All about REIT - The IPO Prospectus

In recent weeks we have seen an increase in the number of companies going for IPO. The most notable ones being that of Global Logistics Properties (GLP) and Mapletree Industrial Trust (MIT), which are linked to GIC and Temasek Holdings respectively. Just last week, we were looking at the listing of Sabana Reit, the first Shari'ah Compliant Reit in SGX.

For an IPO, the main avenue for retail investors to access and evaluate a company will be the IPO prospectus. However, it is very unlikely for someone to read the whole IPO prospectus because it is usually a few hundred pages thick. For example, the IPO prospectus for Sabana Reit comes with a whopping 480 pages! So what shall we look out for in an IPO prospectus? I will be sharing here some of the main items I will look at in the IPO prospectus for a Reit. Though the sharing here is Reit-centric, I think most of the things should apply equally well for the IPO of normal companies. I shall use the IPO prospectus of Sabana Reit as a reference here.

Where to Find the IPO Prospectus
First and foremost is of course where to get hold of the IPO prospectus. I remember few years back when I was working near the SGX centre, I will frequently see a desk being placed outside, with a staff manning a few hundred copies of the IPO prospectus whenever there is an impending IPO. Thanks to the advent of technology, now we no longer need to go all the way to SGX centre to carry back the very thick prospectus. With the MAS Opera site, we can easily download the PDF copy of the prospectus through the internet. You can easily find the MAS Opera site by googling for the phrase "MAS Opera". The site should appear right at the top or near the top.

Once you are in the main page of the MAS Opera site, you should be able to see a category called "Collective Investment Scheme Offers". The IPO prospectus for Reits can be found under this category. This category also includes prospectus of Unit Trusts to be launched by Fund Houses. For normal companies you should look under the category "Share Offers".

Preliminary and Final Prospectus
When a company or a Reit has announced its intention for listing, it will usually lodge a preliminary IPO prospectus with the Monetary Authority of Singapore (MAS) first. When its nearer to the IPO date, the final prospectus will be lodged. There shouldn't be too much differences in the contents, except that the final prospectus should provide details of the important dates for the IPO, such as the subscription period and listing date. Both the Preliminary and Final Prospectus can be found in the MAS Opera site.

The Cover Pages
Without even going into the main contents IPO prospectus, the cover and the first few pages alone will usually give you a general idea about the company/Reit. For the Sabana Reit prospectus, it has provided in its cover pages the summary information about its IPO price, number of units to be issued, its nature of business, its strategies, the projected yield, the indicative timetable, etc.

Use of Proceeds
We should get some idea of what the proceeds raised for the IPO will be used for. Other than for acquisition of the initial properties from the Sponsor, sometimes it may also be used for initial debt payment, which is the case for Mapletree Industrial Trust.

For Sabana Reit, the details of the Use of Proceeds can be found in Pg 75. Most of the proceeds of about S$885 million will go into Acquisition of the Properties, with about S$34 million as transaction costs.

Projected Yield
The projected yield is a very important information for Reits and it will usually be provided in the prospectus, as it is mandatory for Reits to distribute at least 90% of its distributable income. The projected yield is calculated based on the IPO offer price of the Reit. For IPO prospectus of normal companies, this information may not be provided as some companies may be more focused on growth, and thus the dividend payout may not be that predictable.

In the Sabana Reit prospectus, the projected yield can be found in the cover pages, and more details are provided in the "PROFIT FORECAST AND PROFIT PROJECTION" section on Pg 36. The projected yields for Sabana Reit are 8.22% and 8.25% for 2010 and 2011 respectively, based on the issue price of S$1.05. This information can then be used to compare with yields of other Reits, preferably in the same sector, i.e. industrial Reits.

Initial Gearing
Sometimes comparing yield with other Reits alone is not sufficient. We should also compare the gearing. Gearing is defined as the debt over the total assets.
The gearing may not be provided in a standard section in the prospectus. You can search for key words like "Gearing" or "Aggregate Leverage" to find it.

For the Sabana Reit prospectus, the gearing or aggregate leverage can in fact be found in quite a number of places. One such place will be the section on "Capital structure that provides stability and future financing flexibility". Here the figure provided is 26.5%. This is lower than most of the industrial Reits, which are around 30 to 39%.

Sponsor
The sponsor of the Reit may not be something quantifiable like the yield or gearing, but it does give us an idea of how well the Reit can be supported in times of need. Market may give the Reit a premium by virtue of its sponsor. Most of the earlier Reits have sponsors that are either listed blue chip companies (Capitaland, Keppel Land) or government linked private companies (Mapletree Holdings). Recently we are seeing listing of Reits by smaller players such as CWT, sponsor of Cache Logistics Trust.

In the prospectus for Reits, there is usually a section about the Sponsor. For the Sabana Reit prospectus, it can be found on Pg 160. The sponsor of Sanaba Reit is Freight Links Group, a leading international total logistics solutions provider with a strong presence in Singapore and the Asia Pacific region. It is also listed in the SGX mainboard, though many may not be familiar with it before the IPO of Sabana Reit.

NAV per Unit
The NAV per unit is usually used to compare with the share price of the unit to determine how much it is in discount or in premium. The IPO price is usually higher than the NAV per unit. It may not be favourable if the price has too much premium over the NAV per unit. You may also need to compare with the market whether Reits are generally trading in premium or discount, and by how much.

For Sabana Reit the NAV per unit is S$0.99. This can be found in the section "UNAUDITED PRO FORMA BALANCE SHEET AS AT THE LISTING DATE" on Pg 35. The IPO price of S$1.05 is at about 6% premium.

Pro Forma Financial Statements
The Pro Forma statements will help you have a rough idea of how the Reit is going to be performing after IPO, like what is the net profit is going to be like based on the initial portfolio of properties. But you must take note of the assumptions made in the prospectus in coming out with the figures. The Reit may not perform as indicated in the Pro Forma statements as they are after all derived based on the assumptions made.

Others
Although the above figures and information are important to look at in the prospectus, it doesn't mean that other information is not important. If time allows, you should try to cover as much of the prospectus as possible. Items such as Risk factors are definitely worth a look in helping to evaluate the IPO. It will be good if you can look for external sources of information about the Reit and its sponsor, such as any analyst report about the IPO to get a better picture.

Now the above figures are primarily useful for comparing with Reits of similar nature in the market. They are not useful for predicting the opening price on the listing day, as that is usually sentiments driven. Personally I find that compared to normal companies, it is easier to gauge whether the price of a Reit has run up too much on listing day, as its yield cannot be too far off from its peers in the market.

Related Links

• MAS Opera

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• All about REIT - Rights Issue Part 2: What happens during a Rights Issue
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All about REIT - Rights Issue Part 2: What happens during a Rights Issue

Previously I have covered some important terms and definition with regards to Rights Issue in All about REIT - Rights Issue Part 1: Terms and Definition. In this article I shall touch on things that happen during a rights issue. The information here is primarily based on the rights issues that took place for the REITs in 2009.

Entitlement to the Rights
Following the announcement of rights issue of a REIT there will be a period of time in which the REIT units will be trading CR (Cum Rights). Unit holders who hold on to the units till the last day of CR will be entitled to the rights. The units will enter the XR (Ex Rights) period after the last day of CR. You are still entitled to the rights if you sell your units from the first day of XR.

