resolution duly proposed and passed by a simple majority of the Unitholders present and voting at a meeting of the Unitholders duly convened and held in accordance with the provisions of the Trust Deed.
Our corporate governance culture
We believe that strong and effective corporate governance is imperative to the long-term success of AA REIT. Accordingly, we are committed to upholding high standards of corporate governance and operate in keeping with the spirit of the Code of Corporate Governance 2018 (“CG Code”) when discharging our responsibilities as the Manager.
This corporate governance report describes the corporate governance policies and practices that were in place during the financial year ended 31 March 2020 (“FY2020”) with specific reference to the principles and provisions of the CG Code, and where applicable, the Listing Manual and the Companies Act (Chapter 50 of Singapore) (“Companies Act”). For FY2020, AA REIT has complied with the principles of the CG Code in all material aspects and, where there are variations from any of the provisions of the CG Code, explanations are provided together with reasons for the variations as well as details of how the practices adopted are consistent with the aim and philosophy of the relevant principle of the CG Code.
The Board's conduct of affairs
The company is headed by an effective Board which is collectively responsible and works with Management for the long-term success of the company.
The Board is responsible for the overall management and corporate governance of the Manager and of AA REIT. It provides leadership, sets strategic directions and ensures that the necessary financial and human resources are in place for the Manager to meet its objectives in managing the assets and liabilities of AA REIT in the best interests of the Unitholders. The Board oversees the management of AA REIT by setting standards and goals for the management team of the Manager (“Management”), monitors the achievement of the targets set and Management’s performance. It also establishes a framework of prudent and effective controls, which enables risks to be assessed and managed to safeguard the Unitholders’ interests and the assets of AA REIT.
Directors of the Manager are fiduciaries and are collectively and individually obliged to act objectively in the best interests of AA REIT and its Unitholders. Directors hold the Management accountable for performance. Where any Director has or appears to have a direct/deemed interest in a particular matter under discussion by the Board, such Director will be required to declare his interest and recuse himself from deliberation on the matter and abstain from voting on the matter. Compliance by such Director will be duly recorded in the minutes of meeting or written resolutions. To set the appropriate tone-from-the-top, the Board has put in place a Code of Conduct applicable to all employees of the Manager to set the desired organisation culture as well as to ensure proper accountability within the Manager.
The Board is also responsible in identifying key stakeholder groups and recognises that their perceptions aff ect AA REIT’s reputation.
The Board meets regularly, at least once every quarter and as warranted by particular circumstances, to discuss and review the strategies and policies and their execution, and the aff airs of AA REIT. The Board also makes key decisions and provides guidance and direction to Management at these meetings. The Manager has adopted a set of internal guidelines which sets out the limits of its financial authority. The Board’s approval is required for material transactions, including but not limited to the acquisition, redevelopment and/or divestment of investment properties, material asset enhancement initiatives, adoption of the valuation of properties, annual budget for operating/capital expenditure, distributions to Unitholders, bank borrowings and hedging strategies, release of quarterly and full year financial results as well as arrangements in relation to bank signatories. Such matters are clearly communicated to the Management in writing. Appropriate delegations of authority and approval sub-limits are also provided at Management level to facilitate operational efficiency. The Board also reviews the risks to the assets of AA REIT and acts upon recommendations from both the internal and external auditors of AA REIT.
In the discharge of its functions, the Board is supported by special board committees (“Board Committees”) which also serve to ensure that there are appropriate checks and balances. These Board Committees are the Audit, Risk and Compliance Committee (“ARCC”) and the Nominating and Remuneration Committee (“NRC”). The ARCC and the NRC are both chaired by Non-Executive Independent Directors. The Board comprises members with a breadth of expertise in real estate, accounting, finance, investments, public sector, business and management. The current Board members are as follows:
Director Board membership Audit, Risk and
Mr George Wang Chairman, Non-Executive Non-Independent Director - Member Mr Ko Kheng Hwa Non-Executive Lead Independent Director Member Chairman Mr Chong Teck Sin Non-Executive Independent Director Chairman Member Mr Peter Michael Heng Non-Executive Independent Director Member Member Mr Koh Wee Lih Executive Director and Chief Executive Officer - -
The profiles of the Directors and other relevant information are set out on pages 26 to 28 of this Annual Report.
Each of these Board Committees operates under delegated authority from the Board with clear written terms of reference. However, the Board retains overall responsibility for any decisions made by the Board Committees. Other Board Committees may be formed as dictated by business imperatives and/or to promote operational efficiency.
Information on the ARCC can be found in the section “Audit, Risk and Compliance Committee” of this Annual Report. Information on the NRC can be found in the “Board membership”, “Board performance” and “Remuneration matters” sections of this Annual Report.
The Manager is also assisted by the Business Review Committee (“BRC”), which comprises senior representatives from the Manager and the Sponsor to review the business operations and asset management of AA REIT. Where appropriate, the Manager will submit the recommendations of the BRC to the Board for consideration. The minutes of meetings of the BRC are circulated to the Board for information.
The number of Board and Board Committee meetings held during FY2020 as well as the attendance of each Director at these meetings are set out in the table below:
Board meetings ARCC meetings NRC meetings Annual General
Number of meetings held in FY2020 5 4 2 1 Board members Mr George Wang 5 n/a 2 1 Mr Ko Kheng Hwa 5 4 2 1 Mr Chong Teck Sin 5 4 2 1 Mr Peter Michael Heng 5 4 2 1 Mr Koh Wee Lih1 5 4 2 1
n/a Not applicable as Director is not a member of the ARCC.
1 Mr Koh Wee Lih, being the Chief Executive Officer, attends all the ARCC and the NRC meetings by invitation although he is not a member of either Board Committee.
The Manager’s Constitution permits Board meetings to be held by way of telephone conference or any other electronic means of communication by which all persons participating in the meeting are able contemporaneously, to hear and be heard by all other participants. If a Director is unable to attend a Board meeting or Board Committee meeting, he will still receive all the Board papers tabled for discussion at that meeting. The Director will review the Board papers and will advise the Chairman or Board Committee if he has any views and comments on the matters to be discussed so that they can be conveyed and tabled at the meeting for discussion.
The Manager issues formal letters to new Directors upon appointment, setting out the Director’s duties and obligations. Newly appointed Directors undergo an induction and orientation program upon their appointment, where they are briefed on their roles and responsibilities as Directors of the Manager, business activities of AA REIT and its strategic directions and the contribution the Directors would be expected to make, including the time commitment and any participation in Board Committees. Newly appointed Directors will also be brought on site visits to selected AA REIT properties to facilitate a more complete understanding of AA REIT’s business and operations. A Director who has no prior experience as a director of a listed company will be required to attend the necessary modules of the Listed Company Director (“LCD”) Programme conducted by the Singapore Institute of Directors in order to acquire relevant knowledge of what is expected of a listed company director. The LCD Programme focuses on comprehensive training of directors on compliance, regulatory and corporate governance matters which should allow first time directors to have a broad understanding of the roles and responsibilities of a director of a listed company under the requirements of the Companies Act, the Listing Manual and the CG Code. The Manager allocates each Director with an annual training budget and recommends relevant and/or necessary training courses and programmes for the Directors’ participation.
The Board is regularly updated either during Board Meetings or at specially convened meetings involving the relevant professional advisors, auditors and Management in areas that may aff ect AA REIT’s business such as relevant legislation and regulations, corporate governance practices, changes in risk management, financial reporting standards and other industry-related matters. Management also provides the Board with information in a timely manner through regular updates on financial results, market trends and business developments. Directors are also encouraged to participate in industry conferences, seminars and training programmes in connection with their duties.
Management provides the Board with complete, timely and adequate information on all AA REIT and/or Manager matters which require the Board’s deliberation. Proposals to the Board and/or Board Committees for decisions or mandates sought by Management are in the form of Board papers and/or Board Committee papers that contain explanatory background to the matter, facts, analysis, resources needed, conclusions and recommendations.
Ongoing reports relating to the operational and financial performance of AA REIT are provided to the Board periodically to enable them to exercise effective oversight over AA REIT. Directors are briefed by the Management during Board meetings, at specially convened sessions or via circulation of Board papers. Any material variances in respect of budgets and forecasts are also duly disclosed and explained to the Board. Additionally, reports by independent external analysts on AA REIT are forwarded to the Board from time to time to keep Directors apprised of analysts’ views on AA REIT’s performance.
The Company Secretary of the Manager (“Secretary”) works with the Chairman and the Chief Executive Officer to ensure that Board papers and the agenda are provided to each Director in advance of the Board meetings so that they can familiarise themselves with the matters prior to the Board meetings. Senior executives who can provide additional insights into matters to be discussed are also requested to attend the Board meetings so as to be at hand to address any questions that the Board may have. AA REIT’s auditors are also invited from time to time to attend such meetings.
