RE Securities Flashcards
What is the main rationale for the emergence/popularity of REIT?
usually not feasible to get exposure to diversified prop for the significant capital required in direct re inv, hence popularity of lpt (listed prop trusts aka REITs) or trend toward unitisation/securitisation of re
how does a trust differ from an incorporated vehicle?
unlike companies, a trust is not a separate legal entity, cannot sue or be sued and does not have the legal powers of a company/individual
4 elements of a re trust?
- underlying re and assets/liabs of the trust
- beneficiaries
- manager/trustee (responsible for performance and compliance of the trust)
- custodian (separate to the manager)
name the main types of re trusts?
- fixed
- discretionary
- unit trusts (in which case units are like shares in a company and the beneficiaries are unit holders)
trust is externally managed. what are the 2 categories of management vehicles?
- internally managed vehicles i.e. stapled trusts (property development-based management vehicles e.g. Westfield and GPT Group) combining the management coy and the trust but perceived to be prone to loss of arm’s length pricing and tendering;
- mgmt vehicles NOT associated with prop developer but with financial institution
REIT sector is now a major property inv alternative - what makes it attractive other than exposure to diversified prop invs at affordable price?
- stable distributions based on asset quality and transparent sources of income;
- investor confidence follows expertise of management (sector interest enhanced through niche specialisation in health, aged care, data centres and caravan parks, but fundamentally investors focus on the fundamental quality of their underlying prop/asset of the REIT holdings
Name the 6 specific factors that determine the growth of REIT sector
- conversion of unlisted to listed prop trusts
- growing oppo to arbitrage the yld differential b/w physical props and listed REITs
- low interest rates
- institutional investors electing to gain exposure to prop via listed trusts (vs direct re inv )
- ability to access offshore re inv (tax efficient and currency efficient)
- emergence of listed re equity structures around the world and local/regional/global re equity indices
Distinguishing characteristics of unlisted REITs (often aka prop syndicate) and listed REITs, what are the main differences?
- unitholder redemption process - listed REITs are closed-end (price is driven by mkt forces, capital of the trust is intact), whereas unlisted REITs are open-end structures (investor is paid out at a stated net asset backing determined by independent valuation).
- quality of the underlying assets in a syndicate (or unlisted trust) is generally lower than that of the listed RE sector, and the underlying assets generally trade at a higher cap rates and provide higher yld to unitholders (which usually appeal to retail investors and self-funded retirees) - trusts usually have interests in 90% of the largest shoppening centres and trophy offices/hotels/industrial estates in aus/major cities (which are rarely traded so investors can only access Rs of these RE via A-REITs); difficult to replicate quality of these assets through direct prop inv.
Discuss 3 ways manager of an **unlisted trust** can satisfy unitholder’s redemption claim?
* dip into trust’s cash reserves
* increase trust borrowings
* transfer the units to new investor who’s willing to invest at the net asset backing
What challenges do trust managers of unlisted trust face when meeting unitholders’ redemption claims?
simply put, under stressed market conditions, tst mgers may not be able to borrow, dip into cash reserves or sell to raise cash reserves whilst faced with a prop mkt downturn creating a flood of redemptions). also, increasing interest rates (banks unwilling to increase lending against property), dearth of transaction in the physical re mkt, limited cash reserves, reduced ability to sell prop -> collectiveluy lead to liquidy crisis for the unlisted trust managers faced with a flood of redemption claims. essentially, it was **the limited liquidity/limited value** to the broader range of investors (esp. institutional investors) that led to the demise of unlisted REIT sector in early 90s - mid 90s.
What are the main characteristics of listed REITs?
- divisibility and liquidity - unitising the prop assets so that investors can access the Rs in proportion to their inv size constraints ; liquidity is facilitated by the orderly mkt provided by the ASX
- valuation - real time pricing made possible by monitoring actual stock trading on the ASX
- quality of prop - difficult to use direct prop inv to replicate the quality of underlying assets as REITs mostly interested in 90% of the largest shopping centres in aus and trophy offices/hotels/industrial RE in major cities which are rarely traded in the physical prop mkt.
