Tuesday, July 17, 2012

More than a Reit, less of a lure?

Straits Times: Mon, Jul 16

WHEN CDL Hospitality Trust (HT) went public six years ago, it was sold to investors as Singapore's first-ever hotel real estate investment trust (Reit).

By all measures, it has been a big outperformer on the local bourse, having more than doubled from its 83 cent issue price to $1.925 over the period.

But CDL HT is not a pure Reit. It is actually a 'stapled' security made up of a Reit stapled together with a business trust. Few retail investors are aware of this when they buy into the counter.

Given the roaring success which CDL HT enjoys, it is not surprising that investors are hoping for an encore when Ascendas Hospitality Trust launches its own hotel-related offering that comes with a similar business structure.

Others, however, have flagged reservations about these sorts of newfangled investments finding their way to the Singapore Exchange (SGX).

'Stapled securities, preference shares, non-voting shares, and the like... Investors unused to these gimmicky listings should stay clear,' says stock activist Denis Distant.

One big lure of the CDL HT in 2006 was the highly attractive 'tax-free' yield of 6.37 per cent that it featured prominently on its prospectus.

This is also likely to be Ascendas HT's big selling point given its forecast yield of up to 7.8 per cent, and the extremely low interest rate environment.

As such, it may be worthwhile to understand what Reits and business trusts are all about, as well as the merits of stapling the two products together, as CDL HT did - despite the qualms raised by some market watchers.

Reits are 'closed end' funds which operate in a similar manner to unit trusts. But unlike unit trusts, which raise funds to invest in shares, Reits specialise in income-generating real estate assets, such as shopping malls, offices, industrial buildings, warehouses or hotels.

Funds raised in a Reit are used to buy a pool of properties which are then leased out to produce rental income. This is eventually given out to investors as dividends.

As Reits are 'passive' investors, they have to appoint a manager - usually a sponsor or major shareholder - to manage the properties.

And that is where a business trust steps in, if it is stapled to a Reit and sold to investors as a single offering.

What is good about a business trust is that it is run like a company by its trustee manager, without facing any of the legal or regulatory restrictions which a Reit will encounter on its borrowings.

It also enjoys the advantage of being able to distribute dividends directly out of the cash flow it gets from the business it runs.

That beats buying into a listed company which can pay dividends only out of accounting profit - a number derived after deducting non-cash items such as depreciation for machinery and buildings.

Better still, the business trust can be appointed as the manager running the properties owned by the Reit, if the two business classes are stapled together.

Corporate lawyers say that this is likely to be the rationale behind CDL HT's business structure - where the Reit is stapled to a dormant business trust. In the event that the manager appointed to run its hotels should quit, for whatever reason, CDL HT can always activate the business trust to take over the hotel management.

But that is not the case for Ascendas HT, whose objective appears to be maximising the potential of the business trust, stapled to its Reit, to the fullest.

Unlike CDL HT's dormant business trust, Ascendas HT's business trust makes up almost three-quarters of the group's total assets.

Ascendas HT also makes no bones about growing the business trust side of the company, disclosing in its prospectus that it 'will endeavour to selectively undertake certain hospitality and hospitality- related development projects which have the potential to enhance its portfolio'.

Whether that will go down well with investors remains to be seen. As its business trust is dormant, CDL HT has always been highly prized as a hotel Reit, ranking on a par with the best Reit performers listed on the SGX in investors' eyes.

Business trusts, however, have languished. Seven of the nine business trusts tracked by Shareinvestor.com are trading way below their respective IPO prices.

These include Perennial China Retail Trust, which has fallen 31 per cent from its 70 cent issue price since it started trading in June last year.

Still, whether investors value stapled securities as Reits or as business trusts may boil down to factors such as the rules of engagement when they become takeover targets.

The stringent takeover code on listed firms applies to Reits, but is not applicable to business trusts.

Indeed, a hostile takeover of a business trust can succeed only if its trustee manager can be removed, and this requires the go-ahead from at least 75 per cent of the unit-holders.

But Ascendas HT's prospectus discloses that the takeover code applies to stapled securities too.

'The stapled security holders must closely adhere to the takeover code in respect of any acquisitions or investments as business trusts are subject to the takeover code,' its prospectus reads.

This means that if an investor acquires more than 30 per cent of a stapled security, he may be required to make a takeover offer for the rest of the company.

Such a safeguard will come as a big relief to investors who have griped about the difficulties of removing incompetent trustee managers who stay in the driver's seat, simply because they retain control over at least 25 per cent of the business trust.

Still, before investors plough their hard-earned savings into a stapled security, they should make sure that they read the prospectus carefully and understand all the risks involved.

Just because CDL HT is thriving is not a good enough indicator that other stapled securities with a similar business structure will do just as well.

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
Senior Sales Director
Email: marshe_inc@yahoo.com.sg
DTZ Debenham Tie Leung (SEA) Pte Ltd (L3006301G)

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