Yield-hungry investors in Singapore have been dished with two mouthwatering initial public offers this week. A REIT offering by newspaper publisher Singapore Press Holdings (SPH) and a hotel property trust by Indonesia's real estate tycoons, OUE Hospitality Trust. Applications for both IPOs have opened and will close by midweek.
|Both the SPH REIT and the OUE Hospitality Trust will have prominent properties along Orchard Road|
For some, making a decision between the two might seem overwhelming. Both IPOs will have coveted properties along Orchard Road, Singapore's premier shopping district and offer respectable yields for the committed long term investor. REITSWEEK compares these two offerings, broken down into several critical factors for you to consider should you have yet to make up your mind. They are namely yield, quality of properties, industry and potential for growth.
|IPO||SPH REIT||OUE Hospitality|
|Yield % (FY14)||5.79||7.46|
But before we delve deeper into the comparison, it is important to establish a fundamental difference between the two IPOs : One is a REIT, the other is not. This is a concept that several commentators, including those in the mainstream media, have surprisingly failed to grasp. The OUE Hospitality Trust is a stapled security, not a REIT. REITSWEEK has discussed this previously in a more comprehensive piece title REITs, Trusts and Stapled Securities. You may wish to take a look at this before we go further.
In the low-interest environment that we are currently in, the IPOs above would be drawing investors who are primarily concerned with dividends. So naturally it is prudent to start this comparison with projected yields.
At its offering price, SPH REIT has forecast a yields of 5.79 percent for FY2014. This is very comparable to yields that are being paid out by existing Retail REITs in Singapore at current prices. Meanwhile the OUE Hositality Trust has settled for an IPO price at the low end, further lifting its projected yield to 7.46 percent. A figure like this is Industrial REIT territory and is a very handsome projection indeed for a hospitality trust. Based on yield alone, the OUE Hospitlaity Trust beats the SPH REIT by a clear margin.
Quality of Properties
SPH REIT has reported committed occupancy of 100 percent through 2013 for both its properties. This is not surprising given that both the Paragon and Clementi Mall are located in pedestrian-heavy areas serving a wide catchment area. Furthermore, the SPH REIT holds a 99-year leasehold interest in Paragon commencing on the date of listing and a 99-year leasehold interest in The Clementi Mall commencing on 31 August 2010. This compares starkly with OUE Hospitality Trust's lease of Mandarin Hotel and Mandarin Gallery which has only 43 years remaining on its lease.
Although the OUE Hospitality Trust will be leasing out the Mandarin Orchard Hotel on a master lease to an operator, its retail outlets at the Mandarin Gallery will not. These shops are in direct competition from other retail outlets in the area and faces very real prospects of vacancy risks. Total committed occupancy in totality for the OUE Hospitality REIT stands at only 89.7 percent for 2013. In terms of quality of properties, our vote of confidence goes to SPH REIT.
Nature of Industry
The hospitality industry is highly cyclical in nature and depends largely on tourist and visitor arrivals into the county, which in turn depends on the existence of favorable economic conditions. Earlier in the year, we ran a story on the factors why Hospitality REITs and Trusts are expected to under perform in 2013.
The retail industry is not immune to changes in the economic climate either but it is less volatile. Furthermore, a significant amount of rent that the SPH REIT will collect are from the likes of Fairprice Finest, Jason's Supermarket, Marks and Spencer and other retailers of consumer staples. Investors who do not have the stomach for the cyclical nature of the hospitality industry might want to take the side of the SPH REIT in this aspect.
Potential for Growth
Besides the soon-to-be-completed Seletar Mall which is owned by sponsor SPH, it is not immediately obvious as to which other properties are going to make it into the fold of the SPH REIT. In contrast, the OUE Hospitality Trust has pipeline of prominent properties currently under the sponsor in which it could make acquisitions. They include the Crowne Plaza Changi Airport and a couple of Meritus Mandarin hotel properties.
However the SPH REIT has a more comfortable gearing of about 27 percent as compared to OUE Hospitality Trust at 32.85 percent. This presents SPH REIT with a more breathable debt headroom to make further acquisitions in the future, especially so should interest rates head north. We are calling a draw on the parameter of "Potential for Growth". Although the OUE Hospitality Trust has a comfortable pipeline of properties down the road, the SPH REIT has plenty of debt headroom for growth in which it can acquire external retail properties both overseas and within Singapore.
In summary, we would suggest that potential investors look beyond projected yield numbers when making a decision. A better yield in the projected years is not a guarantee of future results. A better analysis of the two IPOs above is one that takes into account the quality and lease of properties, debt headroom and nature of the industry that the security is dealing in.
For us in REITSWEEK, if we had to choose just one, our vote goes to the SPH REIT for the reasons above. You may have other objectives or other reasons for thinking otherwise. In any case all the best in your investment decisions!