Saturday, 19 May 2018

Some thoughts on reits after reit symposium(OUE H-Reit and OUE C-Reit)

Attended the 1st half (before lunch break) of Reit Symposium and decided to jot down some thoughts i have after attending it.

*Do note that these are just some of my thoughts and there could be inaccuracy in my information.

OUE Hospitality Trust

  • Refinancing has allowed for 2-3 million in interest savings
  • Crown Plaza (Airport) is forecasted to receive minimum rental this year as RevPar still below the level of minimum rental
  • Income support of 7.5 million has been drawn down
  • Mandarin Gallery's negative rental reversion for FY 2017, -12% for 28% of Net Lettable Area (NLA) is starting to be reflected in its results as income from retail decreased
  • Mandarin Orchard continues to grow in NPI when compared to same quarter in previous year.
I got curious with regards to its gearings and decided to view the other hospitality reits that i can think of back of my head and do a very layman analysis.

In an increasing interest rate environment, one would look out for fixed loans as well as longer weighted average and lower cost of debt.

It seems like OUE H-Trust has not done so bad compared to its peers with the only 'red' mark being its gearing ratio being the highest among the other reits.

Its hard to understand why their gearing is much higher but they do have significantly lesser properties compared to their listed peers. It could be that they do think that their few assets are pretty prime and are unlikely to see a revaluation downwards that would make gearing ratios hit 45%.
A rough estimate will be that given debt levels remain constant it would need about 337 million (might not be accurate) reduction in asset value to hit 45%

Conclusion: Their Airport Hotel and Mandarin Gallery seems to be under-performing but they have done well in managing debt with a longer maturity weighted average and improved Mandarin Orchard performance to soften the impact of its under-performance of the 2 reits.

OUE Commercial Reit
  • Occupancy Rates of its 3 properties above average of its comparisons
      • Both Shanghai and Singapore Office market rental seems to be on the up-trend after a very prolonged downtrend. For Singapore Office market, rental rates was downtrend from Q1 2015 to Q1 2017. While the Shanghai Puxi Office market was downtrend from Q3 2016 to Q3 2017
  • In 1Q 2018, the average expired rents were much higher than market rental as well as much higher for passing rents for its Singapore Properties. These expired rentals seem to be on the higher end of its committed rents, which means that there is a higher chance that there is more negative rental revisions. For its China Property, the passing rent is higher than its average expired rent and the average expired rent is on the downside of the committed rents.
  • Gearing ratio of 40.5%, with 35.3% of loans set to mature in second half of 2018. It would be interesting to see the rates which OUE C-Reit is able to refinance at. According to its 2017 annual report, the nominal interest rate of its bank loans which matures from 2018-2022 is 0.8% to 2.62%.
  • Another point worth noting will be that aggregate leverage(gearing) increased from 37.3% in Q4 2017 to 40.5% in Q1 2018. This is due to redemption of some its convertible perpetuals issued in October 2015. These perpetuals which are roughly 360 million dollars on its books as of Q1 2018 are considered as equity. The distribution is 1% per annum of issue price (which is 1 dollar) and can only be converted after 4 years (October 2019) at a price of  $0.841. From a purely financial standpoint, unless the cost of debt is below 1% it really does not make much sense to convert these perpetuals. Furthermore with the stock trading at 71 cents (18 May 18). There is not much value in converting these perpetuals other than getting a higher dividend yield at the cost of current equity holders.
Conclusion: The properties seem to be well-managed although the expired rents seem to be on the higher end of the range of committed rents which could point to future downside in rental income. On the financing side, its quite boggling to see the redemption of its perpetuals before its refinancing its done as this has increased the gearing ratio which might increase the interest rate it refinances at.

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