M&L Hospitality Trusts (M&L Trusts) has kicked off the institutional roadshow for what could become the largest initial public offering in Singapore in almost a year. The vehicle, which is structured as a stapled security comprising a real estate investment trust (Reit) and a dormant business trust, is seeking to raise between S$425.8 million and S$463 million ($339 million to $369 million). If all goes to plan, it will start trading on May 5.
As the name implies, M&L Trusts focuses on the hospitality sector and at the time of listing it will own six hotels in Singapore, Australia and Japan with a combined asset value of about S$1.2 billion.
The offering comes after Singapore’s first listing this year had a strong trading debut on Thursday last week and as the company running the Formula One race circuit is preparing for a listing in the Lion City. On Friday, Formula One held a bake-off in Singapore to choose the bookrunners for the upcoming IPO, which is currently targeted for June or early July. UK media have earlier reported that the company will be valued at about $10 billion, which implies an IPO size of about $1.5 billion to $2 billion, depending on how big a portion it offers for sale.
The first IPO to hit Singapore this year was a lot smaller than that, but the strong reception for the stock, both during the initial share sale and once it started trading, did send a positive signal to investors and issuers alike. The hope is that this will help convince other listing candidates in the pipeline to go ahead and launch.
As reported, Bumitama Agri, a crude palm oil producer with all of its businesses in Indonesia, raised S$221.7 million ($177 million) after fixing the price at the top of the range. And, with a limited number of shares available for institutional investors other than the cornerstones, there was also good follow-through buying in the secondary market. The stock jumped 31.5% on the first day to close at S$0.98, and although it dropped slightly to S$0.96 on Friday it is still well above the IPO price of S$0.745.
M&L Trusts is offering 55% of its total share capital for sale, in the form of approximately 532.2 million units. There is also a 10% greenshoe, that could increase the total proceeds to as much as $406 million at the top of the range, if exercised in full. The price range has been set at S$0.80 to S$0.87, which based on the company’s projected earnings implies a dividend yield of 4.7% to 8.0% for 2012 and 7.7% to 8.3% for 2013. The final price will be fixed after the institutional book closes on April 26.
M&L Trusts will comprise one unit in M&L Hospitality Reit and one unit in M&L Hospitality Business Trust, which will be traded together as one entity. Since the business trust will be dormant at the time of listing, the stapled security will be no different for investors than to hold a normal Reit.
Like all Reits, the intention is to provide investors with steady dividends supported by the income generated from leasing the hotel properties to companies operating them. Part of the income will come from an inflation-hedged fixed rent, while the rest will be made up of a variable rent that is pegged to gross operating revenues and gross operating profits and which will allow M&L Trusts to share the upside of both top line growth and margin improvements.
Aside from the geographical diversity, the hotels also offer exposure to the economy and mid-market segments as well as the upper-end of the market, with about 68% of its 2,509 available rooms in the former two segments. This, the management believes, will make the trust more resilient during economic downturns. It will also make it less exposed to reductions in room rates and occupancies, since economy and mid-market hotels have lower fixed costs and higher profit margins. The six properties in the initial portfolio are currently occupied by two Ibis hotels in Singapore, a Four Points by Sheraton and a Swissotel in Sydney, a Travelodge in Melbourne and a Hilton in Nagoya.
M&L Trusts is sponsored by Grandline International, which is owned by the Singapore-based Kum family. The family, led by Michael Kum, was previously involved in the Singapore shipping industry, particularly the chartering of offshore support vessels and barges to companies in the oil and gas industry in the Middle East and Southeast Asia through its holding company Miclyn Offshore. In 2007, Miclyn was sold to a financial institution in return for cash and shares in a new combined entity, Miclyn Express Offshore (MEO), that is listed in Australia. Michael Kum retired from MEO in 2009, which is when he started to acquire the hotels that will be included in M&L Reit. The family sold its remaining holdings in MEO earlier this year.
Michael Kum is chairman of M&L Trusts as well as of the M&L Reit management company, which is wholly-owned by M&L Trusts. His daughter, Jocelyn Kum, is CEO of both vehicles. The name M&L is a combination of Michael and his wife’s name Lynda, just as Miclyn was.
One of the attractions of M&L Trusts is that it has a visible acquisition pipeline. According to the preliminary prospectus, it has the right of first refusal to three hotels in Japan, one in Melbourne and one in New Zealand that are currently owned by the sponsor, as well as one other hotel in Auckland that the sponsor has already agreed to buy. If M&L Trusts proceeds with the acquisition of all these hotel properties, its total number of rooms will increase by 42% to 3,567 rooms. In addition, the sponsor has also entered into exclusivity arrangements for the potential acquisition of a further two economy hotels in Japan, both of which are relatively new. If these are added to the potential future portfolio, the number of rooms would grow by 53%.
At the time of the listing, M&L Trusts will have a leverage ratio of 29.3%, which gives it a remaining borrowing capacity of about S$70 million for future acquisitions.
The target group for the IPO will be the usual Reit-focused investors and yield players, although the high yield is expected to make it interesting for general investors as well. However, an additional challenge will be to get them to invest in a vehicle with cross-border assets — something investors have previously shown they are not particularly keen on, even if it does make the exposure more diverse.
The fact that there aren’t that many hotel Reits available in Asia also means that investors will have to put in a bit more work to understand the dynamic. Perhaps for that reason, investors are quite keen to meet with the management before they make a decision on whether to invest or not, a source said.
Notably, there are no cornerstone investors supporting the deal, although the bookrunners supposedly had some anchor demand lined-up before launch. It remains to be seen if this is enough to make other investors comfortable enough to commit money to the offering.
The Reg S deal is arranged by DBS, J.P. Morgan and UBS.
