On May 23, unitholders of Mapletree Commercial Trust (MCT) voted overwhelmingly in an extraordinary resolution to change its fee structure to that of Mapletree North Asia Commercial Trust (MNACT), which MCT is acquiring. MCT’s current fee structure constitutes a base fee of 0.25% per annum of the value of MCT’s deposited property and an annual performance fee of 4% of its Net Property Income (NPI).
With the proposed new fee structure, the management fee for MCT’s manager after the merger with MNACT comprises a base fee of 10% of Distributable Income (DI) per annum and performance fee of 25% of the y-o-y growth in DPU per annum. Under the current fee structure, MCT’s manager would be entitled to a performance fee regardless of DPU growth as it is based on a percentage of NPI. The revised management fee structure, which is pegged to DI and DPU growth, enables closer alignment of interests with unitholders of the merged entity by incentivising sustainable DI and DPU growth. “MCT unitholders should note that the new fee structure will result in lower management fees for the merged entity as a percentage of total assets,” the merger announcement says.
Indeed, while base fee rises significantly, this is more than offset by a fall in performance fees. Based on its illustration in Table 1, the combined MCT-MNACT entity, to be renamed Mapletree Pan-Asia Commercial Trust (MPACT), DPU would have to rise by 20% for its new performance fee to match its current performance fee. This may be a tall order in the short term.
To show alignment with unitholders, MCT’s manager will waive the acquisition fee for the merger. This is a similar move during the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust to form CapitaLand Integrated Commercial Trust (CICT), where CapitaLand Mall Trust’s manager waived the acquisition fee.
Sabana Industrial REIT’s performance fee sets a pretty high bar and is payable only if the REIT achieves at least a DPU growth of 10% y-o-y. In FY2021 ended Dec 31, 2021, Sabana REIT’s DPU grew by 10.5% y-o-y to 3.05 cents. Hence Sabana REIT’s performance fee was $259,000 in FY2021. There was no breakdown between the manager’s management fees in its annual report.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
“An increase of the DPU by 10% y-o-y is challenging and the performance fee will incentivise the manager to take a holistic and balanced approach towards assuming sensible risks to grow the REIT over the long-term,” says Sabana REIT’s annual report.
Starhill Global REIT, unfortunately, has never been charged a performance fee by its manager. This is because its performance fee is tied to price performance against certain benchmark indices and the REIT has not achieved this since its IPO in 2005.
Table 2 shows the approximate fees garnered from the REITs’ annual reports for those with financial years ended June, September and December 2021. For REITs with March yearends, the fees were well displayed in their financial statements. Mapletree Industrial Trust’s (MINT) property management fee was included in its property expenses, so the figure in the table is an estimate based on 2% of gross revenue.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Table 2 includes Dasin Retail Trust which is a property trust rather than a REIT as it is structured like a REIT in that it pays out at least 90% of its distributable income and has a self-imposed gearing limit. However, its yield has expanded to above 10% and it is trading at a fraction of its NAV of $1.40. Dasin Retail Trust’s fees are also the lowest among the REITs and property trusts.
Property management fees
Previously, CCT had the most efficient fee structure. Following its merger with CMT, CICT adopted CMT’s fee structure. Retail REITs have the complicated task of managing malls. One of the major changes between the fees in FY2020 and FY2021 is the significant rise in the property management fees of CICT. This is because FY2021’s property management fee “captures the enlarged portfolio” a spokeswoman for CICT’s manager says.
Partly because of the higher property management fee, CICT’s total fees rose from 0.36% of deposited property for FY2020 to 0.6% of deposited property in FY2021. While this fee appears to be much higher than the previous year, CICT has returned around 10% in unit price appreciation this year, excluding its 5% yield. This is on par with Suntec REIT’s price appreciation. On the flip side, Suntec REIT is trading at a higher yield, and its total fees as a percentage of deposited property are higher, its fixed debt and interest coverage ratio are low; and gearing is high.
Property management fees can sometimes be extensive. Often, these fees are paid to third parties. For instance REITs such as Keppel Pacific Oak REIT and Prime REIT are likely to outsource their leasing to agents, as do the smaller industrial REITs. REITs with overseas assets often have higher fees as a percentage of deposited property because their property management fees are often paid to third parties.
Not all REITs are transparent with the fees. An example is iREIT Global on the payment of property management fees to third parties: “Under the property management agreements, the property managers of IREIT’s current portfolio are entitled to receive monthly property management fees calculated based on a percentage of the rental income or an agreed fixed fee, subject to certain minimum thresholds on a property by property basis. The property managers are not related parties of the manager.”
Be like Ascendas REIT
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The most transparent REIT is Ascendas REIT. Its annual report lays out all its fees as a percentage of assets and distributable income. Check out page 262 of Ascendas REIT’s 2021 annual report and ask all your REIT managers to be as transparent as Ascendas REIT with their disclosures.
Of course, REIT managers have an obligation to report related party transactions, and interested person transactions in their annual reports. It is here that EC World REIT reports that $105 million or 84% of its revenue comprise related-party transactions.
The hospitality trusts often are not as transparent with their property management fees as other REITs. This is probably because they have to pay a hotel manager to manage the hotels as part and parcel of their business. Elsewhere, Sasseur REIT does not report property management fees.
Sometimes, the REIT with the lower cost of capital has the lower fee. In the case of commercial and industrial REITs, CICT and Ascendas REIT have relatively lower fees than their peers. In fact, only six REITs have lower fees than CICT. Among them is ParkwayLife REIT, the S-REIT with the lowest cost of capital. This is probably because it has not had a capital-raising exercise since its IPO in 2007 and its capital management is robust. First REIT has both higher fees and higher cost of capital than ParkwayLife REIT.
During a recent merger exercise, a REIT manager pointed out that the largest expense for a REIT is its cost of debt. The average gearing among the S-REITs is 36.8%. Hence the capital structure of S-REITs would imply that cost of debt is likely to be a focus among REIT managers this year given rising risk-free rates.
A strange case
Cromwell European REIT’s (CEREIT) manager claims that it is acting in unitholders’ interests by taking all its fees in cash. This is because issuing units implies paying the manager its fees out of capital, CEREIT’s manager claims. This may not make sense to some investors. Issuing units is the equivalent of issuing scrip which adds to unitholders’ funds.
CEREIT also has a distribution reinvestment plan (DRP) where unitholders can opt for units in lieu of cash. At any rate, whenever REITs pay DPU, the NAV falls by the amount of DPU paid. This is often reported by the CapitaLand REITs and by MNACT most recently.
Most REIT managers and sponsors (but not all) who have their interests aligned with those of their unitholders often take a combination of units and cash as fees. Investors shouldn’t begrudge paying these managers their fees in this combination.
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