Issue of Rights
If you are entitled to the rights, the rights will be credited to your CDP account, usually a few days after the end of CR. The number of rights issued will be based on the ratio of rights issued per unit. A 1 for 1 rights issue means you will get one right per share, and a 1 for 2 rights issue means you will get 1 right for every 2 shares you have. The best way to check whether your entitled rights have been credited into your CDP account will be through the online CDP access. The name of the rights will normally be the name of the parent unit followed by a "R".
Example:
Starhill Global R for rights of Starhill Global Reit.

Rights Issue Circular and Application Form
Now even if you do not actively follow the SGX announcements, you should still get to know that you are entitled to the rights for the units you owned when CDP send you the Circular about the Rights Issue and Application Form to subscribe to the new units. In the application form, the number of rights you have been issued will be stated. You should take note of the important dates mentioned in the circular, especially the dead line to subscribe to the new units, and trading period for the rights.

Decide what to do with the rights
You should make careful decision on what to do with the rights. If you want to subscribe to the new units, you should take note of the deadline for you to do so and try not to miss it. If you want to sell the rights you should take note of the trading period for the rights. Of course you can also sell some of the rights and subscribe to the new units using the remaining rights. Now it will be unwise to totally do nothing about the rights. You will lose out in having your existing units diluted in terms of yield and other per unit financial figures such as NAV per unit.

Trading of Rights
As mentioned above, you should take note of the trading period of the rights if you intend to sell the rights fully or partially. During the trading period, a temporary counter will be created in SGX, and the rights can be sold or bought just like normal shares through your brokerage trading account.The counter name should be the same as the name of the rights in your CDP account.

Sometimes there may be additional counters for trading of odd lots of the rights, which is possible based on certain combination of rights to units ratio. Example, for a 1 for 2 rights issue, every board lot of 1000 units will be issued with 500 rights. So there will normally be an additional counter for trading of rights in board lot of 500 rights. The counter name will usually be the name of the parent unit followed by a "R", and the number of rights per board lot.
Example:
Starhill Global R500 for rights of Starhill Global Reit in board lot of 500 rights.

Subscribing to the New Units
There are 2 possible ways to subscribe to the new units, by application form or by ATM.

As mentioned above, the application form is mailed to the rights owner along with the rights issue circular. To subscribe via the application form, you need to indicate in the form how many new units you wish to subscribe to based on the number of rights you have. If you wish to subscribe to additional new units based on the excess rights, you should also indicate this in the form. For payment you need to use a Cashier's Order or Bank Draft, the amount of which should be the total cost of the new units you are subscribing to, inclusive of the cost of additional units based on excess rights. Note that payment by cheque is not allowed.

Personally I find that subscribing using the application form is highly inconvenient, especially when you have to visit the bank to purchase the Cashier's Order. You must also make sure you mail back the form and Cashier's Order early so as not to miss the dead line. Application by ATM is much more convenient. Similar to the application form, you need to indicate the number of new units you wish to subscribe to and any additional units via excess rights. The cost to subscribe to the new units will be deducted from your bank account, and you will get a receipt indicating the details of the subscription. Note that you should check the circular for the participating banks for subscription via ATM. Although most of the time the 3 local banks (DBS, UOB, OCBC) are included, you should not assume this to be true all the time. I was caught by surprise once when DBS was not included as a participating bank for the rights issue exercise of a company (not a REIT), and it was very near the deadline when I realized it.

Balloting Process for Over Subscription
One or two days after the deadline to subscribe to the new units, the REIT will usually make an announcement in SGX about how many valid subscriptions have been received, as well as the number of subscriptions via excess rights. There will be over subscription when the number of subscriptions via excess rights exceed the actual number of excess rights available. This will bring about a balloting process to allocate the new units subscribed via the excess rights. Those with odd lots of the new units will have priority during the balloting to top it up to full lots. For example, for a 1 for 2 rights issue, someone originally with 1000 units will end up with 500 new units. If this person apply for 500 additional new units via excess rights, the chances of getting it will be higher.

Results of Rights Issue
For new units you have subscribed to based on your rights entitlement, these new units will definitely be allocated to you. For those applied via the excess rights, you will also definitely get them if there is no oversubscription. If there is oversubscription, whether you will get the new units will depend on the balloting process mentioned above. Normally the Rights Issue Circular will indicate the date in which the new units will be credited into the CDP account. You should be able to check whether the new units have been credited into your CDP account online via www.cdp.com.sg one day later.

Refunding for Unsuccessful Subscription
If you have unsuccessfully subscribed for additional new units via excess rights, the amount you have paid for the application will be refunded to your bank account one day to a few days later.

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All about REIT - Rights Issue Part 1: Terms and Definition

REITs normally raise funds for its acquisitions by debts. However, there are certain circumstances that will restrict a REIT from borrowing further. One situation will be the 35% (60% with corporate rating) limit on its gearing (see All About REIT - The Basics Part 4: Gearing Limit) has been reached, such that its debt level cannot be further increased. Sometimes the REIT may be trying to refinance an existing loan, and the refinancing terms may not be favourable and higher interest cost may be incurred. This is especially so during the period of credit crunch after the collapse of Lehman in 2008. Under these circumstances, the REIT may have to raise new funds by equity instead. Rights issue is one way in which a REIT can raise funds by equity. A straight forward description of rights issue is as follows:

The company issues new shares to existing shareholders. Shareholders can take up the new share at a price, or can give up the entitlement.

The above is a very simplistic view of the rights issue, but it covers the main idea. In an actual situation, the company issues rights to the existing shareholders first. These rights are actually entitlements to subscribe to the new shares to be issued. The rights may have a market value and may be traded within a specific window period. The owners of the rights can choose to subscribe to the new shares or give up their entitlement.

In 2009, quite a number of REITs have gone on the path of rights issue to raise funds and strengthen their balance sheets, examples being A-REIT, CapitaMall Trust, CapitaCommercial Trust, Frasers Commercial Trust, K-Reit, Fortune Reit, AIMSAMPI Reit, and Starhill Global Reit.

Following are some terms and information related to rights issues:

Rights to Share Ratio
The number of rights issued per existing share. Example a 1 for 1 rights issue means each existing unit will be issued with one right, which in turn entitles it to one new share. Following the issue of the new shares, the total outstanding shares will be doubled in this case. Another example is FCOT's 3 for 1 rights issue in 2009. 3 new shares has been issued for each existing share, thereby increasing the total outstanding shares by 4 times.

Renounceable Rights
Usually we will see this term being mentioned in the circulars about the rights issue. Renounceable rights means that the rights are transferable and can be traded off if the unit holder does not wish to subscribe to the new shares. The rights can also be non-renounceable, meaning it is non transferable and hence cannot be traded. Most, if not all the rights issue of the REITs in 2009 involved renounceable rights.

Trading of Rights
This applies to the renounceable rights. Usually there will be a window period of 1 to 2 weeks for the rights to be traded in the stock exchange. A temporary counter for the rights will be created for this purpose. Unit holders who do not wish to subscribe to the new shares can sell of their rights for a value determined by the market. After this window period, the unit holder can only choose to subscribe to the new shares, or give up the entitlement.

