Imagine being questioned all the time that your salary is too high and you’re overpaid. Or imagine having your backers suspecting whether your actions are solely for your personal interests or aligned with overall shareholder’s interests.
These are the “ordeals” REIT managers have had to face the past few years and the perceived mistrust came to a head three years ago when Keppel Land sold Ocean Financial Centre to its sister company, Keppel REIT. The 99-year leasehold office property was deemed to be too expensive at the time of acquisition when the market was slowing down due to the Euro Debt crisis. Despite several unhappy unitholders voicing their disapproval at the deal at the meeting, the deal was concluded successfully.
A Love-Hate Relationship
Since then, REIT unitholders seem to have a love-hate relationship with their REIT managers. On one hand, REITs in Singapore have been paying regular and steady dividends at an average yield of 6% last year. On the other hand, some unitholders are unhappy with the way REIT managers are compensated and often question their motives at the several annual general meetings I attended.
As a result, the Monetary Authority of Singapore (MAS) decided to review the Code on Collective Investment Schemes which governs the REIT industry in Singapore and sought feedback from several stakeholders including REIT managers, sponsors, members of industry associations, and investors.
One of the points suggested was the removal of the typical acquisition fee (1%) and divestment fee (0.5%) paid to the manager because it incentivizes a manager to acquire and sell assets regardless of whether the deal is good for the REIT or not. Instead, the suggestion recommended that managers claim expenses incurred during the acquisition/divestment process on a cost-recovery basis. There was also feedback that REIT managers should have their performance fees directly linked to the REIT’s distribution per unit.
Changes in the Singapore REIT Industry
Cambridge Industrial Trust (CIT) took the feedback seriously. Two months ago, CIT revised and pegged its performance fees to 25% x increase in distribution per unit over highest distribution per unit paid since 2009. In other words, if unitholders didn’t receive growing dividends from their investment, the REIT manager wouldn’t get paid its performance fees. The move was strongly welcomed by unitholders with 92% voting for the resolution. And these proposed changes were done before MAS’s consultation paper was even finalized!
Whether REIT managers are over or underpaid is highly subjective depending on your perspective or whom you’re comparing them with. For example, a private equity firm typically receives 2% management fees annually excludingperformance fees. In comparison, a REIT typically receives management fees of less than a percent of the total assets under management. But of course, the bottom line and what most unitholders care about is overall returns per share. If a REIT manager can grow (or at least maintain) distribution per unit relative to the industry standard, it is a win-win for both managers and unitholders.
(**If you are keen in looking at Singapore REITs, check out our S-REIT data tableto find the highest distribution paying REITs in Singapore.)
The MAS Response
After eight months of review, the MAS consultation paper was finalized last week. Instead of directly fixing fees for the market (a sigh of relief for REIT managers, I believe, who must been worried whether their rice bowl would be significantly affected), the MAS announced new measures to safeguard the interests of unitholders:
- REIT managers are bounded by statutory duty to prioritize the interests of unitholders over the interests of managers and sponsors. If found guilty, directors may face jail terms. This is to clean up the old misperception where REITs are seen as a “dumping ground” for a sponsor’s unwanted property assets and the high fees charged by a manager (which is also usually owned by the sponsor).
- At least half the board must be made up of independent directors. While their influence is somewhat limited, independent directors do help to balance the interests of shareholders and the REIT and monitor the performance of the board as a whole.
- REIT managers have to disclose the justification of each type of fee chargedand explain how performance fees are derived and take into account unitholders long-term interests. While some good managers already do this for their unitholders, all managers are now required to do so.
- REIT development limit is increased to 25% of total assetsfrom the previous 10% restriction. This new measure will allow REIT managers to perform asset enhancement initiatives for larger assets that were previously restricted to size. I expect more proposed developments coming from greenfield projects that could enhance a REIT’s distribution per unit over time.
- Gearing (total debts/total assets) is evened out at 45%.Instead of the previous 35% ceiling (60% for a REIT rated by a ratings agency), it is believed that this percentage is ideal and removes the reliance on credit rating agencies. Good move but an investor should not rely on gearing ratio alone when evaluating a REIT’s ability to weather a crisis or recession.
The above changes will take effect from 1 Jan 2016 onwards.
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