NTT DC REIT

[CY09]

In what could be one of the most unitholder-friendly moves in the Singapore REIT sector, NTT DC REIT has tied its REIT manager’s performance fee to DPU growth. If DPU growth fails to exceed 3% in a year, the manager receives no performance fee.

This is a remarkable move that puts unitholders’ interests first by directly linking the manager’s rewards to distribution growth. It is also a bold precedent that I doubt the likes of UOB, CapitaLand and Keppel will be quick to follow.

https://links.sgx.com/FileOpen/NTT%20DC%...eID=906415

[weijian]

In what could be one of the most unitholder-friendly moves in the Singapore REIT sector, NTT DC REIT has tied its REIT manager’s performance fee to DPU growth. If DPU growth fails to exceed 3% in a year, the manager receives no performance fee.

This is a remarkable move that puts unitholders’ interests first by directly linking the manager’s rewards to distribution growth. It is also a bold precedent that I doubt the likes of UOB, CapitaLand and Keppel will be quick to follow.

https://links.sgx.com/FileOpen/NTT%20DC%...eID=906415

Hi CY09,

Based on the last fiscal year, performance fee only makes up ~30% of the total fees and so I would say it is not a major overhaul, but nonetheless still significant from a signaling perspective.

NTT DC REIT's calculation is based off a % of NPI if it exceeds the DPU growth hurdle. This removes the need for a high water mark safeguard and is much better than Keppel Infrastructure Trust's (KIT) fee which is also based on DPU growth. But for KIT, the performance fee is calculated from the YoY %growth in DPU. As Corporate Monitor has pointed out, KIT has no high water mark safeguard and so it is perfectly ok to have KIT mgr earning performance fees just to have DPU in recovery mode on a YoY basis.

The debate about how to link mgr remuneration to unitholders is not new and DPU metric has its own flaws as well. For example, the most obvious one is that the mgr just needs to to look for "return of capital" type of assets to increase DPU. This kind of assets generally come from assets where its useful life is limited or rapidly diminishing, due to technological advancements or usage rights. For example, one can buy a HDB flat with 10years lease remaining and rent it out for double digit yields - So these returns make sense for someone who has 10years of lifespan left but not for anyone with much more. As one of Capitaland Investment's top executives has once remarked publicly (but I can't remember which one) - it is actually very easy to boost DPU on a short term basis, but it will not be sustainable over the long term.

Of course, I am not saying that NTT DC REIT mgr will be doing that (boosting short term DPU at the expense of long term sustainability of payouts) but again, is there anything to disincentivize them not try doing a little bit of that? End of the day, my personal opinion is that although the alignment of financial incentives are important, but GP-LP alignment is more nuanced than just the type of financial KPIs involved.

[swakoo]

Based on the last fiscal year, performance fee only makes up ~30% of the total fees and so I would say it is not a major overhaul, but nonetheless still significant from a signaling perspective.
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Of course, I am not saying that NTT DC REIT mgr will be doing that (boosting short term DPU at the expense of long term sustainability of payouts) but again, is there anything to disincentivize them not try doing a little bit of that? End of the day, my personal opinion is that although the alignment of financial incentives are important, but GP-LP alignment is more nuanced than just the type of financial KPIs involved.

Hi weijian,

Yes, it's good to have a healthy dose of cynicism.  
But to your point, significant from a signaling perspective. NTT should be applauded for being the 1st Sreit to implement this dpu linkage. And hopefully sets the trail for other Sreits to follow.

Note though think that their top tenant is still that company that has just demo 'ed (launched?) a car with nobody inside that was engineered to seem to fly for a few seconds, moving off something like a ski slope.

[CY09]

Hi Swakoo,

Not just that. NTT DC REIT went above and beyond that if the manager elects to take any fee in units, if market price is below NAV, their shares will be paid based on NAV/Unit price and if above NAV, it takes shares at the market price.

I do not think any Keppel, UOB or Mapletree entity will accept that. Imagine their REIT is at 0.7-0.9 book value currently, but when they elect to take units, they have to subscribe to the NAV per unit price. Unthinkable especially for the Keppel entities.

[weijian]

Hi weijian,

Yes, it's good to have a healthy dose of cynicism.  
But to your point, significant from a signaling perspective. NTT should be applauded for being the 1st Sreit to implement this dpu linkage. And hopefully sets the trail for other Sreits to follow.

Note though think that their top tenant is still that company that has just demo 'ed (launched?) a car with nobody inside that was engineered to seem to fly for a few seconds, moving off something like a ski slope.

