Centurion Corp Ltd Wants To Set Up A REIT: Is That A Good Move For Its Investors?

Centurion Corp Ltd (SGX: OU8) announced to the market last Friday that it is exploring the possibility of setting up a real estate investment trust (REIT).

The new REIT on the block

The dormitory owner and operator plans to inject some of its real estate, which are designed for use as workers’ accommodations,  into a REIT that would be listed in Singapore.

Although the plan is still in the early stages and is subject to the approval of stock exchange operator Singapore Exchange, the announcement does give the market some indication about the future business-direction of Centurion.

Centurion’s future and what to expect from the REIT

Currently, Centurion owns and manages workers dormitories in Singapore and Malaysia. The company has also been investing in student accommodation projects in Australia and the UK.

Centurion believes that spinning off some of its assets into a REIT would give the company a method “to recycle capital to pursue its growth strategies across its growing accommodation business. 

For me, this seems to mean that the company’s management believes that the upcoming REIT would be a channel for Centurion to cash out from its mature assets so that it can free up capital to fund future growth projects.

Therefore, investors who are interested in the future REIT from Centurion should not be expecting it to own real estate with great growth potential.

Centurion’s rationale for asset-recycling

The following could be just a simplistic generalization on my part, but, it seems that Centurion’s management would like the company to retain its growth potential; to do so would require the disposal of mature real estate to investors who might be more interested in getting a stable yield from a REIT.

In addition, Centurion seems to be in need of having to reduce its leverage. The company currently has a total debt to equity ratio of 133% with a current ratio of only 1.1 – those aren’t signs of a strong balance sheet.

Also, Centurion does not seem to have the ability to fund its growth needs organically; in 2013, the company only generated S$28 million in cash flow from operations and yet had spent S$123 million on capital expenditures. If the REIT proposal isn’t successful, Centurion might have to slow-down its capital expenditures significantly or risk piling even more leverage on its balance sheet in pursuit of growth.

Foolish Summary

The market hasn’t been kind to Centurion of late. Its share price has fallen by more than 25% from about S$0.75 per share in July 2014 to S$0.55 currently. This may be a sign that the market’s also wary of the financial risks underlying Centurion’s business.

Perhaps, the REIT proposal is more than just a way for the company to “recycle its capital” – it could be a financial lifeline for the company as well.

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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 Stanley Lim does not own any companies listed above.