You will be able to read a REIT's fee structure and spot fees that reward size over unitholder returns.
After Darren learned that his REIT's manager was owned by the sponsor, he went looking for how the manager was paid. He found a table in the annual report with five different fees, each with its own formula, and a total that ran to millions of dollars a year. Some were paid in cash and some in units. He could read every line and still had no idea whether the arrangement was good for him.
This lesson gives you a way to read that table. The question to ask of every fee is simple: what does the manager have to do to earn more of it, and does that also make you better off?
Most S-REIT managers receive a base fee, usually calculated as a percentage of the value of the REIT's properties, often called deposited property. The exact percentage and basis are set in the trust deed and stated in the annual report.
With made-up figures, say the base fee is 0.3% a year of deposited property. A REIT with S$4 billion of property pays the manager S$12 million a year. If the REIT buys another S$1 billion of property, the base fee rises to S$15 million.
Notice what drives that increase. The fee went up because the REIT got bigger. Whether the new property raised or lowered the income each unitholder receives made no difference. A manager paid mainly on size has a reason to grow the REIT even when growth does nothing for distributions per unit.
That does not mean every manager acts on it. But you should know which way the incentive points.
Many managers also receive a performance fee. The name sounds reassuring. What matters is the performance it measures.
Some performance fees are a share of the REIT's net property income, or its total distributable income. Those grow when total income grows, which, like the base fee, can happen simply by buying more property and issuing more units.
Other performance fees are tied to growth in distribution per unit, DPU, the income each unit actually receives. Lesson 5.1, DPU is the number that pays you, explains why this is the number that matters to you. A manager paid more only when DPU rises has an incentive that lines up much more closely with yours.
Read the formula in the annual report or the prospectus. Note whether the fee is based on total income or on a per-unit measure, and whether it is measured against a fixed starting point or against the previous year.
Acquisition fees and divestment fees pay the manager a percentage of the price each time the REIT buys or sells a property. With made-up figures, a 1% acquisition fee on a S$1 billion purchase pays the manager S$10 million.
These fees are earned when the deal completes, whether or not it turns out well for unitholders. A manager that buys an overpriced property from its own sponsor earns the acquisition fee on the full price. Combine that with a base fee that rises with every purchase and you can see why the circular for a sponsor deal deserves careful reading.
There may be other fees too, such as development management fees on building projects. The property manager, lesson 4.1 showed, earns its own fees as well. List them all.
Fees can be paid in cash, in new units, or in a mix. Paying in units keeps cash in the REIT, which managers sometimes present as a sign of confidence. It also creates new units each time.
With made-up figures, if the S$12 million base fee is paid entirely in units at S$1.20 each, the REIT issues 10 million new units a year. Against 3 billion units in issue, that is about a third of one percent. Small in one year, but it repeats every year and spreads the same income over more units. The annual report states how each fee was settled, so check rather than assume.
For each fee, write down its basis, the amount paid last year, and how it was settled. Then mark which fees grow when the REIT gets bigger, regardless of DPU. If most of the manager's pay comes from those, ask what is stopping the manager from growing for its own sake. The answer may be a strong track record of DPU growth, an independent board, or a large sponsor stake that means the sponsor shares in unitholders' results. Or there may be no good answer.
Darren's REIT turned out to have a base fee on deposited property, a performance fee on net property income, and acquisition and divestment fees, with part of the base fee paid in units. Every one of them grew with size.
In the activity you will build the same list for one S-REIT, with last year's amounts, and mark the fees that reward size so you can see the balance at a glance.
List every fee in one S-REIT's annual report, its basis and the last year's amount, and mark which ones reward growth in size.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).