You will be able to name each party in an S-REIT structure and what it is responsible for.
Darren has held units in an S-REIT that owns suburban malls for three years. He collects the distributions, glances at the results, and assumed that he and the other unitholders more or less ran the place. Then a circular arrived about the REIT buying a new mall from a company with almost the same name as the REIT, and he realised he did not know who was on which side of the deal.
Every S-REIT has the same basic cast. Once you know who plays which part, the annual report, the circulars and the fee tables start to make sense.
An S-REIT is a trust. When you buy units, you become a unitholder, one of the beneficial owners of everything the trust holds. You own the REIT in the sense that its income and assets belong to the unitholders as a group.
You do not hold the properties directly, though, and neither does anyone you elect. The properties are held by the trustee, a separate company, usually the trust arm of a bank or a specialist trust company. The trustee holds the assets on behalf of unitholders. It also has a supervisory job: it checks that the manager runs the REIT according to the trust deed, the legal document that sets out how the REIT works, what it can invest in and how fees are paid.
The trustee does not make investment decisions. Think of it as the custodian and referee. It keeps the assets safe and can step in if the manager breaks the rules.
The manager runs the REIT. It decides the strategy, chooses which properties to buy and sell, arranges the borrowing, decides how much to distribute within the rules, and reports to unitholders. When you read the annual report, almost every decision described in it was made by the manager.
The manager is a separate company with its own shareholders, and it is paid fees by the REIT for doing this work. Lesson 4.3, How the manager is paid, and why it matters to you, looks at those fees in detail.
In most S-REITs, the manager is owned wholly or mostly by the sponsor. That is the part Darren had missed.
The sponsor is usually a property group that set the REIT up. Typically the sponsor already owned properties, put some of them into the new REIT at its listing, and kept a stake.
The sponsor's role continues after listing in three ways. It often sells more properties into the REIT over time, which is how many S-REITs grow. It may hold a right of first refusal, a promise to offer certain properties to the REIT first before selling them elsewhere, which gives the REIT a pipeline of possible acquisitions. And it often holds a block of units itself, so it has a share in the REIT's results.
A strong sponsor can be good for unitholders. It brings a pipeline of properties, expertise, tenant relationships and sometimes better borrowing terms. It also creates obvious questions. When the sponsor sells a property to the REIT, it wants a high price. Unitholders want a low one. And the manager, which negotiates for the REIT, is usually owned by the sponsor.
That is the situation Darren was looking at. The seller of the new mall was the sponsor. The buyer was the REIT, represented by a manager that the sponsor owns. Rules exist for exactly this case, including independent valuations and, above certain sizes, a unitholder vote, and lesson 4.4, How MAS regulates S-REITs, covers them. Knowing the structure is how you know to look for those protections.
The fourth party runs the buildings day to day. The property manager handles leasing, tenant relations, maintenance, cleaning, security and the operating side of each property. It is paid fees out of the property income.
In many S-REITs, the property manager is also a company in the sponsor's group. So the sponsor can end up on several sides at once: seller of properties, owner of the manager, operator of the buildings, and a large unitholder. Some REITs use outside property managers instead, particularly for overseas assets.
The annual report names each party. Look for a corporate structure diagram near the front, usually with the REIT in the middle, unitholders above it, the trustee alongside, the manager and property manager linked to it by fee arrows, and the properties underneath. The corporate information page lists the names of the manager, trustee and property manager. The section on unitholdings shows the sponsor's stake, and the prospectus or the annual report describes any right of first refusal.
If the REIT has a sponsor in a group with a similar name, check carefully which company does what. Names in the same group are often very close.
In the activity you will draw that structure yourself for one S-REIT, with each party named, which will make it much easier to see who sits on each side the next time a circular like Darren's arrives.
Draw the structure of one S-REIT from its annual report, labelling the sponsor, manager, trustee and property manager by name.
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