Is it Time for Unitholders of Cambridge Industrial Trust to Cheer?

Cambridge Industrial Trust (SGX: J91U), or CIT, recently announced that it had decided to reduce the trust’s performance fee calculation in favour of unitholders. The change was made after feedback from unitholders over the performance fees for the first half of 2013 (1H2013).

Like all real estate investment trusts (REITs), the manager of CIT is entitled to be paid performance fees for its active management of the REIT’s assets. The calculation of the performance fees varies between different REITs but for CIT, it is based upon the extent of outperformance of CIT’s total return (capital gains plus gains from reinvested distributions) in relation to a benchmark index, which in turn is based on the total return of nine of the largest REITs listed in Singapore.

As of 16 April 2014, the benchmark index is made up of Ascendas Real Estate Investment Trust (SGX: A17U), CapitaCommercial Trust (SGX: C61U), CapitaMall Trust (SGX: C38U), CDL Hospitality Trusts (SGX: J85), Keppel REIT, Mapletree Commercial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust and Suntec Real Estate Investment Trust.


Market Capitalisation (16 April 2014)

Ascendas Real Estate Investment Trust

S$5.57 billion

CapitaCommercial Trust

S$4.71 billion

CapitaMall Trust

S$6.89 billion

CDL Hospitality Trust

S$1.72 billion

Keppel REIT

S$3.34 billion

Mapletree Commercial Trust

S$2.60 billion

Mapletree Industrial Trust

S$2.38 billion

Mapletree Logistics Trust

S$2.62 billion

Suntec REIT

S$4.26 billion

Cambridge Industrial Trust

S$904 million

Source: S&P Capiltal IQ

The extent of outperformance (or underperformance) is measured every six months. Both the old and the new system have a two-tier arrangement but the percentages have been reduced in the new system.

Under the old system, the performance fee calculations for CIT are as follows:

* Tier 1 performance fees are calculated as: Outperformance x 5% x Market Capitalisation.

* Tier 2 performance fees are calculated as: (Outperformance – 1%) x 15% x Market Capitalisation.

If the level of outperformance is below 1% for each half-year time period, CIT’s Tier 2 performance fees cease to apply.

In the new system, the Tier 1 performance fees remains the same but the Tier 2 performance fee rate will be reduced to 5% from 15% previously. Tier 2 performance fees will now be calculated as such: (Outperformance – 1%) x 5% x Market Capitalisation.

According to the REIT, the change will reduce management’s performance fees by about 50%.

To put things into perspective, let’s use the performance fees for 1H2013 as an example. In 1H2013, the outperformance was at 16.86% and the market capitalisation of CIT stood at S$861.1 million. The total performance fees, which include the Tier 1 and 2 performance fees, came up to S$27.74 million. However, under the new system, the total performance fees would have been just S$14.08 million, a reduction of 50.8%.

In fact, the managers of CIT did not take home a performance fee of S$27.74 million but had instead taken home a reduced amount of S$13.87 million. This was because they had “voluntarily and irrevocably elected a once off fee waiver to reduce the performance fee for the half year to approximately S$13.9 million” as announced in the REIT’s earnings announcement for 1H2013.

So, what does the latest move mean for unitholders of CIT? It shows that management listens to its unitholders and acts on their feedback; if unitholders’ interests are aligned with that of management’s, then that’s certainly one less thing to worry about for owners of the REIT. On the other hand, if management consistently does things to the detriment of a REIT’s unitholders, it’s logical for unitholders to throw in the towel or try to force changes. In the case of CIT’s unitholders, they have at least gotten a management team who has unitholders’ interests at heart. Putting the issue of the business performance of the REIT aside, the change in management fees is, at the very least, a sign of the REIT having good management in place and that probably deserves two thumbs up.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.