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AIMS AMP Capital Industrial REIT and Sabana REIT: Performance fees.

Sunday, June 17, 2012

This issue of The EDGE has a very interesting article by Goola Warden on S-REITs. In a nutshell, it looks at potential conflicts of interest between their external managers and unitholders. To this end, it looks at the layers of fees charged by the managers.

As investors, we want to make sure that the REIT managers are fairly rewarded since no one would work for free. However, we have to safeguard our interests too especially when there is a lack of uniformity in the way the fees are calculated.

On the issue of performance fee, CLSA says that AIMS AMP Capital Industrial REIT and Sabana REIT are amongst S-REITs with the most equitable performance fee structures. The managers are only paid performance fees upon satisfying certain conditions.

The manager of AIMS AMP Capital Industrial REIT gets paid 0.1% of the deposited property value if distribution per unit (DPU) growth exceeds 2.5% per annum. The manager gets paid 0.2% of the deposited property value if DPU growth exceeds 5% per annum.

The manager of Sabana REIT gets paid 0.5% of the net property income (NPI) if the REIT achieves DPU growth of 10% per annum for unitholders.

So, if unitholders get a meaningfully higher DPU, the managers are rewarded with a performance fee. I doubt if anyone would quarrel with this. It appeals to my sense of fair play.

Between the two REITs, however, I believe that Sabana REIT's performance fee structure is fairer. Rewarding the manager with a percentage of the NPI makes sense because a higher DPU is probably due to a higher NPI. 

So, having the REIT manager rewarded a percentage of the NPI makes more sense to me than rewarding them with a percentage of the deposited property value.

Nonetheless, AIMS AMP Capital Industrial REIT's conditional performance fee is still better than those of REITs like Suntec REIT which pays 4.5% of the REIT's NPI as performance fee to its manager regardless of performance. 

Er... Am I missing something here?

Seems like there is more reason to like Sabana REIT now apart from its very high distribution yield. ;)

"Growth versus value.", Goola Warden, The EDGE, pages 22 to 24, 18 June 2012.

Related posts:
1. Sabana REIT: 1Q 2012 DPU 2.26c.
2. AIMS AMP Capital Industrial REIT: 4Q FY2011.


INVS 2.0 said...

Hi Ak71,

I thought Greek could help to slap the prices down but instead on my face. :(

AK71 said...

Hi INVS 2.0,

Ah, you were hoping to buy some units in both REITs cheaper? It could still happen. Who knows? ;)

Serendib said...

Just wait a while mr market will realize that nothing is solved - the empty promises from Greece will continue.

Ah John said...

Hi AK, thanks! Good information! Do you know any other REITs have similar incentive structure?

Btw, 10% growth annually should be tough? Because if they can really achieve it, will be a great investment for us too!

AK71 said...

Hi Serendib,

The can has been kicked down the road. ;)

AK71 said...

Hi Ah John,

Indeed, if Sabana REIT is able to grow DPU 10% annually, the managers deserve their performance fee. ;)

Believe it or not, most REITs do not have conditions such as this for their managers to be awarded performance fees. Most REITs just give out performance fees to their managers unconditionally.

JCK said...

i concur that managment fees should be in tandem with performance.

Sabana's looks very fair.

Again AK, thanks for this invaluable info!

AK71 said...


There are other fees paid to the manager of a REIT, to be sure. However, paying performance fees to managers when there is no yardstick for measuring their performance is odd but it seems to be the norm for S-REITs. So, I picked on this for discussion in this blog post.

I am glad you have found the blog post useful. :)

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