OUE Hospitality Trust and Commercial REIT Merger

There was a trading halt for OUE Hospitality Trust on 8th April 2019 and investors like me who are vested in OUE Hospitality Trust smell something fishy. The announcement came shortly. The respective managers of OUE Commercial REIT (“OUE C-REIT”) and OUE Hospitality Trust (“OUE H-Trust”) jointly announced the proposed merger of OUE C-REIT and OUE H-Trust (the “Proposed Merger”).

With the merger, the total assets will increase to approximately S$6.8 billion, making it one of the largest diversified S-REITs (Office and Hospitality).

The managers cited the following reasons for the proposed merger:

  1. Creation of one of the largest diversified S-REITs
  2. Larger capital base and broadened investment mandate provide flexibility and capability to drive long-term growth
  3. Enhanced portfolio diversification and resilience
  4. DPU accretive transaction

New Structure

With the merger, OUE Hospitality Trust investors get to own OUE Bayfront, One Raffles Place, OUE Downtown Office and Lippo Plaza which I deemed are quality assets to me.

OUE Hospitality Trust Security Holders

Currently, OUE Hospitality Trust makes up 4% of my stock portfolio.

Based on the announcement, stapled security holders of OUE Hospitality Trust (the “Stapled Security holders”) will receive the following under the scheme consideration:

  • S$0.04075 in cash per Stapled Security (“Cash Consideration”); and
  • 1.3583 new OUE C-REIT units per Stapled Security (the “Consideration Units”).

Distribution Per Unit

The total DPU paid out by OUE Hospitality Trust in FY18 was 4.99 cents.

The Proposed Merger will be distribution per unit (“DPU”) accretive on a historical pro forma basis for both OUE C-REIT unitholders and OUE H-Trust Stapled Securityholders by 2.1% and 1.4% respectively, for the 12-month period ended 31 December 2018.

If the DPU for the new combined REIT is 5 cents, this is only 1 cent more than the current 4.99 cents paid out by OUE Hospitality Trust. I can be wrong but the accretion is actually 0.2%.

Debt

Based on the presentation slides, the enlarged REIT’s larger capital base will also enhance its funding capacity and flexibility, with (i) debt headroom increasing from approximately S$254 million (for H-Trust) to approximately S$551 million as at 31 December 2018.

The gearing for OUE Hospitality Trust and OUE Commercial Trust is 38.8% and 39.3% respectively. Gearing is expected to increase to 40.3% after the merger. This is currently very near the cap of 45%.

My Thoughts

As a dividend investor, I am very concern on the DPU accretion which after the merger does not seem so fantastic and in fact the post merger DPU seems flat to me. However, the cash consideration of S$0.04075 in cash per stapled security does appeal to me.

Gearing ratio has increased to 40.3% which I deemed as high and leaves little headroom for further acquisition.

As you can see below, the stock market also does not support this merger. Share price declines slightly from S$0.735 to S$0.72.

Here is the share price of OUE Commercial REIT which declines from S$0.53 to S$0.51.

As an existing OUE Hospitality Trust investor, I probably will hold on for the cash per stapled security and continued flat DPU. If I am not yet vested, I will try to avoid OUE Hospitality Trust and OUE Commercial REIT in view of the high gearing after the merger.

No Recovery In Sight Yet Based On OUE Hospitality 3Q2018 Financial Results

OUE Hospitality Trust Logo

It was another quarter of disappointing financial results for OUE Hospitality Trust. On 7th November 2018, OUE Hospitality Trust announced their 3Q2018 financial results. Despite claims of increasing tourists arrival to Singapore, the financial results was a sea of red.

Net Property Income (“NPI”) for 3Q2018 was $0.4 million lower than 3Q2017 due to lower gross revenue from the properties. Distributable income in 3Q2018 was S$1.3 million lower than in 3Q2017, and Distribution Per Share (“DPS”) for 3Q2018 was 1.28 cents, 5.9% lower than 3Q2017. The manager attributed the lower distribution to mainly the absence of income support for Crowne Plaza Changi
Airport (“CPCA”). Read More

What To Invest Now?

Previously, I wrote about re-investing the money I gotten from the sale of Suntec REIT. This puts me in a dilemma as I do not know which REIT in my stock portfolio should I increase my position. Thus, the best way to find out is to compare their current dividend yield for better decision making.

The minimum criteria for my next REIT selection is that the current dividend yield should be better than Suntec REIT which currently yields 5.21% based on the current price of S$1.92.

From the below table that I have tabulated, ParkwayLife REIT is definitely out of the game as it current gives a dividend yield of 4.93%. I have also eliminated CapitaMall Trust as its dividend yield is 5.26% which is very much close to Suntec REIT’s dividend yield of 5.21%.

I have also eliminated OUE Hospitality Trust due to its poor 2Q2018 financial results. (Read more: OUE Hospitality Trust 2Q2018 Financial Results – Still Awaiting The Jewel) Read More