Frasers Hospitality Trust (FHT) has entered the second week of pre-marketing for Singapore’s first Reit in five months. Its deal has been timed to take advantage of a recent rally in S-Reit stocks, which have recouped some of 2013’s losses.
FHT represents a merger between the hospitality assets of Frasers Centrepoint Ltd (FCL) and TCC Assets - the privately-held arm of one of Thailand’s richest billionaires, Charoen Sirivadhanabhakdi, who also owns ThaiBev. FCL itself was spun out of Fraser and Neave this January, after Charoen won control of the Singapore-listed conglomerate in 2013.
Under the lead management of DBS, HSBC, Morgan Stanley, Standard Chartered and UOB, FHT’s deal is being marketed on a fair value range of S$1.022 billion ($810 million) to S$1.12 billion ($890 million). The company is proposing to issue 30% of its enlarged share capital post shoe to institutional and retail investors.
The offer range represents a dividend yield of 6.7% to 7.3% of prospective 2015 earnings and 1.04 to 1.13 times on a 2015 price to book basis.
Comparables
There are already a string of hospitality trusts listed in Singapore but none has the diversified revenue mix of FHT, whose assets span hotels and serviced apartments across Singapore, Australia, Japan, Malaysia and the UK. The serviced apartments come under the Frasers brand, while the hotels include the Singapore Intercontinental, Westin Kuala Lumpur and ANA Crowne Plaza Kobe.
This mixed bag can be seen as both a strength and weakness.
On the plus side, a wide geographical asset base means that one part of the portfolio can balance out another experiencing weakness. However, in the past investors have not always been keen on this kind of geographical diversity because it means they have to model in FX risk as well.
The closest comparable in terms of a balanced mix of hotels and serviced apartments is Far East Hospitality Trust, although, unlike FHT, it is a pure Singaporean play. It has 2,461 hotel rooms and 368 serviced apartment units compared to FHT’s 1,928 hotel rooms and 842 serviced apartments.
Far East Hospitality Trust is currently the most expensive hospitality S-Reit, trading on an estimated 2015 dividend yield of 6.7%. Year-to-date, the stock has also been the sector’s best performer, trading up 12.9% since mid-February.
In terms of serviced apartments, the biggest and most well known Reit is Ascott Residence Trust, with 8,692 serviced apartments to its name, but no hotels. Like FHT, it has broad geographic exposure, with 39% of its assets in Europe and 31% in Asia compared to FHT’s mix of 69% Asia, 19% Europe and 12% Australasia.
Since mid-February, the stock has climbed 7.3% and is currently trading on a 2015 dividend yield of 7%.
The biggest REIT on the basis of hotel rooms is CDL Hospitality Trust, which currently manages 4,455 rooms, of which 77% are in Singapore and 15% in Australasia. The stock has climbed 10.8% since early February and is trading on a 2015 dividend yield of 7%.
At the outer end of the scale is OUE Hospitality Trust, the smallest hospitality S-REIT in terms of hotel rooms, with 1,051 - all in Singapore. It is also the cheapest hospitality S-REIT, with a 2015 dividend yield of 7.9% and has risen the least far, up 6.3% since mid-March.
Whither interest rates?
Sentiment towards S-Reits is heavily influenced by prevailing views on interest rates. In the middle of 2013, the whole sector crashed 15% to 20% after 10-year US Treasury yields spiked 100bp as talk of tapering gathered momentum.
As a result, the S-Reit sector underperformed the Straits Times Index (STI) by 9% over the course of the year. In 2014, it has kept pace with the STI, which is up 4.1% year-to-date.
One key decision will centre on whether the current rally has further momentum and if FHT’s valuation offers enough of a cushion should Treasury yields spike. S-Reits' historical average spread over 10-year Singapore government bonds stands at 396bp.
FHT is being pre-marketed on a spread of 413bp to 473bp over 10-year Singapore Treasuries, which were yielding 2.57% on Friday. Despite the group’s broad asset base, specialists say Singaporean government bonds provide the best proxy.
These, in turn, closely track US Treasuries, which were also trading around the 2.57% level on Friday. However, there is an almost complete lack of market consensus on how fast US yields will rise as tapering continues, with 12-month predictions spanning a wide gamut between 2.5% to 3.5%.
Current levels were underpinned last week by dovish comments from the European Central Bank about its future easing policy. The next key marker should come on June 18, when the US Federal Reserve announces its next policy decision.
A second key driver for S-Reits in recent months has been the investment activities of one Chinese property developer – Tong Jinquan, chairman of Summit Holdings. He is estimated to have purchased about S$1 billion ($US800 million) in smaller Reits and is still active, providing an important source of flow.
Asset pipeline
One market participant described FHT’s pipeline as its key selling point. “If you doubt the group’s ability to inject assets then you shouldn’t be buying this deal,” he told FinanceAsia.
FHT’s current portfolio comprises 61% hotels and 39% serviced residences. It has been injected into the Reit at a slightly premium to its S$1.65 billion valuation.
This makes it smaller than all of its most direct comparables. At one end of the scale is OUE Hospitality Trust with an asset base of S$1.77 billion and at the other, Ascott Residence Trust with an asset base of S$3.32 billion.
But FHT has a large pipeline of potential assets at 17 hotels and serviced residences, which could boost the initial portfolio by a further 127%. This will also tilt the geographical mix away from Singapore and potentially make the group far more pan-Asian embracing Cambodia, China and the Philippines.
One issue investors remain divided on is the optimal gearing ratio for S-Reits at a time when interest rates are on a rising trend. Based on current forecasts of 40.2% for the 2014 financial year, FHT is currently the most heavily geared S-Reit.
But FHT management will also argue that asset values will be improved by the group’s refurbishment programme, particularly at the Singapore Intercontinental where the group hopes to target higher paying corporate guests.
Formal roadshows are scheduled to begin in mid-June.
