Management fee structure of the (public) Italian real estate funds. Le strutture commissionali dei fondi immobiliari quotati in Italia.

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1 Maagemet fee structure of the (public) Italia real estate fuds. Le strutture commissioali dei fodi immobiliari quotati i Italia. Massimo Biasi Uiversity of Macerata ad atholic Uiversity of Mila massimo.biasi@uimc.it Eres Idustry Semiar Rome, October 18, 2013 Maagemet fees Specialess of the maagers compesatio schemes of real estate ivestmet fuds (REITs) gross asset value compesatio structures (-REITs) et asset value -based compesatio structures (-REITs) Effect of maagemet fees o Ivestmet choices apital structure decisios Ifluece o REIT s share value ad performace Prelimiary market data cosiderig the preset prudetial disciplie ad regulatio 18 Ottobre 2013 Eres Idustry Semiar 2 1

2 Maagemet fees Maagemet fee typically refers to: (1) a fixed compoet defied as ivariable percetage of : total assets [alteratively gross asset value ()] A D et assets () (2) a variable compoet defied as a (over)performace fee related to target corporate-level total retur rates paid out at REIT s liquidatio Low variace i compesatio methods 18 Ottobre 2013 Eres Idustry Semiar 3 Maagemet fee Number of (Public) Equity REITs alculatio Base Aual Maagemet Fees mea % Other Fees (Performace Fee) Aual Fial (mea) 9 1,25% 18,00% mi. 0.5 max ,60% 19,25% mi. 1.3 max 1.9 Net Asset Value Gross Asset Value (Total Assets) (Weighted) mea values. 2012/2013 data. 18 Ottobre 2013 Eres Idustry Semiar 4 2

3 -based REIT ompesatio Structure = t= 0 = f m t ( 1+ ( ) mi A ~ ;A AQ * [ m;mi( A ~ ;AAQ);k; ( r r )] fixed fixed fixed k 0 + (1+ [ D; ( E rr )] A = f ; * [( 1+ r) ( 1+ r ) ] m fixed fee rate A ~ RE assets appraisal values A acq. Acquisitio price k fixed over-performace fee rate r * hurdle retur rate E et earigs rr et earigs retetio rate i opportuity cost of capital [ mi( A ~ ;A AQ )] ± ValGaiLoss Other Pr ofitslosses E A ~ t + 1 = ra rdd m ± 18 Ottobre 2013 Eres Idustry Semiar 5 Expected Effects o Fiacial Decisios of -based ompesatio Structures Icetive to leverage (fast) up to the max. allowed debt ratio proceeds of debt used to purchase additioal real assets (A) that icrease compesatio base This regardless of NPV of ivestmet opportuities NPV >=< 0 Appraisal based assets valuatio margially limits opportuistic behaviors of REITs maagers due to the reductio of the compesatio base to market values i the case of eg. NPV ivestmets (i.e. property value equal to the preset value of expected property s cash flows i order to obtai a zero-npv) Icrease i debt (D) geerates a (expected positive) et earigs cotributio to of margial ivestmet as log as r A > r D as fuctio of rr t+1 > t Icrease i debt (D) also amplifies expected volatility of et earigs (E) which i tur icreases optio value embedded i the (over)performace-fee compoet of the compesatio scheme Effects o share value depedig o valuatio perspective ( valuatio vs. market price) 18 Ottobre 2013 Eres Idustry Semiar 6 3

