Boustead Singapore

[Nick]

We don't see office and retail reits engaging in development properties due to the 10% limit. A shopping mall or office tower would often cost in excess of $500 million hence the REIT AUM need to exceed $5 billion which is pretty rare. Moreover, I doubt they will wish to compete with their sponsors directly in the development arena. So far, we only have CCT and CMT working in tandem with Capitaland to develop malls and office.

This is different for industrial REITs as the project size are small - often cost < $100 million so virtually any REIT can qualify. We have seen every industrial REIT (with the exception of Sabana) engaging in DB&L over the past few years due to the attractive returns. Moreover, many of these REITs lack a large active developing sponsor - AIMS, CIT, Sabana, Ascendas and even Maptree sponsors are not developing local industrial properties at the moment.

I think the reason is the tax benefit. A corporate structure needs to charge a higher revenue compared to a REIT to attain similar level of profit assuming debt cost are the same. So in terms of lease rates, the REIT often have a more attractive deal to a potential client. This makes it tougher for non-REIT to compete.

My guess is that the stapled REIT could include a business trust component. There is no development limit in a business trust so that entity could be holding on to future development assets.

[wcpk90]

Isn't Boustead still relatively far away from a possible Reit listing? (About halfway there. Looking at their current building portfolio)

And could someone enlighten me on the reit part (I don't understand reits quite well), given that interest rates are likely to increase, Reits will find it more expensive to borrow hence can't compete with boustead for better yielding projects without compromising their returns for shareholders. So Boustead wants to set up a staple reit for tax efficiency purposes?

[freedom]

maybe I did not make myself clear enough.

What I mean is why not every property owning company(note:the company only owns properties, derives its income from owning the properties and has no other business) is structured as a reit, and let the parent company wholly own it and distribute 90% of its income to the parent company. Anyway, the full income from the property owning will go to the parent eventually.

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Am I thinking too much? I thought that Boustead can't compete with REITs because Boustead has a much higher IRR expectation than REITs to compensate the risk. Sadly, in Singapore, there are too many investors demanding too little from REITs, which making the REITs very aggressive on building assets.

Ideally, the engineering part is where the money comes from. and the part of owning the asset at most provides average return in the longer term. Think about why Boustead is not interested in BOT projects for its water division. My simple understanding is that the above. The Engineering part is good money, and the owning part is dead money.

In the past, Boustead never does DBL projects, If I am wrong, because of the same reason. Only recently that the industrial properties price is increasing and REITs are all in for it.

[greengiraffe]

Hi Nick,

The upcoming model that Boustead is pursuing is an established model for many property companies listed on ASX.

Australand is one such example and we can easily check it up.

Under this model - if I may clarify again as follows:

- Should my imaginations be proved correct - Boustead will become Boustead + Stapled REIT;

- Boustead Singapore as the parent will host the "business trust". The "business trust" is in fact Boustead Projects which is the originator of the pipeline;

- The stapled reit is basically a REIT which is tagged onto the ordinary share and does not trade separately for the time being. The basic rationale for such an arrangement is due to the lack of critical listable size. Boustead has previously set 300,000 sm of lettable space as a minimum criteria for separate listing. However, with keen competition that set target is likely to materialise for a long time coming;

- Given the heightened competition and the unlevelled playing field, the stapled arrangement will be an innovative way to "unlock" value. Boustead as a parent will in turn have to crystallise the value of the portfolio that will be injected into the REIT and distribute at least 90% of the distributable tax free rental income earned by the REIT - ie raising the level of transparency that investors have always been yearning for;

- Meantime, the "trade secrets" of how they can innovatively and competitively structure future DBL contracts will continue to reside at Boustead Projects level (the "business trust");

- Going forward, one can never rule out the possibilities that the stapled reit may have M&A activities - for more growth or even being divested if the price is highly attractive.

I think this the logical understanding that I have gathered from replaying of the teleconference details.

Vested
GG

We don't see office and retail reits engaging in development properties due to the 10% limit. A shopping mall or office tower would often cost in excess of $500 million hence the REIT AUM need to exceed $5 billion which is pretty rare. Moreover, I doubt they will wish to compete with their sponsors directly in the development arena. So far, we only have CCT and CMT working in tandem with Capitaland to develop malls and office.

This is different for industrial REITs as the project size are small - often cost < $100 million so virtually any REIT can qualify. We have seen every industrial REIT (with the exception of Sabana) engaging in DB&L over the past few years due to the attractive returns. Moreover, many of these REITs lack a large active developing sponsor - AIMS, CIT, Sabana, Ascendas and even Maptree sponsors are not developing local industrial properties at the moment.

I think the reason is the tax benefit. A corporate structure needs to charge a higher revenue compared to a REIT to attain similar level of profit assuming debt cost are the same. So in terms of lease rates, the REIT often have a more attractive deal to a potential client. This makes it tougher for non-REIT to compete.

My guess is that the stapled REIT could include a business trust component. There is no development limit in a business trust so that entity could be holding on to future development assets.

[wee]

maybe I did not make myself clear enough.

What I mean is why not every property owning company(note:the company only owns properties, derives its income from owning the properties and has no other business) is structured as a reit, and let the parent company wholly own it and distribute 90% of its income to the parent company. Anyway, the full income from the property owning will go to the parent eventually.

Distributions made by a REIT to a corporate shareholder in Singapore is subject to corporate tax at in the hands of the corporate.

The stapled reit idea of boustead (based on the recent con-call, nothing conclusive was disclosed) involves stapling the REIT to the mother corporate shares. Distributions made by the REIT will flow directly to shareholders of Boustead, not to the Boustead the company. Individual shareholders of Boustead will benefit from the tax transparency, and boustead becomes more competitive in its DBL business, creating a win-win arrangement.