The Board has separate, independent and unfettered access to Management and the Secretary as well as to any information that it may require at all times. The Secretary or her designated representative attends all Board meetings and Board Committee meetings to record the minutes of the meeting. The Secretary renders assistance to the Board as may be necessary and helps to ensure that applicable rules and regulations are complied with. The appointment and removal of the Secretary is a Board reserved matter.
The Directors, either individually or as a group, may at the Manager’s expense seek independent professional advice where necessary to discharge his or their duties effectively.
Board composition and guidance
The Board has appropriate level of independence and diversity of thought and background in its composition to enable it to make decisions in the best interests of the company.
The Board considers and assesses the independence of each Director in accordance with the CG Code and the Securities and Futures (Licensing and Conduct of Business) Regulations (“SF(LCB) Regulations”). The SF(LCB) Regulations requires at least half of the Board to comprise independent directors where the Unitholders of AA REIT do not appoint the directors of the Manager. In addition, Provision 2.2 of the CG Code recommends that independent directors make up a majority of the Board where the Chairman is not an independent director and Provision 2.3 of the CG Code recommends that non-executive directors should make up a majority of the Board. Mr George Wang, Chairman of the Board, is the founder and Chief Executive Officer of AIMS Financial Group and is not an Independent Director. The current composition of the Board is in keeping with prevailing guidelines and regulations, consisting of five members, of whom majority are Independent Directors. The majority of the Board members are also Non-Executive Directors with the Chief Executive Officer as the only Executive Director.
Under the CG Code, an independent director is one who is independent in conduct, character and judgement, and has no relationship with the Manager, its related corporations, its substantial shareholder or its officers that could interfere or be reasonably perceived to interfere with the exercise of a director’s independent business judgement in the best interests of AA REIT.
Regulations 13D to 13H of the SF(LCB) Regulations imposes additional independence requirements on the Manager. Under the SF(LCB) Regulations, a director is considered to be an independent director if the director:
- is independent from the management of the Manager and AA REIT;
- is independent from any business relationship with the Manager and AA REIT;
- is independent from every substantial shareholder of the Manager and every substantial unitholder of AA REIT;
- is not a substantial shareholder of the Manager or a substantial unitholder of AA REIT; and
- has not served as a director of the Manager for a continuous period of nine years or longer.
An independent director who did not satisfy any condition mentioned in the aforementioned (a) to (c) may nevertheless be treated as an independent director of the Manager if the Board is satisfied that the director is able to act in the best interests of all Unitholders of AA REIT as a whole.
The independence of each Independent Director is reviewed and assessed by the NRC, taking into consideration independence requirements set out in the CG Code as well as the SF(LCB) Regulations, annually. The NRC assesses whether each of the Independent Directors has any relationships or circumstances which could aff ect his independent status and makes its recommendations to the Board. If the Board deems a Director to be independent notwithstanding the existence of such relationships or circumstances, it shall disclose such information in full and provide its reasons accordingly.
The following paragraphs set out the outcome of the assessment carried out by the NRC on the independence of the Independent Directors for FY2020:
(a) Mr Peter Michael Heng
Mr Peter Michael Heng is a director of the Property Manager, which is a related corporation of the Manager and AIMS Financial Holdings Limited, a substantial shareholder of the Manager and a substantial unitholder of AA REIT. Mr Heng’s role in the Property Manager is to provide oversight as an independent director of the Property Manager since the Property Manager provides significant services to AA REIT. As such, his role is non-executive in nature and he is not involved in the day-to-day conduct of the business of the Property Manager. He serves on the Property Manager in his personal capacity as an independent director and not as a representative or nominee of AIMS Financial Holdings Limited. In addition, he is not in any obligation to act in accordance with the directions, instructions or wishes of AIMS Financial Holding Limited. The NRC has considered the conduct of Mr Heng in the discharge of his duties and responsibilities as a Director, and is of the view that the aforementioned relationship did not impair his ability to act with independent judgement in the discharge of his duties and responsibilities as a Director. Save for the aforementioned relationship, Mr Heng does not have any other relationships and is not faced with any of the circumstances identified in the CG Code, SF(LCB) Regulations and Listing Manual, or any other relationships which may aff ect his independent judgement. The NRC is therefore of the view that Mr Heng has exercised independent judgement in the discharge of his duties and responsibilities, and is able to act in the interests of all Unitholders of AA REIT as a whole. Based on the above, the NRC arrived at the determination that Mr Heng is an Independent Director.
(b) Mr Ko Kheng Hwa and Mr Chong Teck Sin
Mr Ko Kheng Hwa and Mr Chong Teck Sin do not have any relationships and are not faced with any of the circumstances identified in the CG Code, SFR(LCB) Regulations and Listing Manual, or any other relationships which may aff ect their independent judgement. The NRC considered whether each of them has demonstrated independence in character and judgement in the discharge of his responsibilities as a Director and concluded that each of them has acted with independent judgement. The NRC is therefore of the view that each of Mr Ko and Mr Chong has exercised independent judgement in the discharge of his duties and responsibilities. Based on the above, the NRC arrived at the determination that each of Mr Ko and Mr Chong is an Independent Director.
Pursuant to Regulation 13E(b)(i) of the SF(LCB) Regulations, the Board of the Manager, after considering the assessment and recommendation of the NRC above, is satisfied that:
- Mr Ko Kheng Hwa and Mr Chong Teck Sin (i) are independent from the management of the Manager and AA REIT during FY2020; (ii) are independent from any business relationship with the Manager and AA REIT during FY2020; (iii) are independent from every substantial shareholder of the Manager and every substantial unitholder of AA REIT during FY2020; (iv) are not a substantial shareholder of the Manager or a substantial unitholder of AA REIT during FY2020; and (v) have not served as a director of the Manager for a continuous period of nine years of longer as at the last day of FY2020; and
- Mr Peter Michael Heng (i) is independent from the management of the Manager and AA REIT during FY2020; (ii) is not a substantial shareholder of the Manager or a substantial unitholder of AA REIT during FY2020; (iii) has not served as a director of the Manager for a continuous period of nine years of longer as at the last day of FY2020, and notwithstanding that Mr Heng is not independent from business relationship with the Manager and AA REIT as well as from the substantial shareholder of the Manager and substantial unitholder of AA REIT during FY2020, the Board is satisfied that such relationship did not impair his ability to act with independent judgement in the discharge of his duties and responsibilities as a Director and Mr Heng was able to act in the best interests of all Unitholders of AA REIT as a whole, as at 31 March 2020, and concurred with the NRC’s determination that Mr Heng is an Independent Director. As at 31 March 2020, Mr Heng was able to act in the best interests of all Unitholders of AA REIT as a whole.
Mr George Wang is the founder and Chief Executive Officer of AIMS Financial Group, which owns the Manager, the Property Manager and such other Sponsor-related entities as set out on page 211 of this Annual Report and is a substantial unitholder of AA REIT. Therefore, Mr Wang is deemed to have a management relationship with a related corporation of the Manager and a business relationship with AA REIT as well as deemed to be a substantial shareholder of the Manager and a substantial unitholder of AA REIT. Mr Koh Wee Lih is currently the Executive Director and Chief Executive Officer of the Manager. As such, he has a management relationship with the Manager and is deemed to be connected to a substantial shareholder of the Manager and a substantial unitholder of AA REIT. The Board of the Manager is satisfied that, as at 31 March 2020, each of them was able to act in the best interests of all Unitholders of AA REIT as a whole. For the purposes of Regulation 13E(b)(ii) of the SF(LCB) Regulations, as at 31 March 2020, each of Mr George Wang and Mr Koh Wee Lih was able to act in the best interests of all Unitholders of AA REIT as a whole.
Non-Executive Directors actively participate in setting and developing strategies and goals for Management as well as reviewing and assessing Management’s performance. This enables Management to benefit from the external, diverse and objective perspectives of Independent and Non-Executive Directors on issues that are brought before the Board. It also enables the Board to interact and work with Management through a robust exchange of ideas and views to help shape the strategic process. The Non-Executive Directors meet informally without the presence of Management regularly on a need-to basis and the chairman of such meeting will communicate feedback of such meetings to the Chairman of the Board and/or the Board.