Subscription price of the new share
The price the owner of the rights need to pay to subscribe for each new share. Normally this will be at a discount to the last traded price of the Reit before the announcement of the rights issue, or to the average share price of the last few days. In the earlier part of 2009 when market is still uncertain, the discount given was rather large, probably to encourage more unit holders to take up the new shares.

Excess Rights
More often than not, some may give up the entitlement to the new shares although they hold the rights. These rights then become the excess rights. Those who choose to subscribe to the new shares with the rights they own can also opt to subscribe to new shares with these excess rights. If the number of applications to the excess rights exceeds the available excess rights, some kind of balloting process will kick in. Usually those who have odd lots of the rights will have priority. Example if you have 999 rights, you will have a high chance to get the 1 excess right for you to make up a full lot of new share.

Pro Forma Figures
The Pro Forma Figures is a set of important figures that are usually presented in the circulars about the rights issue. The pro forma figures are estimated values of important financial figures such as yield, gearing, NAV, revenue, net profit, etc, assuming the rights issue has been carried out at an earlier date, usually 1 year or 6 months ago. The past financial figures will be adjusted accordingly to factor in the effect of the rights issue. It will factor in the reduction in interest payment for debts if the funds raised has been used to pay up loans. If the rights issue comes together with proposed acquisitions of new properties, then the increase in distributable income from these new properties will be factored in. Most importantly, the increase in total outstanding shares will be factored in when calculating the figures such as yield and NAV. The pro forma figures is an important set of figures to look at if you want to estimate the diluting effect of the rights issue. The yield may decrease in the short term due to the increase in the share base, but the pro forma figures will give an idea of yield in the middle to long term after factoring in payment of debts and income from new acquisitions. However, do take note that these are estimated figures, and the actual figures may turn out better or worse.

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All about REIT - Net Asset Value (NAV) and Asset Valuation

Previously I have wrote about gearing and yield, two basic figures that are usually used in assessing a Reit. The Net Asset Value (NAV) per unit is another basic figure that is frequently used in assessing a Reit. NAV is the total assets minus the total liabilities of the Reit. NAV per unit is simply the NAV of the Reit divided by the total number of units in issue. Theoretically, the NAV per unit is the remaining assets of the Reit in which the unit holders will receive per unit in the event that the Reit is liquidated, and after its assets were sold off and used to pay off existing debts to debtors and bond holders. In practice this is usually not true, reason of which I shall elaborate in the section on Asset Valuation.

Determining NAV and NAV per unit from Financial Reports
To get the latest NAV, you should refer to the Balance Sheet statement of the latest quarterly earnings report. The Balance Sheet statement will list all the assets and liabilities of the latest quarter, and somewhere below the statement there should be an item call Net Assets or Net Asset Value, which is the NAV. Otherwise, the NAV can also be easily calculated by deducted total liabilities from the total assets.

The earnings report will usually list the assets and liabilities for the same quarter of the previous year alongside figures of the latest quarter. This will give you an idea of how much the NAV has changed over the year, and which item is the main cause of it. Example, the NAV may have reduced drastically due to devaluation of the property assets. In this case you should see a huge reduction in the item "Investment Properties" under "Non-Current Assets" compared to the a year ago. For a real life example you can refer to the 4Q 2009 earnings report of Capital Commercial Trust. There is a page showing the Balance Sheet as at 31 December 2009 vs 31 December 2008. The Investment properties has dropped by 17.1% to about S$5.5 billion in Dec 09 from about S$6.7 billion in Dec 08. The Net assets shows a drop of 4.8% to about S$3.9 billion from about S$4.1 billion. The drop in NAV is not as drastic as the investment properties because of the payment of debts which reduces the liabilities. This info can also be found in the balance sheet, under the Long Term and Short Term borrowings.

The NAV per unit is usually quoted in the earnings report. Otherwise it can be easily calculated by dividing the NAV determined above by the total number of units in issue.

Asset Valuation
The asset valuation of the investment properties of a Reit is one of the most important factors that impact the NAV. Section 8 of Appendix 2 in the MAS Code on Collective Investment Schemes contains the details about Valuation of the Property Fund’s Real Estate Investments.

As mentioned above, in the event that a Reit is liquidated, the unit holder should get back assets equivalent to the NAV per unit. However, this is usually not true in practice and one of the reason is closely related to the frequency of valuation of the properties. Following are 2 related sections in the MAS code covering the frequency of valuation:

"8.1 A full valuation of each of the property fund’s real estate assets should be conducted by a valuer at least once a year, in accordance with any applicable Code of Practice for such valuations."
                                                                                   
"8.2 Where the Manager proposes to issue new units for subscription or redeem existing units, and the property fund’s real estate assets were valued more than 6 months ago, the Manager should exercise discretion in deciding whether to conduct a desktop valuation of the real estate assets, especially when market conditions indicate that real estate values have changed materially."

From the above, we find that the Reit is only required to do a valuation of its assets once per year. So the NAV we see in the earnings report could sometimes be outdated by several months, and does not reflect the true value the property will fetch if it is to be sold in the market. This is especially so if the property sector is in a severe down trend, like what has happened to the office sector in the past few quarters.

Desktop valuation mentioned above means a valuation based on transacted prices/yields of similar real estate assets, without a physical inspection of the property. Sometimes we will see Desktop valuation being used in Analyst reports of a Reit, in which the analyst will try to give a more updated estimate of the asset valuation of the properties based on the latest transacted price of similar properties, usually properties in nearby locations that are of a similar grade.

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All about REIT - REIT as a Property Developer

The main business of a REIT is in acquiring and renting out of income producing properties. There is a related paragraph in the MAS Code on Collective Investment Schemes about this in section 7.1:
"... at least 75% of the property fund’s deposited property should be invested in income-producing real estate"

Deposited property is defined in section 2.2 as follows:
"Deposited property means the total value of the underlying assets of the
scheme.". In another words, it is the total asset value of the REIT.

This guideline helps to ensure that a REIT is primarily a property landlord, such that it is able to distribute a stable and regular dividend from its rental income. However, other than being a property landlord, a REIT can also be a property developer. Following are 3 related paragraphs about this in section 7.1 of the MAS code:

"A property fund should not undertake property development activities whether on its own, in a joint venture with others, or by investing in unlisted property development companies, unless the property fund intends to hold the developed property upon completion. For this purpose, property development activities do not include refurbishment, retrofitting and renovations;"

"A property fund should not invest in vacant land and mortgages (except for mortgage-backed securities). This prohibition does not prevent a property fund from investing in real estate to be built on vacant land that has been approved for development or other uncompleted property developments;"

"The total contract value of property development activities undertaken and investments in uncompleted property developments should not exceed 10% of the property fund’s deposited property;"

Simply put, the REIT can engage in property development activities of up to 10% of its total asset value, but it has to hold the developed property upon completion. As 10% is a rather low level, a REIT can only engage in significant property development activities when its total asset value is large enough in size.

Ascendas Reit and its Built-To-Suit projects
As of this writing, the only REIT I am aware that has actually engaged in property development activities is Ascendas Reit. Its total asset value is around $4.6 billion, a large enough size for significant property development activities. It has completed some development works in Changi Business Park. It is also involved in some Built-To-Suit (BTS) projects.

A simple definition of Built-To-Suit:
"It is an arrangement whereby a landowner offers to pay to construct on his or her land a building specified by a potential tenant, and then to lease land and building to the tenant."

