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Does It Make More Investing Sense To Think Of UOL Group Limited As A REIT?

UOL Group Limited (SGX: U14) is one of the newest companies to join the Straits Times Index (SGX: ^STI).

It is an integrated property company, with interests in property development, property investment, hotel operations, and also real estate management services.

Interestingly, UOL Group generates most of its income from recurring sources such as its hotel operations, management services, and its portfolio of property investments. In 2015, 68% of its operating profit were sourced from these businesses. Turning to the balance sheet, 72% of its total assets in 2015 came from its investment properties and its hotels.

So if the recurring portion of UOL Group’s income is so large, should we think of the company as a real estate investment trust? REITs earn their keep mainly by collecting rent from the properties they own – that’s recurring in nature.

Two things to be aware of

It is true that UOL Group might have a stable base of recurring operating income that works almost like the recurring rents that REITs get to enjoy from the properties they own. But, investors need to be aware of two things that make UOL Group different from a REIT.

First, there is no promise when it comes to the dividend.

As a company, UOL Group is not obligated to distribute its recurring income to shareholders, unlike a REIT, which is supposed to distribute 90% of its distributable income.

This can be seen from UOL Group’s dividend payout ratio (dividend over earnings) of only around 30% in 2015. The company’s shares also carry a yield of less than 3% even though it is has a low price to book ratio of 0.6 or so. As a company, UOL Group also has the right to cut its dividend at any time even when it has the ability to pay a dividend – this adds uncertainty for income investors.

Second, there is no restriction on the businesses that UOL Group wishes to enter.

As a company, UOL Group can venture into any new business that its managers fancy. Unlike REITs, which have clear mandates on the type of assets they are allowed to invest in, UOL Group can easily venture into unrelated businesses in the future.

In fact, in 2015, 7% of UOL Group’s assets – roughly S$800 million – was invested in the bank, United Overseas Bank Limited (SGX: U11).

Foolish Summary

UOL Group might have an asset and income base that looks very similar to a REIT. But, given its structure as a company, it should not be confused with a REIT – a REIT has clear mandates for its operations and income distribution. UOL Group is unrestricted on both factors and investors should understand this.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.