A RECENT report by ING Bank did not sit well with the managers of Keppel Reit and Suntec Reit because it showed them to be grossly overpaid. This was not a research report, but an independent financial adviser's report done by bankers to give an opinion to CapitaLand Mall Trust (CMT) unitholders. CMT was proposing to amend its fee structure, and needed unitholders' approval.
In wanting to show that the proposed fee structure of CMT is in line with market norms, ING selected some Reits to compare with and plotted their management fees as a percentage of performance metrics such as gross revenue and net property income (NPI).
The result is that the bar charts of Keppel Reit and Suntec Reit soared far higher than the others on both counts, such that while the focus of the report was not on them, it inevitably drew attention to them and led readers to wonder if these managers were indeed so overpaid.
As is often the case, the devil is in the details - in this case, in the footnotes, where it said: "gross revenue excludes contributions from joint ventures and/or associates". Such an exclusion is to the detriment of Keppel Reit and Suntec Rei, because they are the only two Reits with substantial contributions from associates, due to the partial stakes they own in various buildings. The fact that revenues from these part-owned buildings were not included in their headline gross revenue figures resulted in their fees as a percentage of revenue appearing disproportionately higher.
The report said that Keppel Reit's management fees were 25 per cent of gross revenue. If share of results from associates and joint ventures as well as rental support were included, the percentage is actually at about 17 per cent. The report also said that Suntec Reit's management fees were 15 per cent of gross revenue. Again, if revenue from its partially-owned properties was included, the figure ought to have been 10 per cent. These would have been more in line with the office Reit sector's mean average of about 10 per cent.
Keppel Reit owns partial stakes in Marina Bay Financial Centre and One Raffles Quay in Singapore, and several other properties in Australia. Almost half its revenue is derived from these co-owned assets.
Suntec Reit owns partial stakes in Suntec Singapore Convention & Exhibition Centre, One Raffles Quay, Marina Bay Financial Centre, and Park Mall. More than a third of its revenue is derived from these co-owned assets.
This is not the first time that a sector comparison of management fee structures has caused grief to these two Reit managers, which have the "misfortune" of partially owning a number of buildings. Last year, a report by RHB yielded similar findings. Outliers are common in any market comparison study, and there are usually good reasons to explain their deviance. Analyses should not neglect specific attributes of samples that affect how they compare against other samples. If these attributes are the reason for their deviance, it should also be stated upfront, to put things in perspective for the reader.
In the case of this ING report, it would have taken a careful reader to notice something amiss two pages later, where ING produced another chart comparing performance fees as a percentage of total assets. In this chart, Keppel Reit's and Suntec Reit's management fees now appear to be in line with peers. This is because this time, the "total assets" metric included its co-owned stakes.
Reit managers' compensation has become a sensitive topic, as scrutiny over Reits' management fees intensifies. It started two years ago when Cambridge Industrial Trust investors were stunned to learn that the manager was entitled to performance fees amounting to more than a quarter of the Reit's revenues for 2013. The manager then agreed to halve its performance fees for the year, and subsequently adjusted its fee structure to, in effect, permanently lower its performance fees going forward.
"Fee structures" was also on the list of items that the Monetary Authority of Singapore (MAS) consulted the industry on in 2014. It then decided last year that it would give Reit managers room to set their own fee structures, hoping perhaps that the market will regulate itself.
The latest trend has been for Reit managers to tie their fees to distribution per unit (DPU), which supposedly aligns Reit managers' interests with those of unitholders. Others also peg their fees to performance metrics like gross revenue and NPI. MAS has expressed concern that this may incentivise managers to grow the Reits' assets instead of looking to maximise returns for unitholders.
There are also some that peg performances fees to deposited property, which carries the same afore-mentioned concern. But supporters of this structure say that it allows the manager to take a longer-term view for the Reit, and do things (eg renovations) that are good for the Reit in the long run, without fearing implications on the Reit's revenue and earnings. The question of which fee structure is best is a roundabout argument with no unanimous conclusion. But the least research analysts can do is to keep their analyses of Reits' management fees clear, accurate and comprehensible. Then investors can decide for themselves which Reits and fee structures they are most comfortable with.
This article was first published on May 2, 2016.
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