This a actually a win-win situation for the landlord and the tenant. The tenant gets exactly what he wants for the design of the property, while the landlord already has a committed tenant before the building is built. Recently, A-Reit has completed a BTS project for Built-to-Suit for Expeditors Singapore. The property is a part 2-storey and part 4-storey logistics facility at Plot 6 of Airport Logistics Park, 100% of which will be leased to Expeditors Singapore. The development cost of this property is S$24.4 million.

Currently it is engaged in a more significant BTS project for Singtel, the development of a 9-storey Hi-Tech Industrial building at Kim Chuan. There will be a 20 + 10 years lease with annual rental escalation. The estimated development cost is S$175.4 million.

To study the impact of property development on the Reit, we can take note of the development cost of the property, and monitor the subsequent asset valuation of the property. We can also compare this to the acquisition cost and subsequent asset valuation of a property that is purchased through acquisition, to compare which one brings in a greater advantage in increasing its total asset value.  

CapitaMall Trust's Bid for the Clementi Mall Tender
As of this writing, CapitaMall Trust is the largest Reit in terms of total asset value, with latest figure at about $7.4 billion. It has definitely achieved the size to engage in significant property development activities.

So far I have never come across CMT having actually involved in any property development projects. But it has shown its interest for suburban mall developments with its bid for Clementi Mall in early November. The tender for Clementi Mall drew a response of six bids, and CMT's bid of S$338.8 million was the third highest. The tender was eventually awarded to a joint venture between Singapore Press Holdings, NTUC Income and NTUC FairPrice which placed the highest bid of $541.9 million. (Many has viewed this bid as being excessive as the next 4 bids were all in the S$300 million range). Although CMT was not awarded the tender, some analysts still view the decision to bid positively as it shows that it is ready to engage in property development actitvities.

Personally I find that tenders for development of new retail malls of significant size will probably be hard to come by. There are already quite a number of new malls being completed recently or in progress of development in both the central and suburban areas. Nowadays, you will hardly see a more populous town without a flagship mall in its town centre. New shopping areas will also come up in the integrated resorts and the Marina Bay area. My feeling is that if CMT wants to look for significant property development projects, it will probably need to look overseas. But this seems unlikely for now as property development overseas is already being undertaken by its new parent, CapitaMall Asia. Furthermore, CMT is still mainly a Singapore player, other than some indirect exposure to China through its 20% stake in CapitaRetail China Trust. It may likely remain a pure property landlord in the near term, unless of course there are tenders for smaller retail mall development projects.

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All about REIT - REIT, Business Trust, and Shipping Trust

Other than REIT, Business Trust is another investment class that offers investors a way to invest in high yielding cash-generating assets. Shipping Trust is actually a type of Business Trust with assets mainly in ships. Following are brief descriptions of these investment products:

REIT

A Real Estate Investment Trust (“REIT”) raises capital to purchase primarily real estate assets, usually with a view to generating income for unit holders of the fund. It allows individual investors to access real property assets and share the benefits and risks of owning a portfolio of property assets which typically distribute income at regular intervals.

Business Trust

Business Trusts offer investors a new way to invest in cash-generating assets. Business Trusts are business enterprises set up as trusts, instead of companies. They are hybrid structures with elements of both companies and trusts. Like a company, a business trust operates and runs a business enterprise. But unlike a company, a business trust is not a separate legal entity. It is created by a trust deed under which the trustee has legal ownership of the trust assets and manages the assets for the benefit of the beneficiaries of the trust. Purchasers of units in the business trusts, being beneficiaries of the trust, hold beneficial interest in assets of the Business Trust.

As of this writing, CitySpring Infrastructure Trust and Hyflux Water Trust are 2 Business Trusts listed in SGX that owns infrastructure assets.

Shipping Trust

A shipping trust is registered as a business trust, and its business mainly involves acquiring ships and leasing them out to shipping companies for cash income.  

Currently there are 3 shipping trusts listed in SGX, namely the Pacific Shipping Trust, First Ship Lease Trust, and Rickmers Maritime. Compared to their REITs cousins, the shipping trusts are not doing as well recently. Their stock prices are still relatively depressed, probably because they are deemed as being riskier with their association to the volatile shipping cycle. The depressed prices in turn means higher yield to compensate for the risk in holding them.

Similarities
Following are some similarities between a REIT and a Business Trust:

• Unlike a listed company, the dividend payout of both REIT and Business Trust are from the operation cash flow rather than the accounting profit. As such, for a listed company, appreciation or depreciation of assets will  affect its accounting profit, and will in turn impact the dividend payout. REIT and Business Trust, on the other hand, can still maintain the same dividend payout even if there is appreciation or depreciation of assets as these are just accounting profit/loss and not loss in cash income.
• No tax on individual investors on the distribution income.
• Assets they own are usually highly expansive and requires some form of debt financing for the acquisition.
• Most of them have a sponsor that injects assets into the trust based on a right of first refusal agreement.
  

Differences
Following are some differences between a REIT and a Business Trust:

• REIT is legislated under the Code on collective Investment Schemes, while the Business Trust is under the The Business Trusts Act.
• The REIT has a separate Trustee and asset Manager, while for a Business Trust, these roles are fulfilled by a single entity. The Trustee-Manager of Business Trusts thus has dual responsibility of safeguarding the interests of unitholders and managing the Business Trusts. This stems from the difficulty in apportioning the fiduciary responsibility between two roles given the nature of Business Trusts as active enterprises.
• The gearing limit for REIT is 35% without corporate rating, and 60% if it has a rating. There is no gearing limit for Business Trust. Thus it is not surprising to find Business Trust with debt being equal or even few times the value of its total assets.
• Assets of REITs are restricted to real estate. Business Trust has no such restriction, and may own a variety of cash generating assets including ships, gas stations, power stations, water treatment plants, etc.
• REIT has to maintain a minimum payout ratio of at least 90% of its distributable income. A Business Trust does not have this restriction, but it will usually maintain a high payout ratio.

REIT or Business Trust?
This is a question that cannot be generalized because different REITs and Business Trusts can have different levels of quality and risks. Even among the Business Trusts, we cannot compare apple to apple a Shipping Trust and an Infrastructure based Trust. Having said that, because of some distinct differences in their nature, the are some factors we can consider when deciding between a REIT or a Business Trust.

• As a Busines Trust has no gearing limit, it can potentially have a gearing of 100% or more. So when you have a REIT of 20% gearing and a Business Trust of 300% gearing, both giving the same yield, what should be the decision? Of couse some may argue that having no gearing means that the Business Trust can potentially grow much faster by debt. Well this boils down to the risk tolerance of an individual, whether you are looking for high risk high return kind of investment, or otherwise.
  
• The minimum payout ratio for REIT is 90%, while Business Trust has no such restriction. So Business Trust may have a higher element of surprise in having a drastic cut of payout ratio in times of difficulties. Case in point, Rickmers Maritime. Due to the current difficult operating environment, the Trust has accelerated its cash retention efforts. The distribution payout for 2Q2009 and 3Q2009 was 13% of distributable income compared with 46% in 1Q2009 and an average of 67% for FY2008. Compare this with CDL H-Trust, which cuts the payout ratio from 100% to 90% earlier this year. 

