What Investors Need to Know About Frasers Hospitality Trust’s Initial Public Offering

What Investors Need to Know About Frasers Hospitality Trust’s Initial Public Offering

By Sudhan P - June 24, 2014

Frasers Hospitality Trust (FHT) is slated to be the newest kid on the block in the neighbourhood of real estate investment trusts and business trusts. This comes barely seven months after FHT’s sponsor Frasers Centrepoint (SGX: TQ5) went public.

Real estate developer Frasers Centrepoint was spun-off from the conglomerate Fraser and Neave(SGX: F99).

Once FHT goes public on 14 July 2014, it will be the first global hotel and serviced residence stapled trust listed in Singapore’s share market.

The initial portfolio of FHT will comprise of 12 properties – six hotels and six serviced residences – that come from TCC Group and Frasers Centrepoint.

The hotels are InterContinental Singapore, Novotel Rockford Darling Harbour, Park International London, Best Western Cromwell London, ANA Crowne Plaza Kobe, and Westin Kuala Lumpur. These hotels are from the TCC Group, which happen to be one of Frasers Centrepoint’s major shareholders.

Meanwhile, the six serviced residences are Fraser Suites Singapore, Fraser Suites Sydney, Fraser Place Canary Wharf, Fraser Suites Queens Gate, Fraser Suites Glasgow, and Fraser Suites Edinburgh. These properties come from Frasers Centrepoint.

Based on the above, FHT’s portfolio will boast a total of 1,928 hotel rooms and 842 serviced residence units. The properties, which serve the mid-scale to luxury market segments, are located in Australia, the United Kingdom, Japan, Malaysia and Singapore.

According to a draft prospectus filed with the Monetary Authority of Singapore, FHT will sell 182.1 million stapled securities at S$0.88 apiece. Each stapled security consists of a unit of Frasers Hospitality Real Estate Investment Trust and a unit of Frasers Hospitality Business Trust.

There are a number of FHT’s potential-properties that are under master leases. In the case of a loss of any master lessees, Frasers Hospitality Business Trust will, as a last resort, step in as the master lessee or tenant.

The total number of outstanding stapled securities immediately after the completion of the initial public offering (IPO) will be 1.19 billion, which include offerings to the vendor of Fraser Suites Singapore, vendors of the hotels that are part of the portfolio, and cornerstone investors such as DBS Group Holdings (SGX: D05) and Fortress Capital Asset Management. This translates to a market capitalisation of S$1.04 billion for FHT based on its IPO price.

Frasers Centrepoint and TCC Group will hold 65% of FHT immediately following the IPO, assuming that the over-allotment option is not exercised. This helps align the interests of the parties behind the IPO and the new stapled security holders that buy-in during the offering.

The distribution yield for FHT is projected to be 7%. The net asset value per stapled security will be S$0.83, translating to a price-to-book (PB) ratio of 1.06.

Risks

There are a number of risks that potential investors have to take note of. The first has to do with the gearing ratio and the other has to do with financial engineering.

The gearing ratio of FHT will be 41.7% according to its prospectus. According to an analyst report by Maybank-Kim Eng dated 23 June 2014, the average gearing ratio of all the hospitality trusts listed here is at 32.8%. A trust with a gearing ratio that’s too high will be more vulnerable to downturns in the property cycle as it still has to continue to service its borrowings despite the downturn.

Moving on to the financial engineering-related risks, there is a provision for a payment top-up where the vendor of InterContinental Singapore and one of the vendors of Fraser Suites Singapore will deposit a total of S$9.7 million in escrow. When the gross operating profit of the relevant property falls below certain thresholds, the REIT Trustee will be able to draw down on these amounts. The payment top-up will be in force from the date of listing to 30 November 2015. Beyond that, if the gross operating profit continues to fall short, stapled security holders of FHT will be left wanting.

Without the payment top-up, the distribution yield for FHT will drop to 6.5% from the projected 7%. According to the report by Maybank-Kim Eng, the average distribution yield of hospitality trusts listed here is 6.8%. Excluding the payment top-up, the yield of FHT is actually slightly below average. When OUE Commercial REIT (SGX: TS0U) went public, it too engaged in similar kinds of financial engineering to shore up its yield.

Going forward

Frasers Centrepoint, directly and/or indirectly, owns 12 properties, of which five are hotels and seven are serviced residences and these could potentially be injected into FHT in the future. Furthermore, there are six hotels directly and/or indirectly owned by TCC Group, which could also be offered to FHT.

If all the 18 properties are acquired by FHT, the total number of hotel rooms and serviced residence units of FHT will increase by 2,372 and 1,135 respectively, resulting in a total 143% increase in the portfolio size for the stapled trust. According to the draft prospectus, the 18 properties will “provide a visible pipeline to FHT, offering potential opportunities for portfolio growth”.

Foolish Summary

Here’s a quick round up of what I’ve discussed: 1) FHT will debut in our shores on 14 July 2014 as mentioned earlier; 2) with an offer price of S$0.88, it gives potential investors a yield of 7% (with payment top-up) at a PB ratio of 1.06; 3) risks associated with the stapled trust include its high gearing ratio and a potential decrease in income; 4) lastly, its growth factors include the possible injection of the properties currently held by Frasers Centrepoint and TCC Group.







- wong chee tat :)