Scott’s REIT, one of Canada’s few real estate investment trusts whose stock is still hurting following the financial crisis, will soon be doling out more money to chief executive officer John Bitove after he struck a deal to jack up the fees that the REIT pays to his own management company.
Because Scott’s is simply a real estate owner, the company pays a percentage of the rental income it earns to an external firm who manages its properties. This external manager also gets a cut of things like the capital that Scott’s raises. As both chief executive of Scott’s and head of JBM Properties Inc., the REIT’s external manager, Mr. Bitove will soon divert more cash flow away from the REIT – and away from unitholders – to benefit his own bottom line.
Though this structure isn’t unusual for REITs, the new fees that Mr. Bitove will ultimately earn are much higher than the industry norm, and fees this high are almost unheard for a company as small as Scott’s. Canada’s biggest REITs have market values worth billions of dollars, while Scott’s is worth just $50-million.
Yet in an interview, Mr. Bitove said Scott's small asset base forced him to act because his management company wasn't making money. Earning 0.25 per cent of Scott's asset base amounts to much less than 0.25 per cent of Dundee REIT's asset base.
Under the previous fee structure, "we don’t make any money, and at some point you have to get back to at least breaking even to make it work," he said.
“It’s a very different REIT from the IPO," Mr. Bitove added. The previous management agreement was put in place "seven years ago, when 99 per cent of its leases were with one tenant. We’ve done a great job of diversifying, a great job of bringing in other tenants and other assets."
However, paying himself, or people he knows, is also a common theme in Mr. Bitove’s storied business dealings. Back in 2007, Canadian Satellite Radio , run by Mr. Bitove, agreed to pay $1.9-million over the next 15 years to a private company that he controlled. CSR also paid $725,000 in 2006 to public relations firm Wilcox Group, which was run by someone on CSR’s board, and the company’s administrative expenses that same year included $1.96-million for marketing services paid to a firm owned by a relative of Mr. Bitove.
Oddly enough, Scott’s investors appeared to have missed the crucial piece of new information when the company quietly sent out a press release late last week. That could be because this update was buried below the news that Scott’s has also extended its first and second mortgages, providing the company with financial flexibility. The stock is up about 6 per cent since.
The release also failed to highlight the exact fees and instead pointed interested investors to SEDAR, where Canada’s corporate public documents are posted online. In the formal material change report posted there, it is disclosed that Scott’s property management fee will jump from 3 per cent of rental revenues to 4 per cent, and also noted that JBM, Mr. Bitove’s company, is now also responsible for capital expenditure work and repairs to Scott’s portfolio properties.
On top of higher rental charges, the base fee being charged for asset management is moving from 0.25 per cent of gross book value per annum to the greater of that, or 0.25 per cent of fair market value. JBM will also earn higher acquisition fees for each property that Scott's acquires, rising to 2 per cent on properties with a purchase price less than $50-million, from 1 per cent; 1.75 per cent on properties with a purchase price between $50-million and $100-million, from 0.75 per cent; and 1.50 per cent on properties with a purchase price over $100-million, from 0.50 per cent.
Dundee REIT , by contrast, is known for having the highest management fees on the Street, and this blows them out of the water.
Scott's is also adding brand new fees, including: a financing fee worth 0.75 per cent of the amount it borrows from banks, financial institutions and other third party lenders when a broker isn’t retained, and 3 per cent of the amount of the capital it raises in public markets.
The distributions that Scott's currently pays out to unitholders amounts to a 12 per cent yield.