NZL

[Hectorplains]

I don't normally quote people's messages from such a long time ago because its not really fair on people as opinions can change and so can companies but I think it could be worth discussing this in the context of NZL.

As you can see above I did have a look at the detail of the management contract and realised ALF has it. I know a modest amount about ALF's chequered past but then I looked at the appalling liquidity and decided, considering that, you'd really have to have 100% confidence in ALF, its management and board for the long run, (which requires me to take a very deep dive into ALF and is more intellectual bandwidth than I can apply at this point), before taking a meaningful position, if you could get one without materially affecting the share price.  So that's as far as I got with it but I did wonder the following which perhaps you could shed some light on ?

1. Do ALF have the irrevocable ownership of the management contract with NZL ? 
2. If so, who gave them this ownership ?
3. Can the terms of the contract be reviewed by NZL's board, especially the egregious 10% of all capital gains with no hurdle rate at all, even for general inflation ?
4. How does the overall cost of the contract compare with say ARG's internalized management which has an expense ratio of just over 8% of rental income ?

This is my understanding...

 1. Do ALF have the irrevocable ownership of the management contract with NZL?

Yes, ALF via its wholly owned subsidiary NZ Rural Land Management Ltd (NZRLM), holds the "exclusive and ongoing management agreement" for NZL. This contract does not have a fixed end date.

2. If so, who gave them this ownership?

NZL did when it listed on the NZX in December 2020 as part of its IPO structure.  NZRLM was appointed as the external manager of NZL.
The terms of the contract, including the fee structure, were disclosed at the time of listing. 


3. Can the terms of the contract be reviewed by NZL's board—especially the 10% capital gains fee with no hurdle rate?

Legally, the NZL board cannot unilaterally change the terms of the management agreement.   The 10% performance fee on gross capital gains  is contractually embedded.  The agreement is highly favorable to the ALF and not renegotiable without their approval (of which they have no obligation provide).  ALF would surely not be agreeable to any alteration as this would not be in their shareholders best interests.

4. How does the overall cost of the contract compare with say ARG's internalized management which has an expense ratio of just over 8% of rental income ?

NZL's total expenses as % of rental income I estimate at 20%+ of rental income, when including base + performance fees.   As Basil previously noted, NZL's capital gains fee (10%) has no hurdle rate, so it can be triggered even by inflation.  NZL's management fees are considerably higher, especially considering their passive farmland ownership model.

[Basil]

Thanks Hectorplains, much appreciated.  I'm quite surprised Rob Campbell agreed to such a lucrative management contract with no hurdle rate for performance fees.   By way of comparison, I think KPG's 12 point something percent of rental income with its internalised management contract is still too high, (was a lot worse and to me still indicates the fat cats at the management table are far too well fed), but ~ 20% is egregiously bad.  8 point something percent for ARG is okay-ish.

In my opinion the management contract is probably the key reason the share price is well south of asset backing.

[Hectorplains]

Thanks Hectorplains, much appreciated.  I'm quite surprised Rob Campbell agreed to such a lucrative management contract with no hurdle rate for performance fees.   By way of comparison, I think KPG's 12 point something percent of rental income with its internalised management contract is still too high, (was a lot worse and to me still indicates the fat cats at the management table are far too well fed), but ~ 20% is egregiously bad.  8 point something percent for ARG is okay-ish.

In my opinion the management contract is probably the key reason the share price is well south of asset backing.

20% is a conservative estimate, it's probably closer to 30%.

[Basil]

20% is a conservative estimate, it's probably closer to 30%.

I thought Rob Campbell was smarter than signing on to a deal like that.  Maybe he's got a bit carried away with his ESG leanings over the years and taken his eye off the ball at bit ?   I have read you're at your professional peak at 47 years old and its all down hill from there...something I am acutely aware of.

[Plata]

How fortunate buying in on Monday. Super bizarre announcement. Anyway, regarding management expense as a % of rental income its the transaction fee that has the most impact in recent times (they sold 25% of the portfolio to a capital partner). It seems pretty difficult to estimate this kind of information without looking at financial statements. I expect FY25 ratio to be below 12% unless they do something drastic with this capital review.

                                   NZL FY24
RENT                          19869
MANAGEMENT FEES  2067
STATIC RATIO             10.4%
+ TRANSACTION FEE 1242
TOTAL RATIO              16.6%

[Hectorplains]

Here's my calcs

1. Base Management Fee = 0.75% per annum of NZL's total gross asset value.  NZL gross assets are approx $400 million, the base fee is: $3m per year

2. Performance Fee 10% of the gross increase in net asset value (NAV) over the financial year. If NAV growth is 5%, net asset increase = $15m.  10% fee = $1.5m performance fee

I assumed most income was rental yield @ 4% = $12m p.a.

Total Fee % of Rental Income:
4m / 12m = 33.3

Even without a performance fee, the base fee alone ($3m) would already be 25% of $12m rental income. Unless my sums are way out? 

[Basil]

Okay...I couldn't help myself researching the facts seeing as there's such a broad spectrum of opinion on what the fees really amount too.

These are the facts on the total all up management fee costs (for all types of fees, annual management, transactional and performance fees) from the accounts over the periods / years since NZL listed.

1. In the first period of trading from the IPO to 30 June 2021 total management fees of $3,599K were paid against lease income of $498K (see note 18 of the accounts)

2. In the year ended 30 June 2022 (see note 19) total fees were paid of $6,013K on lease income of $8,215K  (This year included a massive performance fee)

3. They changed the balance date after that to December.  In the half year ended 31 December 2022 (see note 20) fees paid were $962K on $5,681K lease income

4. In the year ended 31 Dec 2023 (see note 20) fees of $2,878K were paid on lease income of $15,350K

5. In the year ended 31 Dec 2024 (see note 23.1) fees totaled $3,466K on lease income of $19,869K

6. Total management fees paid since listing, (excludes IPO costs that ate up ~ 4 cents of NAV) were $16.92m on total lease income of $49.61m.

7. The overall management fee expense ratio as a percentage of lease revenue from the time of IPO to 31 December 2024 was a whopping 34.1%

8. Now they want to do a strategic review.  My goodness.  More fees to be paid....surely not !!

My view is that the management expense ratio is egregiously high and you can lay almost all the blame for the discount to NAV at the door of the ludicrously generous management contract.  Please note that the above fees and management fee expense ratio does not include the annual costs of the board of directors so your total costs to have this managed for you is considerably worse than 34.1% of net lease income.
That basically concludes my review of NZL, although tomorrow just for fun if I get time and feel inclined, I might work out the total management expense ratio including directors fees as a percentage of income.  Disc: I do not own any and have no intention of acquiring any after my review.

[Plata]

Making a judgement based on the fees paid during their initial deployment of capital post-ipo (whilst I agree it was excessive) is not really representative of the current state of affairs IMO. Board of director fees add another 227k on top IIRC.

[Basil]

Okay, excluding the period from IPO to June 2021 total management fees to date are $13.32m / $49.1m = 27.1% per annum + directors fees, still egregiously excessive.

[Plata]

I still think including periods 1-3 is pointless because as the low lease incomes indicate, they had not spent all their money yet. I am wary of any capital review actions generating a lot of fees but in theory that's what the directors are for.