4 -based REIT ompesatio Structure = t= 0 = f m [ mi( A ~ ;A AQ ) D] t ( 1+ * [ m; [ mi( A ~ ;A AQ ) D;k; ] ( r r )] fixed fixed fixed ( A D) = f [ ( E;rr )] k 0 + (1+ * [( 1+ r) ( 1+ r ) ] m fixed fee rate A ~ RE assets appraisal values A acq. Acquisitio price D Debt k fixed over-performace fee rate r * hurdle retur rate E et earigs rr et earigs retetio rate i opportuity cost of capital [ mi. ( A ~ ; AAQ ) D] ± ValGaiLoss Other Pr ofitlosses Et + 1 = ra A rdd m ± 18 Ottobre 2013 Eres Idustry Semiar 7 ompesatio base ot directly affected by (D) But, below others: Expected Effects o Fiacial Decisios of -based ompesatio Structures (Limited, i relative terms) icetive to leverage i order to use the proceeds to purchase more real assets that icrease compesatio base because of: a (expected positive) icreases (at decreasig rates) via et earigs cotributio of the margial ivestmet as log as r A > r D as fuctio of rr t+1 > t REIT maagers are expected to use debt proceeds to select oly ivestmet opportuities which have zero or positive NPV NPV 0 [trasactio price market value] Net asset-based compesatio disicetivizes NPV<0 ivestmets valuato losses egatively affect (i.e. the compesatio base) Icrease i debt (D) also amplifies expected volatility of et earigs (E) which i tur icreases optio value embedded i the (over)performace-fee compoet of the compesatio scheme Net effect: icetive to leverage (but at lower rates compared to -Reits) Effects o share value depedig o valuatio perspective ( valuatio vs. market price) 18 Ottobre 2013 Eres Idustry Semiar 8 4

vs. -based REITs Relative ompariso I relative terms, give the regulatory ad market framework, it might be expected, below others, that: (1)We should observe positive debt tred for all REITs Leverage

5 vs. -based REITs Relative ompariso I relative terms, give the regulatory ad market framework, it might be expected, below others, that: (1)We should observe positive debt tred for all REITs Leverage process should be faster for -based REITs Leverage of -based REITs could be lower because of selective i ivestmet decisios (2)Maagemet fees of -based REITs should exceed i the course of time ad as fuctio of m i relative terms maagemet fees of -based REITs ad egatively affect et RE returs (3)-REITs are expected to be more selective i ivestmet decisios ad to experiece a higher RE assets tradig itesity i order to exploit gais from asset valuatio i respect to -based REITs A A A ~ A ~ r A ~ A ~ r < Gross retur of RE ivestmets could be higher for -based REITs tha for -based REITs Returs et of maagemet fees should be higher for -based REITs tha for -based REITs because of expected higher fee icidece for -based REITs r A ~ A ~ A ra A ~ A ~ < 18 Ottobre 2013 Eres Idustry Semiar 9 Prelimiary market data (leverage as % of the max allowed amout) 18 Ottobre 2013 Eres Idustry Semiar 10 5

6 Asset retur (total retur) Average retur for vs. -Reits (etire populatio) DATA Overall RE Asset Returs Differece (- ) Aual mea differece 30/06/2006 0, , , /12/2006 0, , , ,07% 30/06/2007 0, , , /12/2007 0, , , ,13% 30/06/2008 0, , , /12/2008 0, , , ,35% 30/06/2009 0, , , /12/2009 0, , , ,18% 30/06/2010 0, , , /12/2010 0, , , ,02% 30/06/2011 0, , , /12/2011 0, , , ,78% 30/06/2012-0, , , ,42% 18 Ottobre 2013 Eres Idustry Semiar 11 Asset retur et of maagemet fees Overall RE Asset Retur et of Mgmt. Fees Differece Aual mea DATA (- ) differece 30/06/2006 0, , , /12/2006 0, , , ,70% 30/06/2007 0, , , /12/2007 0, , , ,73% 30/06/2008 0, , , /12/2008 0, , , ,61% 30/06/2009-0, , , /12/2009-0, , , ,13% 30/06/2010 0, , , /12/2010 0, , , ,27% 30/06/2011 0, , , /12/2011 0, , , ,65% 30/06/2012-0, , , ,59% 18 Ottobre 2013 Eres Idustry Semiar 12 6

7 Fial cosideratios Maagemet fee choice is peculiar of real estate ivestmet fuds The alterative betwee ad compesatio base affects the ivestmet decisios ad capital structure choices which i tur may ifluece REIT share value ad performace Need to defie the compesatio base ad the fee level cosiderig the ivestmet objectives ad target leverage ratios at iitial stage (i.e. at REITs costitutio) 18 Ottobre 2013 Eres Idustry Semiar 13 7

REITInsight. In this month s REIT Insight:

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