More than a Reit, less of a lure?

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The Straits Times
www.straitstimes.com
Published on Jul 16, 2012
More than a Reit, less of a lure?

New Reit hybrid's emphasis on its business trust breaks new ground

By Goh Eng Yeow

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.
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