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REIT - Closer look at Business Trusts

Written By Stock Fanatic on Thursday, May 23, 2013 | 23.5.13

Though investors’ perceptions of Business Trusts (BTs) have been tainted by a few weak listings, we think it is too early to slap a life sentence on all. We see reasons why certain assets/ operations have to be listed as BTs. Recent listings are also faring better, and we see room for improvement with better investors’ perceptions and understanding.

Key criticisms of BTs include risks and corporate governance. We think the former could be reined in through the trust deed and the latter addressed by regulatory bodies in future. With proper strategy and execution, BTs could provide a higher-growth alternative to REITs (NEUTRAL) and a dividend-friendly alternative to companies.

Legitimate reasons for a Business Trust structure
There are legitimate reasons why certain assets/operations are listed as Business Trusts. Cash-generative non-real estate assets (like infrastructure) would not be allowed to be held in a REIT. For real estate assets, some would adopt a BT structure if there are foreign ownership restrictions of real estate assets in countries like India, or if management sees higher growth potential through development.

Why are some against BTs?
Common criticisms against BTs are: 

i) the lower level of restrictions (vs. REITs), 

ii) weak share price track record, and 

iii) corporate governance. 

We think (i) could be reined in via tighter restrictions on asset leverage, development caps and minimum pay-outs in the trust deed. 

For (ii), we note the stronger performance of recent listings (like Croesus and RHT) and see room for improvement with better investors’ perceptions and understanding. 

Lastly, we think corporate governance concerns over the combined trustee-manager role in a Business Trust and difficulty in removing an incumbent trustee manager is something that regulatory bodies could address in the future.

Too early to slap a life sentence?
Despite BTs having earned a ‘bad name’, we believe that investors should not be too fast to slap a life sentence on all BTs. With proper strategy and execution, some could provide higher-growth alternatives to REITs and dividend-friendly alternatives to companies. 

Of essence eventually would be evaluations for: 

i) restrictions in trust deed, 

ii) quality of assets and sustainability of cash flows, 

iii) corporate governance,

 iv) prudent capital management practices. (Read Report)

Highlighted Companies

Croesus Retail Trust
Croesus Retail Trust is a Business Trust with Japanese suburban retail exposure. The trust commenced trading on 10 May with a listing FY14 yield of 8.0%.

Asian Pay Television Trust
Asian Pay Television Trust is a Business Trust with its sole asset being the Taiwan Broadband Communications. Based on prospectus, projected yield for FY14 is about 8.5%.  (IPO Prospectus)

Investec Aviation Trust
Investec has reportedly revived potential listing of an aviation-leasing Business Trust, though it has yet to lodge its prospectus as of writing.

Source : CIMB Research

Read Also : SINGAPORE REITS - THE BURGEONING MARKET

• S-REITs continue to perform

• Sector currently trading at 1.24x P/B

• Prefer S-REITs with strong fundamentals and compelling valuations

Firm 1Q13 performance; mostly in line
In our latest assessment of the S-REITs sector, we continue to see familiar trends. REIT managers have generally maintained firm growth in their trusts’ rental income, on the back of contributions from past investments and improved operational performance. Of the 16 SREITs under our coverage, 10 of them reported results that were in line, three exceeded our expectations, while the remaining three fell short of our forecasts. (Read More)

Source : OCBC Research


Posted on Thursday, May 23, 2013 | 23.5.13


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