OUE H-Trust

[wee]

Hi Lonewolf

I know that BT is not active. But this is a structured product so we need to understand the mechanics properly. Thanks for guiding me to A-HT

My basis is very simple: if Lonewolf you are the owner, what is the incentive for you to go into a complex structure like this instead of a simple REIT?

For one I can think of using funds allocated to the BT during capital calls to pay for the master lease as a "short term bridging" so that the REIT yield does not drop ON PAPER. That of course means little to those who analyse the cashflow properly. Or when the owners deemed right, to venture into other non REIT related business.

I'm trying to figure out what is the incentive. After a while we can see the difference between listed business trust and REIT in Singapore, when people thought they were not so dissimilar prior to 2009.

Hi Specuvestor,

maybe I'm a bit dense here but since REITs are concocted by vendors/managers, wouldn't the optionality for the manager to further financial engineer post REIT (per your example) be enough incentive for them to go into such a structure?

Or is your question about the incentive of the REIT investors for such a structure? If its the latter, I would say lesser financial engineering the better for investors, of course.

What am I missing?

[KopiKat]

For Trusts, the interesting thing is this Stapled thingy is used only for those where the assets are mainly in Hotels (some do have a smaller Retail / Office part). So, is there something the Hoteliers (original owners of the assets ie. Sponsors) know that we do not know??

Perhaps it's also a more tax efficient structure if in the future, the Trust have to operate the Hotels when the original "tenant" (sponsor), for whatever reasons, decide to move on?

[specuvestor]

Hi Wee if the risk / reward is the same, it is hard to understand why one would go into a complex structure, unless there are external incentives. People sell/buy structured products rather than say straight bonds because there are incentives, be it higher return, tax, liquidity, access etc. Venturing into a non related business is certainly an incentive but I'm not sure that is shareholder friendly.

REITs are here to stay because they serve a purpose for the issuer: capital recycling with management income yet continue to control the entity; while investors disintermediate overriding the financial institutions to get higher yields.

Then now we see people try to be even smarter... business trusts and now stapled. KopiKat raised a good point that so far it is the hospitality REIT that are stapled... maybe it is just peculiar to the hotel industry. I just worry like Hokkiens say: "smart is good, don't try to be fake smart"

Watch this space... the riady family are "operators". Indonesians know them as well as we know UOB Wee (pun not intended, hope u are not related to him LOL)

[lonewolf]

From what I understand, business trust structure was initially developed and promoted for none Singapore real property assets that doesn't require/benefit from the tax efficiency of a REIT. After a while, more recently listed REITs started to list stapled REIT & business trusts.

My simple mind thinks that is a logical development (from the manager's standpoint) since it gives the manager full tax efficiency of a Singapore property reit plus the flexibility to invest in many other types of assets in the future, including foreign properties (importantly without affecting the Singapore corporate tax efficiency of the REIT vehicle) - all in 1 listed vehicle.

But many listed REITs has foreign owned properties without needing to go into the stapled-security arrangement. So that should not be the main reason or consideration.

I shared KopiKat's observations that this arrangement is limited to hospitality trust with assets mainly in hotels. FEHT has some serviced apartments but that should not be the consideration since Ascott Residence Trust see no need to go into the stapled-security arrangement too.

I agree with KopiKat that it has something to do with the possibility that trust may need to operate the hotels in future. But that observation that does really square up with the situation in A-HT.

Maybe I'm over-simplifying things and not asking enough questions. My perspective is that until and unless the BT component of the stapled-security become active, we should continue to analyse it in the same way as any other REIT.

[wee]

Hi Wee if the risk / reward is the same, it is hard to understand why one would go into a complex structure, unless there are external incentives. People sell/buy structured products rather than say straight bonds because there are incentives, be it higher return, tax, liquidity, access etc. Venturing into a non related business is certainly an incentive but I'm not sure that is shareholder friendly.

Its hard to understand the investors' mind indeed. Currently, do investors discount a REIT + BT stapled, when compared to a pure REIT? Investors at large seem very accommodating to financial engineering going on for the longest time - I would be surprised if they do discount a new listing just because of a passively stapled BT + REIT.