The size and composition of the Board is reviewed from time to time to ensure that the Board is of an appropriate size and the composition reflects a strong independent element as well as balance and diversity of thought and background to facilitate effective decision-making. During FY2020, the Board has adopted a Board Diversity Policy. The NRC will, in its process of searching for qualified persons to serve on the Board, strive for the inclusion of diverse groups and viewpoints. The final decision on selection of directors will be based on merit against the objective criteria set and after giving due regard for the benefit of diversity on the Board. During FY2020, the Board has reviewed its size and composition and is of the view that the current Board comprises of members with diverse business experiences with a breadth of expertise in real estate, accounting, finance, investments, public sector, business and management to enable it to make decisions in the best interests of AA REIT, and accordingly, the Board composition is in line with spirit of Principle 2 of the CG Code. Taking into account the nature, scope and requirements of AA REIT’s operations, the Board is satisfied that the present Board size and composition is appropriate and enables constructive debate as well as effective decision-making in the best interests of the Unitholders of AA REIT.
Chairman and Chief Executive Officer
There is a clear division of responsibilities between the leadership of the Board and Management, and no one individual has unfettered powers of decision-making.
The roles of Chairman and Chief Executive Officer are separate and the positions are held by two separate persons in order to ensure an appropriate balance of power, increased accountability and greater capacity of the Board for independent decision-making. The Chairman and the Chief Executive Officer are not related to each other.
There is clear separation of roles and responsibilities between the Chairman and the Chief Executive Officer. The Chairman is responsible for the overall leadership and management of the Board to ensure its effectiveness on all aspects of its role. This includes setting the agenda of the Board in consultation with the Chief Executive Officer and ensuring that adequate time is available for open discussion and robust debate of all agenda items, in particular strategic issues. The Chairman also ensures that the Directors receive complete, adequate, clear and timely information. In addition, the Chairman facilitates the contribution of Non-Executive Directors, encourages constructive relations between the Executive Director, Non- Executive Directors and Management, ensures effective communication with Unitholders and promotes a high standard of corporate governance. The Chairman also ensures that the Board works together with integrity and competency and that the Board engages Management in constructive debate on strategy, business operations, enterprise risk and other plans. On the other hand, the Chief Executive Officer has full executive responsibilities over the business directions and operational decisions in the day-to-day management of the Manager and AA REIT.
Provision 3.3 of the CG Code recommends appointing an independent director to be the lead independent director in certain circumstances, including where the Chairman is not independent. Mr Ko Kheng Hwa is the current Lead Independent Director in accordance with Provision 3.3 of the CG Code. Mr Ko as Lead Independent Director has the discretion to hold meetings with the Independent Directors without the presence of the Non-Independent Directors and Management as he deems appropriate or necessary and to provide feedback to the Chairman after such meetings. The Lead Independent Director is available to Unitholders if the Unitholders have concerns and for which contact through the Chairman, the Chief Executive Officer or the Head, Finance, has failed to resolve or is inappropriate.
The Board has a formal and transparent process for the appointment and re-appointment of directors, taking into account the need for progressive renewal of the Board.
The NRC administers nominations to the Board, reviews the structure, size and composition of the Board and reviews the performance and independence of the Directors. In addition, as part of regulatory requirements, prior approval from MAS is sought for any change of the Chief Executive Officer or of any appointment of director. Directors of the Manager are not subject to periodic retirement by rotation.
The NRC has written terms of reference setting out its scope and authority in performing the functions of the nominating committee, which include assisting and/or making recommendation to the Board in matters relating to:
- review of succession plans for Directors, in particular the appointment and/or replacement of the Chairman, the Chief Executive Officer and key management personnel;
- the development of a transparent process and criteria for evaluation of the performance of the Board, its Board Committees and Directors, including assessing whether Directors are able to commit enough time to discharge their responsibilities;
- conducting annual assessment of the Board and its performance and provide a report of its findings to the Board;
- review and confirmation of the independence of each Director annually;
- reviewing of training and professional development programmes for the Board and the Directors; and
- the appointment of Directors (including the alternate directors, if any).
The NRC members are appointed by the Board, and support the Board in nominating matters relating to the Manager in accordance with the NRC’s written terms of reference. The NRC comprises four Directors, the majority of whom, including NRC Chairman, are independent directors. The current members of the NRC are as follows:
Mr Ko Kheng Hwa (Lead Independent Director) NRC Chairman Mr Chong Teck Sin NRC Member Mr Peter Michael Heng NRC Member Mr George Wang NRC Member
The composition of the Board, including the selection of candidates for new appointment to the Board, is determined using the following principles:
- the Board should comprise directors with a broad range of commercial experience, including expertise in funds management, the property industry and financial management;
- the Board should comprise directors with balance and diversity of thought and background to facilitate effective decision-making; and
- at least half of the Board should comprise Independent Directors.
The Manager adopts a comprehensive and detailed process in the selection of new Directors. The selection of candidates is evaluated taking into account various factors, including the current and mid-term needs and goals of AA REIT, and hence, the Manager, as well as the relevant expertise of the candidates and their potential contributions. Candidates may be put forward or sought through contacts, recommendations or through external consultants. The Board, in consultation with the NRC, will consider AA REIT’s and the Manager’s strategic goals, business direction and needs. The NRC will conduct interviews with the candidates, and nominate the candidate deemed most suitable for appointment to the Board.
As more than half of the Board comprises independent directors, the Manager will not be voluntarily subjecting any appointment or re-appointment of directors to voting by Unitholders.
In FY2020, none of the Directors has appointed an alternate director.
The NRC considers whether each Director is able to and has been adequately carrying out his duties as a Director, taking into consideration, inter alia, the Director’s other public listed company board representations and other principal commitments. In addition, the NRC also takes into consideration, inter alia, a qualitative assessment of each Director’s contributions as well as any other relevant time commitments. Although some of the Directors have other listed company board representations and commitments, the Board has determined through a formal assessment of the Board’s performance that each individual Director has devoted sufficient time and attention to his role as a Director and to the aff airs of the Manager. Based on the attendance and level of participation at the Board and Board Committee meetings held in FY2020, the Board is of the view that such appointments do not hinder the Directors from discharging their duties adequately and diligently and therefore believes that it would not be necessary to prescribe a maximum number of listed company board representations a Director may hold. The Board does not wish to exclude from consideration suitable individuals who, despite the demands on their time, have the capacity to participate and contribute as members of the Board.
The Board undertakes a formal annual assessment of its effectiveness as a whole, and that each of its board committees and individual directors.
The NRC performs an annual assessment on the effectiveness of the Board as a whole, each of its Board Committees and individual Directors. Each Director will complete a questionnaire and the aggregated evaluation results will be reported to the NRC. Following the NRC discussion and review of the overall evaluation, the NRC will recommend to the Board key areas for improvement and follow-up action, where necessary, with a view of enhancing the effectiveness of the Board, the Board Committees and individual Directors in the discharge of its and their duties and responsibilities.
In FY2020, this evaluation was conducted internally. However, the NRC has the discretion to engage external consultants to conduct the evaluation, if it deems necessary. In respect of the Board and Board Committees assessment, the evaluation categories covered in the questionnaire include Board composition, performance and strategy, Board procedures, environmental, sustainability and governance, access to information by the Board, management of the Manager’s performance, director development, risk management and internal controls. As part of the questionnaire, the Board also considers whether the creation of value for Unitholders has been taken into account in the decision-making process. A Director’s peer evaluation was also carried out wherein each Director assesses other members of the Board. The evaluation categories include Director’s contributions, conduct and interpersonal skills, knowledge of the industry and business which AA REIT and the Manager operate in as well as strategic thinking. In FY2020, the NRC is of the view that the Directors, the Board as a whole and the Board Committees have fared well against the performance criteria, as positive ratings were received for all the attributes in the evaluation categories. Accordingly, the NRC is satisfied with the performance of the Directors, the Board and the Board Committees.
The Board takes cognisance that contributions by an individual Director may be in the form of providing objective perspectives on issues, facilitating business opportunities and strategic relationships with external parties and being accessible to Management outside of formal Board and/or Board Committee meetings.
The Board has a formal and transparent procedure for developing policies on director and executive remuneration, and for fixing the remuneration packages of individual directors and key management personnel. No director is involved in deciding his or her own remuneration.
The level and structure of remuneration of the Board and key management personnel are appropriate and proportionate to the sustained performance and value creation of the company, taking into account the strategic objectives of the company.
The company is transparent on its remuneration policies, level and mix of remuneration, the procedure for setting remuneration, and the relationships between remuneration, performance and value creation.
AA REIT, constituted as a trust, is externally managed by the Manager and accordingly, it has no personnel of its own. The Manager appoints experienced and qualified personnel to manage the day-to-day operations of the Manager and AA REIT.
