"The real estate business trusts also have the liberty of owning real estate which generate no or limited income for years but can still fund dividends to investors through various forms of guarantees (as in the case of Perennial China Trust) and so on. No critical questions are asked by investors and analysts as long as the company is able to pay dividends."
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Source: Business Times © Singapore Press Holdings Ltd.
Published November 23, 2012
LETTER TO THE EDITOR
Investors need to be wary of business trusts
THE structure of a business trust and the rights of unitholders are certainly important issues as pointed out in "Time to tighten rules for business trusts" by Teh Hooi Ling (BT, Nov 21) and "Complex structures for listed entities not business friendly" by Mak Yuen Teen (BT, Nov 22).
There is, however, another more fundamental reason for investors to be wary of business trusts and that is simply the nature of their business.
Apart from being able to maintain effective control of a business with minimal ownership, a sponsor is also able to garner much better valuations if the business is listed as a trust versus as a regular company. This is because the trust starts getting valued based on yields rather than the fundamental earnings power of the business, as in the case of a regular company.
Under this structure, a business can hold very capex-intensive assets and yet not count depreciation as a cost.
It can also hold obscure and virtually impossible-to-value assets such as wind turbines (as in the case of the Macquarie International Infrastructure Fund). It can hold "assets" such as "service concession receivables" which decrease in value over time (thus reducing the net asset value of the trust) to fund investor dividends (as in the case of K-Green Trust).
The real estate business trusts also have the liberty of owning real estate which generate no or limited income for years but can still fund dividends to investors through various forms of guarantees (as in the case of Perennial China Trust) and so on. No critical questions are asked by investors and analysts as long as the company is able to pay dividends.
Despite their opaque nature, the reason business trusts still have a following among investors is the lure of high yields. Investors seem to forget the simple fact that yields only matter if the initial capital stays intact.
In most cases, high yields simply provide cover for a fundamentally weak business.
Bobby Jayaraman
Source: Business Times © Singapore Press Holdings Ltd.
Investors need to be wary of business trusts
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Source: Business Times © Singapore Press Holdings Ltd.
Published November 23, 2012
LETTER TO THE EDITOR
Investors need to be wary of business trusts
THE structure of a business trust and the rights of unitholders are certainly important issues as pointed out in "Time to tighten rules for business trusts" by Teh Hooi Ling (BT, Nov 21) and "Complex structures for listed entities not business friendly" by Mak Yuen Teen (BT, Nov 22).
There is, however, another more fundamental reason for investors to be wary of business trusts and that is simply the nature of their business.
Apart from being able to maintain effective control of a business with minimal ownership, a sponsor is also able to garner much better valuations if the business is listed as a trust versus as a regular company. This is because the trust starts getting valued based on yields rather than the fundamental earnings power of the business, as in the case of a regular company.
Under this structure, a business can hold very capex-intensive assets and yet not count depreciation as a cost.
It can also hold obscure and virtually impossible-to-value assets such as wind turbines (as in the case of the Macquarie International Infrastructure Fund). It can hold "assets" such as "service concession receivables" which decrease in value over time (thus reducing the net asset value of the trust) to fund investor dividends (as in the case of K-Green Trust).
The real estate business trusts also have the liberty of owning real estate which generate no or limited income for years but can still fund dividends to investors through various forms of guarantees (as in the case of Perennial China Trust) and so on. No critical questions are asked by investors and analysts as long as the company is able to pay dividends.
Despite their opaque nature, the reason business trusts still have a following among investors is the lure of high yields. Investors seem to forget the simple fact that yields only matter if the initial capital stays intact.
In most cases, high yields simply provide cover for a fundamentally weak business.
Bobby Jayaraman
Source: Business Times © Singapore Press Holdings Ltd.
Investors need to be wary of business trusts
