Measuring the pulse of Calan's fees

The Calan Healthcare Properties Trust has been widely criticised in the past for its high management fees, intensified because much of its development work is done in-house so that element of this year’s annual report, due out later this week, is sure to receive much attention.

Its fees are certainly comparatively high. Last year, its management expense ratio (MER), the total of all costs excluding interest and a small foreign currency loss, added up to 18.4% of revenue.

While that was down from 22.9% of revenue in the previous year, it still compares very poorly with other listed property trusts. Kiwi Income Property Trust, for example had a MER of 11.3% in the year ended March and 11.8% in the previous year.

The comparison isn’t entirely fair as Kiwi is much bigger with total assets of $880 million and consequently has significant economies of scale compared with Calan’s $213.2 million.

When Calan reported its results at the end of August, it said its overall expenses were down 10.7% because it paid less interest. Its pre-tax profit was up 18.3% at $10.6 million, although a higher tax bill cut the bottom line increase to 4.8% at $9.1 million. But what of this year’s MER?

Chief operating officer Miles Wentworth says the annual report will show Calan’s MER is continuing to fall and was only 15.74% of revenue in the latest year.

He also says that property trust MERs aren’t directly comparable because of differing accounting practices in different companies.

It’s "absolutely unfair" to make comparisons unless you’re comparing apples with apples, he says.

"We believe we’re probably the most explicit in what we do in the market place. Maybe that in itself creates criticism," Wentworth says.

While the Shareholders’ Association is taking a close look at Calan’s fees, analysts say investors shouldn’t look at them in isolation.

One reason Calan’s fees are so high is that a lot of the work associated with its developments is done in-house and that in such a specialist field outside experts are mostly not available.

"There’s not a lot of expertise in the design of health properties in New Zealand. These guys have built up a lot of internal expertise," says one analyst

Wentworth says the company would prefer to have external parties doing the work. "It adds an additional risk from the management company’s perspective," he says.

Another analyst says the amount of Calan’s fees isn’t really the issue. "I don’t care about paying for performance," and that’s where Calan has fallen down in the past because of development delays.

But those problems are reflected in the current unit price, 80 cents, which probably fairly prices the company, he says. That’s down from near $1.20 in early 2000. "The market’s sent the company a bit of a message. Until they get runs on the board, that’s the way it’s going to stay."

Net asset backing per unit at 30 June was $1.09.

One factor in management’s favour has been its readiness to sell properties, he says.

The company sold $23.4 million worth of property last year, at mostly slightly more than book value, and has sold a further $2.7 million since 30 June.

"I encourage companies to recycle their capital but not many do because the game has been growing funds under management," the analyst says.

Another encouraging sign for investors is that the gross distribution rose this year from 6.8 cents a unit to 7.5 cents after years of declines.