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All about REIT - The Basics Part 6: Property Types and Geographical Location

REITs can be distinguished by property types and geographical location. Currently there are 5 main property types for SREITs, namely healthcare, retail, office, industrial, and hospitality. Geographical location wise, most of the SREITs are Singapore-centric, and some have regional exposure mainly in the asia pacific region.

Different property types and geographical location also mean different level of risk. The risk level will in turn translate to the stock price volatility of the REIT. The higher the risk, the stock price will usually be more volatile, i.e. high beta. Following is the general ranking of the risk level of REITs by property types, based mainly on the volatility of its rental income and how much it is correlated to the business cycle (From the highest to lowest in risk level):

1) Hospitality
2) Office and Industrial
3) Retail
4) Healthcare

Hospitality Reit
Currently there are 2 listed hospitality Reit, CDL H-Trust and Ascott Reit.

The portfolio of Ascott Reit is made up of serviced apartments. It is one of the more geographically diversified Reits, with properties in developed markets such as Singapore, Australia and Japan, and also emerging markets such as Vietnam, China, Indonesia and The Philippines.

The portfolio of CDL H-Trust consists of hotels and one relatively small retail property, namely the Orchard Hotel Shopping Arcade. Almost all its hotels are located in Singapore, except for one in New Zealand.

In terms of property types, hospitality sector is usually deemed as the most risky because the length of stay in the properties is usually short term. We can look at the price movement of CDL H-Trust to get an idea. Despite having a relatively low gearing of 19%, since the begining of the financial crisis, its share price has dropped from above the $1.5 level all the way down to $0.415 in March 2009. Yet when market started to turn better, it was one of the best performing REIT, with its stock price going even higher than pre-Lehman level. Recently the price has broken the 52 weeks high above the $1.70 level. This really does fulfil the saying of high risk high return.

Office Reit
CapitaCommercial Trust, K-Reit Asia, and FrasersCommercial Trust are some of the listed office Reits.

The portfolio of CapitaCommercial Trust includes mainly offices. The properties it owns directly are all in Singapore, but it does have some exposure in Malaysia through its stake in the Quill Capita Trust (“QCT”), a REIT listed in Bursa Malaysia which owns commercial properties in Malaysia.

K-Reit Asia owns offices in Singapore. Currently it does not have exposure in other countries.

The portfolio of FrasersCommercial Trust includes mainly offices. The properties are located across Singapore, Australia and Japan. It also owns Alexandra Technopark, which is essentially an industrial building, albeit a high-tech one. It also has some exposure in retail properties indirectly through its stake in Allco Wholesale Property Fund, which has exposure to both office and retail sectors in Sydney.

Industrial Reit
Ascendas Reit, MapleTree Logistics Trust, Cambridge Industrial Trust and MacArthurCook Reit are the 4 listed industrial Reits.

Ascendas Reit is a pure Singapore play, with its portfolio of industrial properties such as Business and Science Parks, Logistics and Distribution Centres, and Hi-Tech Industrial buildings.

MapleTree Logistics Trust owns mainly logistics properties. It is one of the more geographically diversified Reits with properties in 6 countries, namely Singapore, Malaysia, China, Hong Kong, Japan, and South Korea.


Cambrige Industrial Trust owns industrial properties which are all in Singapore. Its properties include warehouses, light industrial buildings, car showrooms and workshops.

MacArthurCook Industrial Reit owns industrial properties mainly in Singapore. It also has a warehouse property in Japan.

Retail Reit
CapitaMall Trust, CapitaRetail China Trust, FrasersCentrepoint Trust, Fortune Reit, LippoMaple Indonesia Trust, and Starhill Global Reit are some of the listed retail reits.

The portfolio of CapitaMall Trust includes mainly shopping malls in Singapore. It has some exposure to China through its 20% stake in the CapitaRetail China Trust, another listed Reit. It also has some office properties in Raffles City, etc, which forms a very small part of its overall portfolio.

The portfolio of CapitaRetail China Trust includes shopping malls in China. As the name implies, it is a pure China play.

The portfolio of FrasersCentrePoint Trust includes shopping malls in Singapore, mainly in the suburbs.

The portfolio of Fortune Reit includes shopping malls in Hong Kong. It is currently still a pure Hong Kong play, though its management has expressed before its interest to expand into China.

The portfolio of LippoMaple Indonesia Trust includes shopping malls in Indonesia.

The current portfolio of Starhill Global Reit includes mainly shopping malls in Singapore, Japan and China. With the recently announced acquisition plan, it will be expanding its geographical reach to Australia and Malaysia, making it the most geographically diversified Retail Reit listed here. It is not called a "Global Reit" without reason. A small part of its portfolio also includes office properties, including those in Ngee Ann City and Wisma Atria.

Healthcare Reits
Currently there are 2 listed healthcare Reits, Parkway Life Reit and First Reit.


The portfolio of Parkway Life Reit includes mainly hospitals in Singapore, namely Mount Elizerbeth, Gleneagles, and Eastshore. It also owns a number of medical facilities and nursing homes in Japan.

The portfolio of First Reit includes mainly hospitals and a hotel in Indonesia. It also owns some nursing homes and a hospital in Singapore.

Office and Retail Reits
Suntec Reit has significant ownership of both office and retail properties. So it is difficult to classify it either as a office or a retail reit. All its properties are located in Singapore, bulk of which are located in Suntec City.

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All about REIT - The Basics Part 5: Sponsors

Most of the SREITs have a sponsor which, as the name implies, is another company that basically provides support to the REIT. Unlike trustee and manager, the roles and responsibilities of a sponsor are not explicitly defined in the MAS Code on Collective Investment Schemes. So the type and level of support that is provided is very much dependent on the REIT and sponsor relationship.

So what are some of the common roles and attributes of the sponsors?

The sponsor is usually the major shareholder of the REIT
In most cases when the REIT is created, it is the sponsor who injects its own properties into the initial portfolio of the REIT. The sponsor will then retain majority of the ownship when the REIT is listed.

Right of first refusal of the sponsor's assets
There is usually a right of first refusal agreement between the REIT and its sponsor. When the sponsor wants to sell its property asset, the REIT will be offered the right to purchase the asset first before it is being offered to the market. Point to note is that usually the sponsor has the obligation to ensure that the rental income of the properties are stable before injecting them into the REIT.

Source of credit
When the REIT is sourcing for credit for acquisition purpose or refinancing of debt, the presence of a strong sponsor will offer several advantages. The financial institutions may be more willing to lend because of the sponsor. The REIT may also tap on the existing relationship of the sponsor with certain financial institutions. As a last resort, the sponsor may also provide credit to the REIT with its own funds. For example, in Nov 2008, Fraserscomm refinanced its short-term debt of S$70.0 million by way of a loan from F&N Treasury Pte. Ltd, a wholly-owned subsidiary of its sponsor F&N.

Source of equity
When the REIT is raising funds via rights issue, the sponsors may support the exercise by undertaking to subscribe for their pro-rata entitlement of rights units, and also to subscribe to part or all of the excess rights units. In a way, we can view this as the sponsor injecting funds directly into the REIT. Sometimes the sponsor's percentage holding of the REIT may be increased as a result of subscribing to the excess rights. For example, in the rights issue exercise of Mapletree Logistics Trust in August 2008, its sponsor Mapletree Investment has increased its stake in the REIT from 30.2% to 46.9% after acquiring 325m excess rights units.

