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Overpaid for our investments in business trusts?

Monday, February 16, 2015

As investors, we do our best to look ahead but because we have imperfect knowledge, what we can see is probably just our best guess. Things are usually clearer on hindsight.

As income investors, we can be too concerned with yields sometimes and it does not help that certain consultants also put their focus on yields. To be fair, this is a common pitfall and I fell into such pits in my early days as well. However, consultants are professionals and, as a consequence, sometimes, they have a bit more reach. We should be more wary.

I do not have perfect knowledge. I am not a professional. I am just your average retail investor who has opened his fair share of cans of worms. I just share my thoughts and experience here in my blog but, remember, that they are not sacred in any way.

On 20 June 2014, I wrote a piece in response to a report which quoted a consultant as saying "If you want to invest in business trusts, you shouldn't be looking so much at capital gain... your objective is more dividend yield. Prices do come down, but you actually still get your dividend yield."

I took issue with that statement and listed 5 reminders to myself:

1. Dividend yield is a key factor, not the only key factor.

2. Keep an eye on possible capital gain or loss.

3. Look at yield on investment based on current price.

4. Could it be that we are taking back our own money?

5. Does the yield sufficiently compensate us for the risk?

To read the complete blog, refer to related post number 1 at the end of this blog.

Over the weekend, an article in The EDGE said:

"There is no doubt now that investors who bought shares in Hutchison Port Holdings Trust (HPH Trust) at its IPO four years ago paid Hong Kong tycoon Li Ka-shing's corporate stable far too much."

I did not apply for shares in HPH Trust's IPO.

Actually, I have not applied for shares in any IPO for many years. I think avoiding IPOs has generally been more rewarding for me than not. So, this might be a good rule of thumb for me to stick to.

Similarly for Croesus Retail Trust's IPO, I avoided although I was interested and watched in disbelief as the unit price was chased to a high of $1.18. Its yield was being compressed so much as its price shot through the roof and some people still said it was attractive enough to buy. Did they know something I didn't? I wondered to myself, self-doubt settling in.

Well, this is just a short blog post to remind myself that REITs and business trusts are relevant tools for income investors and that there are many things to look out for, not just their distribution yields. Look at yields only and I could end up overpaying.

Related posts:
1. High yielding business trusts: A discussion.
2. HPH Trust: Storm clouds over a safe harbour.
3. Croesus Retail Trust: Motivations and risks.


Singapore Stock Picker said...

are retail trusts the same as reits? if so, i think both just end up asking for more cash from you in the future.

AK71 said...


Business trusts have certain differences when compared to REITs. They don't have a gearing cap, for example.

It is probably a sweeping statement to say that REITs will end up asking for more cash from us in future. :)

SS said...

Hi AK.

Agreed that there is more than just yield to look at for business trusts and REITs.

I would prefer those Trusts that have the potential to grow its rental revenue and are conservative in debt management.

Croesus Retail Trust seems highly levered though.

AK71 said...


Well, a relatively high gearing level in itself is not necessarily a problem. If we expect asset value to increase or if we expect revenue to improve significantly, what might seem like a relatively high gearing level might be a non-issue. :)

Superolio said...

Hi AK,

So wat you think on the current Croesus and Saizen's result? Can accumulate?

Thanks and Happy New Year..

AK71 said...

Hi Clement,

Both Croesus Retail Trust and Saizen REIT are expected to perform satisfactorily in 2015. The only worry we might have is the prospect of a weaker JPY since we receive income in S$ terms.

Both of them hedge against forex risk. Although it provides certain downside protection, this is done on a six monthly basis. So, if the JPY is on a longer term downtrend, we could still see a lower DPU in S$ terms over the next 2 years.

There are ways of improving DPU in JPY terms which would ameliorate any decrease in DPU in S$ terms, of course. However, we can only assess these measures as and when they take place.

After taking all these into consideration, if anyone is quite comfortable with the possibility of a 10% decline in DPU in S$ terms over the next 12 to 24 months, considering long positions in Croesus Retail Trust and Saizen REIT as investments for income seem fairly palatable.

The Sun said...

Hi Ak,

In fact, investing in the IPO of CRT @ 93 cents in May 2013 would not be too bad a decision after all. If one had held the units since then, he would have amassed the semi annual dividends distributed. And as for the share price, at least it is not trading below the IPO price, based on today's closing price of 93 cents.

AK71 said...

Hi Sun,

Oh, I was really referring to people who chased the unit price of CRT as it shot to $1.18 although I must agree that those who got in at IPO would have done quite reasonably well. Mr. Market is always right, after all. ;)

AK is just a giamsiap fellow. ;p

caelitus said...

Hi Clement,

With reference to Saizen, are you prepared for:

1. 20% decline in Yen.
2. Decrease in revenue because of competition from newer properties and possibly reduced demand (shrinking population).

A positive is that the management has been able to dispose of assets above the book value. If it is trading below its NAV, there is further discount based on the above.

AK has said previously, there will always come a time where the price makes it a good buy.

AK71 said...

Hi caelitus,

I want to make a point regarding the type of residential properties that Saizen REIT owns. There are many types of residential properties and the type that Saizen REIT owns primarily is not seeing much new supply. This is because the cost of building them is higher than buying them pre-owned. Herein lies the concept of replacement cost.

I blogged about this last year:
Buy a property below valuation and replacement cost.

Such buildings in Japan are now still valued at below replacement cost although they are seeing an increase in value. So, developers and investors are not pumping money into new builts. This is probably one reason why Saizen REIT has been able to sell some of its apartment blocks at a huge premium to book value.

The new residential developments in Tokyo that we see some road shows in Singapore promoting are generally not in the same class. They are a bit more atas. ;p

AK71 said...

Hutchison Whampoa, which controls assets ranging from ports to telecommunications, said net profit more than doubled to HK$67.16 billion (US$8.66 billion) up from HK$31.11 billion in 2013. Revenue rose two per cent to HK$421.47 billion.

Octogenarian Li, who is nicknamed "Superman" for his sharp business acumen, has been selling assets in China and Hong Kong and making multi-billion dollar purchases in Europe, fuelling speculation that he was losing confidence in the region.


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