Cash needs cause relook

Some want to pay investors part-units instead of all cash

WHEN the property market was booming, investors picked up real estate investment trusts (Reits) for their policy of paying out most of their profits in cash.

But with the economy now slowing and asset prices falling, these one-time market darlings are looking for ways to conserve cash – and that may lead some of them to pay investors partly in units rather than all in cash.

“There is nothing under MAS regulations that prohibits Reits from deciding to pay their dividends in part-stock, part-cash,” a Monetary Authority of Singapore spokesperson told Today.

But should Reit managers choose to do so, it is unclear whether they will need to pay tax on the portion that they decide to pay in stock. Currently, Reits enjoy tax concessions for paying out at least 90 per cent of their distributable income.

This practice, while already common in countries such as the United States and Australia, is unusual in Singapore. The first to try it here appears to be Mainboard-listed Saizen Reit.

Saizen, which invests in Japanese residential properties, has proposed a scrip-only dividend scheme, which will provide “flexibility for Saizen to pay out part or whole of a dividend by way of new scrip dividend units (in the event that a dividend is announced) and allows cash to be conserved for loan repayments”, the trust said last month.

Will Saizen’s proposal spark similar moves among its Singapore-listed peers, some of which are equally tight for capital as their refinancing dates loom?

One Reit manager said the plan was enticing, but “we’ll be watching Saizen” before deciding whether or not to adopt the scheme. He was referring to the outcome of Saizen’s extraordinary general meeting – slated to take place between end-March and April – where unitholders will vote on the proposed scrip dividend scheme.

While Mr Vincent Yeo, chief executive of the manager of CDL Hospitality Trusts, finds a part-unit-part-cash payout a “worthwhile consideration … at a time when capital needs to be conserved”, he said: “Shareholders have to ultimately decide that this is a scheme that they are comfortable with on the basis that there are some investors who invested in Reits with the specific objective of receiving cash returns.”

That was one reason behind the Government’s decision not to agree to the industry‚s reported requests for a reduction in the minimum payout ratio, which is currently set at 90 per cent.

Senior Minister of State for Finance Lim Hwee Hua said last week during a conference on Reits that there would be no change to the minimum ratio because “the key characteristics of Reits as a stable, high-payout, pass-through vehicle are important considerations for investors and, hence, must be preserved”.

Analysts are mostly sceptical that the scrip dividend move will be widely followed by more established players, with CIMB-GK Securities analyst Janice Ding calling it a “last resort” for Reits without strong banking relationships and strong sponsors committed to tiding them over.

A “longer-term solution” to raise cash is equity fund raising, said a local brokerage analyst who declined to be named.

He said: “We see that as a more effective method as the balance sheet will be recapitalised immediately upon the completion of the fund raising and the Reit will be better positioned to tap on growth opportunities going forward.”

Phillip Securities‚ Lau Kok Joo said cash conserved from paying dividend in stock would not be substantial enough to repay debt, although it may help with immediate working capital needs.

Mr Lau also felt such a move would not go down well with investors. “Sentiments are already not very good … unless they are holding it for the long term, most (investors) would just sell and add to the selling pressure,” he said.

Source : Today – 23 Feb 2009

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