Shinhan Global Active REIT, a listed real estate investment trust (REIT), has sold part of its equity in a real estate fund in the United States that it holds as its underlying asset. Shinhan Global Active REIT anticipates that it will be able to pay off all its borrowing fund with the proceeds from the sale, reducing its expense burden and potentially lowering its hedge settlement costs.
Shinhan Global Active REIT announced on the 21st that it plans to sign a contract to sell 80% of its equity in the United States real estate fund PRISA to a European pension fund, UBS. The contract for the sale is scheduled to be signed on the 24th. Shinhan Global Active REIT will receive the sale proceeds of $33.4 million (approximately 42.8 billion won) through its subsidiary's paid-in capital reduction process.
Shinhan Global Active REIT plans to use this money to first pay off all its borrowing fund of 39.7 billion won. The annual interest rate on the borrowing fund is 8.5%, which has been identified as a factor in its expense burden. The remaining sale proceeds are expected to be used as operational funds, including dividends.
As a result of this equity sale, Shinhan Global Active REIT's annual dividend income from PRISA will decrease by approximately 1.5 billion won. However, the annual interest on the borrowing fund of 3.37 billion won will also disappear, improving cash flow by about 1.87 billion won.
The burden of Shinhan Global Active REIT's hedge settlement will also decrease. Hedge refers to fixing the exchange rate at the time of the hedge contract to prepare for asset price fluctuations due to changes in the exchange rate.
The hedge contracts that Shinhan Global Active REIT has with SC First Bank and Shinhan Bank are set to mature in July and August. The won-dollar exchange rate was around 1,285 won at the time of the contract but has been fluctuating above 1,450 won, which means the company will have to pay about 23.4 billion won in settlement. This settlement amount is expected to decrease by about 5.68 billion won due to the sale of the PRISA equity.
Shinhan Global Active REIT is investing in three U.S. real estate funds, including PRISA, USGB, and CBRE USCP. The U.S. local real estate market is facing difficulties, and as the hedge settlement issue has surfaced, the stock price has halved from the IPO price of 3,000 won last July to the current 1,538 won.
Shinhan Global Active REIT expects to enhance its active management strategy as the U.S. office real estate market enters a recovery phase. A representative from Shinhan Global Active REIT noted, "We will do our best to ensure scheduled dividend payments through this asset sale and rebalancing."