The NRC has written terms of reference setting out the scope and authority in performing the functions of a remuneration committee, which include assisting the Board in matters relating to:
- reviewing and making recommendation to the Board on the Manager’s remuneration framework for the Board and key management personnel by taking into account all relevant legal and regulatory requirements including the principles and provisions of the CG Code. In doing so, the NRC shall ensure that:
- a significant and appropriate proportion of executive directors’ and key management personnel’s remuneration is structured so as to link rewards to corporate and individual performance. The performancerelated remuneration must be aligned with the interests of Unitholders and promotes the long-term success of AA REIT;
- the remuneration of non-executive directors is appropriate to the level of contribution, taking into account factors such as effort, time spent, and responsibilities; and
- the remuneration is appropriate to attract, retain and motivate the directors to provide good stewardship of AA REIT and key management personnel to successfully manage AA REIT for the long term;
- reviewing and recommending to the Board on the specific remuneration packages for each Director, Chief Executive Officer and key management personnel; and
- reviewing the Manager’s obligations arising in the event of the termination of a Director’s or key management personnel’s contract of service and ensure that such contract of service contains fair and reasonable termination clauses which are not overly generous.
No member of the NRC is involved in any decision relating to his own remuneration.
The remuneration policy adopted by the Manager is in line with AA REIT’s business strategies and enables the Manager to attract, motivate, reward and retain quality employees. Key management personnel remuneration comprises a fixed component, a variable component and other employee benefits. The fixed component comprises the base salary and compulsory employer’s contribution to the employees’ Central Provident Fund (“CPF”). The variable component is in the form of short-term and longer-term bonuses, and the Board, with the support of the NRC, reviews the eligibility of employees for such bonuses on an annual basis. The NRC also takes reference from the local market practices in setting the Manager’s employee remuneration and benefits policies. Currently, there are no unit-based incentive schemes or award schemes in place to reward employees as part of the remuneration package. The NRC has access to independent remuneration consultants as and when required. No external remuneration consultants were engaged for FY2020.
The compensation structure for the variable component is comprehensive and structured, and directly linked to corporate and individual performance, both in terms of financial, non-financial performance as well as the performance of AA REIT through the incorporation of appropriate key performance indicators (“KPIs”) that are specific, measurable, result-orientated and time-bound. A year-end review is carried out to measure actual performance against the KPIs while taking into consideration qualitative factors such as business environment, regulatory landscape and industry trends to determine a variable year-end bonus that is commensurate with the performance achieved. A portion of the variable year-end bonus is deferred for key employees to incentivise them to strive for short and longer term performance. In determining the actual quantum of the variable component of the remuneration to be paid, the NRC would take into account the extent to which the KPIs have been met. Some of the KPIs of the Manager include distribution growth of AA REIT, occupancy rate of AA REIT’s property portfolio and the unit price performance of AA REIT compared to its peers. This will allow alignment of the Manager’s employees’ interests with those of AA REIT’s Unitholders. During FY2020, the NRC has reviewed the performance of the Manager and is satisfied that all KPIs have largely been achieved.
The Chief Executive Officer and Non-Executive Non-Independent Directors are not paid directors’ fees by the Manager. Independent Directors are paid fixed basic fees for their Board and Board Committee memberships by the Manager. In determining the quantum of the fees, the Manager took into account factors such as effort, time spent and responsibilities of the Directors, and they are not overcompensated to the point that their independence may be compromised. Directors’ fees are reviewed periodically to benchmark such fees against the amounts paid by other listed real estate investment trusts. No Director decides on his own fees. Currently, there are no unit-based incentives or awards in place to reward directors as part of the remuneration package. The NRC will periodically review and reevaluate this option.
Directors’ fees are paid by the Manager. As at 31 March 2020, the directors’ fees paid in cash were as follows:
Directors' fees FY2020 FY2019 Board members Mr George Wang - - Mr Ko Kheng Hwa S$70,000 S$13,3061 Mr Chong Teck Sin S$72,5003 S$32,5402 Mr Peter Michael Heng S$65,000 S$67,5004 Mr Norman Ip Ka Cheung - S$74,5975 Mr Eugene Paul Lai Chin Look - S$62,500 Mr Koh Wee Lih - -
- Mr Ko Kheng Hwa was appointed as Non-Executive Independent Director, member of the ARCC and member of the NRC on 21 January 2019. Following the retirement of Mr Eugene Paul Lai Chin Look on 20 February 2019, Mr Ko succeeded Mr Lai as Chairman of the NRC with effect from 20 February 2019. Following the retirement of Mr Norman Ip Ka Cheung on 29 March 2019, Mr Ko succeeded Mr Ip as Non-Executive Lead Independent Director. For avoidance of doubt, with effect from 29 March 2019, Mr Ko is the Non-Executive Lead Independent Director, Chairman of the NRC and member of the ARCC of the Manager.
- Mr Chong Teck Sin was appointed as Non-Executive Independent Director, member of the ARCC and member of the NRC on 1 October 2018. Following the retirement of Mr Norman Ip Ka Cheung on 29 March 2019, Mr Chong succeeded Mr Ip as the Chairman of the ARCC. For avoidance of doubt, with effect from 29 March 2019, Mr Chong is the Non-Executive Independent Director, Chairman of the ARCC and member of the NRC of the Manager.
- Includes a S$2,500 fee for chairing the FY2019 Annual General Meeting (“AGM”) in July 2019.
- Includes a S$2,500 fee for chairing the FY2018 AGM in July 2018.
- Mr Norman Ip Ka Cheung retired as Non-Executive Lead Independent Director, Chairman of the ARCC and member of the NRC on 29 March 2019.
- Mr Eugene Paul Lai Chin Look retired as Non-Executive Independent Director, Chairman of the NRC and member of the ARCC on 20 February 2019.
The Board is cognisant of the requirements under Principle 8 and Provision 8.1 of the CG Code for listed issuers to make certain remuneration disclosures inter alia, the amounts and breakdown of the Chief Executive Officer’s remuneration, and the names, amounts and breakdown of the remuneration of at least the top five key management personnel (who are not directors or the Chief Executive Officer) in bands no wider than S$250,000 and in aggregate the total remuneration paid to these key management personnel.
However, the Board of the Manager has reviewed, assessed and decided against such disclosures for the following reasons:
- the spirit of Principle 8 is to enable shareholders of the Company to assess the remuneration levels of the Chief Executive Officer and key management personnel vis-à-vis the performance of the company as the remuneration is paid by the company and would impact the net returns to shareholders. However, in the current structure of AA REIT, the remuneration of the Directors and employees of the Manager are not paid out of the deposited property of AA REIT (listed issuer). Instead, they are remunerated directly by the Manager, which is a private company. The fees that the Manager received from AA REIT for FY2020 have been fully disclosed under the “Interested person/interested party transactions” section of the Annual Report;
- there is no misalignment between the remuneration of the Directors and the key management personnel of the Manager, and the interests of the Unitholders given that their remuneration is not linked to the gross revenue of AA REIT and is paid out of the assets of the Manager and not out of AA REIT. In addition, the remuneration policy and performance-based compensation structure of the Manager have been disclosed to facilitate a better understanding of the relationships between remuneration, performance and value creation; and
- given the confidentiality and sensitivity of remuneration matters, the Board firmly believes that the disclosure of the remuneration of the Chief Executive Officer and the top five key management personnel of the Manager (whether in exact quantum or in bands of S$250,000) would be prejudicial to the interests of AA REIT and its Unitholders. The majority of the current management team has been serving the Manager and AA REIT for a considerable period of time and it is a stable and effective team. It is important for the Manager to retain such talent for the longterm interests of AA REIT and its Unitholders and to ensure the stability and continuity of the business operations with a competent and experienced management team at the helm. In view of the competitive conditions and the specialised skill sets required in the Singapore real estate and Singapore REIT industry, such disclosure of remuneration may potentially result in staff movement. Therefore, the Board believes that not disclosing the remuneration will be in the best interests of AA REIT and the Unitholders and the interests of AA REIT and the Unitholders will not be prejudiced as a result of such non-disclosure.
The Manager believes that, notwithstanding the variation from the abovementioned Provisions, the current disclosures remain consistent with the aims and philosophy of Principle 8.
In FY2020, there were no employees of the Manager who were substantial shareholders of the Manager, substantial unitholders of AA REIT or immediate family members of a Director, the Chief Executive Officer, any substantial shareholder of the Manager or any substantial unitholder of AA REIT.
- reviewing and making recommendation to the Board on the Manager’s remuneration framework for the Board and key management personnel by taking into account all relevant legal and regulatory requirements including the principles and provisions of the CG Code. In doing so, the NRC shall ensure that:
Accountability and Audit
Risk Management and Internal Controls
The Board is responsible for the governance of risk and ensures that Management maintains a sound system of risk management and internal controls, to safeguard the interests of the company and its shareholders.
