Do You Look At Management Fee in Selecting Which REIT to Invest ?



<Image Credit : Fool.com>

We do understand that most of the time, "yield" is the main consideration for investors to invest in REIT and of course other than P/NAV , gearing , interest coverage ratio, asset quality , occupancy rate etc.

Other than normal property expenses such as interest & finance cost and operating expenses , management fee is also the major cost for a REIT.  How often do we really look at the management fees as one of the criteria in selecting a REIT to invest ?





If every $1 we earn from the property but 40cts goes to management fee , then we may need to pay more attention on this major cost as it may have huge impact on our long term investment return as some might say “ We just work for the Management !! “

In recent K-REIT’s AGM which I have attended last week , as usual , this issue of high management fees been brought up again by shareholders during the meeting. ( Mr. Mano fired the first salvo … )

If you have scrutinized their Annual Report , you may find out that it is not difficult to spot the figure as the expense for Management Fee = $50.5 Mil vs Net Property Income = $128.3 Mil in FY 2016. Which amounting to approx. 39% of the total NPI. Well , if we compared it to other peers like Capital Commercial REIT which generated NPI of $231.2 Mil in 2016 ,but only spent about $15.14 Mil as expenses in Management Fees. ( 6.5% vs NPI ) , then we may see the huge difference.

At current price which given Dividend Yield of 5.9 % for Capital Commercial Reit vs 5.5% yield for K-Reit , obviously , I know which REIT I prefer to put my money and invest more… in the long run.

K-Reit was one of my major holding right after GFC because of strong sponsor ( GLC ) during that uncertain and volatile market , but I have since trimmed it down much in my holding and diversify to others REIT along the way. ( At the peak , I used to own 252,000 share of K-Reit in early 2010  as compared to now only 40,000 ). 

I may consider to further reduce my holding in K-REIT if opportunities arise where I have chance to divest and switch to other counters , although no doubt that their assets quality are in good and prime locations.


<Image Credit: theleasedoctors.com>
  

Below table published in The Straits Times Business sector on 11 Jul 2015 shall give you some clue about the cost of Management fees vs Revenue among the REITs in Singapore.







Append below, few good articles which I have searched and selected from WEBs , it included article from News paper, Money Management Portals and Bloggers. This may serve as good start of reading point to have better understanding of cost impact of Management Fees in REITs.

Investors would definitely welcome more specific guideline from MAS with regards to how REITs should form and construct their management fees in line with market’s expectation and unit-holders value.

Enjoy reading !!


Cheers !!



//////////////////////////// Appendix ///////////////////



REIT Fee Structure–Are they rewarding investors or the sponsors, from InvestmentMoat , 15 June 2012

  
REIT Fee Structure , from InvestmentMoat , 4 Aug 2012


MGCCT's fee model for future Mapletree Reits , from BT Invest , 20 May 2013


A Look at  REIT’s Fees, from The Motley Fool SG , 1 Oct 2014

Check out Reit manager's fee, not just dividend , from The Straits Times , 11 Jul 2015


MAS tweaks REIT rules , from TodayOnline , 2 Jul 2015 ( the full report from MAS –here )



Comparing REIT fees: 2 cases of anomalies , from The Business Times, 3 May 2016



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< Credit goes to all the Writers / Authors and Publishers of above link document / articles >




PS:
The recent hotly debated topic of " Removing Manager " from Sabana REIT is a bit different with " Principal - Agent Problem " ( which I have blog about it here ) , if you look at above table , the ratio of " management fee vs income " was quite in line with market when the time of the article published. But , the problem of this REIT is more on declining DPU due to purchase of "over value " asset with temporary income support where eventually drop year by year ... their DPU has dropped from 9.38 cts (FY 2013 ) to 4.64 cts (FY 2013) while their management fees maintain at $5.3 Mil in 2016 vs $5.8 Mil in 2013( mainly because of their fees are being pegged with asset value rather than DPU ).

Now the ratio of "Management fee vs NPI " has increased to 9.3% base on FY2016's figure.




"We have almost certainly not conquered the business cycle. We may not even have tamed it. "
Philip Fisher




Comments

  1. Will you look at CEO's pay too when investing in non REITs?

    ReplyDelete
    Replies
    1. Yah ! Uncle CW , U are right ,, we don't ... mots of the time ... just look at the P&L ...
      In fact ,, some CEO are getting astronomical high pay... :-(
      Some CEO's talent is "over-rated " !!

      Cheers !!

      Delete
  2. Ah I was about to comment on Sabana REIT saga when I read your "PS" portion.
    At 9.3%, it is now one of the highest.

    ReplyDelete
    Replies
    1. Yah! There is more than one way to skin a cat !! Managers can use the creative thing like " temporary income support" to boot the DPU by purchasing over value property .. :-(
      Cheers !!

      Delete
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