- trans costs - mainly brokerage (0.1-1.5% of the unit price of A-REIT units ) and trans taxes, settlement of A-RET stocks typically within 3 working days (vs 1 month + settlement, 3-5.5% stamp duty + agency fee with physical re transactions)
- ASX listing rules - think disclosure stds and ratification requirements
- diversification - difficult to replicate these benefits via direct prop inv in terms of: a. numerical diversification - investor not dependent on the performance of any single prop in a particular country e.g. may have retail tenants across several countries ; b. geographic diversification - access many diff mkts in diff metropolitan, non-metropolitan, offshore; c. category diversification (diverse re assets : shopping centres, office buildings, industrial props , hotels, car parks; can invest in a trust that provides sector diversification ) locations
- mgmt - g exentive re inv mgmt skills of the mgmt team within a trust that add value to the investors. however, MER (management expense ratio) and manager/trust relationship can affect the Rs to unitholders hence should be examined carefully.
In what ways does a trust structure differ from a coy?
-
tax - a tst structure must be a passive investment vehicle to main its advantageous tax status. such provision constrains tst mgmt from entering the vehicle into speculative trading of re which are risky activities that might not align with the LT prop ownership inv objectives of the tst unitholders.
* franking credits are not accessible to investors such as low income earners and offshore investors who’d prefer to receive income stream that has not been subject to taxation. - debt - tsts have borrowing restrictions (usually up to 60% of asset val ) as per tst deeds, unlike coys. re tsts have historically been **conservatively geared** simply coz they typically pay out earnings hence have no way to accumulate funds to pay off principal debt.
- mgmt - mgmt of a tst and its assets CANNOT be internal func of the tst (a tst mgmr (external party) is contracted to ensure the activities of the tst are performed as per tst deed); whereas in a coy structure, mgmt is typically an internal func of the entity.
why has it been argued that interests of tst mgmt and those of tst unitholders are non-aligned?
because tst mgmr is an external entity to the tst with his own objectives, and fees to him are not necessarily tied to the inv performance but typically size of the tst.
What may give rise to conflicts b/w tst mgr and the tst?
- tst mgr may grow the size of the fund (and thus mgmt fee to tst mgr) via acquisitions /developments or
- tst mgr may fail to sell assets that have reached optimum R outlook just to maintain a large tst size (selfish reason)
- tst mgr may charge mgmt fees for services like development and construction, prop mgmt, leasing, acquisition due diligence, internal tst accounting and other admin
How are conflicts b/w tst mgrs and tst unitholders usually mitigated?
* **disclosure requirements** (relating to all services/transactions between the mgr and the tst)
* **unitholders being able to vote a mgr out** by majority
* **formal unitholders approval** of major trans b/w mgmr and the tst
* have the big boys (significant boys and financial institutions) as the tst mgr, then their reputation is on the line.
What’s the main feature and advantage of stapled securities?
A stabled security is designed for tax efficiency/avoid paying tax on passive prop invs so that stapled security holder maximises pre-tax income received.
investor given an equivalent number of shares in a coy and units in a tst. (shares and units are not separable i.e. must be bought and sold together)
tst holds LT passive prop inv (remains untaxed), while the coy carries on any trading/business activities (subject to tax)
Discuss internally vs externally managed stapled structure vehicles.
- interally managed stapled structure (prop in the tst, mgmt in the coy) - passive prop invs are contained in the tst structure, tst mgmt and other operating business activities (development, prop mgmt, land trading etc) are contained an a coy structure ; this address (to some extent) the issue of alignment of interests between the investor and the vehicle manager, although this structure makes it difficult to remove mgmt and allows greater risks (to be taken by mgmt), also difficult to obtain tax authority approval
- externally managed stapled structure (prop in the coy, mgmt external) - allows investors to gain exposure to props that have a component of business operation. asset is typically a hotel (that would otherwise be contained in a trading trust subject to tax). hotel business is owned by the coy but it pays out virtually all its pre-tax earnings to the tst as a rent. and unitholders receive all this income from the tst vehicle. mgmt of the tst is carried out by an external entity.