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Sunday, January 12, 2014

OUE Limited is spinning off OUE Bayfront in Singapore and Lippo Plaza in Shanghai into a REIT. Seems like OUE Limited is actively recycling capital and trying to catch whatever remaining interest investors might have in a REIT IPO. Just barely half a year ago, they listed OUE Hospitality Trust and I blogged about that here.

OUE C-REIT is the name of the latest offer. It will be priced at 80c a unit and will offer a distribution yield of 6.8% or a DPU of about 5.44c.

I believe that this IPO is a plus for OUE Limited shareholders just like the listing of SPH REIT was good for SPH shareholders. However, I don't think OUE C-REIT is attractive as an investment for the same reason that I thought SPH REIT was not attractive compared to SPH as an investment. You might be interested in that blog post. Read it: here.

I like the fact that OUE Limited has given a commitment to support the REIT by offering assets at a discount to valuation in future. This is something that the Lippo Group has done for LMIR and First REIT as well. After all, it is the same family that is in control of OUE Limited. Yes, OUE Limited is a 55% owned subsidiary of the Lippo Group.

I also like the fact that OUE Limited will retain a 45 to 50% stake in OUE C-REIT which will see their interests more aligned with those of minority unit holders in the REIT since any action taken which might hurt minority unit holders will hurt the sponsor, OUE Limited, most.

Having said this, we have to remember that the sponsor would have reaped most of the benefits from the IPO and the higher distribution yield is a result of income support given by the sponsor. If there were no such support, the distribution yield is actually 5.56%, almost 20% lower.

Over the next couple of years, if the REIT manager is able to fill up all the vacant space in the two initial properties and achieve positive rental reversions in re-leasing, the REIT could deliver a yield of 6.8% without any support.

However, with interest rates set to increase, we could see a heavier debt burden come 2017 when most of the REIT's debt mature. This could wipe out any hope of maintaining the relatively attractive distribution yield now unless unit price of the REIT declined.

The REIT could grow DPU through accretive purchases from its sponsor, of course, but with gearing ratio relatively high at 41% or so now, it would probably have to resort to equity fund raising either in the form of a rights issue or private placements. Unit holders should be prepared for this.

All investments are good at the right price and to invest in OUE C-REIT for income, I would only be interested if it should offer a much higher distribution yield, given the considerations above.

Related posts:
1. A strategy to grow wealth and augment income.
2. 2013 full year income from S-REITs.


Solace said...

A very thorough and detailed analysis.

Indeed holding on OUE parent company is the wiser choice. I have already received one round of special dividend from OUE because OUE H-trust. Looking forward to another round dividends for the listing of OUE C-Reits.

INVS 2.0 said...

Thanks for the insight. Normally I won't go into REITs that are only <5 years as their management have yet to be proven true to deliver results. :)

AK71 said...

Hi Solace,

Congratulations on a making a prudent investment decision. Huat ah! ;)

AK71 said...

Hi INVS 2.0,

A sensible consideration although by that token I should have avoided Sabana REIT and Croesus Retail Trust. ;p

AK71 said...

Singapore property firm Overseas Union Enterprise is looking to raise at least $346 million through the listing of a commercial real estate investment trust in the city-state’s first major IPO this year, two sources said.

OUE Commercial Reit is selling 433 million units at $0.80 a unit offering a yield of 6.8%, the sources with direct knowledge of the deal told Reuters.

There is a greenshoe option of another 41.6 million units, which if exercised, could raise the deal size to about US$299 million ($380 million).

Cornerstones will be offered 225 million units or more than half of the deal, one of the sources said.


Hi All,

Will give this a miss as well and looking forward to more data coming from Korea on Lotte Shopping REITs.

AK71 said...

Hi Solidcore,

Unlike Japan, I have almost zero understanding of the Korean property scene or economy. I hope better informed readers will contribute generously when the time comes. :)

SnOOpy168 said...

Lotte Mall in Jakarta which i just visited, is really a flower pot of a showcase. HUGE space but seriously lacks serious shopper. Thanks to the fallen Rupiah, i had a few generous meals there without breaking the bank. Wouldn't do that 2 years ago.

SnOOpy168 said...

OUE was a stock that my brojer recommended years ago. as i couldn't understand what they really do, i chased yield stocks instead.

@AK, if the IPO price is down to give a launch yield of 8%, will this attract your attention ?

AK71 said...

Hi SnOOpy168,

Well, its gearing is pretty high. About as high as that of Croesus Retail Trust's.

Since I am only comfortable investing in CRT with a yield of at least 8.5%, OUE C-REIT would probably have to offer me just as much for me to invest in it. ;)

AK71 said...

OUE Commercial Trust, the second trust Singapore developer OUE has listed in the past six months, fell on its first day of trading amid concerns that the yield and credit rating are lower than its peers.

The units slid as much as 3.8% to 77 cents before trading at 78 cents at 2:20 p.m. local time. The stock was sold at 80 cents each in its initial public offering. The REIT raised $346.4 million, offering 208 million units to the public and selling an additional 225 million units to cornerstone investors.

The trust has a provisional rating of Ba1 from Moody’s Investors Service, one level lower than investment grade. The rating is in a range that’s speculative and subject to substantial credit risk, according to its prospectus. OUE Commercial plans to offer a dividend yield of 6.8% for this year with income support from OUE; without the support, the yield is 5.56%, it said.

“The yield without income support isn’t that attractive,” said Vikrant Pandey, an analyst at UOB Kay Hian Pte in Singapore. “That coupled with a credit rating that is below investment grade is also affecting the sentiment.”

Source: Bloomberg

AK71 said...

OUE C REIT issued 393,305,817 new units in August as part of a 9 for 20 rights issue to partly finance the acquisition of an indirect interest in One Raffles Place.

The REIT's distribution per unit (DPU) of 1.46c for the quarter, excluding new units issued under the rights issue, was 2.1 per cent higher than a year ago.

But based on the expanded units base, its actual DPU for the quarter is 1.01c. Unitholders will be entitled to a DPU of 2c per unit for the first half of this year on Sept 15.

redponza said...

Hi Ak,
With OUE Comm REIT recent good result, will you reconsider the REIT?
The current yield is 7.71%, taking into the income support, so the real yield is around 7.71% x 6.32%?

Think you may be in if it reaches 8% real yield?

AK71 said...

Hi redponza,

If distribution yield should expand because of falling unit price, I might consider. This is because the value is probably real then and not financially engineered. ;)

redponza said...

Hi AK,
Checking the income support amount in the latest statement seems to suggest that the % of income support in the DPU is less than before after the rental increase of property.

If this is the case, then the said yield is solid and can be maintained.
This may be of interest for you.

AK71 said...

Hi redponza,

I would like to see whether the distribution yield can be maintained without any income support. If current distribution yield is only possible with income support although reduced, then, it is still not organic. It is still financially engineered.

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