The Board recognises the importance of sound internal controls and effective risk management practices to good corporate governance. As such, the Manager has put in place a system of internal controls comprising procedures and processes to safeguard AA REIT’s assets, Unitholders’ interests and to manage risks. The Board has overall responsibility for risk governance, determines AA REIT’s levels of risk tolerance and risk policies and oversees the Manager in the design, implementation and monitoring of the risk management and internal controls systems, including financial, operational, compliance and information technology controls. The ARCC assists the Board in overseeing the risk management framework and policies for AA REIT.
The Board, in consultation with Management, has established a risk identification and management framework and has implemented risk management policies and processes covering areas of significant risks such as anti-money laundering and countering of terrorism, financial risk management, outsourcing risk, business continuity risk and technology risk management to ensure that AA REIT maintains a sound system of risk management and internal controls to safeguard Unitholders’ interests and AA REIT’s assets as well as achieving strategic objectives and value creation. The framework strengthens AA REIT’s capability to recognise and capitalise on new challenges and opportunities so as to value-add to Management’s decision-making, business planning and operational management and as a protection for investors.
The Legal and Compliance Manager has been appointed to provide oversight and co-ordination of risk management to the Manager and AA REIT. Periodic updates will be provided by the Legal and Compliance Manager to the ARCC on AA REIT’s and the Manager’s risk profile. Such updates would include an assessment of AA REIT’s key risks, current status, mitigating measures put in place, effectiveness of such mitigating measures, and any action plans to be undertaken by Management to manage such risks. The internal auditors conduct reviews of the adequacy and effectiveness of the material internal controls (including financial, operational, compliance and IT controls) and risk management systems and any material non-compliance or lapses in internal controls together with corrective measures recommended by the internal auditors are reported to and reviewed by the ARCC. The Board, through the ARCC, reviews the adequacy and effectiveness of internal controls policies and procedures to ensure that a robust risk management framework and internal control system is maintained.
Information on risk management can be found in the section “Risk Management Report” on pages 56 to 57 of this Annual Report.
The Board has received assurance from the Chief Executive Officer and Head, Finance of the Manager that: (a) the financial records have been properly maintained; (b) the financial statements of AA REIT and its wholly-owned subsidiaries (“Group”) and the Trust are drawn up so as to present fairly, in all material respects, the financial position and portfolio holdings of the Group and of the Trust as at 31 March 2020, and the total return, distributable income and movements in Unitholders’ funds of the Group and of the Trust and cash flows of the Group for the year then ended in accordance with the recommendations of Statement of Recommended Accounting Practice 7 “Reporting Framework for Unit Trusts” issued by the Institute of Singapore Chartered Accountants and the provisions of the Trust Deed. The Board has also received assurance from the Chief Executive Officer and the relevant key management personnel that the system of risk management and internal controls in place are adequate and effective to address the risks that the Manager considers relevant and material to the current business environment as at 31 March 2020.
Based on the enterprise risk management framework established and maintained by the Manager, work performed by the internal and external auditors, reviews conducted by Management and various Board Committees including the ARCC as well as the assurance from the Chief Executive Officer and relevant key management personnel, the Board is of the opinion that the system of risk management and internal controls (including financial, operational, compliance and information technology controls) was adequate and effective to address the risks (including financial, operational, compliance and information technology risks), which the Board considers relevant and material to its current business environment as at 31 March 2020. The ARCC concurs with the Board on its opinion. No material weaknesses in the systems of risk management and internal controls were identified by the Board or the ARCC in the review for FY2020.
The Board notes that the system of risk management and internal controls established provides reasonable but not absolute assurance that AA REIT will not be adversely aff ected by any event that could be reasonably foreseen as it strives to achieve its business objectives. In this regard, the Board also notes that no system can provide absolute assurance against the occurrence of material errors, poor judgement in decision-making, human error, fraud or other irregularities.
The Board has an Audit Committee which discharges its duties objectively.
Audit, Risk and Compliance Committee
The ARCC members are appointed by the Board. The ARCC is comprised entirely of Non-Executive Independent Directors. The current members of the ARCC are:
Mr Chong Teck Sin ARCC Chairman Mr Ko Kheng Hwa ARCC Member Mr Peter Michael Heng ARCC Member
Members of the ARCC are appropriately qualified to discharge their responsibilities as they possess the requisite recent and relevant accounting or related financial management expertise or experience. None of the ARCC members are former partners or directors of AA REIT’s existing auditing firm, KPMG LLP, within the previous two-year period, nor does any of the ARCC members have any financial interest in KPMG LLP. The number of ARCC meetings held and corresponding attendance for the financial year are set out on page 38 of this Annual Report.
The ARCC is governed by written terms of reference and has explicit authority to investigate any matter within its terms of reference. The ARCC has full access to and cooperation by Management, the internal and external auditors and has full discretion to invite any Director or senior executive to attend its meetings. The ARCC is reasonably resourced to enable it to discharge its functions properly. The ARCC is kept updated whenever there are changes to the financial reporting standards or issues that may have an impact on the financial statements of AA REIT.
The duties of the ARCC include:
- reviewing the significant financial reporting issues and judgements so as to ensure the integrity of the financial statements of AA REIT and any announcements relating to its financial performance;
- reviewing and reporting to the Board at least annually the adequacy and effectiveness of the Manager’s internal controls, including financial, operational, compliance and information technology controls as well as risk management systems;
- reviewing the assurance from the Chief Executive Officer and Head, Finance on the financial record and financial statements and the assurance from the key management personnel regarding the adequacy and effectiveness of the risk management and internal control systems;
- reviewing the adequacy, effectiveness, independence, scope and results of the external audit and the Manager’s internal audit functions;
- making recommendations to the Board on the proposals to the Unitholders on the appointment, re-appointment and removal of the external auditors and approving the remuneration and terms of engagement of the external auditors; and
- reviewing the policy and arrangements for concerns about possible improprieties in financial reporting or other matters to be safely raised, independently investigated and appropriately followed up on.
During FY2020, the ARCC’s activities included the following:
- The ARCC performed independent reviews of AA REIT’s quarterly and full year financial results before recommending
to the Board for approval on the release of the financial statements and SGXNET announcements relating to AA
REIT’s financial statements. In conducting its review of the audited financial statements of AA REIT prepared by
Management of the Manager, the ARCC also assessed significant financial reporting issues and judgements, including
the consistency and appropriateness of accounting policies and the quality and completeness of disclosures so as
to ensure the integrity of the financial statements of AA REIT and any SGXNET announcements relating to AA REIT’s
financial statements. The ARCC also reviewed the key audit matter as reported by the external auditors for the
financial year ended 31 March 2020, as set out below. The key audit matter for this financial year remains unchanged
from the previous financial year.
Key audit matter How the issue was addressed by the ARCC Valuation of investment properties The COVID-19 pandemic which was declared by the World Health Organisation as a “Global Pandemic” on 11 March 2020 continues to pose challenges to businesses and the economy globally, including in Singapore and Australia where AA REIT’s investment properties are located.
The external valuations are conducted by independent professional valuers who have the appropriate recognised professional qualifications and recent experience in the location and category of properties being valued. The valuers are changed at least once every two years to provide independent and fresh perspectives to the valuation process. The valuers have substantially considered all known information which included the effect of the COVID-19 pandemic situation, as at the date of valuation into their valuation assessment.
The external auditors reviewed the external valuations prepared by the independent professional valuers and noted that the valuation methodologies used which included capitalisation approach, discounted cash flow analysis and direct comparison method were consistent with generally accepted market practices. The external auditors also determined that the key assumptions used in the valuations, including the market rental growth, capitalisation rates, discount rates and terminal capitalisation rates, were generally within the range of market data available as at 31 March 2020. Where assumptions were outside the expected range, the additional factors considered by the external valuers were consistent with other corroborative evidence.
The ARCC held discussions with the external auditors and Management to assess the valuation methodologies and assumptions applied including the reasonableness of the market rental growth, capitalisation rates, discount rates and terminal capitalisation rates adopted by the valuers as well as comparable market transactions and are satisfied that the valuation method and estimates are reflective of current market conditions (e.g. rental rates and occupancy rates) as at 31 March 2020 and the valuation reports are prepared in accordance with recognised appraisal and valuation standards.
The valuation of investment properties was an area of focus for the external auditors. Please refer to pages 133 to 134 of this Annual Report for the key audit matter as reported by the external auditors in the audit report for the financial year ended 31 March 2020.
Based on the review and discussions with Management and the external auditors, the ARCC is of the view that the financial statements prepared by Management are fairly presented and conform to generally accepted accounting principles in all material aspects.
- In performing its duties, the ARCC had met the external auditors without the presence of Management once during the year and confirmed that they had full access to and received full co-operation and support from the Management.
- The ARCC reviewed and approved the audit plan and scope of the external auditors on the audit of the full year financial statements.
