Mirabaud: Concerns Grow Regarding Socimi Corporate Governance

2 February 2017 – Expansión

Under the magnifying glass / Remuneration systems based on asset values, such as those used by Merlin and Lar España, have been criticised in the market, above all given that these real estate companies are not actually performing that well on the stock market.

(…). Last summer, some critical voices began to be heard, when Metagestión, a Spanish investment firm, lashed out against Lar’s remuneration scheme. Now, a report from Mirabaud about the real estate market and, specifically, about the Socimis, openly states that “corporate governance is still a problem in the sector”.

In addition to Lar España, the report analyses Hispania, Axiare and Merlin Properties. The analysts express their “concern about the high incentives that the real estate companies have to grow, regardless of the conditions in the market”. Mirabaud’s financial experts explain that “on the basis of conversations that we have had with several experts, there is growing discomfort regarding the corporate governance of Spain’s real estate companies”.

Variable bonuses

Socimi’s are managed in one of two ways: internally, when the management team forms part of the Socimi, such as in the case of Merlin and Axiare; and externally, where the management team forms part of another company, which in turn manages the Socimi, such as in the case of Lar España and Hispania, which are managed by Grupo Lar and Azora, respectively. Irrespective of this management structure, the remuneration that the directors receive can also take two forms.

On the one hand, the directors may receive a management fee by way of fixed or basic remuneration. Then, they may be assigned a bonus over the medium or long-term, on the basis of various parameters. As a general rule, the benchmark used is the evolution of the net value of the assets under management, excluding capital increases. This bonus is known as a performance fee and it is what is concerning investors the most. In some cases, these fees are received through a share delivery program.

One of the most talked about aspects is the basis upon which this incentive is calculated, namely: the growth in the asset value of the company (NAV), given that this is conditioning the market and forcing companies to carry out capital increases to continue buying assets. With the exception of Axiare, “the other real estate companies under analysis all carried out capital increases in 2016” explain the analysts, who add that, in the majority of cases, the operations that were performed were “debatable”. (…).

Provisions

In the case of Hispania, the incentive is not linked to NAV, but instead to the volume of profits recorded and distributed to the shareholders as cash flow. “Everything seems to indicate that the incentives will remain at similar levels and will continue to be paid until 2020, but their calculation will have to be adapted to reflect an operational company, which means that they will have to be linked to the NAV or the share price. We think that it is very likely that the incentives will have to be provisioned for once the company no longer has a clear settlement date”, states the report from Mirabaud.

The latent criticisms have emerged at a time when, despite the fact that the Socimis have expanded their portfolios, their performance on the stock exchange has been mediocre to say the least. With the exception of Axiare, the other large Socimis have been trading below their maximum share prices for the last year and a half. As such, between 2014 and the first half of 2016, the net asset value (NAV) by share had decreased in the case of Lar and Merlin (by -15% and -1%) and had grown very modestly in the case of Hispania (14%), compared with that of Axiare (30%) and other groups in the sector, such as Colonial (43%).

Original story: Expansión (by M.Á. Patiño and R. Arroyo)

Translation: Carmel Drake

110