Hi swakoo,

NTT DC REIT is not the first S-REIT to implement "DPU linkage". I will re-post Corporate Monitor's S-REIT report where it lists down 21 S-REITs that link performance fee to DPU. So out of the 41 S-REITs in the report, 51% (21 out of 41) or the majority actually link their performance to DPU. With NTT DC REIT crossing over, it will be 22/41~54%.

Corporate Monitor's S-REIT report (pg9): https://corporate-monitor.org/singapore-...ther-fees/

It is probably going to be a matter of time before Tesla merges with SpaceX/xAI. With accelerated technological improvements (which means accelerated obsoletion as well) and huge investment into supply, this 2 tailwinds will probably change into headwinds for all data center REITs in the future.

Market discipline has started to come in on neoclouds and some out-of-nowhere data center developer/operators (eg. Aus's Firmus was the big news). From reflexivity perspective, discipline is good as it keeps the excesses in check. Of course, it is still always better to be inside a bubble than outside!

[swakoo]

NTT DC REIT is not the first S-REIT to implement "DPU linkage". I will re-post Corporate Monitor's S-REIT report where it lists down 21 S-REITs that link performance fee to DPU. So out of the 41 S-REITs in the report, 51% (21 out of 41) or the majority actually link their performance to DPU. With NTT DC REIT crossing over, it will be 22/41~54%.

Corporate Monitor's S-REIT report (pg9): https://corporate-monitor.org/singapore-...ther-fees/

Hi weijian,

Thanks for sharing the Corporate Monitor S-Reit report. Admittedly, it is the 1st in the reits i monitor which are among the 20 out of 41.  Nevertheless the 3% dpu growth hurdle is a good signaling. Wonder if the other 21 S-reits have dpu growth hurdles too? [edit: 4/21 have]

It is probably going to be a matter of time before Tesla merges with SpaceX/xAI. With accelerated technological improvements (which means accelerated obsoletion as well) and huge investment into supply, this 2 tailwinds will probably change into headwinds for all data center REITs in the future.

Are u referring to Tesla/SpaceX merger tailwinds from Flying Roadster and Starmind? (video in next post due to VB video quota per post)

Market discipline has started to come in on neoclouds and some out-of-nowhere data center developer/operators (eg. Aus's Firmus was the big news). From reflexivity perspective, discipline is good as it keeps the excesses in check.

Ya, silver lining?

Some investors see a potential silver lining to the troubles. John Lloyd, the global head of multi-sector and corporate credit at asset manager Janus Henderson, said slowing down the financing for projects “makes existing projects and existing AI infrastructure even more valuable”.

Of course, it is still always better to be inside a bubble than outside!

Howard Marks says bubble is only partially inflated so far.

“If you had to single out one element for a bubble, this might be it: The bubble becomes a public mania, a craze, and some people are getting ridiculously rich and anybody who’s not in it feels stupid and is kicking themselves,” said Howard Marks, co-chair of Oaktree Capital Management LP.

Marks — who presciently called the top of the dot-com market, and warned last year that he was “on bubble watch” — said the term bubble is “amorphous” but generally requires markets to measurably reach levels that defy investor judgment, while risk-taking and sentiment also disconnect from reality.

“A bubble is irrational exuberance, it’s imprudence,” he said by phone. “Obliviousness is another good word.”

When analyzing his preferred bubble indicators these days, Marks isn’t convinced we’re there yet. While investors are showing classic signs of fear of missing out on a further rally in tech, the constant comparisons to past bubbles mean they’re not oblivious to the risk. When it comes to another signal — investor imprudence — the signals are also mixed. Traditional price-to-earning ratios do not look bubble-like at current levels, even if they are alarming when the multiple is based on the past ten years of earnings.

[swakoo]

Starmind

[swakoo]

NTT DC REIT went above and beyond that if the manager elects to take any fee in units, if market price is below NAV, their shares will be paid based on NAV/Unit price and if above NAV, it takes shares at the market price.

Hi CY09,

Yes, good! Think they are the only one to do this?

I do not think any Keppel, UOB or Mapletree entity will accept that. Imagine their REIT is at 0.7-0.9 book value currently, but when they elect to take units, they have to subscribe to the NAV per unit price. Unthinkable especially for the Keppel entities.

Ya, Keppel is the most mercenary if look at the fee % in the Corporate Monitor report.

[swakoo]

deleted duplicate post

[touzi]

I do not think any Keppel, UOB or Mapletree entity will accept that. Imagine their REIT is at 0.7-0.9 book value currently, but when they elect to take units, they have to subscribe to the NAV per unit price. Unthinkable especially for the Keppel entities.

Ya, Keppel is the most mercenary if look at the fee % in the Corporate Monitor report.

Isn't KORE a Keppel sponsored reit? It's in the fair list in the CML report.