When a REIT manager's fee runs off equity, the incentive structure can work against a discount to NAV thesis

Reading the management agreement on a smaller externally managed REIT, the incentive structure is often pointed the wrong way for a buyer expecting convergence to NAV. A typical structure: base fee of 1.5% of stockholders' equity per year, incentive fee above a 7% hurdle on core earnings, termination fee at three times trailing base plus incentive, and internalization requiring a supermajority. The manager gets paid on equity capital raised, so issuing shares at a discount to net asset value still grows the fee base even as it dilutes existing holders. That is the specific problem with using this kind of vehicle as a discount to NAV play. The convergence case assumes the REIT either rerates or uses the gap to buy back stock accretively. An externally managed name with fees on equity has a live incentive to keep issuing rather than to buy back stock at 0.75x NAV, and a termination fee at that size makes an activist path expensive enough that a $600m market cap name is unlikely to attract one. Two questions worth working through: does a buyback authorization in the charter mean much when the manager's fee falls with equity shrinkage, and how should the termination fee get priced into a NAV estimate, as a straight liability or as a discount rate adjustment. Carrying it as a liability at three times trailing knocks roughly 4% off the per share number, and whether that is too crude or too generous is a fair debate.