SGX Business Trust Discussions

[Nick]

WARNING: LONG POST


Business Trust Screener

Dear forummers,

Please add/substract to the list and share your views.

The business trust asset class fared terribly in the previous downturn with only a handful walking away relatively unscathed. I compiled some questions to ask before investing in any biz trust. Hope you will it useful.

1) Has the distributable income been stable for the past 3 years ?

If distributable income is fluctuating violently, this may not be a safe and defensive business trust to invest in. Generally, most trust locked in their long term cash generating contract over a period of years. Hence the main risk is counter-party risk which will be prevalent in recession periods.

2) Did the Trust face financing difficulties over the past 3 years ?

Most business trusts are highly geared and unlike REITs, there is no gearing limit. A well-managed trust must not over-expand in good times and face loan payment problems in the bust era. Moreover, some Trust have loan covenants ie credit ratings or LTV ratios which may expose the Trust otherwise defensive business to a whole new volatile cycle , asset valuation and credit cycle. This is a huge contradiction , what is the point of making the Trust operations anti-cycle when at the same time, it embraces the mother of all volatile cycles (the asset valuation and credit cycle) ?

3) Is the Trust operating as a self-liquidating trust ?

A large number of assets in this world do not last forever hence we must pay attention to the type of assets held by a business trust and in turn their dividend payout policy. The 3 common business trust's assets are vehicles (cars, railway carts, vessels and aircrafts), properties and infrastructures. In the case of vehicles, such assets will depreciate with time and eventually its cash generating ability will diminish. Similarly, this applies to leasehold properties and infrastructure assets especially those operating as a BOT plant with a fixed concession periods. These assets will be returned without charge back to the State when the lease/concession contract is over. Lease extension is no guarantee and it will not come cheap. Hence if the Trust uses cash-flow from depreciation to pay dividends to shareholders, there is no way it can replenish its own assets and its NAV will trend towards 0 and the Trust ceases to exist. There is nothing good or bad about this , shareholders just need to realize whether the Trust is termed as such and hence can the yield truly compensates its risk.

4) Is there a plan to repay its loans (if any) ?

Most Trusts are highly geared and often turn to bank loans or bonds to finance their capex intensive acquisitions. A key question therefore is whether a plan exists to repay such loans. Are they diverting part of their annual cash-flow to loan payments or do they intend to keep rolling it over every 3 years ? If the Management is failing to plan, then they are planning to fail.

5) Is the Trust's DPU growing ?

Business trust are low growth asset class but in return, there are expected to pay a consistent dividend to their shareholders. A shrinking DPU is not a very healthy sign unless there is a good reason. A well-managed Trust would be able to add value by slowly increasing the DPU with time through asset enhancement schemes or acquisitions.

6) Is the Trust NAV growing ?

This is closely linked to point 3. It is a good test to see whether the Trust is self-liquidating or whether is it truly growing. The biggest risk is when the Trust capital structure is self-liquidating in nature but the Management and shareholders assume that it is fully sustainable and acts as such. Generally, the only way to grow is to retain a portion of the net profit.

This are some basic questions to ask before buying a business trust. The business trust class was pretty badly hit in the previous year and only a handful looked strong enough to survive. Off-hand, I can only think of Ascendas India and PST which walked away from it unscathed. The jury is still out on newly listed Treasury China Trust and KGT.

My Personal Application of the Guidelines

Ascendas India

1) NPI has increased consecutively for FY 2008, 2009 and 2010. However the lack of diversification of its tenant base does pose some risk.

2) The Trust maintains a low gearing of 20%. It did not face any financing risk in the credit crunch of 2009.

3) It operates as a going concern since all of its properties are on freehold land.

4) As a property developer, it can divest its properties for a profit to repay its loans. However, there is no concrete plan for loan payment at the moment.

5) DPU shrank this year due to unfavourable exchange rates between IDR and SGD.

6) NAV has been declining due to unfavourable exchange rates and fair value loss in their properties.

Cityspring

1) Cash earnings increased substantially initially due to the Basslink acquisition. However there was a small dip in cash earnings in FY 2010 as compared to FY 2009. It is in a highly defensive industry.

