Are Reits a better alternative to Hutchison Port trust?

HUTCHISON Port Holdings (HPH) Trust’s initial public offering has clearly been a letdown for punters who are in for a quick ride. The container port business trust sank in its stock market debut almost two weeks ago and has not recovered past its offer price of US$1.01 per unit since.

But for long-term investors seeking yields, the verdict remains open. The lower unit price means a chance of securing higher yields by buying in now, assuming that the projected distributions to unitholders (DPUs) materialise. Is HPH Trust worth a shot for this purpose?

The answer may be ‘no’, because better options exist in the form of real estate investment trusts (Reits).

To be fair, HPH Trust is dangling attractive yields. Its forecast seasonally annualised DPU for 2011 is 45.88 Hong Kong cents and at yesterday’s closing unit price of 98.5 US cents, after currency conversions, the yield comes up to almost 6 per cent. This is high in today’s low interest rate environment. For 2012, based on the same closing unit price, the yield could be 6.7 per cent.

What is uncertain is whether HPH Trust will eventually pay out the same DPUs as projected, and also maintain reasonable distributions in future.

In the first place, business trusts are not required to make minimum levels of payout. This is something that a number of investors may not have noticed, because they assume that business trusts and Reits are the same. They are not.

HPH Trust said in its prospectus that its policy is to give out all of its distributable income. But in any case, it has flexibility to change this, especially if hard times come along.

Recall what shipping trust Rickmers Maritime did in 2009 when it had to conserve cash during the financial crisis. Even though income available for distribution in Q2 rose 42 per cent year-on-year, Rickmers still cut DPU and unitholders received 73 per cent less from the previous year.

By contrast, Reits have to pay out at least 90 per cent of their distributable income to unitholders to enjoy tax transparency on the amount they pay out. This alone puts Reits ahead of business trusts for investors keen on steady yields.

Unitholders can be pretty sure that this rule will not change. Even in the face of 2009’s credit crunch, the authorities rejected requests from some Reit managers to lower the minimum payout ratio, emphasising that Reits’ characteristics as a stable, high-payout, pass-through vehicle must be preserved.

Reits look even safer when we consider the currency exposures HPH Trust investors face. Most of HPH Trust’s revenue is recognised in Hong Kong and US dollars; its units are priced in US dollars; and its DPUs are in Hong Kong dollars. The risks are worth repeating given how the Singapore dollar looks poised to continue strengthening.

The Sing dollar was trading at around S$1.26 to the US dollar yesterday and one of the more bullish research houses believes this could reach S$1.19 by year-end. If the forecast materialises, HPH Trust investors will have to pray that unit prices go up by more than 5 per cent just to make up for foreign exchange losses.

The Singapore Exchange (SGX) is looking at ways to facilitate the quotation and trading of HPH Trust in Singapore dollars as well as US dollars. But until details emerge, it is not clear if the arrangement will remove currency exposure on that front.

Also, assuming that the Sing dollar appreciates against the Hong Kong dollar at the same pace (since the latter is pegged to the greenback), HPH Trust’s distributions would lose value after currency conversion.

Investors can easily minimise foreign exchange risks by investing in Reits. All but one of them listed on SGX trade in Sing dollars, and most pay out distributions in Sing dollars. It is even possible to find Reits which hold only assets in Singapore, meaning that income streams are insulated from currency movements.

A quick scan on Bloomberg turns out a few Reits that generate yields of over 6 per cent and pay out distributions in Sing dollars. Some examples are Ascendas Reit and Frasers Commercial Trust.

Some may argue that HPH Trust has greater growth potential because its Shenzhen ports still have a lot of room for expansion. Also, unlike Reits, business trusts are not hampered by limits on borrowings or development asset size.

These are good reasons for the growth-seeking investor to consider HPH Trust. But investors hungry for yields and stability may sleep better with their money parked in Reits.