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. 

Related Posts

• All about REIT - REIT as a Property Developer 
• All about REIT - The Basics Part 6: Property Types and Geographical Location
• Other articles from All about REIT

Books and Thoughts - Growing Your Tree Of Prosperity

The "Me and My Money" article of the sunday times investment section this week features Mr Ng Wai Chung, the author of the books Growing Your Tree Of Prosperity (2005), Harvesting The Fruits Of Prosperity (2007), and the latest book Sowing The Seeds Of Prosperity. I have read the first 2 books, and actually my interest in REIT investment is partly inspired by his books. I believe he is in turn inspired by Robert Kiyosaki's idea of cash flow in Rich Dad Poor Dad. The main idea he is trying to put forward is that we should grow our passive income and reduce our expenses to a point that the passive income can more than cover the expenses. I like the books because they are written in the Singapore context, so while Rich Dad Poor Dad tells you the concept of cash flow, these books provide some useful guidance in how to put the cashflow concept into practice in Singapore.

REIT was introduced in the books as a viable investment vehicle to grow the passive income because it pays a dividend that is usually higher than normal companies, and it does so in a regularly and consistently, in terms of the distribution amount. The books also introduced some companies that pay relatively high dividend consistently, such as the telcos, Comfort Delgro, SPH, etc.

I remember reading about REITs in one of the chapters, probably in the 2005 book. I think at that time not many REITs have been listed yet, so it has only introduced Ascendas REIT (A-REIT) and CapitaMall Trust (CMT). The yield then, as mentioned in the book, was about 4%, and it was considered a relatively high yield at that time. As of this writing, CMT yield is about 5.4%, and A-REIT about 7%. Few months back in March, their stock prices were so depressed that they were yielding more than 10%. I think someone who has seen these REITs yielding at 4% in 2005, would never have believed the yield will go up to 10% one day. This just get to show how much things can change in the market.

In 2008, around the time after the collapse of Bear Stearns and before the collapse of Lehman Brothers, in order to grow my passive income, I was shopping around for high yield stocks. I thought it was a good time to go into the market as some time after the collapse of Bear Stearns, the market seems to have stabilized. So I bought high yield stocks like Cambridge Industrial Trust (CIT), a REIT, First Ship Lease Trust (FSLT), a Shipping Trust, and Macquarie International Infrastructure Fund (MIIF), a Business Trust. I bought CIT at around 0.680++, FSLT at around 1.100++, and MIIF at around 0.860++. At that time I thought it was too good an opportunity to miss, as they were trading at around 50-70% of their peak prices in 2007, at 50-70% of their NAV, and were all yielding more than 10%. I did check their historical cash flow to verify that they had been consistent in generating the cash flow to support the dividend distribution. The gearing was rather high for all the 3 trusts, but I did not think too much into it. My thinking then was even if the market goes down, I will still be able to get a regular distribution of cash to help ride through the rough times.

Well to this day I still believe my thinking was not entirely wrong then. Dividend yield stocks should indeed help you ride through rough times with the regular cash flow. However, I have underestimated the effect of the credit crunch on companies with high level of debts. During the good times where there was abundance of credit, these companies have borrowed heavily to acquire more assets to boost the yield.With the collapse of Lehman, financial institutions were unwilling to lend, and so the worry over the repayment or refinancing of debts became such a big issue that their stock prices were heavily punished by the market. Their prices went down to an all time low, dropping by a further 50-70% of my purchase prices. Dividends were also cut, some by as much as 50%. I sold them at a huge loss at the worst of the crisis to switch to blue chips. Prices of blue chips also went down a lot at that time, but I was more confident of the recovery of blue chips than the high yield and high gearing stocks. In hind side, I have done the right thing as with the recent bull run most of the blue chips have recovered to pre-Lehman levels, whereas CIT and MIIF are still trading around 0.4++ and FSLT around 0.6++, still way below their pre-Lehman levels.

So what have I learnt? Don't chase high yield stocks just for the sake of getting as much dividend as possible. Research into whether they can sustain the dividend payout. More importantly, check the kind of debts they are holding and the chances of repaying or refinancing. If you are not sure,
it may be wiser to go for something that may yield less but is able to give you a better peace of mind (like Singapore Post, Comfort Delgro, etc). If you are not careful, you may lose so much in the capital that will take years of dividends to cover back. The building up of passive income should be a long term affair, so sustainabilty of the payout is very important. You do not want to come to a point that suddenly the distribution is cut such that your passive income is no longer able to cover the expenses.