Advantages of having a sponsor
The advantages of having a strong sponsor are clearly revealed during the financial crisis. The REITs were able to tide through difficult times with the support of the sponsor, whether in their support in the rights issue exercises, or in helping to source for credit.

Disadvantages of having a sponsor
There are some who argues that the rights of first refusal agreement with the sponsor is at a disadvantage to the REIT. The argument is that as the sponsor may also be the major shareholder, the REIT may be 'pressured' to purchase the assets, even if it is not being offered the best price in the market. Of course this point can only be proved if the asset is really refused and offered to the market such that the prices can be compared. Some also questioned the quality of the properties injected by the sponsors into the REITs.

List of some of the REITs and their sponsors
[Updated as at 10 Nov 2010]

REIT	Sponsor
AscendasReit	Ascendas Pte Ltd
AscottReit	Capitaland
Cache Logistics	CWT
CapitaRChina	Capitaland
CapitaComm	Capitaland
CDL H-Trust	CityDev
CapitaMall	Capitaland
FirstReit	Lippo Group
Fortune	Cheung Kong (Holdings) Limited
FrasersComm	F&N
FrasersCT	F&N
K-Reit	Keppel Land
LippoMapleTrust	Mapletree Investments, Lippo Group
MapleTreeInd	Mapletree Investments
MapleTreeLog	Mapletree Investments
AIMSAMPI Reit	AIMS Financial Group
PLife	Parkway Holdings
Starhill Gbl	YTL Corporation
Suntec	Suntec City Development Pte Ltd

Some background information about the sponsors
[Updated as at 10 Nov 2010]

Sponsor	Background	Listed
Ascendas Pte Ltd	In 2001, the subsidiary of JTC, Arcasia Land, merges with the international operations arm of JTC International to form Ascendas Pte Ltd. Currently Ascendas is Asia's leading provider of business space solutions. Renowned for quality infrastructure and lifestyle environments catering to business, Ascendas has an excellent track record as Asia’s premier developer and manager of business space.
Capitaland	CapitaLand is one of Asia's largest real estate companies. Headquartered and listed in Singapore, the multi-local company's core businesses in real estate, hospitality and real estate financial services are focused in growth cities in Asia Pacific, Europe and the Gulf Cooperation Council (GCC) countries.	SGX
CityDev	Singapore's property pioneer since 1963, City Developments Limited (CDL) is a listed international property and hotel conglomerate involved in real estate development and investment, hotel ownership and management, facilities management, as well as the provision of hospitality solutions. The Group's global presence is led by its diversification into hospitality management and the acquisition of hotel assets through CDL's London-listed subsidiary, Millennium & Copthorne Hotels plc (M&C).	SGX, London (M&C)
CWT	CWT was founded in 1970 and listed on the Singapore Exchange in 1993. CWT has since grown and the principal businesses of CWT currently comprise integrated logistics solutions and engineering maintenance and facilities management services. Being the largest listed logistics company in Southeast Asia, CWT offers integrated logistics solutions to some of the world´s leading brands in the chemical, commodities, automotive, marine, oil & gas, defence and industrial sectors. Through its global network, the CWT Group is able to connect customers to 120 ports and over 1,200 destinations seamlessly around the world.	SGX
Lippo Group	The Lippo Group is a major Indonesian conglomerate founded by its Chairman, Dr. Mochtar Riady in the 1950s. It consists of private and public companies in China mainland, Hong Kong and Macau; Indonesia, Philippines, Singapore and South Korea with US$11 billion in assets. Lippo Group has over 15 public-listed companies in different parts of Asia including Hong Kong, Indonesia and Singapore.
Cheung Kong (Holdings) Limited	Cheung Kong (Holdings) Limited ("Cheung Kong Holdings") is the flagship of the Cheung Kong Group, the leading Hong Kong based multi-national conglomerate. Cheung Kong Holdings is a property development and strategic investment company. It is one of the largest developers in Hong Kong of residential, commercial and industrial properties. About one in seven private residences in Hong Kong were developed by the company. The company also has substantial interests and operations in life sciences and other businesses. It is listed on the Main Board of the Hong Kong Stock Exchange.	Hong Kong Stock Exchange
F&N	F&NL is a leading Pan Asian Consumer Group with core expertise and dominant standing in the Food and Beverage, Property and Publishing & Printing industries. Leveraging on its strengths in marketing and distribution; research and development; brands and financial management; as well as years of acquisition experience, it provides key resources and sets strategic directions for its subsidiary companies across all three industries. F&NL owns an impressive array of renowned brands that enjoy market leadership across a mix of beer, dairies, soft drinks and beverages; residential properties, retail malls and serviced residences; as well as publishing and printing services.	SGX
Keppel Land	Keppel Land is today one of Asia's premier property companies, recognised for its sterling portfolio of quality award-winning residential developments and investment-grade commercial properties, and high standards of corporate governance and transparency. Keppel Land is geographically diversified in Asia, with current focus on Singapore, China, Vietnam, India and Indonesia.	SGX
Mapletree Investments	Mapletree Investments (Mapletree) is a 100% owned subsidiary of Temasek Holdings. It is a leading real estate company in Singapore with an Asian focus. It is focused on investing in and managing real estate assets and funds in the office, logistics, industrial, business park and retail/lifestyle sectors.
AIMS Financial Group	AIMS Financial Group Established in 1991. AIMS Financial Group is an Australian diversified non-bank financial services and investment group which has a solid track record in the Australian mortgage and securitization markets. Since establishment, AIMS Financial Group has also expanded to become an international financial group focusing on lending, securitization, real estate investment, private equity, investment banking, funds management, securities exchange ownership and e-commerce across the Asia Pacific region.
Parkway Holdings	Parkway Holdings Limited provides healthcare services throughout Asia, while also managing Parkway Life REIT and providing healthcare education through Parkway Education Pte Ltd.	SGX
YTL Corporation	YTL Corporation Berhad is one of the largest companies listed on the Bursa Malaysia. The company was listed in 1985, has also had a secondary listing on the Tokyo Stock Exchange since 1996. YTL was the first Asian non-Japanese company to be listed on the Tokyo Stock Exchange. The YTL Group's core businesses are ownership and management of regulated utilities and other infrastructural assets, serving 10 million customers in three continents.	Bursa Malaysia, Tokyo Stock Exchange.
Suntec City Development Pte Ltd	Suntec City Development Pte Ltd was incorporated in Singapore in August 1988. In December 1988, its highest bid and distinguishable design won the Urban Redevelopment Authority (URA) tender to build the S$2.3 billion complex comprising the convention and exhibition centres, office towers and a shopping and entertainment centre. Situated on a site of 11.7 hectares, Suntec City is the single largest privately owned commercial development in Singapore. Funded entirely by a consortium comprising some of Asia’s most successful entrepreneurs, it began with a vision to create a futuristic city to meet the challenges of a global metropolis and be a premier landmark of Singapore in the 21st century.

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All About REIT - The Basics Part 4: Gearing Limit

Previously we have touched on the topic of gearing, about its definition and how to determine it from the balance sheet. In this posting I am going to touch on the closely related topic of gearing limit.