But at this point in time, I am not sure if this particular idea would be approved by MAS (since its not done before).





www.iras.gov.sg/...Tax.../etaxguides_CT_ Income%20Tax%20Treatment%20of%20REITs_2012-10-01.pdf

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Am I thinking too much? I thought that Boustead can't compete with REITs because Boustead has a much higher IRR expectation than REITs to compensate the risk.
[/quote]

Freedom, even if Boustead has exactly the same IRR expectation as REITs, it can't compete with REITs currently due to the corporate tax element. Wouldn't this alone be enough of a reason to consider a REIT if Boustead is still keen in the DBL business?

[freedom]

maybe I did not make myself clear enough.

What I mean is why not every property owning company(note:the company only owns properties, derives its income from owning the properties and has no other business) is structured as a reit, and let the parent company wholly own it and distribute 90% of its income to the parent company. Anyway, the full income from the property owning will go to the parent eventually.

Distributions made by a REIT to a corporate shareholder in Singapore is subject to corporate tax at in the hands of the corporate.

The stapled reit idea of boustead (based on the recent con-call, nothing conclusive was disclosed) involves stapling the REIT to the mother corporate shares. Distributions made by the REIT will flow directly to shareholders of Boustead, not to the Boustead the company. Individual shareholders of Boustead will benefit from the tax transparency, and boustead becomes more competitive in its DBL business, creating a win-win arrangement.

But at this point in time, I am not sure if this particular idea would be approved by MAS (since its not done before).

www.iras.gov.sg/...Tax.../etaxguides_CT_ Income%20Tax%20Treatment%20of%20REITs_2012-10-01.pdf

If the REIT units are distributed to shareholders of Boustead, that is, Boustead, the company, does not own any units in the REIT, what's exactly the benefit of current shareholders of Boustead?

Net net, Boustead shareholders are taking higher risk(I assume, since Boustead does not want to take it for itself) in REIT units to enjoy the little benefit of tax savings. In a way, Boustead can take any project that does not make sense for itself, just to dump the project into the REIT. When the REIT sh*t hits the fan, who is footing the bill?

Is that really desirable for most shareholders of Boustead?

[wee]

If the REIT units are distributed to shareholders of Boustead, that is, Boustead, the company, does not own any units in the REIT, what's exactly the benefit of current shareholders of Boustead?

Net net, Boustead shareholders are taking higher risk(I assume, since Boustead does not want to take it for itself) in REIT units to enjoy the little benefit of tax savings. In a way, Boustead can take any project that does not make sense for itself, just to dump the project into the REIT. When the REIT sh*t hits the fan, who is footing the bill?

Is that really desirable for most shareholders of Boustead?

The stapled REIT units (per my imagination based on the con-call) are not distributed at all. Its stapled. This proposed REIT is not the same as the stapled REITs (REIT + BT) we have seen in the SG market currently. you may want to re-read GG's posts above.

Since the REIT is stapled to the company, there is no "dumping" issue. All the shareholders of Boustead Co will hold the same stapled REIT in the same proportion.

The thing I don't quite understand is the rationale of thinking that the tax benefit is "little". Most businesses would consider having a few percentage points as a powerful competitive advantage, and here we are talking roughly 17%.

One may argue, if its such a good idea, why hasn't anyone done it yet. I don't have the answer. It could be the small issue of getting MAS approval.

[yeokiwi]

Will Boustead apply some gearing to the stapled REIT? Technically speaking, one of the purposes of doing a REIT is to release the lockup values in the properties.

A 30% gearing is going to release a lot of cash for the shareholders.($100 million?? or 20cts per cash?)

[wee]

Hi Yeokiwi,

No idea, but knowing FF Wong, who is very conservative, don't bet on too much leverage or much of a distribution.

[freedom]

Will Boustead apply some gearing to the stapled REIT? Technically speaking, one of the purposes of doing a REIT is to release the lockup values in the properties.

A 30% gearing is going to release a lot of cash for the shareholders.($100 million?? or 20cts per cash?)

left hand to right hand only.

What shareholder value are we talking about?

The REIT unit holders are the same shareholders of Boustead. It is just Boustead shareholders decide to pay themselves some money by letting one of the company within the ownership(the REIT) to take the same amount of debt.

Assume the stapled structure and 1:1 stapling, essentially, the shareholders of Boustead will hold a share of Boustead share and a stapled unit of the REIT. There isn't additional value because every shareholders are holding the same thing. Nothing has changed except corporate structure. No money comes in, where got additional shareholder value?

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The stapled REIT units (per my imagination based on the con-call) are not distributed at all. Its stapled. This proposed REIT is not the same as the stapled REITs (REIT + BT) we have seen in the SG market currently. you may want to re-read GG's posts above.

Since the REIT is stapled to the company, there is no "dumping" issue. All the shareholders of Boustead Co will hold the same stapled REIT in the same proportion.

The thing I don't quite understand is the rationale of thinking that the tax benefit is "little". Most businesses would consider having a few percentage points as a powerful competitive advantage, and here we are talking roughly 17%.

One may argue, if its such a good idea, why hasn't anyone done it yet. I don't have the answer. It could be the small issue of getting MAS approval.

Doesn't matter how the staple works.

What's the real difference for every shareholder of Boustead except for corporate structure? Every shareholder of Boustead continues to hold the same percentage of other business within Boustead and hold the same percentage of ownership of the properties.

think about the tax savings. Boustad earns little over 10 m from its owned properties. so the tax saving is 1.7m. Is this all the benefit of such corporate restructure? If the REIT is more aggressive on building its asset base like all other REITs, it is negative to the return. the benefit is going to be even less than 1.7m. So can someone tell me what's the shareholder value if the REIT is not going to sell to someone else?