Analysing REITS

[swakoo]

Plus, I don't think there is a perfect fee structure. Any structure can be manipulated if the Manager isn't of high integrity:

Fee based on AUM = Acquire anything that is on sale = higher fees.

Fee based on DPU = Acquire anything with short land lease for higher yield = higher fees.

Fee based on NAV = Aggressively revalue buildings with lower cap rates = higher fees.

Fee based on NPI / Distributable income = Acquire anything that is on sale = higher fees.

True but it is more difficult to manipulate based on the 2nd and 3rd one than the 1st and 4th one.

[Nick]

Plus, I don't think there is a perfect fee structure. Any structure can be manipulated if the Manager isn't of high integrity:

Fee based on AUM = Acquire anything that is on sale = higher fees.

Fee based on DPU = Acquire anything with short land lease for higher yield = higher fees.

Fee based on NAV = Aggressively revalue buildings with lower cap rates = higher fees.

Fee based on NPI / Distributable income = Acquire anything that is on sale = higher fees.

True but it is more difficult to manipulate based on the 2nd and 3rd one than the 1st and 4th one.

2nd is fairly easy to manipulate. Just invest in buildings with < 20 years land lease and watch the DPU 'soar'.

[swakoo]

2nd is fairly easy to manipulate. Just invest in buildings with < 20 years land lease and watch the DPU 'soar'.

True but
- if reit managers start to acquire assets that have much shorter land leases than what is already in their portfolio, it'll be very obvious to see
- also have to find corresponding assets with very short land leases than what is typical for the asset type (of course the seller can structure it thus but more of a hassle if the seller just want to exit)
- down the road, with very short land leases, as the leases run out the overall dpu will plunge and affect the fees negatively

[Nick]

2nd is fairly easy to manipulate. Just invest in buildings with < 20 years land lease and watch the DPU 'soar'.

True but
- if reit managers start to acquire assets that have much shorter land leases than what is already in their portfolio, it'll be very obvious to see
- also have to find corresponding assets with very short land leases than what is typical for the asset type (of course the seller can structure it thus but more of a hassle if the seller just want to exit)
- down the road, with very short land leases, as the leases run out the overall dpu will plunge and affect the fees negatively

i) Over the past 12 months, I have already seen 2 acquisitions and 1 AEI of properties with < 25 years land lease by REITs with DPU-linked performance fees. Not saying these transactions are in any way detrimental to unitholders. Even short lease assets can deliver excellent IRR is bought appropriately so it boils to managerial acumen.

iii) A lot of things can happen in 10-15 years time. Current management team has retired etc. Basically, the downside of this approach is that it might encourage short-term return as opposed to sustainable long term returns.

iv) Personally, there is no perfect fee structure in the world. Any structure can be abused by a manager whose interest isn't aligned with the unitholders. I do like the idea of forcing managers to disclose their fees and the expense ratio to unitholders and justifying it.

On the other hand, I do wonder will an internally managed REIT possess better corporate governance ?

[swakoo]

You forgot to mention reit manager can also use income support to shore up dpu of acquisitions to get more fees, which brings me to another disappointment with this MAS response:

SECTION 5: STRUCTURING OF REITS

A. INCOME SUPPORT ARRANGEMENTS

5.1. MAS invited comments on whether the current approach of relying on disclosure to impose market discipline on the use of income support arrangements is effective, and if not, the additional possible measures that could be considered to address the concerns with the use
of such arrangements.

5.2. Respondents were generally of the view that the current disclosure approach is sufficient, but a few respondents suggested that the use of income support arrangements should be prohibited.

MAS’ Response

5.3. This was another open-ended consultation question to solicit feedback on the effectiveness of the current disclosure-based approach in preventing the abuse of income
support arrangements. Given the feedback and our plans to impose additional ongoing disclosure requirements on income support arrangements (see Section 6), MAS is of the view that further regulatory intervention is not necessary at this stage.

[CityFarmer]

I am in favor, of MAS decision not to intervene on manager fee. Manipulation, will be there, even for a "prefect" regulation. The "perfect" regulation might unnecessary restrict the the manager, even on decision, which beneficial to both unit-holders and manager.

Maximizing transparency, on justifications and disclosures, is the way to go.

(not vested in any REIT)

[Boon]

Check out Reit manager's fee, not just dividend
PUBLISHED JUL 11, 2015
Goh Eng Yeow, Senior Correspondent
http://www.straitstimes.com/business/che...t-dividend

[Boon]

Reit dividend growth outlook dismal: HSBC

Lee Meixian
The Business Times
Thursday, Jul 16, 2015

THE growth of Reit dividends is expected to slow down in the coming few years due to the unfavourable supply-and-demand outlook across various property sub-segments: office, retail, hospitality and industrial, HSBC said at a seminar on Tuesday.

The seminar was organised by the Real Estate Developers' Association of Singapore. There, Pratik Burman Ray, HSBC's director and senior property analyst, ASEAN, said that the two-year distributions per unit (DPU) are expected to grow just 2 per cent from 2015-2017 (lower still at one per cent for major Reits), compared to an average of 4.5 per cent from 2007 to 2014.

