Analysis of OUE Hospitality Trust & OUE Commercial Trust

Current Price of OUE Hospitality Trust on 15th June 2019 = $0.705

• Yield = 6.70%  
• Price-to-book Ratio = 0.94
• Assets per unit = $1.233
• Debt per unit = $0.483 (including current liabilities and perpetual securities)
• Gearing = 39.2%

It has been a while since they have announced their merger with OUE Commerical Trust. It seems that the market does not really like the deal so the price of both REITs went down. I have made a calculation on the statistics about what happens after the merger and here it is. 

Firstly, every 1,000 shares (which cost $705) will give you 1,358 shares of OUE Commercial Trust and $40.75 of cash payout. Therefore, I took $705 - $40.75 = $664.25. And use $664.25 / 1,358 shares and it gives me a conversion price of $0.489 of OUE Commercial Trust shares. So here is the statistics after conversion.

Conversion Price to OUE Commercial Trust on 15th June 2019 = $0.489

• Yield = 7.36%  
• Price-to-book Ratio = 0.786
• Assets per unit = $1.286
• Debt per unit = $0.645 (including current liabilities and perpetual securities)
• Gearing = 50.9%

And we compare it to OUE Commercial Trust before merger.

Current Price of OUE Commercial Trust on 15th June 2019 = $0.505

• Yield = 7.13%  
• Price-to-book Ratio = 0.739
• Assets per unit = $1.581
• Debt per unit = $0.898 (including current liabilities and perpetual securities)
• Gearing = 56.8%

From the statistics, it looks like a good deal for OUE H-Trust shareholders with increased yield, and better price-to-book ratio. For OUE Commercial Trust shareholders, its price to book ratio went up which sort of diluted their NAV although their yield is still quite comparable. Therefore it looks like a bad deal for OUE Commercial Trust shareholders and I do agree.

However, I do notice that gearing of OUE C-Trust went down from 56.8% to 50.9%. Do note that OUE C-Trust has substantial perpetual securities which is expensive. Although it is treated as equity in SGX, it is treated as debts in my point of view which is why their gearing is so high and different from their published gearing. I suspect that OUE C-Trust is facing issues which require their gearing to be brought down and this is probably one good way to bring it down substantially. In other words, OUE H-Trust is used to rescue OUE C-Trust.

Nevertheless, when a rescue is conducted, it is usually at favourable terms to the rescuer. Thus, OUE H-Trust shareholders will still benefit more (with increased yield and price-to-book ratio) while OUE C-Trust paid the price to achieve lower gearing and therefore more stability in its balance sheet.

I took the opportunity to enter 50,000 shares of OUE H-Trust at $0.68 earlier last month as I could not figure out why the drop is so substantial. I saw it more as an opportunity. And I guess if you want to earn based on the cheaper conversion price (of $0.489 compared to current price of $0.505), the opportunity is still there.