- The ARCC also reviewed the nature and extent of the non-audit services provided to AA REIT by the external auditors for the financial year and was satisfied that the nature and extent of such services would not prejudice the independence and objectivity of the external auditors.
The aggregate amount of fees paid and payable by the Group to the external auditors for FY2020 was approximately S$305,000, of which audit fees amounted to approximately S$227,000 and non-audit fees amounted to approximately S$78,000. The non-audit fees paid/payable to the external auditors mainly related to general tax and advisory services in relation to asset acquisition.
The ARCC has assessed the quality of work carried out by the external auditors based on factors such as time spent and the experience of the audit team assigned. The ARCC is satisfied with the adequacy, independence and objectivity of the external auditors and has recommended to the Board the re-appointment of KPMG LLP as the external auditors of AA REIT at the forthcoming AGM.
The Board financial, on behalf of AA REIT, that AA REIT has complied with the requirements of Rules 712 and 715 of the Listing Manual in respect of the suitability of the auditing firm for AA REIT.
- The ARCC reviewed and approved the internal audit plan and scope of the internal auditor’s work and its audit programme. It reviewed the findings during the year and Management’s responses thereto and it satisfied itself as to the adequacy of the internal audit function. The ARCC also met the internal auditors without the presence of Management once during the year and confirmed that they had full access to and received full co-operation and support from the Management.
- The ARCC reviewed the enterprise risk management framework and the policies and procedures put in place by Management to ensure that AA REIT’s risk management and internal control systems are adequate and effective.
- The ARCC reviewed interested person/interested party transactions to ensure compliance with the Listing Manual and the Property Funds Appendix.
Whistle Blowing Policy
The Manager adopts a zero-tolerance stance against any form of illegal activity, including corruption, bribery and other impropriety involving its employees and associates, and will take all necessary steps to eradicate such conduct if discovered. Accordingly, a Whistle Blowing Policy has been put in place to provide a channel through which employees, being a director, executive, manager or other officer or contractor of the Manager (each, a “Whistleblower”) may report in good faith and in confidence any reportable conduct, which in the view of the Whistleblower, is:
- a fraudulent misappropriation of assets;
- illegal or a breach of any applicable laws (including theft, drug sale/use, violence or threatened violence and criminal damage against property);
- unethical (either representing a breach of the Manager’s code of conduct or generally);
- other serious improper conduct or gross mismanagement;
- an unsafe work-practice; or
- any other conduct which may cause financial or non-financial loss to the Manager or be otherwise detrimental to the interests of the Manager,
and arrangements are in place for independent investigation with appropriate follow-up action. Under the Whistle Blowing Policy, all employees can notify in writing of any reportable conduct to the Whistleblower Protection Officer or the Chairman of the ARCC. The email address of the Whistleblower Protection Officer is firstname.lastname@example.org.
The ARCC reviewed the Whistle Blowing Policy and is satisfied that reportable conduct may be raised in confidence and that arrangements are in place for the independent investigation of such matters and for appropriate follow-up action.
In FY2020, the Whistleblower Protection Officer or the Chairman of the ARCC did not receive any report of reportable conduct.
The ARCC decides on the appointment, termination and remuneration of the internal audit services and has a policy of assessing the need to rotate the internal audit function on a triennial basis. In 2017, Ernst & Young Advisory Pte Ltd (“EY”) was appointed by the ARCC to provide internal audit services to review and assess the adequacy of AA REIT’s internal control systems, including financial, operational, compliance and information technology controls over a three-year internal audit plan period. The internal auditor is independent of Management and reports directly to the ARCC and administratively to the Chief Executive Officer. EY has unfettered access to all the Manager’s documents, records, properties and personnel, including unrestricted access to the ARCC. To ensure that the internal auditor’s activities are performed competently, the internal auditor is guided by the Standards for Professional Practice of Internal Auditing set by The Institute of Internal Auditors and recruits and employs suitably qualified professional staff with the requisite skill sets and experience.
EY’s role as the internal auditor is to assist the ARCC to reasonably ensure that Management maintains a sound system of internal controls by regular monitoring of the effectiveness of key controls and procedures. EY’s scope of work includes risk assessments and compliance audits in order to check that internal controls are aligned to business objectives and in place to address related risks.
In FY2020, EY conducted audit reviews on the internal audit plan approved by the ARCC covering financial, operational, compliance and information technology controls using a risk-based auditing approach. Upon completion of each audit assignment, EY reported their audit findings and recommendations to Management who responded on the actions to be taken. EY also submitted internal audit reports, at least twice yearly, to the ARCC on the audit findings and follow-up actions taken by Management based on the recommendations. Through the ARCC’s review of the internal audit reports, the ARCC is satisfied as to the independence, adequacy and effectiveness of the internal audit function with respect to FY2020 and the ARCC is of the view that the internal auditor is adequately resourced to perform its functions.
Unitholders' rights and engagement
The company treats all shareholders fairly and equitably in order to enable them to exercise shareholders’ rights and have the opportunity to communicate their views on matters affecting the company. The company gives shareholders a balanced and understandable assessment of its performance, position and prospects.
The company communicates regularly with its shareholders and facilitates the participation of shareholders during general meetings and other dialogues to allow shareholders to communicate their views on various matters affecting the company.
The Manager adopts the principle that all Unitholders should be treated fairly and equitably. It facilitates the exercise of ownership rights by all Unitholders through its commitment to ensuring continuous, clear and timely communication with Unitholders to promote a better understanding of AA REIT’s business, and to promote a system of effective disclosure to key stakeholders.
The Listing Manual requires a listed entity to disclose to the market matters that could or might reasonably be expected to have a material effect on the price or trade of the entity’s securities. The Manager upholds a strong culture of continuous disclosure and transparent communication with Unitholders, various stakeholders and the investing community. The Manager’s disclosure policy requires timely and full disclosure of all material information relating to AA REIT by way of public releases or announcements through the SGX-ST via SGXNET and on its corporate website at www.aimsapacreit.com on an immediate basis, where required by the Listing Manual. Where immediate disclosure is not practicable or not so required by the Listing Manual, announcements are made as soon as possible to ensure that Unitholders, stakeholders and the general market have parity of access to the information.
Conduct of general meetings
An AGM is held after the close of each financial year. The Notice of AGM setting out all items of business to be transacted at the AGM is published on SGXNET and AA REIT’s website. All Unitholders are entitled to receive a printed version of the Annual Report. Unitholders are sent a Notice of AGM and a proxy form with instructions on the appointment of proxies. As and when an extraordinary general meeting is to be held, Unitholders will receive a copy of the circular, containing details of the matters to be proposed and a proxy form with instructions on the appointment of proxies, for Unitholders’ consideration and approval. Notices of all general meetings are issued via SGXNET. Prior to voting at an AGM or any other general meeting, voting procedures will be made known to the Unitholders to facilitate them in exercising their votes. An independent scrutineer is also appointed for the purpose of vote-taking and validation of votes at general meetings.
The Manager strives to give Unitholders balanced and understandable assessment of AA REIT’s performance, position and prospects. Unitholders are given the opportunity to raise questions and clarify any issues they may have relating to the resolutions to be passed at the AGM. During the AGM for FY2019, all Directors (including the chairpersons of the respective Board Committees), Chairman of the Board, Chief Executive Officer, senior management of the Manager were in attendance and the external auditors of AA REIT were also present to address Unitholders’ queries including any query on the conduct of audit and the preparation and content of the auditor’s report. Directors’ attendance at general meetings held during the financial year is disclosed on page 38 of this Annual Report. Any Unitholder who is unable to attend a general meeting is allowed to appoint up to two proxies to attend and vote on the Unitholder’s behalf. A Unitholder who is a relevant intermediary (including but not limited to nominee companies, custodian banks or CPF agent banks), is entitled to appoint more than one proxy to vote on its behalf at the meeting through proxy forms sent in advance, provided that each proxy must be appointed to exercise the rights attached to a diff erent Unit or Units held by such Unitholder, where the number of Units shall be specified. The Manager has also taken measures to cater for the multiple proxy regime, in anticipation of attendance by beneficial Unitholders, such as those holding Units through the CPF Investment Scheme, at general meetings.
Provision 11.4 of the Code requires the issuer’s constitution to allow for absentia voting at general meetings. However, voting in absentia by mail, email or fax has not been implemented until concerns relating to issues of authentication of Unitholders’ identity and other related security issues in this regard have been satisfactorily resolved. The Manager is of the view that its practice is consistent with Principle 11 as Unitholders have adequate opportunities to communicate their views on matters aff ecting AA REIT even when they are not attendance at general meetings. For example, Unitholders may appoint proxies to attend, speak and vote, on their behalf, at general meetings.
