3 potential assets OUE could inject to its REIT portfolio

The REIT is worth around $2b.

According to Phillip Securities, OUE announced on Mar 21 that it is currently exploring the establishment of a REIT to be listed on the Main Board of SGX-ST and is in preliminary discussion with several banks.

Based on its property portfolio, Phillip Securities believes the potential assets are Mandarin Orchard, Mandarin Gallery and Crowne Plaza Changi Airport Hotel that could be injected to form a hospitality cum retail REIT worth approximately S$2bn, based on the Dec-12 valuations as disclosed by the company.

In addition, the management had in the last analysts’ briefing expressed the intention of converting part of 6 Shenton Way (former DBS Tower 1 and 2) and Twin Peaks into serviced residence.

Here's more from Phillip Securities:

We believe these could be potential pipeline assets to be injected into the REIT if the spin-off materialized.

Based on the 3-properties portfolio and assuming capital structure of 35:65 (D:E), cost of debt at 3.5%p.a. and average management fee of 0.5%p.a. on AUM, we estimate that the REIT could yield around 7% if it is priced at 1.0x book value.

We believe the spin-off plan looks viable when compared to the implied yields of similar H-REITs in the market.

The consensus forward yields range from 6.5% for Ascott Residence Trust (ART), to 5.3% for Ascendas Hospitality Trust (AHT) and Far East Hospitality Trust (FEHT). Recall that the forecast yields of AHT and FEHT were 7.9% and 6% respectively during their IPO in 2012