Great Eagle puts fresh face on key asset spin-off
Company may be considering plan to sell the $12.8b Citibank Plaza and other properties through a reit
When Great Eagle Holdings abandoned its $2.6 billion plan to spin off its commercial property arm Tai Shan Properties in 1997, the second time it had done so since 1994, assistant director Adrian Lee Ching-ming said: 'It is very unlikely that we will try it again.'
Nine years later, the company says it is considering selling certain of its investment properties through a real estate investment trust or some other vehicle.
According to market sources, Great Eagle's mooted reit will mainly include the prime asset in its old Tai Shan portfolio - Citibank Plaza in Central.
Most analysts believe Great Eagle may be able to pull it off this time, given the favourable market conditions and the company's need to slash its hefty debts.
Analysts put Citibank Plaza's market value at between $12.5 billion and $12.8 billion and estimate that Great Eagle could raise more than $8 billion if it sells its 70 per cent interest in the building.
'Reits have become a hot investment vehicle,' BOC International analyst Ken Yeung Hoi-chuen said.
'Strong responses to the recent listings of the Link Reit, GZI Reit and Prosperity Reit indicate strong demand for such investments while Great Eagle would be disposing of its properties at higher prices through a reit.'
Langham Place may have changed the face of Mongkok but it also radically altered Great Eagle's balance sheet with a debt of $14.7 billion, giving it an 87 per cent gearing in June last year.
If the reit scheme is pushed through, its gearing should drop to 37 per cent and its earnings would be boosted by 23 per cent due to interest-expense savings, Mr Yeung said.
The main reason for aborting the Tai Shan spin-off in 1997 was that investors were asking for up to a 30 per cent discount to its net asset value which the firm found unacceptable, the management said.
Some analysts say Great Eagle could sell Citibank Plaza at less than 10 per cent discount amid a buoyant office market.
Mr Lee declined to comment, although he said Great Eagle's office investment properties, especially Citibank Plaza, had good upside potential over the next few years.
'It is a landlords' market now,' he said. 'Office supply has been tighter than the previous peaks in 1994 and 2000, while demand remains strong from financial institutions due to booming capital market activities.'
Rents at Citibank Plaza, now at about $60 per square foot, had risen 12 per cent so far this year after last year's 70 per cent rise, he said.
The building is 90 per cent occupied and Mr Lee expects occupancy to hit 95 per cent by June. Up to 60 per cent of tenants' leases will be up for renewal next year, while those for the remaining 40 per cent longer-term tenants are up for review.
Built in 1992, Citibank Plaza has 1.27 million sq ft of grade A office space attributable to Great Eagle, accounting for 25 per cent of its gross assets and generating $146.6 million in rental income in the first half of last year. But like many grade A offices in Central, its yield is relatively low at about 3 per cent. Mr Lee expects this to improve to 5 to 6 per cent in two years.