A separate resolution is proposed for each substantially separate issue at general meetings to safeguard Unitholders’ interests and rights. The Manager conducts poll voting for the Unitholders and/or proxies present at the general meeting for the resolutions proposed at the general meeting to ensure transparency in the voting process and to better reflect the interests of Unitholders. The total number of votes for or against such resolutions and the respective percentages are displayed at the general meeting and announced via SGXNET following the general meeting. Minutes of the general meeting recording the substantial and relevant comments made and questions raised by Unitholders, and responses from the Board and Management, are made available on AA REIT’s website.
Provision 11.6 of the CG Code encourages companies to have a policy on payment of dividends. The Manager’s policy is to distribute at least 90.0% of AA REIT’s taxable income, comprising substantially its income from the letting of its properties, after deduction of allowable expenses. The actual level of distribution will be determined at the Manager’s discretion taking into account the needs of AA REIT for capital expenditure, working capital requirement and the liquidity position of AA REIT. Since AA REIT’s listing in 2007, AA REIT has distributed 100.0% of its taxable income to Unitholders.
The Manager has a dedicated investor relations department that regularly interacts with stakeholders to engage and facilitate communications. The investor relations function is headed by the Head, Investment & Investor Relations. In order to provide regular, effective and fair communication of accurate and timely information to the investment community, the Manager conducts regular briefings and conference calls for analysts, institutional investors and media representatives which generally coincide with the release of AA REIT’s results or disclosure of material transactions. During these briefings, the Manager reviews AA REIT’s most recent performance or explains the transaction (where applicable), and solicits views of Unitholders and to address their concerns. Unitholders’ views are also solicited during general meetings as the Unitholders are given opportunity to raise questions and clarify on any issues.
Investors may also subscribe to email alerts on AA REIT’s corporate website for all announcements and SGXNET filings issued by AA REIT. They are also able to direct their enquiries to the Investor Relations team of the Manager and receive responses in a timely manner. Please refer to the “Investor Relations” section of this Annual Report for more information of the Manager’s investor relations activities.
Managing Stakeholders Relationships
The Board adopts an inclusive approach by considering and balancing the needs and interests of material stakeholders, as part of its overall responsibility to ensure that the best interests of the company are served.
The Manager believes that engaging stakeholders is critical for the long-term performance of AA REIT. The Manager has identified its key stakeholder groups based on importance, representation, responsibility, dependency and proximity to AA REIT’s business. Such stakeholders include investors, analysts, media, tenants, banks, staff as well as the local community. The Manager adopts an inclusive approach by considering and balancing the needs and interests of key stakeholders, including sustainability issues, as part of the overall strategy to ensure that the best interests of stakeholders and the long-term business value of AA REIT are served. The Manager is committed to sustainability and incorporates the key principles of environmental and social responsibility, and corporate governance in AA REIT’s business strategies and operations. The Manager has arrangements in place to identify and engage with key stakeholder groups from time to time to gather feedback on the sustainability issues most important to them.
Details of AA REIT’s sustainability strategy, including its stakeholder engagement process and initiatives, can be found in the “Sustainability Report” section of this Annual Report.
The Manager maintains AA REIT’s corporate website at www.aimsapacreit.com to facilitate communication and engagement with stakeholders and ensure that stakeholders have access to timely information on AA REIT.
Dealings in AA REIT Units
In line with Rule 1207(19) of the Listing Manual on Dealings in Securities, a quarterly memorandum is issued to the Directors, officers and employees of the Manager on restrictions on dealings in the Units in AA REIT:
- during the period one month before the public announcement of the Group’s annual results and two weeks before the public announcement of the Group’s quarterly results, and ending on the date of announcement of the relevant results; and
- at any time while in possession of unpublished material or price sensitive information.
The Directors and employees of the Manager are also advised not to deal in the Units on short-term considerations.
Each Director is required to give notice to the Manager of his acquisition of Units or changes in the number of Units which he holds or in which he has an interest within two business days after such acquisition or the occurrence of the event giving rise to changes in the number of Units which he holds or in which he has an interest.
In addition, the Manager is required to announce via SGXNET the particulars of its holdings in the Units and any changes thereto within one business day after the date on which it acquires or disposes of any Units, as the case may be. The Manager has also undertaken that it will not deal in the Units one month before the public announcement of the Group’s annual results and two weeks before the public announcement of the Group’s quarterly results and ending on the date of announcement of the relevant results.
Dealings with conflicts of interest
The following main principles and procedures have been established to address potential conflicts of interest which may arise in managing AA REIT:
- the Manager is dedicated to managing AA REIT and will not directly or indirectly manage other real estate investment trusts;
- all executive officers of the Manager are employed by the Manager;
- all resolutions in writing of the Directors of the Manager in relation to matters concerning AA REIT must be approved by a majority of the Directors including at least one Independent Director;
- Independent Directors constitute majority of the Board;
- in respect of matters in which the Sponsor and/or its subsidiaries have an interest, direct or indirect, any Directors appointed by the Sponsor and representing its interests shall abstain from voting on such matters. In such matters, the quorum must comprise a majority of the Independent Directors of the Manager and shall exclude such Directors of the Sponsor and/or its subsidiaries; and
- in respect of matters in which a Director or his associate has an interest, direct or indirect, such interested Director is required to disclose his interest and will abstain from voting on resolutions approving the said matter.
Interested party transactions
The Manager has established an internal control system to ensure that all transactions with Interested Parties (as defined in the Property Funds Appendix) (“Interested Party Transactions”) are undertaken on an arm’s length basis and on normal commercial terms and will not be prejudicial to the interests of AA REIT and the Unitholders. As a general rule, the Manager must demonstrate to the ARCC that such transactions satisfy the foregoing criteria which may include obtaining (where practicable) quotations from parties unrelated to the Manager, or obtaining one or more valuations from independent professional valuers (in accordance with the Property Funds Appendix).
The Manager maintains a register to record all Interested Party Transactions which are entered into by AA REIT and the basis, including any quotations from unrelated parties and independent valuations obtained to support such basis, on which they are entered into. Further, the following procedures will be adhered to:
- transactions (either individually or as part of a series or if aggregated with other transactions involving the same interested party during the same financial year) equal to or exceeding S$100,000 in value but below 3.0% of the Group’s net tangible assets will be subject to review by the ARCC at regular intervals;
- transactions (either individually or as part of a series or if aggregated with other transactions involving the same interested party during the same financial year) equal to or exceeding 3.0% but below 5.0% of the Group’s net tangible assets will be subject to the review and prior approval of the ARCC;
- transactions (either individually or as part of a series or if aggregated with other transactions involving the same interested party during the same financial year) equal to or exceeding 5.0% of the Group’s net tangible assets will be reviewed and approved prior to such transactions being entered into, on the basis described in the preceding paragraph by the ARCC which may, as it deems fit, request advice on the transaction from independent sources or advisors, including the obtaining of valuations from independent professional valuers. Furthermore, under the Listing Manual and the Property Funds Appendix, such transactions would have to be approved by the Unitholders at a meeting of Unitholders; and
- the ARCC’s approval shall only be given if the transactions are on arm’s length and on normal commercial terms and consistent with similar types of transactions with third parties which are not Interested Parties.
Where matters concerning AA REIT relate to transactions entered into or to be entered into by the Trustee for and on behalf of AA REIT with an Interested Party (which would include relevant associates thereof), the Trustee is required to ensure that such transactions are conducted on normal commercial terms, are not prejudicial to the interests of AA REIT and the Unitholders and are in accordance with all applicable requirements of the Property Funds Appendix and/or the Listing Manual relating to the transaction in question. Furthermore, the Trustee has the ultimate discretion under the Trust Deed to decide whether or not to enter into a transaction involving an Interested Party. If the Trustee is to sign any contract with an Interested Party, the Trustee will review the contract to ensure that it complies with the requirements relating to Interested Party Transactions in the Property Funds Appendix (as may be amended from time to time) and the provisions of the Listing Manual relating to interested person transactions (as may be amended from time to time) as well as other guidelines as may from time to time be prescribed by the MAS and the SGX-ST to apply to real estate investment trusts
AA REIT will, in compliance with Rule 905 of the Listing Manual, announce any interested person transactions if such transaction, by itself or when aggregated with other interested person transactions entered into with the same interested person during the same financial year, is 3.0% or more of the Group’s latest audited net tangible assets. Details of all interested person/interested party transactions (equal to or exceeding S$100,000 each in value) entered into by AA REIT during the financial year are disclosed on page 211 of this Annual Report.
Fees payable to the Manager
Pursuant to the Trust Deed, the Manager is entitled to receive fees payable out of the deposited property of AA REIT.
The methodology for the computation of the fees is disclosed on page 150 under the “Notes to the Financial Statements” section of this Annual Report.
