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K-Green Trust with an investor relations reply to falling NAV

I did some more figurative analysis on K-Green trust and it would seem that the yield on its 3 assets is all very very low.

I post some question to K-Green Trust Investor relations:

My understanding is that K-Green Trust do not own the assets but is a 15 year concession with the option to renew for another 15 years. I believe the concession for the other 2 assets is longer.

Based on accounting, the concession will need to be amortized throughout this 15 years. How does K-Green trust then maintainened the NAV of the trust? If NAV is not maintain wouldn’t it be paying back the investors original assets back to them across 15 years?

Here is their first reply:

Thank you for your email.

We would like to clarify that the three existing assets, two Waste-to-Energy Plants and one NEWater Plant, are indeed owned by K-Green Trust (KGT).  These plants have long-term concession agreements with the Singapore Government of between 15 years to 25 years. The term of the incineration services agreements entered into with NEA for Senoko Plant is 15 years, while for the Tuas Plant, it is 25 years.  The term of the NEWater agreement with PUB for the Ulu Pandan Plant is 20 years.  For the Senoko Plant, the option to extend the agreement for another 15 years lies with NEA.

We would also like to assure you that the Trustee-Manager of KGT is focused on providing long-term, regular and predictable distributions to its Unitholders.  While the three existing Singapore plants are contributing steady cash flows to the Trust, KGT will also be seeking additional new assets so that the Trust can continue to maintain the level of distributions over the longer term, when the concession agreements of the three plants end.

As stated in the Introductory Document issued on the listing of KGT dated 31 May 2010, Keppel Integrated Engineering, the sponsor of KGT, has granted KGT rights of first refusal to four assets.  They are the three district cooling system (DCS) plants under Keppel DHCS Pte Ltd, and a 22% stake in a waste-to-energy plant in Sweden.  KGT is looking to acquire the three DCS plants in the near term.

We hope the above clarifies.

For me I don’t think it answers my question directly that whether I have a misunderstanding regarding the way the trust works. For me the NAV is still not answered.

So I probe further:

Appreciate the reply. How is K-Greens favored leverage ratio?

From my analysis, K-Green is only paying out of its current concession as assets. The yields of the 3 assets are 3.5%. 2.5% and 1.2% respectively for the duration of the individual concession with cashflow growing at 3% growth rate.

With assets yield such a low returns, the current 7% yield is paying out of assets. Any new assets acquistion will still come from rights issues or placements, which dilutes the share holders.

At the end of the day, the shareholders seem to be getting a very bad deal even though on the surface the yield advertise is 7%.

What is K-Green’s view on this issue?

The final reply:

Thank you once again for your view on K-Green Trust.

On your comment regarding acquisitions of new assets, the Trust currently does not have any gearing, which will facilitate its ability to utilise debt financing for any future acquisitions.  Whether the Trust uses debt or equity to finance its future acquisitions will depend on the availability and cost of capital at the time it makes the acquisitions.

On the forecast yield of 7%, we are unable to add on to what the Trust has disclosed so far.

I thought they answered the first part of the question well, but averted the second question. at most they could tell me my calculations are fraud or wrong but that totally left me dissatisfied.


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Saturday 15th of September 2012

Well google does like you.. and thankfully their search algos make sense...

I am vested in K-green and ofcourse an looking at where the bear case really is and take my remarks with a pinch of salt.

I guess there are fundamental differences between REITs and the K-green trust. The key ones being: 1) duration of contracts (leases for property typically 3+3); 2) stability of underlying cash flows (property is inherently cyclical; as GFC taught us in a property downcycle capital raising become key risks. The gearing for K-green is low and this cannot be the case in the medium term. I would be worried if the trust is exposed to cyclical businesses (eg. shipping trusts) but the underlying business of K-green is actually utility like.

Also did you look at the tax structure of the trust (i took only a brief look this afternoon and it appears there are benefits that accrue from raising debt at the asset level). Going for absolute IRR could be a wrong way of looking at simply because cash flow risks are far lower than REITs (i am long a few names here but i reckon you cant have a portfolio full of only REITS). My question for you is how would you look at it if K-green were to gear up to optimal level and does a share buyback (either this or acquisition is bound to happen in my view as they will not sit on a lazy balance sheet for long).


Sunday 16th of September 2012

Hi rama, utilities that are ungeared is good but it will depend on the return on assets of utilities vs the REITs. My link to you previously measures the asset cap rate at listing. that is to say how much do the asset yield without taking into consideration leverage. this will be the same as measure against the cap rate of AREIT at 5%+.

Of course the stability of cash flow is different. In utility it should make up of a base component and one that is variable depending on how much is used. Low production in recession will impact them. This would probably be equivalent to lease expiry and oversupply.

If you leverage up K-green they can pay out more cash flow, but they can also choose to save up more so that their NAV do not go down. Have you notice (i did not monitor) but are their net asset value going down?


Saturday 15th of September 2012

Hi. Your blogs are informative and i keep landing up here often.

As far as K-gree is concered, why don't you simply look at cash flows projections over life of contract (i havent had a chance of doing it myself yet) and see the what the yields are going to be?

At the end of the day you need to give them the benefit of using debt to power acuquistions. So base case it looks attractive to me for its bond like characteristics with optionality of boost from acqusitions.


Saturday 15th of September 2012

Hi Rama, that is damn sad. i would hope sometimes when i surf i dun come across my articles as well when i need to look for other peoples info =(.

For Kgreen, i did some like that. The IRR is something close less than 3% for their assets.

which is why i divested. i think its a short lease and the returns are not even reit like.

that is not to say REITs have a good returns AREIT ROA is 6% and its leveraged. if it goes unleveraged i believe its yield is close to 5%. AREIT for me is a longer duration trust compare to kgreen and its very very diversified. so for k-green investors would have to compare against this


Wednesday 27th of July 2011

Drizzt, recently came on your posting so my reply is 8 months late. I had the same thought as you which is that the need to amortise the concession will result in NAV falling. Another way to put it is that the "dividend" being paid comprises two components: one is income (which is low yielding as you have pointed out) and the other is return of capital. At the end of the concession, theoretically, if no further purchases are made, then the NAV is zero and the value of the concession is zero. What would give the concession some value is the likelihood that the offtaker will renew the concession. However, the question is will K Green need to incur any costs to renew the concession?

The issues you have raised are fundamental to the sustainability of the dividend payout in the long term. That K Green Investor Relations failed to address those issues and choose to sidestep your questions with standard "investor relation" lines gives me little comfort as to how senior management actually evaluates the value proposition that K Green gives to investors.

Thank you for your posting and look forward to more insights from you.


Wednesday 3rd of November 2010

Hi Drizzt,

Isn't this the same for all industrial reits where they are granted only 30 years or so?

In fact, this is for all reits ( unless they hold freehold properties), whereby they pay back the original investors over the years due to falling NAV?

This does not only apply to K-green trust right?


Wednesday 3rd of November 2010

hi lim, you are right that industrial reits operate the same way, but so do all the other leasehold reits, the shipping trusts and business trusts.

what you buy is hope that with inflation and the growth of rental will be upwards. if there is no growth, you are actually going to have the same situation. so the number of years u have for assets is important.

for AREIT its property have 7 propertys < 30 yrs, 10 <40 yrs, 50 <50 yrs, 21 61 years and 1 freehold.


Tuesday 2nd of November 2010

Thanks for sharing the update. Usually if they can not reply directly with positive answer, it means something they can not say... I will leave K-Green alone.


Tuesday 2nd of November 2010

no probs. i suddenly think that if they don't address this or someone doesn't correct my flawed understanding we might be looking at a true dud.

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