Some time back ago, I received a query from a reader asking for my views on Far East Hospitality Trust IPO. As mentioned in one of my previous posts, normally I refrain from giving advices on IPO, especially business trusts or REITs. I must admit that my knowledge in business trusts and REITs is lacking. But then again, investors needs to understand that business trusts and REITs are very different from shares trading in the stock market. The structure and nature of the business model can be quite complicated for the man in the street to comprehend. For example, investors need to know that unlike shares of a company, REITs are actually managed by external managers and are backed by sponsors, usually major property developers or shipping companies. Sometimes, there may be non-transparency concerning party-related transactions, so there might be cases of poor disclosures to investors. In addition, the assets are financed not only by unit holders, but also through bank loans as well. Borrowers have to top up their loan facilities, should underlying asset values fall below a certain point. So investors need to understand the leveraging risks of business trusts and REITs as well and not just be seduced by the compelling yield.
Buying a IPO can be risky and so far, I have not invested in any IPO. I always believe that there is a need to have three years of track records of profits and positive net operating cash in order to consider a company good to invest. If an investor bought an IPO based on the potential DPU or hope to make a killing from speculation, then I think that is no different from gambling. Investing requires painstaking research and taking calculated risk. This would requires companies to release detailed financial information so that investors can make informed investment decisions. Henceforth, I have always avoided IPO because the track records just isn't there for me to assess the fundamentals of a company.
The recent financial crisis should serve as a reminder to all investors of the financing risks for business trusts and REITs. During that time, virtually all the banks were unwillingly to rollover loans, leaving business trusts and REITS to scramble for alternative sources of funding or even having to let purchase options expire with penalties.