Why 'bigger is better' could apply to the proposed OUE merger

Why 'bigger is better' could apply to the proposed OUE merger

Goola Warden
09/04/19, 07:57 am

SINGAPORE (April 9): Enlarged scale was among the main reasons for the proposed merger of OUE Commercial REIT (OUE C-REIT) and OUE Hospitality Trust (OUE HT), The Edge Singapore understands from attending an April 8 media briefing with the respective REITs managers and their investment bankers.

A portfolio valued at $6.8 billion and free float of $1.08 billion would make the enlarged REIT more visible to institutional investors.

Both OUE C-REIT and OUE HT currently have limited liquidity. As such, the higher market cap could potentially result in higher trading liquidity and potential index inclusion, say their managers in a joint announcement issued on Monday.  

There is still a way to go before the merged REIT qualifies for the widely-followed EPRA NAREIT Developed Market Index like Frasers Logistics Trust (FLT) did last month.

For one thing, the REIT will require a free float of US$1.26 billion to meet one of the conditions to gain entry into the index.

It will also have to derive at least 75% of earnings before interest tax depreciation and amortisation (EBITDA) from developed markets, like how Ascott Residence Trust (ART) has with its shift towards developed markets.

Another year of its current EBITDA composition would qualify ART for the EPRA NAREIT DM index, considering how free float market cap presently stands at about US$1.26 billion, and that 75% of its EBITDA in FY2018 was from developed markets.

Elsewhere, Manulife US REIT’s free float is around US$1 billion and of course it qualifies in terms of EBITDA composition.

Hongkong Land Holdings is the largest Singapore-listed component in the index at 0.54% of the index followed by CapitaLand Limited at 0.43%.

The largest REITs in the index are Ascendas REIT (0.34%), CapitaLand Mall Trust (0.26%) and CapitaLand Commercial Trust (0.22%).

Other than attracting institutional interest, Tan Shu Lin, CEO of OUE C-REIT’s manager, suggests that the enlarged REIT will be able to look at the acquisition of integrated developments such as OUE Downtown Gallery and the Oakwood Premier OUE Singapore.

“We’re seeing the rise of such developments in the market and we can evaluate these as a whole. This will put us in a very good position to drive growth in the future,” comments Tan.

Last year, OUE C-REIT acquired the office components of OUE Downtown.

On the other hand, OUE has been trying to sell LA Bank Tower in Los Angeles and may not find it efficient to recycle the building into OUE C-REIT as the capital gains tax could be as high as 20% based on the US Tax Cuts and Jobs Act 2017. 

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