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AdvancedBrazilian REITs · Lesson A3.2 · Module A3

The manager's interest is not always yours

Module A3: Can the manager destroy your capital?

11 slides~5 minquiz at the end

In this lesson

  • The four moments of conflict
  • Share issue: −4% for you, +60% in fees
  • Incentive vs. wrongdoing, with a real case
See the slides
Empty meeting room with a long table

Brazilian REITs · Lesson A3.2

Does the manager want what you want?

Almost always. But at some moments their pocket pulls one way and yours pulls the other.

Where interests split

Four moments to watch

  • Issuing sharesa fee on net assets grows, even if the issue dilutes
  • Hiring in-housethe commission stays in the group
  • Not liquidatinga closed fund pays no fee
  • Merging with a rivalthe manager may lose the mandate

An issue below book value

The fund issues R$ 300M at R$ 90 a share

R$ 500M5M shares at R$ 100+R$ 300M3.33M new shares=R$ 800Mnet assets
R$ 800M÷8.33Mshares=R$ 96book value per share

Offering costs left out to keep the math clear.

Who wins from this issue

The needles point opposite ways

Holder who didn't subscribe

−4%

  • Book value from R$ 100 to R$ 96

Manager, with a 1% fee on net assets

+60%

  • From R$ 5M to R$ 8M a year

The issue can be good if what it buys earns more than its cost. The incentive exists even when it doesn't.

Provider from the same group

Money leaves the fund and goes back home

Business groupcontrols the manager and other firms
Managerchooses whom to hire
The FIIpays the bill
Related firmcollects the fee
Property mgmt.
Consulting
Brokerage

Hiring a related party with fund money needs prior, specific and informed approval by the unitholders' meeting (CVM Resolution 175, Annex III, art. 31).

Don't mix them up

Incentive is not wrongdoing

Incentive

Legal — assess it

  • Issuing to grow
  • Charging on net assets

Wrongdoing

Serious violation

  • Hiring a related party without a vote
  • Selling property to a related party without a vote

CVM Resolution 175, Annex III, arts. 31 and 46.

Real case

FII Grand Plaza Shopping: who flags the conflict?

  1. MeetingVote on a spin-offa holder with over 25% also provided services to the mall
  2. CVM staffSaw a presumed conflictthe vote should be blocked
  3. 05/25/2021 · CVM BoardThe holder declares itthe administrator can't block the vote
  4. Today · CVM 175Written rulea conflicted holder declares it before voting

Decision upheld on reconsideration, 09/28/2021. CVM Resolution 175, General Part, art. 78.

Remember this

Three takeaways

  1. Growth pays the managerWith a fee on net assets, issuing raises their revenue — even while diluting you.
  2. Related parties need a voteHiring or dealing with the manager's group needs prior approval.
  3. Incentive isn't a crimeBut it's exactly where you should look.

Quick quiz · 1 of 2

Hiring the property manager from the manager's own group requires…

See answer

A vote first. It's a conflict of interest (CVM Resolution 175, Annex III, art. 31). Without approval, it's a serious violation.

Quick quiz · 2 of 2

Issue below book value, fee on net assets. Who surely wins?

See answer

The manager. Bigger assets = bigger fee. The existing holder who didn't subscribe sees book value fall; whether the issue helps them depends on what the money buys.

Lesson complete

Next lesson

A3.3Advanced · Lesson A3.3Can a fund cheat its investors?Selling below appraisal: when it is management, a mistake or a serious violation.Continue
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Educational content, written for learners. Not investment advice.