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