The management fees are earned by the Manager for the management of AA REIT’s portfolio of properties. The various fees earned by the Manager are further elaborated below:
The Manager is responsible for the ongoing management of the assets and liabilities of AA REIT for the benefit of the Unitholders. Accordingly, the Manager should be fairly compensated for its efforts in the overall management of AA REIT and it should enable the Manager to cover its operational, administrative and compliance overheads incurred in the management of the portfolio. The base management fee is calculated as a percentage of the Deposited Property (as defined in the Trust Deed) of AA REIT as it provides an appropriate metric to determine the resources required for managing the assets. As AA REIT grows its portfolio size, the complexity of management increases and the Manager is expected to expend greater effort in fulfilling its responsibilities.
The performance fee is only payable when the Manager has achieved certain levels of growth in the Distribution per Unit (“DPU”) in the current financial year relative to the previous financial year. As the year-on-year growth of the DPU is in line with the interests of the Unitholders, the performance fee will spur the Manager to seek growth opportunities or embark on cost savings initiatives to improve the performance of AA REIT. The performance fee is calculated as a percentage of the Deposited Property (as defined in the Trust Deed) of AA REIT as it provides an appropriate metric to determine the resources required for such efforts taken to achieve the growth in DPU and aligns the interests of the Manager with Unitholders. The Manager is motivated and driven to achieve DPU growth by ensuring the long-term sustainability of the assets through proactive asset management strategies and asset enhancement initiatives. The performance fee is paid annually, in compliance with the Property Funds Appendix.
Acquisition fee and Divestment fee
These fees are essential to incentivise the Manager to continue to deliver long-term sustainable income to Unitholders, source for growth opportunities and yield-accretive acquisitions for AA REIT and to efficiently recycle capital through the divestment of under-performing or non-core assets. The Manager would have to carry out additional work as well as incur additional resources and time to source for various opportunities before a potential acquisition or divestment opportunity materialises into an eventuality. As such, the Manager should be fairly compensated for the efforts expended, costs incurred as well as time taken for such transactions.
Risk management report
Enterprise Risk Management ("ERM") framework
Risk management is a fundamental part of AA REIT’s business strategy to ensure Unitholders’ interests are protected.
The Board of Directors is responsible for the governance of risk. It is assisted by the ARCC to provide an overview of risk management at the Board level. The ARCC meets on a quarterly basis or more frequently, if required and these meetings are attended by the Chief Executive Officer as well as other key management staff . The ARCC is assisted by the Legal and Compliance Manager and a team of risk leaders on risk management issues.
The Management has adopted an ERM framework to create a robust and rigorous corporate governance structure. This approach systematically identifies major risks that confront AA REIT, estimates the significance of those risks in business processes and addresses the risks in a consistent and structured manner. Key risks, mitigating measures and Management actions are continually identified, reviewed and monitored by Management as part of the ERM framework.
A robust internal control system and an effective independent audit review process make up the ERM framework, which addresses financial, operational, compliance and information technology risks to safeguard Unitholders’ interests and AA REIT’s assets and also to manage risks. The Manager is responsible for the design and implementation of effective internal controls. The internal auditor carries out independent reviews to test the design and implementation to provide reasonable assurance to the ARCC on the adequacy and effectiveness of the internal control system.
Key risks in FY2020
AA REIT reviews and updates risk management systems and methodology yearly so as to manage risks in accordance with its current business conditions, preserve capital and enhance Unitholders’ value. The key risks that were identified in FY2020 include but are not limited to the following:
All investment proposals (such as redevelopment or asset enhancement initiatives of existing properties or acquisitions of new properties/investments) are subject to rigorous and disciplined assessment by Management. In addition, the investment proposals are further robustly reviewed and discussed in the BRC. The BRC will then consider the appropriateness of the potential transaction before making a recommendation to the Board. The role of the BRC is set out on page 38 of this Annual Report. Risk assessment is an important aspect of the evaluation process. Each investment proposal submitted to the Board for approval is accompanied by an assessment of risk factors and risk mitigation strategies.
AA REIT faces real estate market risks such as the volatility in rental rates and occupancy rates due to strong competition and soft demand for industrial premises which have an adverse effect on property yields. In order to mitigate such risks, the Manager has established a diversified tenant base, reduced its tenant concentration risk and has in place proactive tenant management strategies. Regular feedback is also obtained from tenants to foster close landlord-tenant relationships. Where the opportunity arises, the Manager also embarks on asset enhancement activities to improve the value, performance and competitiveness of the properties in AA REIT’s portfolio.
Regulatory and compliance risk
The Manager, being a capital markets services licence holder, is required to comply with the applicable laws and regulations governing AA REIT and the Manager, including the SFA, Listing Manual, Property Funds Appendix, Trust Deed, conditions of the capital markets services licence for real estate investment trust management issued by MAS as well as tax rulings issued by Inland Revenue of Authority of Singapore on taxation of AA REIT and its Unitholders. Any changes in these regulations may aff ect AA REIT’s operations and results.
The employees of the Manager keep abreast of changes in legislation and regulations through training and attending talks and briefings. Various internal procedures have been put in place to facilitate staff awareness and ensure compliance to the applicable laws and regulations.
Tenant credit evaluations are performed by the Manager at the investment stage prior to the acquisition of an asset. For new leases, credit risk assessments are performed by the Property Manager prior to signing lease agreements. The finance and asset management teams monitor the amounts owed by tenants on an ongoing basis. Credit risk is further mitigated by security deposits either in the form of cash or bankers’ guarantees issued by financial institutions with sound credit ratings.
Cash and fixed deposits are placed with financial institutions which are regulated by MAS. Transactions involving derivative financial instruments are allowed only with counterparties who have sound credit ratings.
The Manager maintains an efficient use of cash and debt facilities in order to balance the costs of borrowing and ensuring sufficient availability of credit facilities to meet its financial obligations, working capital and committed capital expenditure requirements. In addition, the Manager also monitors AA REIT’s cash flow position and requirements to meet any operational needs and short-term financing obligation as well as compliance with the Property Funds Appendix in relation to limits on total borrowings. AA REIT’s ability to raise funds from both banks and capital markets has enabled AA REIT to diversify its sources of funding to avoid over-reliance on any single source of funding. As at 31 March 2020, the current interest-bearing borrowings relate to term loans of S$100.0 million and AUD65.0 million which are due to mature in August 2020 and November 2020 respectively. In May 2020, the Group received commitments from its lenders to refinance the facilities with a new four-year term loan facility of S$100.0 million and a new three-year term loan facility of AUD32.5 million. In addition, the Group and the Trust have total undrawn committed facilities of S$181.1 million to fulfil their liabilities as and when they fall due.
Foreign exchange risk
AA REIT is exposed to fluctuation of the Australian dollar against the Singapore dollar. The Manager’s strategy is to achieve a natural hedge through the use of Australian dollar denominated borrowings to fund the Group’s interest in the Australian investments, thereby mitigating the foreign exchange risk. As at 31 March 2020, the foreign currency borrowings hedge approximately 68% of the book value of AA REIT’s investments in Australia. The level of foreign currency denominated borrowings also effectively hedges approximately half of the foreign currency income from Australia.
Interest rate risk
The Manager adopts a proactive interest rate management approach in managing the risk associated with adverse movement in interest rates on interest bearing borrowings which carry floating interest rates. The Manager also monitors interest rate risk regularly to limit AA REIT’s net interest exposure to adverse movements in interest rate. As part of risk management, the Manager enters into hedging transactions to partially mitigate the risk of such interest rate fluctuations through the use of interest rate swaps and/or fixed rate borrowings. As at 31 March 2020, 81.1% of AA REIT’s total debt was on fixed rates taking into account interest rate swaps entered into and fixed rates medium term notes issued.
All operations are aligned to AA REIT’s focus on generating rental income to deliver secure and stable distributions and provide long-term capital growth to Unitholders. Measures include prompt lease renewals to reduce vacancies, prudent control of property expenses and an annual maintenance programme to maintain and enhance AA REIT’s properties. The Manager has also established operating and reporting policies and procedures to manage day-to-day operational activities, which are reviewed and updated periodically to ensure relevance and effectiveness as well as compliance with latest legislations and regulations.
A Business Continuity Plan has been approved by the Board, to minimise the potential impact from disruptions to critical businesses in the event of emergencies such as terrorism, haze and pandemics. The Manager practises risk transfer by procuring relevant insurance policies to mitigate certain financial losses.
Project management risk
The construction and redevelopment of investment properties usually take two to three years to complete, depending on the project size and complexity of the development. There is potential risk that such redevelopment and construction projects may not be completed within the anticipated time frame and budget. A Project Control Group is formed for each construction or redevelopment project. This group meets regularly to monitor and ensure that the project is progressing within the timeline and budget.