Management Fees in Business Trusts

[Nick]

Warning: Long Post !

Business trusts, REITs and mutual funds are deemed to be long term dividend players holding on to a portfolio of defensive assets while distributing a significant portion of the cash-flow to unit-holders in the form of cash dividends. Such asset classes tend to pay an external manager and trustee to own and manage these assets. Unlike REITs, business trusts do not have a uniform management fee structure and have different base-lines. It will be interesting to see the proportion of management fees to their distributable income and whether do companies with the smallest management fee to distributable income ratio are value for money.

1) HPH Trust

Policy: Base fee fixed at US$2.5 million per annum and adjusted for HK CPI. Performance fees applicable in 2012 onwards if DPU > 45.88 HK cents.

Management Fee (M): $15.440 million
Distributable Income (D): $3,283 million
M / D Ratio: 0.5%
Net Debt / Equity: 0.24

2) K-Green Trust

Policy: $2.0 million base fee annually and adjusted for Singapore CPI. Performance fee of 4.5% of total cash distributed to KGT annually.

Management Fee (M): $4.484 million
Distributable Income (D): $49.249 million
M / D Ratio: 9.1%
Net Debt / Equity: Net Cash

3) Cityspring

Policy: 1.0% of market capitalization subject to minimum of $3.5 million. No transaction / performance fees in FY 2011.

Management Fee (M): $5.453 million
Distributable Income (D): $47.654 million
M / D Ratio: 11.4%
Net Debt / Equity: 2.74

4) MIIF

Policy: 1.5% of MIIF Net Investment Value ie Market Capitalization - Net Cash. No performance fees paid in FY 2011.

Management Fee (M): $7.863 million
Distributable Income (D): $67.003 million
M / D Ratio: 11.7%
Net Debt / Equity: Net Cash (but underlying assets have Debt / Equity = 100%)

5) Ascendas India Trust

Policy: Base fee is 0.5% of property value and performance fee is 4.0% of NPI.

Management Fee (M): $7.196 million
Distributable Income (D): $46.079 million
M / D Ratio: 15.6%
Net Debt / Equity: 0.31

6) Global Investments Limited

Policy: Base fee is 1.0% of market capitalization and fixed fee of $0.65 million.

Management Fee (M): $1.410 million
Distributable Income (D): $8.254 million
M / D Ratio: 17.1%
Net Debt / Equity: Net Cash

7) First Ship Lease Trust

Policy: 4.0% of cash rental income and 0.02% of Trust property valuation.

Management Fee (M): $3.821 million
Distributable Income (D): $18.292 million
M / D Ratio: 20.9%
Net Debt / Equity: 1.26

8) Rickmers Maritime Trust

Policy: Fixed fee of US$1.7 million a year and adjusted for CPI and 0.9% of net charter revenue.

Management Fee (M): $3.035 million
Distributable Income (D): $10.168 million
M / D Ratio: 29.8%
Net Debt / Equity: 1.57

I excluded non dividend paying trust/funds like Treasury China Trust, Indiabulls Trust and MPSF.

1) I am quite surprised by the different fee structure and how it results in different proportions of fee to distributions ratio. This isn't a cause for trust out-performance / under-performance but it highlights the reward system in place for the various Managers. A large M / D ratio could mean 2 things - 1) The Manager is excellent and Trust unitholders are willing to cough up large sums to be managed by the team or 2) The reward system is skewed whereby unitholders may be suffering lower distributions but management fees are unaffected.

2) Those with the highest M / D ratio tend to have poor history ie structured finance fund and the shipping trusts. In the case of the former, the fixed fee is large relative to their profits due to significant asset impairment in 2008 - 2009 resulting in smaller operating profits. The shipping trusts have seen falling LTV covenants resulting in lowered income available for distributions as excess cash is used to amortize loans. However, since management fees are linked to revenue instead of DPU, it did not suffer a drop relative to the distributable income.

3) Interestingly, HPHT has a very small M/D ratio and this can be attributed to it being an asset owner + operator rather than a trust investing in an operator which would have resulted in cash leakage to the holding company management team in the form of management fees. A pure-play asset operator like the local telcos or CM Pacific do not have any management fees since shareholders own these companies directly without any trustees holding on to it on their behalf.

4) Debt is a powerful tool but if used wrongly can result in poor distributions. The shipping trust have net gearing exceeding 100% as they have expanded aggressively in the boom years by purchasing vessels without sufficient equity coverage. As a result, they generate large revenue (resulting in large management fees) but small distributable income due to significant interest expense and debt amortization. Cityspring do have large gearing but they are able to maintain their distributions due to resilient cash earnings.

Some questions on my mind -

1) What type of fee structure would reward managers for out-performance but also take into consideration the need to 'punish' managers who failed to perform to expectations (ie reduction in DPU etc) ?

2) Should business trust own their Managers or invest in a stake in the Management team ?

(I am vested in GIL)

Note: I may have made mistakes in the figures/computations so please point out any errors so that I can change it. I am not saying that certain trust/fund are superior/inferior to one another as each trust/fund is unique and should be studied in great detail. This is just an academic exercise and I am not advocating any buy/sell positions. If any offense is taken in this post, please point it out and I will edit the post.

[Drizzt]

they should make it like how Vanguard does it. the management team is owned by the fund itself.

[Stocker]

Thanks Nick for the detailed post.