It’s A Deal – SPH to Spin-Off Properties into REIT

SPHAfter almost two months since the news was first spilled, newspaper publisher and property developer Singapore Press Holdings (SGX: T39) has announced that it will indeed spin-off the two properties it owns into a real estate investment trust (tentatively called SPH REIT).

The SPH REIT offering can be said to be an opportunistic move by SPH’s management to secure better prices for its REIT as it is done on the backdrop of ever-rising prices for locally-listed REITs.

As a group, the REITs can be represented by the FTSE Straits Times Real Estate Investment Trust Index (SGX: FSTAS8670) and it has been on a tear since the start of the year till 17 May 2013, gaining 12.9% in price. In contrast, the Straits Times Index (SGX: ^STI) had only increased by 7.7% in the same period.

The two properties involved in the spin-off are Paragon, located along Orchard Road, and Clementi Mall, located at, well, Clementi.

Paragon, which might be familiar with shoppers who frequent Orchard Road, is an upscale retail mall and commercial building. On the other hand, Clementi Mall is a lot more neighbourhood-friendly as it’s considered a suburban mall and is located in the heart of the Clementi neighbourhood. These malls were valued at $2.5b and $570m for Paragon and Clementi Mall respectively, and are collectively worth $3.07b.

The REIT would purchase the two properties from SPH for around $3.07b, with payment being made in the form of cash amounting to $1.41b and the rest coming from units in the REIT. $1.05b from the $1.41b in cash would be expected to flow to SPH after payment to non-controlling interests related to Clementi Mall and the deduction of IPO-related expenses.

There is nothing inherently right or wrong with the divestment of major assets. But, what management does with the cash from the divestment would determine, on hindsight, if it was a smart decision.

It turns out, that the company would use $290.9m, from the $1.05b it would receive from the sale of the property, to pay a special dividend to shareholders that amounts to $0.18 per share. That’s a windfall to the tune of a 4.1% yield based on SPH’s current share price of $4.39.

The remaining $757.4m would be used for the company’s working capital as well as growth strategies in its existing businesses.

After the IPO, SPH would end up owning 70% of the REIT which is earmarked as a future vehicle for the company to divest its investment properties to. SPH will be providing REIT-management and property-management services to the REIT. That would ensure a stream of fee-based income for the newspaper publisher to help offset the loss of $191.4m in rental-income that it collected from the two properties in its last completed financial year.

For SPH’s shareholders, the pro-forma financials of the company after the spin-off, based on the financial statements for the financial year ended 31 August 2012 and not taking into account the special dividend, are shown in the table below:

Before the Spin-Off After the Spin-off
Net-Asset Value $2.24b $3.66b
Earnings Per Share $0.23 $0.21

Finally, for investors interested in SPH REIT, they would have to wait to find out more details after its IPO-prospectus is filed.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.