Can we use how Reit Manager Fees are structured to determine the Reit Perfomance?

Some investors look at how the Reit managers are compensated to determine whether there is an alignment of interest. 

The logic is, if the interest is aligned, then the long run performance of the Reit should be better than if it wasn't. 

This makes sense.

If investors feel the pain when their Reit's lose money, at the very least, the Reit managers should, rightly, also share in the misery. 

The opposite is also true, if investors make money, Reit manager should be rewarded. 

The management fees of Reit managers come in two components:

• Base fee
• Performance fee

Acquisition and disposal fees are largely similar across the Reits, 1%  of acquired property value and 0.5% of disposed property value.

Base Fee

Performance Fee

In my previous article, i found that the growth of DPU over time is the single most important metric to judge a Reit's performance as a growing DPU would naturally result in a growing Reit price too.

This makes sense as people buy Reits for their distributions. 

All the financial chicanery will over time be laid bare in the DPU.

I have compiled the DPU trend of Reits here on this page. 

Do you think the structure of the Reit Manager fees affect the DPU over time?

3 Reits stood out for me.

• Lippo Mall Trust
• Keppel Reit
• Ara Logistic Trust

If you look at their DPU trend over time, they have been trending down. 

Yet, they have been paid for performance by way of performance fees.

Lippo Mall Trust

Lippo Mall Trust

And to put things in perspective, its performance fee is nearly as much as it's base fee for Lippo in cash.

Keppel Reit

Ara Logistic Trust

The single most important factor for Reit investing

I have probably only broke even or made a little over 6 years of investing in reits on a total basis, meaning including the dividends. This is a bad outcome. We don't have many 6 years of experimenting. 

Upon reflection, i realize that investing in reits is really about trusting the people managing the property portfolio are good at their jobs and most importantly, having as little of the principal-agent problem as possible. 

In my opinion, reits suffer a lot issues related to the principal- agent problem as the underlying properties are rather illiquid and the range of valuation of a property can be very wide and rather subjective. Unit trust ( and for the matter all investments) do have such agent issues too but since the underlying are securities traded on exchanges, there is more transparency in a sense. The more opaque or illiquid the underlying in, the more such agent issues arise.

Principal agent issues related to reits are aplenty with some examples as follow:

• Property is acquired at a high price from sponsor, with rental support given by sponsor to increase the property yield, hence book value is increased. 
• Properties are being bought and sold frequently with transactions being the primary focus as reit managers get acquisition and disposal fees. 
• Reits being the dumping ground of sponsors. 
• Reits managers focus on increasing the asset base as their management fees are a percentage of the assets managed. 

I think it is a given that most, if not all reit investors, invest in reits for their distributions. More specifically , distribution per unit      (DPU).

The effect of sub-par reit managers will certainly tell over time with DPU decreasing. 

Hence, the single most important factor is to select reits whose DPU has shown an increase over time.

Even though i have lost money in reits, i still believe in it as a good asset to have for retirement but being selective is important. 

I have heard many feedback that reits are bad for retirement because of the many rights issues. If one do not have the spare cash, one will be diluted. The Supplementary Retirement Account,especially, gets a lot of flake for this due to the yearly contribution limit. 

But what is the problem with being diluted if the rights-funded acquisition results in an increase in DPU?

In the end, it all boils down to the DPU.

To be clear, reits are leveraged investments and not all rights are for acquisition purposes. In the Great Financial Crisis of 2009, most rights were used to shore up the balance sheet and not for acquisition. Having a large chunk of reits as a percentage in retirement is quite risky.

I have complied the DPU of reits over the years. The DPU is based on date payable. The page can be found here.

Mapletree Logistics Acquisition of China and Vietnam Properties - Effect of Income Support

I think it is important for people to take note of income support for reits and things may not look as rosy as it seems based on the headline figures.

For example in 2018, it was reported that  Keppel reduced its rental support for Keppel Reit and its DPU fell.

Source.

The recent headlines about Mapletree Logistics Trust acquiring 13 China properties and 3 Vietnam properties through issuing rights must have gotten little attention due to many new Reits having IPOs lately, Daiwa House Logistics and Digital Realty.

Headline figures for the China and Vietnam properties paint a very rosy picture of a forecasted rise in DPU, post acquisition of 1.2% .

Sounds good right?

But take note that this includes rental support for 1 year post acquisition by the sponsor.

Stripping out the rental support, the DPU remains unchanged.

Not all rental supports are bad and in theory, the reason for such a practice is to stabilize  the rental income of new properties before they reach their "potential" .

But one can see the potential for exploitation. 

This "potential" may never materialize but only serve to inflate the acquisition price, causing shareholder value destruction.

Only time will tell. 

Investing is having faith too.

Fortune REIT - Another Temasek Holdings Investment

Fortune REIT is an interesting stock. In the realm of REITS listed in Singapore, it is one of the few ( maybe its the only one, we are not sure as we did not check every single REIT) which has current assets approximately equals to its current liabilities. If you have read our previous articles on REITS and about Fortune REIT, most of the REITS in Singapore have current assets very very very substantially lower than their current liabilities, which actually is quite normal given the well known fact that these entities borrow heavily to finance their operations. So let us relook at Fortune REIT , given that they just released their financial statements. Lets use some primary school maths on percentages, shall we?

TAKEN FROM THEIR SLIDES RELEASED ON NOV 08 ( ABOVE)

Firstly, at first glance, it looks impressive, doesn't it?Solid Operations, No Refinancing Needs, blah, blah,blah..all the marketing talk which actually makes us more determined to research the company actually. Circled in RED, it states that currently their portfolio of property has an occupancy of 94.4%, but let's look at their porfolio expiry profile below.

TAKEN FROM THEIR SLIDES RELEASED ON NOV 08(ABOVE)

It states that in the fourth quarter of 2008, 7.7 % of their occupied space is expiring. Let us assume that the 7.7% do not renew. That will leave us with (100%-7.7%) times stated current occupancy level of 94.4%, which gives us an occupancy level of 87.1% at end of this year. Let's look at 2009. As stated above, 33.4% of their occupied space is expiring in 2009. Assuming that the 33.4% do not renew, this will give us an occupancy level of (100%-33.4%) times 87.1%, which turns out to be 58%! Imagine going to a shopping centre, say Suntec City where around 4-5 shops out of 10 shops are closed!

This is the worst case scenario of course. There might be new tenants coming in to take up the slack, some or even all of the tenants might actually renew, and we might even be wrong in our interpretation of "% of occupied space expiring" in their slides. But well, no definition from Fortune breeds speculation.....(Just added: We are not experts in shopping malls leasing, maybe its the industry practice, not perculiar to Fortune. But from a layman's perspective, given these times, its some food for thought!)

Anyway, we are pretty disappointed with the investor relations department of this company as they did not reply on our query on how they are going to mitigate this risky outflow of tenants. Why the following sentence if you are not going to reply ?

"For general enquiries, please email us at enquiries@fortunereit.com and we will respond promptly."

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

Why Reits are faring so Badly!

MapleLog (Current Assets lesser than Current Liabilities)

Macarther reit (Current Assets lesser than Current Liabilities)
K-reit(Currenct Assets lesser than Current Liabilities)

MPREIT ( This one i dont know why they dont seperate Current from Non Current. Why?Why? Why?Why Reits are faring so badly? Cos its a credit crunch and they need to borrow money and a random pick of some Reits in singapore tells the story. And does anyone know why MPReit doesn't seperate currenct from non current? Hmm