Chasing Yields: Singapore Business Trusts

You can’t have your cake and eat it too... says who? Look at these yields...

Yes these are the yields that these business trusts (BTs) are trading at. Despite having higher yields than REITs in general, BTs are seldom in the limelight.

The BT regime was initiated in Oct 2004 but the BT structure was never applied until 2006 when CDL Hospitality Trust, a stapled security created by stapling both a REIT and a BT, was established. In CDL’s case, the BT was a dormant entity. The first active and independent BT was tested by Temasek Holdings when they carved out Cityspring Infrastructure Trust with 2 utility assets in its portfolio.

Apart from Temasek Holdings, several other corporates have tested this structure. Some interesting examples include: Hyflux’s Water Trust (delisted); Li Ka Shing’s Hutchison Whampoa listing the largest BT in Singapore with Hutchison Port; Macquarie Funds spinning off their Taiwanese Pay TV assets on the SGX as Asian Pay Television Trust; India’s Fortis Healthcare creating Religare Health Trust; Accordia Golf Trust from Japan creating the first BT with golf related assets etc. As of today, there are 13 BTs listed in Singapore encompassing a variety of asset classes.  

So what exactly is a BT? A BT is a yield product that securitizes assets with stable and recurring cashflow with the focus of distributing dividends to unit-holders. Too confusing? Well, you can think of a BT as a REIT with a twist. The 2 structures are similar but with some nuances that render specific benefits depending on what the company’s objectives are.

The primary differences between a BT and a REIT are as follows:

1. Asset specification à A BT is able to securitize any type of asset including but not limited to real estate
2. Control à The trustee manager for a BT can only be removed by a super majority compared to a simple majority for the manager of a REIT (Note: Trustee and Manager for a REIT are separate entities)
3. Flexibility in paying out dividends à A BT is legally permitted to pay out operating profits as dividends compared to statutory profits for REITs
4. Development projects à No restrictions on engaging in development activities for a BT unlike the 10% limit for REITs
5. Financing à No gearing limits for a BT unlike a 35% cap for a REIT

You must be wondering – this structure is pretty attractive? There’s more in the bag.

In addition to the aforementioned reasons, BTs like REITs enjoy large tax incentives from the government. Sectors that enjoy these incentives are shipping, infrastructure and real estate. Pretty sure more sectors will be added to this list.   

Nevertheless, a disclaimer must be made.  

Let’s use an analogy. In portfolio A, you have a shopping centre. In portfolio B, you have 5 ships. Both are valued initially at the same book value. Over time, the land on which the shopping centre sits on increases in value. On the contrary, portfolio B’s value decreases as the 5 ships undergo wear and tear, a familiar term in finance – depreciation. Now, what must you do to ensure both portfolios are equally as attractive? Well, by paying a higher dividend in portfolio B, one would increase the attractiveness of the portfolio. This is one of the primary reasons why BTs are obligated to pay an attractive yield in order to compete in the yield space.

Building upon this concept, it is hence crucial to select BTs with strong sponsors (same concept as a REIT). A sponsor that has a solid pipeline of assets to be inject into the trust. Nevertheless, we’ve seen how Temasek ‘neglected’ Cityspring trust post listing. Since Cityspring’s listing in 2007 till present, only 1 asset was acquired into the trust. Perhaps that’s the reason for the merger between Keppel Infrastructure and Cityspring Infrastructure to create a larger entity and boosting the asset values.

Valuation of BTs differ slightly from conventional equities. Apart from the all-encompassing DCF methodology, BTs are not valued on a P/E ratio basis. Instead, a forward dividend yield is used as the key valuation tool. Just look at all trust listings – the largest font size in the entire prospectus is the forward dividend yield. Check this out!

GS

Chasing Yields

Monetary easing - we've heard this term on a daily basis for the past 6 years. The implications of such a dramatic reaction by the Fed post-financial crisis, and what Milton Friedman analogizes as 'dropping money out of a helicopter' is unseen and untested in history. 

Blackrock's 'Investing for a New World' campaign hit the nail on its head. So intelligently slick - It’s a new world. Yields are low. Markets are volatile. Confidence is scarce. One question is on everyone’s mind: So what do I do with my money?

Let's talk about yields. 

It is first crucial to understand the difference between yields and returns. Stealing snippets from Investopedia, while both terms are often used to describe the performance of an investment, yield and return are not one the same thing. Return, expresses what an investor has actually earned on an investment during a certain time period in the past. It includes interest, dividends and capital gain. In other words, return is retrospective, or backward-looking. Yield, on the other hand, is prospective, or forward-looking. It measures the income, such as interest and dividends, that an investment earns and ignores capital gains.

In Mr Greenshoe's opinion, yields are quite simply the most important investing tool in this ‘new world’ defined by Blackrock. Almost all investment opportunities in today’s market yields beats the bank deposit rate. The first question is – can you beat inflation. The second question is – can you get rich. Fret not, investment opportunities lie aplenty.

Focusing on Singapore, we have no lack of yield plays. In fact, the yield market in Singapore yield market is undoubtedly the strongest in Asia. From the creation of the first REIT in 2002 by CapitaMall Trust to the initiation of the Business Trust structure in Asia in 2004, the little red dot now has 33 Singapore Real Estate Investment Trusts (REITs) and 13 Business Trusts (BTs). As of yesterday, REITs and BTs make up 9.8% of the total SGX market cap. A reason for their significant prevalence lies in the numerous government tax incentives and structuring mechanisms that make these yield stocks not only good to buy but also good to hold. Mr Greenshoe will pen a detailed article on S-REITs and S-BTs in the coming weeks!

To end off with a food for thought - c.70% of all Main-Board IPOs in 2013 and 2014 were yield stocks.  

Impressive? Indeed.

GS