Singapore is well known in the region for being a REIT haven, and many REITs (both local and foreign) have gone on to list successfully in our local stock market. However, there is also a different type of structure SGX has introduced: that of the business trust.
My colleague has written about the differences between REITs and business trusts, and I would like to highlight the two key differences I feel are critical to how a business trust should be perceived: the (1) leverage level and (2) distribution policy. But first, let me illustrate my point with three examples of business trusts, and then end off with my thoughts on business trusts.
1. Accordia Golf Trust
Accordia Golf Trust (SGX: ADQU) is a business trust that holds investments in golf course assets in Japan. Its purpose is to own a portfolio of stabilised, income-generating golf courses and driving ranges with an initial focus on Japan.
From FY 2016 through to FY 2019 (the Trust has a 31 March year-end), total distribution per unit (DPU) fell from 6.63 Singapore cents to 3.77 Singapore cents, a 43% decline. Accordia’s share price has also tumbled from S$0.85 in August 2014 to S$0.56 now, or a 35% decline.
2. Hutchison Port Holdings Trust
Hutchison Port Holdings Trust (SGX: NS8U), or HPH Trust, holds a portfolio of deep-water container terminals in the Pearl River Delta of South China. HPH Trust operates Hongkong International Terminals, COSCO-HIT terminals, and Asia Container Terminals in Hong Kong; and Yantian and Huizhou International Container Terminals in China.
From FY 2014 to FY 2018, HPH Trust’s annual DPU has fallen from a high of 41 HK cents to 17 HK cents, for a decline of 58.5%. Its share price has also tumbled from S$0.75 in July 2014 to S$0.315 (a 58% drop).
3. Asian Pay Television Trust
Asian Pay Television Trust (SGX: S7OU), or APTT, is a business trust that owns Taiwan Broadband Communications Group (TBC) as its sole asset. TBC is a leading cable TV operator in Taiwan.
APTT’s DPU has plunged from a high of 8.25 Singapore cents in FY 2015 to just 1.2 Singapore cents (0.3 Singapore cents per quarter) in its latest fiscal year. My colleague explained this in an article last year. The share price of APTT has also crashed 79.5% from a high of S$0.78 five years ago to the current S$0.16.
A toxic combination of three factors
So, what has caused these three business trusts to perform so poorly over the years? It boils down to a combination of three factors, in my opinion. The first, and probably the most important, is the business model. These trusts had business models that either saw declining business volumes, or had deteriorating competitive moats. This led to a steady but inexorable decline in revenue and cash flow, which resulted in dividends being slashed.
The second factor is high leverage. As there is no limit to how much business trusts can borrow (unlike the statutory 45% gearing limit for REITs), some of them were burdened by high finance costs brought about by unsustainable levels of debt. The final factor is distribution — some had paid out a DPU of 100% of their cash flow, which means the trust had little money left over for maintenance of its assets or for servicing of its debt when interest rates increased. These trusts should have committed to a more conservative payout ratio right from the beginning.
Should we trust in business trusts?
I would like to caution that we should not tar all business trusts with the same brush. The above three trusts have shown that their DPUs were unsustainable, and their business models flawed. However, a well-run business trust with a strong competitive moat may still qualify as a good investment. Investors should, therefore, judge each business trust on its own merits.
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