2) It has one of the largest gearing though the bulk of its loans are non-recourse. Basslink currently face a potential drop in credit ratings which will hamper its distribution policy. The trust raised new equity in 2009 to bolster its balance sheet.

3) They are not retaining cash-flow from depreciation. But I don't think its assets operate under a BOT scheme.

4) Some of its loans have an amortizing feature while others demand a lump sum payment. No plans to repay those loans at the moment. They will most likely refinance it or raise new equity.

5) DPU was reduced due to the rights issue.

6) NAV has been declining since the Trust is paying out more than it earns.

First Ship Lease

1) Income available for distribution dropped in 2010 due to the Groda default. Counter-party risk remains a key issue for ship leasing businesses due to the on-going shipping recession especially in the tanker segment.

2) FSLT gearing is large with debts maturing in 2012 and 2014. It breached its LTV covenants and had to restructure its loans by making quarterly loan payment of US$8 million. It raised new equity in 2009 to boost its NAV.

3) It was operating as a self-liquidating trust initially since it did not retain cash-flow from depreciation. However, it is now retaining US$ 8 million a quarter and if continues to do so indefinitely, it should be able to replenish its asset base eventually.

4) There are no loan payment plans. It will most likely restructure its loans into a long term amortizing one in 2012 or raise new equity.

5) DPU has decreased substantially due to compulsory loan payment as part of the LTV waiver and reduction in revenue from Groda default.

6) NAV has declined due to its depreciation policy.

IndiaBulls Trust

1) Net Property income has increased substantially this year as its development projects slowly come online. However, it faced substantial delay initially and hence was not able to meet their forecast.

2) Gearing was reduced due cash raised from rights issue

3) Most of the assets are not yet online so I cannot judge

4) Gearing is low. As a developer trust, it may divest assets to repay loans.

5) No DPU was ever declared

6) NAV declined due to unfavourable foreign exchange rates

KGT (newly listed)

1) Highly defensive industry. Cash earnings should remain stable

2) Debt-free

3) It is operating as a self-liquidating trust since they are not retaining income to replenish assets when the concession period ends.

4) Debt free

5) Cannot judge since it just listed

6) NAV will most likely decline with time.

Pacific Shipping Trust

1) Revenue and profit remained stable with all vessels fully chartered out to its sponsor and CSAV. It did face the possibility of cutting its rates with CSAV a year ago though it was not implemented since CSAV undertook its own equity fund raising program. This underscores how fragile counterparties are in a recession.

2) It faced no financing problem during the credit crunch. It has no LTV covenants.

3) It is operating as a going concern since cash-flow from depreciation is not paid out to shareholders.

4) It takes on long term amortizing debts whereby loans are paid down on a monthly basis in line with its depreciation. It has secured financing for its first 4 vessel acquisition of US$150 million from banks. It has yet to secure debt and equity financing for the 5 Glovis vessels.

5) DPU shrank in 3Q 2009 due to a change in dividend payout policy from 90% to 70% of its net income.

6) Since the Trust is retaining 30% of its earnings, NAV has been trending upwards from US$0.379 in 4Q 2008 to US$0.406 in 3Q 2010.

Rickmers Maritime Trust

1) Revenue and profit has been stable. RMT charterers are blue chip container vessel companies. There was a slight dip in revenue as the charter contract for one of its vessels leased to Maersk expired in early 2010.

2) It breached its LTV covenants and was not able to finance its US$0.9 billion acquisition resulting in a huge restructuring in 3Q 2010.

3) It is operating as a going concern at the moment since merely 30% of its net income (or 13% of cash-flow) is paid out to shareholders.

4) After the restructuring program was approved, RMT repays its loans on an annual basis. It has obtained 3 year LTV waiver. Its debts are now long term amortizing loans.

5) DPU shrank dramatically due a reduction in payout ratio. There is a DPU cap imposed by its lenders for the duration of the LTV waiver.

6) NAV shrunk due to the one off US$64 million loss from the cancellation of the newbuilding projects.

Treasury China Trust

1) It is a new Trust so it is difficult to judge. Its current properties have renewed leases at higher rental rates. Refinancing will reduce interest expense substantially next year. Management expects revenue to double in 2-3 years' time when its development projects are online.

