The Straits Times Index (SGX: ^STI) ended the week 0.7% higher at 3,236 points compared to last Friday’s close. Last week, I highlighted the debut of oil and gas explorer Kris Energy on the mainboard exchange. This week, the spotlight’s on the real estate investment trust offerings of newspaper publisher Singapore Press Holdings (SGX: T39) and real estate developer Overseas Union Enterprise (SGX: LJ3). SPH’s REIT – aptly named as SPH REIT (SGX: SK6U) – took its maiden bow on the Mainboard exchange at $0.98 on Wednesday, representing an 8.9% premium over its offering price of $0.90. The…
The Straits Times Index (SGX: ^STI) ended the week 0.7% higher at 3,236 points compared to last Friday’s close.
Last week, I highlighted the debut of oil and gas explorer Kris Energy on the mainboard exchange. This week, the spotlight’s on the real estate investment trust offerings of newspaper publisher Singapore Press Holdings (SGX: T39) and real estate developer Overseas Union Enterprise (SGX: LJ3).
SPH’s REIT – aptly named as SPH REIT (SGX: SK6U) – took its maiden bow on the Mainboard exchange at $0.98 on Wednesday, representing an 8.9% premium over its offering price of $0.90. The REIT closed at $0.99 yesterday so investors who were offered units in the flotation exercise itself are now sitting on a nice 10% gain after two days of work.
SPH REIT owns two properties; the retail malls Paragon and Clementi Mall. As such, its fate would be tied closely to consumer spending habits and trends in Singapore.
Meanwhile, OUE’s REIT, known as OUE Hospitality Trust (SGX: SK7), started its first day of trading only yesterday at $0.885 per unit, up 0.6% from its offering price of $0.88. It closed yesterday at $0.90, representing a 2.3% increase from the IPO price.
The properties under OUE Hospitality Trust are two connected buildings situated along Orchard Road in Singapore. One’s the up-scale Mandarin Orchard Hotel and the other’s the high-end retail mall Mandarin Gallery. With such properties, the trust’s performance would likely sway with consumer spending and tourism activity.
Both REITs did okay, logging nice gains in just a few days of trading. But, that doesn’t mean these REITs are devoid of risks.
With REITs, there’s always a high level of leverage involved, and so, investors would want to take note of the interest expenses and loan maturities that a REIT has.
For SPH REIT’s case, it’s stated in its prospectus that it has a loan facility of S$975m in place with “staggered loan maturities of three, five and seven year terms.” And, at the date of the offering, the REIT would draw upon S$850m of that loan facility (in simple terms, it means that SPH REIT would have had S$850m worth of debt on its debut day).
Staggered debt maturities generally places less risks on REITs because these REITs would not have to face a large repayment of debt that’s squeezed into a short-span of time.
But, the other key thing to note here is that SPH REIT’s interest rates on its debts are still largely unknown, even though it wants to “fix the interest rates for 50% of the [loan] facility” at a probable rate of 2.35% per annum.
The figure of 2.35% was assumed on my part because most of the financial calculations involving debt that was laid out in the prospectus “assumed that the effective interest rate [for the loans] will remain constant at 2.35% per annum.” In any case, the eventual interest rates that SPH REIT would have to pay for its debts would affect the distributions that unit-holders will receive, so it certainly warrants some attention.
In SPH REIT’s prospectus, they had given a forecasted annualised distribution yield of 5.58% for the second half of financial year 2013. That was based on borrowing costs (a.k.a. interest rates) of 2.35% per year and the offering price of $0.90 per unit.
The prospectus mentioned – on page 101 – that if interest rates were 2.85% instead of 2.35%, the annualised distribution yield would be 5.4% instead. So, that’s a good starting point for investors to figure out how interest rates can affect the REIT’s distributions as well as its interest cover.
Moving on to OUE Hospitality Trust, it has a S$630m loan facility in place but at the date of its listing, will only draw upon S$587m worth of debt, of which S$294m would be due in five years, and S$293m would have to be repaid in three years. This is similar to SPH REIT, where the debts have maturity dates that are evenly spaced out.
According to OUE Hospitality Trust’s prospectus, the trust has already fixed the interest rates for the S$587m loan “at an average rate of approximately 2.2% per annum via interest rate swaps, which have a weighted average tenure of three years.”
The trust had forecasted an annualised distribution yield of 7.36% for financial year 2013 based on borrowing costs of 2.5% and a unit price of $0.88. If interest rates for its loans were 2.25%, the yield would have increased to 7.49% but if interest rates were higher at 2.75%, the estimated yield would have dropped to 7.24%.
As it is with any initial public offering, it pays for investors to understand the finer details of whatever it is that they’re buying into. Failure to do so might just result in nasty surprises awaiting the investor.
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