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OUE Commercial REIT and OUE Hospitality Trust to merge. Thoughts?

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  • Sandra Teo
    Sandra Teo
    Top Contributor

    Top Contributor (Apr)

    Level 6. Master
    Answered on 13 Apr 2019

    Hello!

    One of the reasons for this merger is the motivation to become a mega cap REIT, which provides many benefits for the REIT. A REIT is considered a mega cap REIT once it obtains substantial market cap and assets under management. They will thus be able to issue bonds at cheaper interest rates, gain greater access to instituational funds for private placements and greater ability to develop new properties. The proposed merger will increase the total asset of the merged REIT to S$6.8 billion, and market capitalisation to ~S$42.9 billion.

    Prior to the merger:

    OUE Hospitality Trust

    • NAV: $0.75
    • PB: 0.980
    • DPU: 0.0499
    • Dividend Yield: 6.79%

    UOE Commercial REIT

    • NAV: $0.71
    • PB: 0.732
    • DPU: 0.0348
    • Dividend Yield: 6.69%

    After the merger (pro forma)

    • NAV: $0.62
    • PB: 0.919
    • DPU: 0.0348
    • Dividend Yield: 6.11%

    For OUE Hospitality Trust shareholders, the buyout is below book value/NAV and the dividend yield drops. For OUE commercial REIT shareholders, the NAV decreases by 12.7% (highly dilutive), there is an increase in gearing ratio and there is a potential decrease in price as OUE commercial REIT had never traded near book value/ NAV.

    The merger icnreases the gearing ratio to ~40%, while still below the MAS regulation of 45% it is significantly higher than the average of S-REITs gearing ratio at 37%.

    TL;DR: The merger is slightly DPU accretive to shareholders but highly dilutive based on NAV per unit. This is due to the OUE Commercial REIT units being issued at a massive discount to NAV in order to buy properties at fair value.

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