There was an article in the Sunday Times about investing in Singapore listed business trusts.
A business trust is a structure that is setup to provide a steady stream of dividend payout from the operating business or assets. The yield can sometimes be as high as 10+% (Business Times had previously published an article highlighting the key differences between a REIT and business trust).
The high yield can be enticing for newbie investors, and they sometimes neglect to consider the fundamentals.
Because distributions are paid purely from cashflows (rather than earnings), the trust can pay a higher dividend without factoring in non-cash items like depreciation.
It is important to look beyond the yield and see whether the underlying assets are able to sustain the payout in the long run. Indeed, for a few business trusts, they had to resort to a rights issue to raise capital a few years after listing.
Many investors found out that despite the dividends they had received, they had suffered huge losses as a result of a significant drop in price.
Some examples: (IPO price, last Friday’s closing price)
Cityspring : $0.69, $0.39 (rights issue done twice!)
Hutchison Port : US$1.01, US$0.725
Ascendas India Trust : $1.18, $0.735
Indiabulls : $1, $0.108 (rights issue done once, no distributions given to date!)
First Ship Lease : $1.49, $0.17
Rickmers Maritime : $1.57, $0.315
Some of the business trusts which delivered a position return to shareholders like Hyflux Water Trust and Pacific Shipping Trust are no longer around as they had been delisted.
I have come to a conclusion that for the majority of business trusts, it is better to buy them from the secondary market rather than to get it from the initial public offering (IPO). Of course, that is provided the counter is worth owning in the first place.
Growing Hunger for Business Trust (Sunday Times)