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

Friday, December 18, 2009

- All about REIT, Business Trust, CitySpring, First Ship Lease Trust (FSL), Hyflux Water Trust (HWT), Pacific Shipping Trust (PST), Rickmers Maritime, 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.