Alpha REIT: Kempen Real Estate Update: What does engaged shareholdership mean to you?
We are asked this question often. Before answering we would like to explain how we have embedded active ownership and engagement in our investment process and share a few recent examples. Besides management and balance sheet, ESG is one of the three variables we score to determine the warranted valuation of a company. If our opinion on ESG at a company improves, our warranted valuation of that company increases. Our research shows that it is not the leaders in ESG which have generated the best shareholder returns, but actually those companies that improved the most. Therefore we focus our efforts on those companies where we can unlock most value through engagement.
In June, Finnish company Kojamo recently listed on the Finnish stock exchange. Kojamo owns a portfolio of approximately 36,000 rental apartments in Finland of which 66 percent in the Helsinki area. Based on our proprietary analysis the portfolio quality screened attractive versus the last appraisal value. Now on to ESG and in particular the ‘G’ in this case. The owners of Kojamo include two Finnish pension funds and six labor unions who would retain five out of seven board seats at IPO. In our scoring methodology this would equal a “1” score which is the worst on our 1 through 5 scoring framework. Combined with our proprietary portfolio valuation the IPO price of Kojamo did not screen attractive enough to participate. However, if they publicly communicate a route to majority board independence we would score it a “3” and the IPO price would screen attractive. We communicated to Kojamo management and the lead banks involved that we would like to participate, but only if they improved board independence. Apparently, there were only two other potential investors in the IPO giving pushback on the board structure whilst both had already put in an order. In these circumstances our track record of providing constructive feedback and being an engaged long-term investor definitely helped. The Kojamo board and all banks and lawyers involved came together during the weekend and drafted a statement in which they guided upcoming improvements during the next AGM. We contacted the chairman to provide additional colour and were very pleased with his response and the commitments he was willing to give during our call. Subsequently, we put in an order for the Kojamo IPO. To prepare the next Shareholders’ Meeting in 2019, we will sit down with the board during the fourth quarter to follow up and ensure they stay on course towards a majority independent board.
Why can ESG data vendors not take over this role? We typically meet the companies we invest in twice a year and have known the majority of them for many years. We want to partner with them and provide constructive feedback to drive value for all stakeholders. Like any other research providers, ESG data providers are helpful in our initial assessment of a company, but they do not drive our investment decisions. As engaged long-term shareholder we like to have a constructive dialogue. ESG data providers typically use a ‘one size fits all’ approach which doesn’t take into account the specific context of a company. There has been one example this voting season where a proxy advisor recommended to vote against the approval of the dividend of Deutsche Wohnen because they calculated the payout ratio was too low. What surprised us was that they calculated the payout ratio as a percentage of reported earnings per share including portfolio revaluations et cetera as opposed to a percentage of recurring income. We reached out to the advisor to discuss, but they argued that this was their standard calculation method used across sectors and they did not make exceptions for real estate companies. It was even more staggering to see 13.3% of votes following their recommendation and voting against approval of the dividend. It is difficult to gain credibility with a company’s board when an ‘against’ vote is based on such reasoning?
“We have our own Kempen Voting Policy which we share with boards to offer them guidance on our future voting behavior. ”
We have our own Kempen Voting Policy which we share with boards to offer them guidance on our future voting behavior. This has proven very effective and constructive in our dialogues. However certain matters remain subjective. For their Shareholders’ meeting in May, Unibail-Rodamco tabled new criteria for the incentive plan for executive management arguing that the Westfield acquisition was a valid trigger event for a review of the executives remuneration. The new policy included significant increases in base salaries, bonus caps and long term incentive plan (LTIP) caps in the event of a completion of the acquisition of Westfield. As Unibail-Rodamco was adding geographies like the USA and the UK, they felt a need to reflect change in operational exposure in their peer group. We held multiple discussions with the chairman questioning (amongst others) the immediate incentive given to management to close the deal and the rational to change the peer group against which Unibail-Rodamco’s performance is benchmarked. We want to be able to evaluate the accretion of the Westfield acquisition first, and only then address the LTIP. By changing the peer group now this becomes impossible. We wanted Unibail-Rodamco to determine before effectuating the merger on what criteria management will be tested in three years’ time in order to assess if acquiring Westfield was the right strategic decision. If after year three the Westfield deal proves accretive, we will agree to change the peer group to include US peers to reflect operational exposure. Proxy advisors supported the proposed changes. However, we felt uncomfortable giving our support to the management for these changes and voted against.
Coming back to the initial question, we strongly believe we can make a difference with active engagement and unlock value, but only if we play by the rules. One can be very critical, as long as feedback is constructive. A long-term view is crucial - the continuity of a company can be put at risk if a board is overhauled overnight. Companies shouldn’t be managed from quarter to quarter but for the long run. Agreeing on a roadmap for improvements with the company and supporting them on their journey seems the way forward to us.
We are very curious to hear your feedback (as long as it is constructive ;) ).
As at 30 June 2018, the Kempen Global Property Strategy held shares in Deutsche Wohnen and Unibail-Rodamco whilst the Kempen European Property Strategy held shares in Deutsche Wohnen, Unibail-Rodamco and Kojamo. The views expressed in this document may be subject to change at any given time, without prior notice. Kempen Capital Management N.V. (KCM) has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments.
The information in this document is solely for your information. This article does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.
The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of KCM.