OUE C-REIT will see DPU declining.

Back in 2014, when OUE C-REIT had its IPO, I warned that its gearing was too high and its distribution yield (which was financially engineered to be higher through income support given by the sponsor) was too low given its IPO price of 80c a unit. 

The IPO was a good deal for OUE Limited.

Cheers!

Investing in REITs, we should be prepared for fund raising because they distribute most of their income to their investors. 

When a REIT raises funds, we have to question their reason for doing so. 

If it is to invest in yield accretive assets, it is a good thing. 

Regular readers of my blog would be familiar with the argument that not all rights issues are bad.

See: 
REITs and rights issues: Dilutive or not?

In this instance, OUE C-REIT is placing out new shares at 64.3c a unit (which is some 20% lower than its IPO price) in order to strengthen its balance sheet. 

So, there will be no additional income from this exercise. 

In fact, DPU will most certainly decline since there will be more units in issue while income stays the same.

The REIT's 4Q 2016 DPU was 1.18c. 

This is a 9.36% reduction from a DPU of 1.26c in 4Q 2015 and this is after contribution from One Raffles Place which was acquired in late 2015 too.

OUE C-REIT has about 1,300,000,000 units in issue. 

Placing out around 233,000,000 units to strengthen its balance sheet will see some savings in interest expense but the REIT's DPU is likely to decline further.

Roughly, we could see interest expense reducing some $5 million per year or $1.25 million per quarter. 

While distributable income will increase by a similar quantum, in percentage terms, we will see about an 8% increase. 

Now, put this against an 18% increase in units in issue and do the math.

Math is not my strongest subject but I think we will see quarterly DPU declining to less than 1.1c which means less than 4.4c for a whole year. 

Just to put this in perspective, at the REIT's IPO, DPU was 5.44c.

Therefore, to get the same distribution yield as what was offered during its IPO, OUE C-REIT's units should trade at a much lower price compared to its IPO price. 

How much lower? 

About 20% lower which means a unit price of 64c.

Of course, we want to remember that without income support for OUE Bayfront, the REIT's DPU would be even lower. 

This income support will expire end of 2018. Coupled with new supply of office space which will worsen the excess supply situation in the CBD, OUE C-REIT is on a slippery slope.

So, demanding an even lower price than 64c a unit before investing in OUE C-REIT is not unreasonable but whether Mr. Market is willing to sell at a lower price is anyone's guess.

For anyone who is interested in reading more of my thoughts on OUE C-REIT and, specifically, why I avoided it, please see the related post below and its comments section.

Related post:
OUE C-REIT (12 Jan 14).

See OUE C-REIT presentation (26 January 2017): HERE.

Every 25bps increase in floating interest rates is expected to reduce distribution by S$0.7 million per annum, or 0.05 cents in DPU

Sabana REIT could see a change for the better.

As we grow older, feelings of deja vu might become a bit more common. It is probably due to accumulated life experience or maybe the mind is just degenerating.

Anyway, when I read that e-Shang Redwood Ltd (ESR) became a substantial unitholder in Sabana REIT about a week ago, I got a feeling of deja vu.

ESR are the people who bought a majority stake in the manager of Cambridge Industrial Trust (CIT) not too long ago and they also own 12% of CIT.

e-Shang Redwood is a pan Asian logistics entity. Don't play, play.

This reminds me of the time when CIT tried to take over the distressed MacArthurCook Industrial REIT (MI-REIT). Chris Calvert, the CEO of CIT, who was then formerly the CEO of MI-REIT used CIT's resources to buy into MI-REIT.

There was a big fight over MI-REIT with the team led by George Wang. Fortunately, George Wang et. al. won the fight and AIMS AMP Capital Industrial REIT was formed.

In my opinion, Chris Calvert did a poor job of running MI-REIT which led to a need for massive re-capitalisation. If CIT had taken over MI-REIT, with CIT's lacklustre performance and controversy over the years, I think MI-REIT would not have done any better.

It is one thing having good assets and another having a good manager. If we have both in a REIT, we have a clear winner. However, if I must choose, I will choose a good manager because a bad one will just squander away good assets.

With Sabana REIT, I have shared how its numbers were really good at IPO and it just went downhill 3 years later. The manager has constantly struck me as self serving and mediocre and this is putting it mildly.

So, in Sabana REIT's case, a change is needed. Some might say any manager is better than the current one but, more accurately, I would say that it is difficult to do worse than the current manager.

When CIT bought a big stake in MI-REIT years ago, it was with the intention of taking over MI-REIT. Now, I believe that ESR has the intention of taking over Sabana REIT one way or another.

I am holding on to a legacy investment in Sabana REIT that is free of cost as well as units from the recent deeply discounted rights issue. So, I am very much in the black. If ESR is going to bring change to the REIT, even better.

Related post:
History with Sabana REIT.

Reference:
Sabana REIT and ESR.