Over the past four weeks, the FTSE Straits Times Real Estate Investment Trust Index (SGX: FSTAS8670), which can represent the REITs as a group, has dropped by nearly 11% from its peak of 890 (achieved on 15 May 2013) to 794. REITs have been under pressure lately as investors begin to worry about adverse impacts on them should interest rates rise as a result of any possible slowdown in the US Federal Reserve’s Quantitative Easing (QE) programme. Against this backdrop, it might not seem a good idea for companies to spin-off their properties into REITs. But, if we…
Over the past four weeks, the FTSE Straits Times Real Estate Investment Trust Index (SGX: FSTAS8670), which can represent the REITs as a group, has dropped by nearly 11% from its peak of 890 (achieved on 15 May 2013) to 794.
REITs have been under pressure lately as investors begin to worry about adverse impacts on them should interest rates rise as a result of any possible slowdown in the US Federal Reserve’s Quantitative Easing (QE) programme.
Against this backdrop, it might not seem a good idea for companies to spin-off their properties into REITs. But, if we dial back our time-frame to see how the prices of REITs have changed over the past 12 months’, a different picture emerges.
The FTSE ST REIT index has done very well since last June, gaining 24% to 794 points. In contrast, the broader stock market, represented by the Straits Times Index (SGX: ^STI), only climbed by 14% to 3,185, perhaps signalling investors’ stronger appetite for REITs as compared to other shares.
But in any case, property developer and manager Overseas Union Enterprises (SGX: LJ3) certainly thinks that now’s a good time to announce a spin-off of its properties into a REIT. OUE’s REIT-announcement last Friday follows newspaper publisher and property developer Singapore Press Holdings’ (SGX: T39) plans to spin-off its properties (retail malls Paragon and Clementi Mall) into a REIT that was announced last month.
This time, OUE will be selling its properties to OUE Hospitality Trust (OUE H-Trust), which will be listed on the Mainboard stock exchange at a date estimated to be in the third quarter of 2013. The company is expected to own 30% of OUE H-Trust after its floatation and will be complete owners of the trust’s Manager.
There are two properties that will be sold; Mandarin Orchard Singapore and Mandarin Gallery. The former is an upscale hotel that’s been in operation in Singapore since 1971 while the latter’s a retail mall featuring a host of luxury international fashion brands. These two properties are connected to each other and are located along Orchard Road, the famous shopping belt in Singapore. They are valued at a collective S$1.73b and will be sold to the REIT for a minimum of S$1.705b.
Assuming the properties were sold at the minimum price, OUE expects to receive S$1.36b in cash and S$345.5m in the form of units in OUE H-Trust. With these proceeds, management has the intention to use S$750m out of the S$1.36 in cash to pay down part of the company’s total debt load of S$2.58b.
Furthermore, shareholders of OUE can look forward to a special dividend after the sale of the properties. It will amount to a maximum of 50% of the S$610m in cash that remains from the cash-proceeds of S$1.36b after the company’s partial debt repayment. Assuming the maximum pay-out is given, it will represent a windfall in the form of a special-dividend yield of around 11% for shareholders at OUE’s current share price of $2.95.
The financial effects on the shares of OUE due to the sale of the properties are summarised in the table below.
|Before Sale of Properties||After Sale of Properties|
|Net Tangible Asset (NTA)|
|Number of Shares||909.9m||909.9m|
|NTA per share||S$3.44||S$4.59|
|Earnings Per Share|
|Number of Shares||910.8m||910.8m|
Investors interested in OUE H-Trust will have to wait for more details that will be released along with the trust’s IPO Prospectus.
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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.