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

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. ;)

Reference:
"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.

Olam: Accumulate now?

A few days ago, I blogged about Olam and how Kim Eng has a SELL recommendation. That got a reader who is invested in Olam sufficiently flustered to send me an email. Hey, I was just sharing an analysis which I thought made sense. Don't shoot the messenger and if it is any consolation, my badly timed initial investment in Wilmar fared worse.

"Olam has been the second worst performing member of the STI this year, with only Wilmar having done worse." (The EDGE, 18 June)

Anyhow, the article by Joan Ng in the same publication went on to report that CIMB Research thinks that present cheap valuations could be a buying opportunity for long term investors.

"The correct investment stratey to follow since 2009 has been to raise market exposure and beta when sentiment enters the panic zone, like now," Ajay Kapur, Deutsche Bank. He notes that there have been three major reflation exercises over the past three years.

"At the start of each of these episodes, investors were incorrectly cynical, consumed by the panic of the moment. We think we are on the verge of another policy reflation in the coming weeks or months. Start buying during this bottoming process rather than over-analysing." (The EDGE, 18 June)

For the numerically inclined, Olam is said to be trading at a price to book value of only 1.2x now compared to its trough of 1.5x during the global financial crisis.

Accumulate? Olam's management seems to think their stock presents great value too.

Related post:
Olam: Share price up on buy backs.