Now a REIT can fund the acquisition of a property by using equity or debt. Using equity usually means raising cash by issuing more shares either via rights issue or private placement. So using equity usually leads to near term dilution of DPU. Using debt, on the other hand, usually leads to increase in DPU, as long as rental yield of the acquired property is higher than the interest of the debt. So ideally, a REIT can keep borrowing more and more to fund more and more acquisitions to grow the DPU indefinitely. Of course in reality things do not happen this way as once the debt of the REIT is above its asset value, it will put the REIT in a very risky situation. The REIT may also face serious cash flow problem when loan interest starts to rise and rental yield starts to decline.

According to the MAS Code on Collective Investment Schemes, there is actually a gearing limit for the REITs. Following is the extract of the related section Aggregate Leverage Limit, under section 9.2:

"The total borrowings and deferred payments (together the “aggregate leverage”) of a property fund should not exceed 35% of the fund's deposited property. The aggregate leverage of a property fund may exceed 35% of the fund’s deposited property (up to a maximum of 60%) only if a credit rating of the property fund from Fitch Inc., Moody’s or Standard and Poor’s is obtained and disclosed to the public. The property fund should continue to maintain and disclose a credit rating so long as its aggregate leverage exceeds 35% of the fund’s deposited property."

Simply put it, if the REIT has a corporate rating by Fitch, Moody's or S&P, its gearing limit can go up to 60%. Otherwise it can only be up to 35%. The corporate rating may not be easily determined as it is not a standard reported item. You may need to look through the announcements or press releases, or in the earnings presentation slides, normally under the section on Capital Management. Fortunately we do not have to go through that for all the REITs as those which are currently or has ever been above 35% in gearing would definitely already have a corporate rating. Following table shows the corporate rating, if any, the latest gearing, and the gearing limit:

[Update as at 28 Nov 2009]

REIT	Rating	Gearing	Limit
AscendasReit	Baa1 - Moody	30.50%	60.00%
AscottReit	Baa3 - Moody	41.50%	60.00%
Cambridge	BBB- - S&P	42.60%	60.00%
CapitaRChina		34.40%	35.00%
CapitaComm	Baa2 - Moody	31.20%	60.00%
CDL H-Trust	BBB- - Fitch	20.20%	60.00%
CapitaMall	A2 - Moody	30.40%	60.00%
FirstReit		15.60%	35.00%
Fortune		25.70%	35.00%
FrasersComm	BB - S&P	38.90%	60.00%
FrasersCT	Baa1 - Moody	29.90%	60.00%
K-Reit	Baa3 - Moody	29.50%	60.00%
LippoMapleTrust		11.80%	35.00%
MapleTreeLog	Baa2 - Moody	38.10%	60.00%
MacCookReit	Caa1 - Moody	44.70%	60.00%
PLife	BBB - Fitch	23.20%	60.00%
Saizen	Caa1 - Moody	43.50%	60.00%
Starhill Gbl	Baa1 - Moody	27.20%	60.00%
Suntec	Baa1 - Moody	34.30%	60.00%

The highest gearing I have seen was that of MapleTree Logistic Trust in 2008, well above the 50% mark. This was later brought down to the 30++ % level after a rights issue exercise. So when the gearing of a REIT is near its limit, you will have to be prepared for possible recapitalization exercise (rights issue or private placement).

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All about REIT - The Basics Part 3: Gearing

Previously I have talked about DPU and yield, and whether we should always go for higher yielding REITs. In this posting I am going to talk about another important factor to consider in REIT investment - gearing.

Technically gearing is calculated by the total debts over the total assets. The total debts consists of short-term debts (to be repaid in less than a year) and long-term debts (to be repaid more than a year later). For some REITs, we may have to factor in Debt Securities such as the Convertible Bonds issued. Information on debts and assets can be found in the quarterly earnings or annual report, under the Balance Sheet statement.

Again we use the CMT quarterly statement as for illustration purpose. Following is the CMT Q3 2009 balance sheet:


(Click on image to enlarge)

From the balance sheet:
Total assets = Total non-current assets + Total current assets
= 7,070,514 + 377,484
= 7,447,998

Note that some balance sheets may quote the total assets directly.

To derive the total debts, look for Short term borrowings under Current Liabilities, and Long term borrowings under Non-current Liabilities add them up. In the of CMT, we also need to add the item Debt Securities under Non-current Liabilities. Debt securities in this case relates mainly to the Convertible Bonds issued by CMT for funding purpose.

Total debts = Short term borrowings + Long term borrowings + Debt Securities
= 440,000 + 1,148,029 + 609,827
= 2,197,856

We can also find out the total debts from the Aggregate amount of borrowings and debt securities section of the earnings report if it is available. Again we use the CMT report for illustration.



Here we can straight away get the total debts from the Grand total = 2,197,856

So latest gearing for CMT is as follows:
Gearing = Total Debts/Total Assets
= 2,197,856/7,447,998 x 100%
= 29.5%

So far I have covered the technical definition of gearing and how to derive it from the earnings report. I shall touch on more about effect of gearing on REITs in future postings.

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All about REIT - The Basics Part 2: More about Yield

In the last posting, I have talked about the basic idea regarding DPU and yield. In this posting I shall touch on more on the topic about yield.

Do we always go for the REIT with the highest yield?
On the surface it seems that the higher the yield the better the deal. For a 10% yielding REIT, we can get back the capital from the DPU in 10 years time. For a 5% yielding REIT, it will take 20 years. So why not go the highest yielding REIT? Well if only things were that easy. As the saying goes, there is no free lunch, and so there are always reasons why a REIT has a much higher yield than its peers. In general we can say that the higher the yield the higher the risk, and so we should always do our homework well when we go for a very high yielding stock. We have to look at the reasons and decide whether we want to take the risk.

So what are some of the reasons for REITs to give a very high yield? Well the yield of a REIT is closely tied to its share price, the denominator in the yield calculation. So another way to phrase this question is what are some of the reasons for the market to view a REIT as risky and hence will only pay a lower price for it? I shall not go into details here for the time being, as this is another big topic to be covered. For a brief mention, some possible reasons could be high debt level or gearing incurred by the REIT, sector risk, country risk, etc. An example of sector risk could be during the outbreak of H1N1 when less people travelled, hospitality REITs were affected much more than REITs of other sectors. An example of country risk could be that the REIT has properties primary in a single country, and that country could be facing some political instability.

Actual Property Yield
Was pondering whether to cover this topic as it might cause confusion, but decided to briefly mention this so that the topic on yield is more complete. So far the yield mentioned in this posting is over the share price of the REIT. The actual property yield, on the other hand, is the rental income of the properties over the price of the properties. Now this is one way in which investing in a physical property is different from investing in a REIT. When we buy a private condo for say SGD 500,000, and we collect rent it out for SGD 2,000 per month, the rental yield is 4.8%. To make things simple, I have not factored in debt and interest incurred in buying the property. But when we invest in a REIT, the yield we get is not the actual rental yield, but is dependent on whether market is paying a premium or discount to the NAV (Net Asset Value) of the REIT. NAV of a REIT is its assets minus its liabilities. If the share price of a REIT is lower than its NAV, the yield over the share price we get is higher than the actual rental income yield of the physical properties of the REIT. Again this is a very simplistic way to look at it as the assets part of the NAV may not be entirely made up of physical properties. Some REITs may have stakes in a property fund or another REIT, which in turn has its own unit price.

