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11/12/2023
Cap rate compression has been a challenge for both executives and investors in the past year. One sector that has been impacted more than others is the commercial property sector, with decreased FFO and negative security price growth for most REITs as a result.
We recently analysed vesting outcomes for executive incentive plans in the S&P/ASX 200 A-REIT Index to investigate if realised pay for managers has also been impacted.
The table below sets out STI vesting outcomes in ASX 200 REITs in FY23 compared to FY22. Unsurprisingly, STI vesting outcomes were significantly lower compared to last financial year:
Table 1: STI vesting outcomes % of maximum opportunity
|
Statistic |
FY22 |
FY23 |
|
Average |
88% |
71% |
|
25th Percentile |
76% |
62% |
|
40th Percentile |
87% |
65% |
|
50th Percentile |
93% |
67% |
|
60th Percentile |
96% |
68% |
|
75th Percentile |
99% |
79% |
The weighting of financial and non-financial STI performance measures was consistent with FY22, with 60% weighted to financial measures (e.g. FFO, AUM targets) for the median company. That is, the lower STI vesting outcomes compared to FY22 appear to have been driven mainly by financial performance.
Figure 1: STI performance measure weighting (median)
STI outcomes were also lower across the board. Median STI vesting decreased in Diversified REITs, Office REITs, as well as in Retail REITs:
Table 2: Median STI vesting outcome % of maximum opportunity
|
GICS sub-industry |
FY22 |
FY23 |
|
Diversified REITs |
91% |
67% |
|
Office REITs |
85% |
53% |
|
Retail REITs |
92% |
68% |
For LTI plans tested in FY23 the results were less conclusive than for STI plans. As LTI plans tested in FY23 were typically granted in FY20, the impact from higher interest rates in only the last year of 3-year performance periods may not necessarily have resulted in reduced vesting outcomes.
LTI plans that were tested in FY23 vested at 61% on average, in line with FY22.
Table 3: LTI vesting outcome % of maximum opportunity
|
Statistic |
FY22 |
FY23 |
|
Average |
63% |
61% |
|
25th Percentile |
33% |
43% |
|
40th Percentile |
49% |
61% |
|
50th Percentile |
69% |
68% |
|
60th Percentile |
90% |
74% |
|
75th Percentile |
99% |
97% |
Of the 18 LTI plans tested in FY23, 16 included performance measures based on relative TSR. The weighting was typically at least 50% for this measure. For plans that were tested in FY22, 11 of 15 featured relative TSR. The use of this measure likely contributes to average vesting outcomes being relatively stable despite financial performance and share prices being negatively impacted in the last year, as relative TSR comparator groups typically comprise other ASX 200 A-REITs. As only half of the companies will be above median for a given performance period, which is a typical requirement for vesting to commence, only half of the companies will have a proportion of the LTI vest for the relative TSR tranche.
The average LTI vesting outcomes for REITs in 2022-2023 are also in line with previously observed vesting for LTI plans in ASX 200 companies more broadly (see HERE).
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