When looking at real estate investment trusts (REITs), many investors are usually fixated on their financial figures like the growth in their distributions per unit (DPU), distribution yields, gearing ratios and the price-to-book (PB) ratio. However, many may fail to see that there’s another important aspect of a REIT to look out for: The amount of fees paid out to the manager of a REIT. Exorbitant management fees may mean that the management team is only keen on fattening its own pockets at the expense of the REIT’s unitholders. Every REIT needs a manager to manage it successfully….
When looking at real estate investment trusts (REITs), many investors are usually fixated on their financial figures like the growth in their distributions per unit (DPU), distribution yields, gearing ratios and the price-to-book (PB) ratio. However, many may fail to see that there’s another important aspect of a REIT to look out for: The amount of fees paid out to the manager of a REIT. Exorbitant management fees may mean that the management team is only keen on fattening its own pockets at the expense of the REIT’s unitholders.
Every REIT needs a manager to manage it successfully. The manager of a REIT, like the Chief Executive Officer of a company, is in-charge of its capital management, portfolio management, and growth. For the services rendered, the manager is paid management fees, which come in two forms: Base fees and performance fees.
Fees, fees, and more fees
In Singapore, REIT managers are paid a base fee of 0.1% to 0.5% of the deposited property of a REIT (the actual percentages would differ for each REIT). The term ‘deposited property’, according to the Monetary Authority of Singapore’s Code on Collective Investment Schemes, simply refers to the value of a REIT’s total assets based on their latest valuation. Using CapitaMall Trust (SGX: C38U) as a real-life example, the annual base fee for the REIT’s manager is 0.25% of the deposited property for each financial year.
As for the performance fees, different REITs have different structures but most managers are paid annual performance fees of between 3% and 5% of their REIT’s net property income (NPI) in the relevant financial year. One of the latest REITs on the block, SPH REIT (SGX: SK6U), pays its manager 5% of its NPI per year.
As for CapitaMall Trust, the REIT manager is paid 2.85% of gross revenue per year as performance fees. On the other hand, the manager at Cambridge Industrial Trust (SGX: J91U) is paid using a two-tier arrangement based on the extent of outperformance between the total return of the REIT and a benchmark index. More information can be found here.
Another variation to how performance fees are paid can be seen in Ascendas REIT (SGX: A17U). The manager is paid annual performance fees of 0.1% of the deposited property if the year-on-year DPU growth is at least 2.5% but less than 5%. If the REIT’s DPU growth exceeds 5%, the REIT’s manager gets paid annual performance fees of 0.2% of the deposited property.
What’s important to note about management fees and other types of fees
The structure of the management fees can be found from the initial public offering prospectus of a REIT. The amount of fees that the manager will get, among others, will be clearly spelt out in the document. To know if the management fees are excessive, the fees can be compared with other REITS in the same industry. The management fees of CapitaMall Trust and SPH REIT, for instance, can be compared easily as they are both REITs that specialise in retail properties.
On top of management fees, it is paramount to note that there are also other fees a REIT pays and these include acquisition and divestment fees, property management fees, and trustee’s fees.
Acquisition and divestment fees are paid to the REIT manager whenever the REIT buys or sells an asset. Property management fees are paid to the property manager who is responsible for managing the daily operations of the property. Trustee’s fees are paid to the trustee of a REIT. The trustee ensures the safe custody of the assets of the REIT and oversees the activities of the REIT Manager for compliance with the trust deed.
The Oracle of Omaha, Warren Buffett, once quipped that honesty is a very expensive gift that cannot be expected from cheap people. The valuation of a REIT, such as its distribution yield and its PB ratio, can’t say much about the integrity of the REIT’s management. However, by looking at the management fees of a REIT manager and comparing it with other REITS in the same industry, investors can go one step further and become a more intelligent investor.
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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.