Your thoughts?

Edit:

Some information i fished from Google:-

Quote:
" Importantly, Singapore business trusts are not subject to the restriction that applies to Singapore REITs preventing them from investing in excess of 10 per cent. in development assets and are also not generally subject to restrictions on investing in trading entities in the same way as Australian managed investment schemes."

http://www.lexology.com/library/detail.a...e318456baf

1) hospitality reit may potentially become operator with BT stapled. 2) more adventurous REITs may go into development if they want with BT stapled.

[DP28]

This is a vicious cycle.. Retail, pension funds & instituitions wants a high yield instrument and REITs fulfill that criteria. Low interest rate environment has been ramping up property sales and flipping properties become a very in thing to do even more so for developers. This also attracts people to buy REITs for their high yield relative to low interest rate environment and I witness REITs trades at PE 2x to 5x subsquent exorbitant level like 20x?

In the olden days, businesses will transact their properties to each other at "fair value" at willing buyer-willing seller basis. This is the risk of Lumpiness when you buy a physical property and be rewarded for the risk you untake. When REITs came upon, you provide companies to have a quick exit on the plan B when you cannot find such buyer.

IMO. This few years due to the boom in REITs & High yield stock structure prompt developers and businesses to securitize their assets because of the interest in it and not because developers need to. Back in the old days, will company actually sell out their crown assets? Despite this cycle.. I still believe value has been created along the way. However, when things get complicated when new instrument is created thru stapling, BT & REITs, new innovation and layering etc. These can only be tested in time of market stress and things may start to unfold then. Even now HDB wants to jump into the REITs bandwagon..

My basis is pretty simple. "you dont invest in something that does not make sense at all"

[specuvestor]

I would say investors discounted business trusts vs REITS pre 2009, but not enough There lies the issue I have with Lone Wolf's statement that "unless the BT component of the stapled-security become active, we should continue to analyse it in the same way as any other REIT"... but again Mr market can remain irrational longer than we can remain solvent

Therein lies the wisdom of Buffett's saying: When the tide goes out, then we know who have been swimming naked. When times are good, there is no difference. Only when times are bad that people look at the details.

Agree mostly with DP28, but I think structuring is a secondary evil. The primary evil is leverage. We've seen it again and again through so many crisis. That's why it is a good thing that REITS have a cap on leverage. Using leverage to maintain DPU makes no sense, except "academic ROE" sense.

http://www.fool.sg/2013/08/01/one-import...ith-reits/

[wee]

I am not advocating investment in BT + REIT vs pure REIT at all.

Financial engineering are games vendors and REIT managers play. Many has made good money on REITs in recent years but I am happy to watch by the sideline as I never like the idea of being forced fed expensive assets.

--------------------

Just checked with a contact - insofar hospitality trusts are concerned Kopikat is right. As there is only 1 tenant usually in a hospitality reit, having a BT to take over the operation of the hotels should the tenant decide not to renewal is regarded by the authorities as a level of protection to the public. I was told this model was copied from other jurisdictions.

[DP28]

The only key reason that I can think of for such structuring is to allow flexibility to go above REIT gearing level via the BT. Actually I have a question.. REITs are mandated to distribute 90% of earnings to enjoy tax concession. Can the Stapled securities input a clause to withhold distribution and forgo tax concession?

[wee]

But many listed REITs has foreign owned properties without needing to go into the stapled-security arrangement. So that should not be the main reason or consideration.

I shared KopiKat's observations that this arrangement is limited to hospitality trust with assets mainly in hotels. FEHT has some serviced apartments but that should not be the consideration since Ascott Residence Trust see no need to go into the stapled-security arrangement too.

I agree with KopiKat that it has something to do with the possibility that trust may need to operate the hotels in future. But that observation that does really square up with the situation in A-HT.

Maybe I'm over-simplifying things and not asking enough questions. My perspective is that until and unless the BT component of the stapled-security become active, we should continue to analyse it in the same way as any other REIT.

Kopikat's observations is right. see my above amended post.