2) No loan financing issue highlighted. Development projects have secured financing.

3) Properties are not freehold. But as a developer, it may seek to divest its assets for a profit and recycle capital.

4) No loan payment schedule. Gearing is below its self imposed 45% limit.

5) DPU forecast of 2.5 cents per quarter for FY 2010 and FY 2011. DPU is being funded primarily by retained earnings from a previous asset sale.

6) NAV has increased due to fair value gains in property valuation.

I did not touch on the 3 listed funds - Global Inv, MIIF and MPSF as they are terribly complicating !

Disclosure: Vested in PST. This represents my views only. I may be wrong. Not a call to buy or sell. Please point out any errors made.

[lonewolf]

Very nice guide, Nick!

I wished I have read this guide before putting my money into that real bull of a trust called IndiaBulls. I think the manager mis-spelt and put a 'u' instead of an 'a'.

I find your view on 'NAV growing' to be an interesting proposition cos I am of the view that NAV is not a meaningful measurement in gauging the value of a business trust; but I have to concede that perhaps my views on NAV was too limited in the first place.

Your evaluation of the various shipping trusts also remind me that as investor, we need to be machines and not let our emotions get the better of us. Of the 3 shipping trusts, though my head told me that it was well-managed, I did not like the sponsor Pacific Shipping (for personal reasons) and so refused to invest in it. But time has certainly proven that an investment in PST over the 2 other (which I am vested in) would have profited me more.

[Nick]

Thanks Lonewolf

I hope you find it useful in investing in business trust in the future.

Personally, NAV is important for 2 reasons -

1) It helps gauge the market perception of the Trust stability. A trust trading above its NAV (or close to it) means that the Market considers it to be stable as opposed to another trading at a huge discount. Moreover, raising new equity by issuing shares priced at NAV levels will not be value destroying.

2) In the case of assets holding on to depreciating assets (vehicles and BOT plants), it helps to gauge whether the Trust is self liquidating or operating as a going concern. If the Trust NAV is declining because it is paying out cash-flow from depreciation, it implies that NAV (and unit price) will eventually hit 0 when the asset cash generating ability ceases. So, I have to re-examine its yield to take into account that the trust value will be 0 in X years time.

I do agree about perception. I never gave PST a fair chance until this year because I thought PIL was a weak sponsor and its fleet was lacking diversification. I guess it would have been even worst in 2008 when there was no diversification and its rivals had the exciting Rickmers Group and FSL's diversified fleet. Guess this goes to show that Management quality as opposed to asset quality is a key determinant for the Trust's eventual fate.

Indiabulls was a terrible flop in my opinion. I suppose this is one of the reason why the property development trust never really took off here.

Cheers

[Blackjack]

Nick, thanks for sharing your personal list.

Personally I feel NAV may not be a good measurement for business trusts as opposed to reits (can't help comparing as both are essentially yield plays)

In the valuation of NAV, MIIF for instance uses different techniques to value its non-listed assets i.e. comparative investments, recent transactions, DCF etc. The latter in my view would at best qualify as precise calculations to arrive at an estimated fair value and cannot be treated seriously. HWT on the other hand attributes much of its NAV to intangible assets like concession rights. How much these concession rights would be worth if there are no interested operators is anyone's guess. Whereas shipping trusts have much of their valuation tied up in vessels. Even though they may be depreciated 'conservatively' over 10 or 15 years we know these assets won't fetch nearly as high as properties with similar book value, since the targeted niche players in shipping is much more limited in my opinion.

Agreed with you on Indiabulls though. How they managed to project a yield in their prospectus and yet fail to deliver even one distribution after listing is amazing.

[lonewolf]

Indiabulls was a terrible flop in my opinion. I suppose this is one of the reason why the property development trust never really took off here.

Agreed with you on Indiabulls though. How they managed to project a yield in their prospectus and yet fail to deliver even one distribution after listing is amazing.

A combination of bad proposition, a hint of bad management and the onset of the financial crisis. Or as some of our more esteemed forumers may say 'I dun know how it get listed in the first place.'

