SPH’s Dithering On REIT Spin-off: What Does It Mean For Investors?

SPH On 24 June 2013, the Wall Street Journal reported that newspaper publisher Singapore Press Holdings (SGX: T39) might delay in carrying out its plan to spin-off its properties into a real estate investment trust (REIT) because of depressed global markets.

US Federal Reserve Chairman Ben Bernanke sent market participants worldwide into a fearful mood around a week ago after hinting about the possibility of slowing down the Fed’s Quantitative Easing Programme. That affected REITs more than most, partly because of the highly leveraged capital structure that most REITs have. A slowdown in QE will likely bring about higher interest rates, leading to expensive debt and ultimately more difficult operating conditions for REITs.

In any case, SPH announced on 25 June 2013, a day after the Wall Street Journal report, that it is monitoring the situation closely and will release new updates accordingly.

To SPH’s credit, it is acting on the interests of the company and its shareholders. REITs, represented as a group by the FTSE Straits Times REIT Index (SGX: FSTAS8670), have tumbled by 12.5% since SPH’s official announcement on 27 May 2013 that the gears were set in motion regarding the spin-off of its properties into a REIT.

You can’t sell your merchandise for good prices when its specific market becomes depressed. SPH’s management recognises that, seeing how the REITs are in a relative funk compared to the broader share market, which in itself is going through some difficult times – evidenced by the Straits Times Index’s (SGX: ^STI) 8% slide from 27 May 2013 to 27 June 2013.

With the prospect of raising-lesser-money-than-expected-in-the-REIT-IPO staring at their faces, it’s only natural that SPH is considering all possible moves, given the newspaper publisher’s skin in the game even after the sale of those properties into the REIT.

Following the REIT’s IPO, SPH has the intention to; hold around 70% of the REIT’s outstanding units; distribute $290.9m in special dividends to its shareholders from the expected raise of $1.41b in cash from the sale of its properties to the REIT; assume the role of the REIT’s manager and earn management fees.

So, this matter is of relative importance to SPH’s shareholders. But, it also raises two interesting points about the share market in general.

1. Initial Public Offerings might not be in the best interests of investors.

Intuitively, it makes sense for sellers to strike the best possible deal for themselves. In the case of an IPO, the companies would want the best price for its shares. And, what’s ‘best’ for the seller of shares in an offering might not be what’s ‘best’ for the buyer.

SPH’s apparent reluctance to launch the REIT-IPO in poor market conditions, where lower selling prices become a distinct possibly, brings home the point.

While it’s true that there have been spectacular successes so far in the IPOs that occurred in 2012, it pays for investors to think about the implications behind billionaire Warren Buffett’s quote on IPOs: “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).

2. Market psychology can change in a heartbeat and performance-chasers can suffer

What was once attractive merchandise can look like tainted goods very quickly. REITs were all the rage back in 2012 and the earlier part of 2013, when the FTSE ST REIT Index shot up by more than 50% from 579 points at the beginning of last year, to a peak of around 890 in mid-May 2013.

The index have since retraced some of that ascent to fall back to 741 points, after Ben Bernanke’s recent comments on a QE-slowdown started raising questions about the sustainability of REITS’ earnings power.

The thing is, those concerns should have been on the forefront of investors’ minds even before any investments were made. But, what happened was REITs got pushed up to ever higher prices as valuations got stretched, suggesting performance-chasers at work instead of a reasoned and intelligent investment process.

Those who got in near the peak will not be too comfortable with the paper losses now and that’s a lesson to be learned; market participants who blindly chased after what’s hot without considering the underlying fundamentals would likely get burned when the perception of the attractiveness of the investment changes quickly.

Foolish Bottom Line

As investors, there’s a need to understand the underlying characteristics of each investment we make, regardless of market conditions. And for an IPO, that’s even more important, given how the sellers are almost always in a position of superior knowledge compared to investors, i.e. caveat emptor.

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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.