So why should we bother about the actual physical property yield since we are paying for the share and not for the property? Well this will be a factor to consider if the REIT is acquiring a property. Usually the rental yield of the new property will be mentioned. Base on this information, we should be able to calculate the how it is going to affect the DPU yield we get, i.e. whether it is going to be yield-accretive, hence increasing the DPU we get, or otherwise.

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All about REIT - The Basics Part 1: DPU and Yield

I am starting this series of postings to introduce terms and concepts related to REITs, as well as where we can find the related information.

The very basic things we should consider when investing in REITs are non other than DPU and yield.

DPU
DPU, the Distribution per Unit, is how much dividend we get for every unit/share of the REIT. This information can be easily found in the SGX portal @ www.sgx.com, under "Listed Companies" -> "Corporation Action". Example select CapitaMall Trust for Company Name, select Dividend for the Category. Following is what you should see for the DPU since January 2009 for CapitaMall Trust (CMT):

Company Name	Expiry Date	Record Date	Date Paid/Payable	Particulars
CAPITAMALL TRUST	28 Oct 2009	30 Oct 2009	26 Nov 2009	010709-300909 SGD 0.0228 LESS TAX
CAPITAMALL TRUST	28 Oct 2009	30 Oct 2009	26 Nov 2009	010709-300909 SGD 0.0007 TAX EXEMPT
CAPITAMALL TRUST	30 Jul 2009	3 Aug 2009	28 Aug 2009	010409-300609 SGD 0.0001 TAX EXEMPT
CAPITAMALL TRUST	30 Jul 2009	3 Aug 2009	28 Aug 2009	010409-300609 SGD 0.0006
CAPITAMALL TRUST	30 Jul 2009	3 Aug 2009	28 Aug 2009	010409-300609 SGD 0.0206 LESS TAX
CAPITAMALL TRUST	23 Apr 2009	27 Apr 2009	28 May 2009	010109-310309 SGD 0.0004
CAPITAMALL TRUST	23 Apr 2009	27 Apr 2009	28 May 2009	010109-310309 SGD 0.0192 LESS TAX
CAPITAMALL TRUST	23 Apr 2009	27 Apr 2009	28 May 2009	010109-310309 SGD 0.0001 TAX EXEMPT
CAPITAMALL TRUST	30 Jan 2009	3 Feb 2009	27 Feb 2009	011008-311208 SGD 0.0361 LESS TAX
CAPITAMALL TRUST	30 Jan 2009	3 Feb 2009	27 Feb 2009	011008-311208 SGD 0.0001 TAX EXEMPT
CAPITAMALL TRUST	30 Jan 2009	3 Feb 2009	27 Feb 2009	011008-311208 SGD 0.0003

So from the above, the latest DPU with Expiry Date on 28 OCT 2009 = SGD 0.0228 + SGD 0.0007 = SGD 0.0235, which is SGD 23.5 per lot of 1000 units.

For SREITs, the DPU is given either quarterly (4 times per year) or semi-annually (2 times per year). From the above table, base on the Dates of Expiry or Date Payable, we can see that CapitaMall Trust distributes the DPU every quarter. Following are the details of the SREITs distribution frequency:

[Update as at 10 Nov 2010]
(For latest DPU Information please visit the DPU Information Page)

REIT	Frequency of Distribution
AscendasReit	Quarterly
AIMSAMPIReit	Quarterly
AscottReit	Semi-Annually around Jul and Jan period.
Cache	Quarterly
Cambridge	Quarterly
CapitaComm	Semi-Annually around Jul and Jan period.
CapitaMall	Quarterly
CapitaRChina	Semi-Annually around Jul and Jan period.
CDL H-Trust	Semi-Annually around Jul and Jan period.
FirstREIT	Quarterly
Fortune (HK cents)	Semi-Annually around Jul and Jan period.
FrasersComm	Semi-Annually around Oct and Apr period.
FrasersCT	Quarterly
K-Reit	Semi-Annually around Jul and Jan period.
LippoMapleTrust	Quarterly
MapleTreeLog	Quarterly
PLife	Quarterly
Saizen	Semi-Annually around Jul and Jan period.
Starhill Gbl	Quarterly
Suntec	Quarterly

Yield
Yield is the annualised DPU divided by the share price. Annualised DPU means how much DPU we can get for the whole year. The usual practice in calculation of annualised DPU is to take the latest DPU and mulitply by number of distributions per year, i.e. X 4 for quarterly distribution, X 2 for semi-annual distribution. So for the CMT example above the latest estimated annualised DPU = SGD 0.0235 X 4 = SGD 0.094, OR SGD 94 per lot. From the SGX portal, under "Prices, Indices, Statistics" -> "REITs", we find that the latest closing price of CMT (on 13 Nov 2009) is 1.68. So the latest yield for CMT = 0.094/1.68 = 5.595%.

Of course there are variations to the way in calculating yield. For a REIT giving a stable and consistent amount of DPU, the above method should be accurate. For a REIT with widely varying DPU every distribution, you may add up all the distributions per year, or half a year than multipy by 2, to get a more accurate estimate of the annualized DPU. From observation, the DPU of SREIT is fairly stable, with very little % variable QoQ, other than when there is a rights issue in which the DPU is diluted, or when a troubled REIT temporarily cuts the DPU.

Distributable Income
The DPU is derived from the distributable income of a REIT. The distributable income is how much cash the REIT is able to distribute. Now there is a subtle difference between the REIT and a normal company in terms of dividend payment. For a normal company, it may pay out a certain percentage of its net profit as dividend. But net profit may not consist of purely cash earnings, as some earnings that are posted as profit may not be cash income, example increase in valuation of a property. Similarly, decrease in valuation of a property may be posted as a loss in the calculation of net profit, but it does not mean a loss of cash. For REITs, the distributable income is derived from its cash earnings, so technically it is possible for a REIT to post a net loss when the decrease in valuation of its properties is much more than the rental income, and yet it is still able to have a postive distributable income.

The distributable income statement can be determined from the quartly earnings report of the REIT. You can get the quarterly report from the SGX portal, under "Listed Companies" -> "Company Announcements". Select "Last 3 Months" for the Announcement Period, and say for example "CapitaMall Trust" for the Company Name. Look out for something along the line of "MISCELLANEOUS :: 2009 THIRD QUARTER UNAUDITED FINANCIAL STATEMENT & DISTRIBUTION ANNOUNCEMENT".

Once you get hold of the report, look for the "Statement of Total Return & Distribution Statement". The Distribution Statement will tell you how much cash is available for distribution (Amount available for distribution to Unitholders), and how much cash is actually paid out for that quarter (Distributable income to Unitholders). The Distributable income to Unitholders divided by the total number of units/shares of the REIT will give you the DPU. The total number of units in issue by the REIT can be found out in the same report. Look for Total issued and issuable Units as at end of period under Details of any change in the issued and issuable Units.

By MAS regulation, a REIT is supposed to give out at least 90% of its amount available for distribution to Unitholders. Currently most of the REITs are giving out 100%, and as far as I know CDL HTrust has cut its distribution to 90% since early this year.

Related Posts

• All about REIT - The Basics Part 2: More about Yield 
• Other articles from All about REIT
• DPU Information Page