I mean, for crying out loud, when it was listed, none of the properties in the portfolio was completed! It should have been a huge red flag for me but I was 'blinded' by the prospects of access to the Indian real estate market and took a calculated risk. On hindsight (and everything looks so rosy on hindsight doesn't it), it was quite a bad investment decision.

Well, live and learn I guess.

[Nick]

Hi Blackjack,

I am assuming business trust will not be liquidating their assets any time soon. BOT plants have long term concession agreements while vessels may be locked in long term charters so asset sale is rarely in the interest of a biz trust unless it is at a great premium to book value. If the Trust is liquidating it below book value, it highlights some inherent problem which the Trust might be facing ie loan calls etc. You are right to point out the problems behind using NAV to value a Trust. I should be clearer and stated NAV trend instead.

Concession rights are valued based on the projected cash-flow which the asset may generate over the operating rights life-time. It is written down quarterly in the cash-flow statement (similar to depreciation). I guess it is written down in such a way to coincide its zero value the day the operating rights is handed back to the State. I don't own any infrastructure biz trust so I may not be the best person to comment on this.

Vessel valuation is based on its purchase price and will be written off based on a 20-30 year life time (often assuming zero scrap value). Naturally, NAV may not reflect the vessels true worth - vessel purchased in 2006/07 are worth a lot less today similarly vessel purchased in the last 18 months may be worth even more 2-5 years time if shipping recovers. This is the reason why I don't usually bother to include NAV in my valuation since cash-flow is more important.

I am more interested in the trend behind the NAV. If NAV has been declining over a period of 2-3 years, it highlights a flaw within the Trust itself - they are not retaining cash to replenish its assets. This immediately rings alarm bells since it is the first sign of a self-liquidating Trust and I have to value it as such. This is harder for properties since asset valuation rise and falls over its leasehold period but it is easy test for vehicle and infrastructure trust.

[freedom]

great article, nick.

one thing about Reits in Singapore is that normally the depreciation is not that important and they revalue their properties annually according to market price. normally I won't trust their valuation fully, since there are just too few transactions to conclude property price and since 2003, property has been an upside cycle. What will happen if the valuation downside cycle comes? for quite some reits the equity part will be completely wiped out. in 2008, it was just credit crunch only, not valuation downside cycle.

[Nick]

Thank you freedom !

I don't subscribe to the view of an ever-appreciating property valuation. Property crashes has been exhibited quite commonly even in developed economies. So I tend to view it as a matter of when (1 year, 5 year, 10 year time etc) as opposed to a matter of if. If such an event occurs in a tiny economy like Singapore, I daresay plenty of small cap REITs will be in for a terrible time ! But the market is very efficient and have accorded them with yields exceeding 7.5% in general.

[FFNow]

Nick, why do u feel MIIF is terribly complicating?

[Nick]

Business trust funds like MIIF and MPSF invest $$$ to own small stakes in businesses which they don't control. Hence their fate is not in their own hands but rather in the businesses which they invest in hence a prudent investor must spend time to research all of these businesses (most private) to understand their risk and growth factors. MIIF learnt its lesson from the credit crunch and sold their investments which they had small stakes in (Arqiva, MEIF). CAC was an interesting divestment but I am guessing they just want to be an Asian centric fund. MIIF was in great shape financially with minimal debts and high margins (it is a fund) but its small stake in Arqiva which was highly in debt led to its inability to pay a distribution for the next few years to shareholders (including MIIF). This caused a sharp drop in its revenue and DPU. MPSF invest in a multitudes of funds holding small stakes in each of them. So they are at the mercy of those funds fate most of which turned bad in 2009. Hence, unless prospective shareholders researched each and every investment these biz funds made, they are taking a big leap of faith in fully trusting the fund manager. This is why it is complicating - too many assets, too little time to research them effectively. It is also a paradox - you invest in a fund so that you don't have to do much research but to invest successfully in a fund, you need to research its asset extensively !

There is a difference between control and ownership. MIIF and MPSF owned shares in many companies in 2007/08 but controlled few of them. MIIF is in better shape now since it control significant stake in their assets. But most of these assets have heavy debts so be careful. There are a few listed companies here which deals with infrastructure assets ie Pan United (owns a stake in a port), CM Pacific (owns toll roads), telcos, water stocks and WTE BOT plants.