Are the Incentives of Sasseur Real Estate Investment Trust’s Manager Aligned with Shareholders’ Interests?
A real estate investment trust owns properties, and derives its economic value from them. How these properties are run, and what properties are acquired or sold, depend on the REIT’s manager. As a result, if you invest in REITs, it is important to understand how a REIT’s manager is incentivised.
Listed in March 2018, Sasseur Real Estate Investment Trust (SGX: CRPU) owns four outlet shopping malls in China. Unlike traditional retail REITs, Sasseur REIT employs a third-party manager to manage its properties, in addition to having its own REIT-manager. This third party, called the entrusted manager, looks after the properties, maintains tenant relationships, and collects rent from the tenants.
One of the main reasons Sasseur REIT uses this structure is because outlet mall rents are usually heavily linked to tenants’ sales – almost 90% of the gross rent from Sasseur REIT’s portfolio is based on tenants’ sales. To defer some of the risks of volatility in rent collected, Sasseur REIT employs the entrusted manager, who pays the REIT an entrusted manager agreement (EMA) resultant rent comprising of a fixed fee and variable fee.
How is the entrusted manager incentivised?
In return for managing the properties, the entrusted manager is entitled to a base fee and a performance fee, if applicable. The entrusted manager fees are linked to the performance of the properties and overall gross rent collected from tenants.
The base fee is calculated as the lower of: (1) 30% of gross revenue or, (2) gross revenue minus the EMA resultant rent.
In essence, the entrusted manager is entitled to the leftover of gross revenue after paying what it owes Sasseur REIT. This maximum base fee is capped at 30% of gross revenue. If there is money left over after the base fee and EMA resultant rent is paid to Sasseur REIT, the entrusted manager is also entitled to 60% of the leftover amount as a performance bonus.
From the way the entrusted manager is incentivised, it is clear that it is in the entrusted manager’s interest to drive gross revenue growth in the properties it manages.
REIT manager incentives
The overall REIT manager manages the entire Sasseur REIT operation and works with the entrusted manager to try to provide unitholders with attractive returns.
This REIT manager is also paid a management fee that is made up of (1) a base fee, and (2) a performance fee, which is linked to growth in distribution per unit. The manager is only entitled to the performance fee if the REIT achieves DPU growth over the previous financial year.
In addition, an acquisition and divestment fee is payable to the manager. The hope is that the acquisition and divestment fees incentivise the REIT manager to source for new opportunities to enhance the long-term returns of Sasseur REIT.
The Foolish bottom line
To me, both the entrusted manager and the REIT manager have incentives that are in line with the interests of Sasseur REIT’s shareholders. The entrusted manager, through its base fee, is motivated to grow gross revenue. In turn, gross revenue growth will increase the EMA resultant rent paid to Sasseur REIT.
Likewise, the overarching manager of Sasseur REIT has a performance bonus that is directly linked to DPU growth.
Although the use of an entrusted manager may complicate the picture and increase the total fees Sasseur REIT ends up paying, there are still pros to this multilayered structure. Not only does the entrusted manager have the relevant expertise and long-standing tenant relationships, but the structure also enables Sasseur REIT to defer some operational risks to the entrusted manager. In addition, the current compensation system incentivises both the entrusted manager and the REIT manager to work towards boosting shareholder value.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore writer Jeremy Chia owns units in Sasseur Real Estate Investment Trust.
This content was originally published here.