Goodman Property Trust's manager is pocketing an $8.6 million performance fee for the year ended March, the first time Goodman NZ has earned a performance fee in 10 years.
That suggests the trust has performed particularly well for investors and it's hard to see anybody being disappointed by a 64.7 per cent increase in annual net profit to $319.5 million.
That included a record $201.9 million increase in the value of its properties to $2.6 billion, up from an $83.8 million increase the previous year. The revaluation included $26.2 million from developments - Goodman completed six projects with more than 50,000 square-metres of space in the year just gone and has leased 96 per cent of it.
Goodman NZ's five-year agreement to take its base management fee in Goodman units rather than in cash also ends this year. The base fee this year is $9.3 million.
In 2014, investors approved a package of changes to Goodman NZ's management fee to better align the manager's interests with theirs. That resulted in a lower management expense ratio and improved earnings for unitholders.
Harbour Asset Management portfolio manager Shane Solly says institutional investors had raised a number of governance issues with Goodman NZ ahead of the 2014 changes.
"Most institutional investors look at it as being a positive sign that the managers continue to increase their exposure to the vehicle." The five-year fee agreement "certainly served its purpose."
With Goodman NZ's stake at 21 per cent of the trust, "there's good alignment there," Solly says.
The trust itself has "certainly been a great performer." The trust's units rose half a cent to $1.79 yesterday and have gained 31 per cent in the past 12 months, about double the benchmark S&P/NZX 50 Index's gain.
The reason the performance fee is paid so seldom is that Goodman NZ has a very high hurdle to reach before collecting.
It can claim up to 5 per cent of the trust's outperformance, effectively against the S&P/NZX Property Index, excluding the Goodman trust. But any under – or over – performance from previous years is carried forward indefinitely.
Goodman NZ can't earn a performance fee on any returns in excess of the index plus 5 per cent a year and so this year $11.2 million of out-performance is being carried forward. In 2018, under-performance of $1.1 million was carried forward.
The manager has to use any performance fee to buy units in the Goodman trust at either market price or net tangible asset backing, whichever is the higher.
The Goodman trust is holding this year's payout steady at 6.65 cents per unit, the same amount it paid in the year ended March 31, which Goodman NZ says is 95 per cent of cash earnings.
However, that calculation doesn't include the management fees, which arguably are an expense of running the business. Fund managers usually use the available funds from operations measure.
Chief financial officer Andy Eakins says Goodman NZ doesn't use that measure but that, depending on how it's calculated, would mean per-share earnings of $6.24.
That means that Goodman is paying out more in distributions than cash earnings.
The fund manager who pointed this out says he expects it will take a couple more years before the Goodman trust's payout and its cash earnings align.
Goodman has a significant development programme planned this year, having begun 11 new projects costing $160.5 million.
It also has plenty of development capacity with its loan-to-valuation ratio at just 19.7 per cent at March 31 and committed gearing at 23.7 per cent.
Goodman NZ's fees are in stark contrast to that of Vital Healthcare Property Trust, the only other remaining property trust listed on NZX. Goodman's market capitalisation is $2.3 billion while Vital is less than half that at $1.07 billion.
The fees paid to Vital's manager, owned by Canada-based NorthWest Healthcare Property Trust Real Estate Investment Trust, jumped to $22.1 million in the six months ended December, up nearly 75 per cent from a year earlier, at the same time as Vital's net distributable income fell 18.7 per cent.
That didn't include another $9.5 million in capitalised fees and expenses.
However, NorthWest is having to pay Vital back $3.6 million plus $9 million of the capitalised fees after pressure from independent directors, the trustee, Trustees Executors, and the market conduct regulator, the Financial Markets Authority.