Its projections on DPU growth are based only on organic factors without factoring in growth by acquisitions.

"The growth outlook across all Reit sub-sectors is very lacklustre," he said. He cannot think of any catalyst unless there is a major demand source which pushes up demand for property space in Singapore and takes out a lot of the supply. "If you zoom into the different sub-sectors, you can see that the lowest growth is for the office sector," he added.

In 2014, share prices of office Reits soared 18 per cent, outperforming its peers, when office rents rose on limited supply. That outperformance has quickly reversed in 2015. Year-to-date, office Reits have fallen about 9 per cent in price, he said.

On the sidelines of the event, Mr Pratik Ray said that consolidation among Reits was possible but he was not sure how likely it would be, given inherent difficulties.

"The advantage of looking at deals available in the market versus buying an existing portfolio of assets that a Reit already has is that you can cherry pick and there are no other issues that the manager needs to worry about.

"If you buy a portfolio of assets in the form of a Reit, there are certain assets which you may not like, and the divestment of these assets which you don't like is a challenge," he said.

While there has not been recent cases of Reit consolidation in Singapore, he believes that Reit managers have frequently evaluated that as an alternative to growing their portfolio.

Price-wise, the FTSE ST Reit Index has been "flattish" year-to-date. It had grown 35 per cent in 2012. From mid-2013, it corrected significantly on tapering fears over the US Fed quantitative-easing policy before bouncing back in 2014.

Interestingly, the analyst also noted an inverse correlation between investors' required yield and the market capitalisation of Reits: "Anything over S$2 billion in market cap has come under more or less similar levels of dividend yield. The sweet spot for the Reit sector in terms of size seems to be the S$2-2.5 billion mark where they can start commanding lower dividend yields."

Asked if we might see other forms of assets being 'Reited' in Singapore, he said: "It's tough to say what will gain acceptance. It's a function of investors' willingness to accept new types of assets. In the US, for example, other asset types like self-storage facilities are pretty dominant, but whether that sort of asset type would be accepted in Singapore is yet to be seen.

"It's about yields at the end of the day. If the yields are compelling, investors will look at it. If the yields for a certain type of property are lower (eg. residential rents in Singapore), getting a dividend yield out of them to match investors' requirement would be more difficult."

http://business.asiaone.com/news/reit-di...ismal-hsbc

[MINX]

I am in favor, of MAS decision not to intervene on manager fee. Manipulation, will be there, even for a "prefect" regulation. The "perfect" regulation might unnecessary restrict the the manager, even on decision, which beneficial to both unit-holders and manager.

Maximizing transparency, on justifications and disclosures, is the way to go.

(not vested in any REIT)

I am afraid I don't quite share your view. The review came up because there were some managers who were more keen on upping their own fees versus increasing returns for unit holders. Relying on transparency & disclosures alone will not be effective in restraining these managers. Regulations will be needed. The key here is to introduce regulations which will be win win for both managers and unit holders alike. I recall one of the REIT which had to reduce their aquisition fee by half as it was based on the value of the property acquired, in this instance the acquisiton fee was so large it pushed the REIT's earnings into the red for that quarter despite
no significant downside to it's NPI. I suggest that acquistion fee be based on a percentage of the increase in DPU as a result of the acquisiton made. If the acquisition is not yield accretive, no acquisiton fees wil be paid to managers. This will motivate managers to make only yield accretive acquisitions and not acquire to inflate their fees.

[Nick]

I am in favor, of MAS decision not to intervene on manager fee. Manipulation, will be there, even for a "prefect" regulation. The "perfect" regulation might unnecessary restrict the the manager, even on decision, which beneficial to both unit-holders and manager.

Maximizing transparency, on justifications and disclosures, is the way to go.

(not vested in any REIT)

I am afraid I don't quite share your view. The review came up because there were some managers who were more keen on upping their own fees versus increasing returns for unit holders. Relying on transparency & disclosures alone will not be effective in restraining these managers. Regulations will be needed. The key here is to introduce regulations which will be win win for both managers and unit holders alike. I recall one of the REIT which had to reduce their aquisition fee by half as it was based on the value of the property acquired, in this instance the acquisiton fee was so large it pushed the REIT's earnings into the red for that quarter despite
no significant downside to it's NPI. I suggest that acquistion fee be based on a percentage of the increase in DPU as a result of the acquisiton made. If the acquisition is not yield accretive, no acquisiton fees wil be paid to managers. This will motivate managers to make only yield accretive acquisitions and not acquire to inflate their fees.

Still ways to manipulate DPU. Income support to boost DPU, acquiring properties with < 25 year land lease with NPI yield in their teens, short term loans on floating rates etc.

There is no perfect fee structure. Any structure can be manipulated if the management team are truly sneaky.

Hence I prefer the disclosure method. Let the market decide which REIT Managers are truly investor-friendly and which are not based on the information disclosed. Avoid those with poor track record or those whose remuneration system you are not comfortable with.

(Not vested in any REIT)