Keppel Infrastructure Trust's proposal to align fee structure

WE REFER to the Mark to Market column "Keppel Infrastructure Trust should get its DPU on strong upward trajectory before revising fees" (The Business Times, Apr 4 2022). The article argues that the proposal might have the investors of Keppel Infrastructure Trust (KIT) "feeling that the new fee structure is less about the trustee-manager aligning its interests with those of unitholders than it is about the trustee-manager simply lining its own pockets".

We would like to emphasise that the proposed fee structure aligns with unitholders' interests. In fact, the performance fees are only payable with distribution per unit (DPU) growth. It is a structure that is well-adopted by newly listed Singapore real estate investment trusts (S-Reits).

As pointed out in the article, the independent financial adviser (IFA) found that the revised fees "are not all that different from other locally-listed business trusts and real estate investment trusts (Reits)". By tagging fees to distributable income and DPU increases, the trustee-manager would be better aligned to its objective of long-term value creation and serving the interests of unitholders.

We would like to highlight that KIT declared total DPU of 3.78 Singapore cents for FY 2021, which is a 1.6 per cent year-on-year growth. The trustee-manager is cognisant of the importance of delivering sustainable DPU growth and has identified key sectors to deliver growth and maintain the trajectory.

We believe that amending the proposed fees would better set the stage and support the increased level of resources needed to manage and operate KIT's diverse portfolio.

The proposed base fee, being aligned to distributable income, reflects the level of resources required to manage and operate KIT's diverse portfolio in an increasingly complex business environment. On the contrary, the existing fee structure has no nexus to portfolio size, which has grown by 6 times from S$760 million comprising 3 assets in Singapore as at Dec 31, 2010, to a well-diversified global portfolio of some S$4.6 billion comprising 9 assets across 5 countries as at end-February 2022.

At the time of listing, the trustee-manager had only 7 employees. In contrast, KIFM's staff base has grown more than 3-fold to 22 employees as at Dec 31, 2021. It is not sustainable to support the growth of KIT based on the existing fee structure.

Most importantly, the existing fee structure impedes resource deployment, hampering growth and scalability. The proposed fee structure supports growth, and it is an important step to take to create a bigger and better platform for continued DPU growth in the long term through improving cash flow resiliency. To stay competitive and drive long-term DPU growth, KIT needs to continue retaining and attracting the best talent. We will broaden our global reach and expand our talent pool in investment origination, deal execution and portfolio management to scale up and accelerate growth plans. We are establishing our Australian office this month, and are looking to set up similar offices in London and the Middle East.

The trustee-manager has unveiled key target sectors for growth, as detailed in a strategic review that was concluded in January 2022. The trustee-manager also announced the strategic review of KIT's water-treatment chemicals supplier Ixom Holdings, which was acquired in 2019. The strategic review of Ixom will allow KIT to potentially unlock value from the business and share proceeds with unitholders, as well as reinvest into sectors supported by favourable megatrends of decarbonisation and digitalisation.

The proposed base fee will be implemented progressively over the financial year ending Dec 31, 2022, to reflect the progressive building-up of KIT's portfolio of assets by the trustee-manager, and to also allow more time to build up the trustee-manager's resources.

We would like to take this opportunity to reassure all unitholders that the new structure proposed has been through careful deliberation, considering the long-term interests of KIT and that of our unitholders. The trustee-manager has conducted an extensive exercise, including peer benchmarking with global listed infrastructure funds and Singapore business trusts and S-Reits.

The competitive fee structure will not only strengthen the trustee-manager's ability to drive KIT's long-term growth, but also enhance the trustee-manager alignment with the interests of our unitholders.

Jopy Chiang CEO, Keppel Infrastructure Fund Management (as Trustee-Manager of Keppel Infrastructure Trust)