Asia's first hotel REIT prices IPO at yield premium to Singapore peers

Viewed as a play on Singapore's tourism industry, CDL Hospitality Trusts attracts mainly Singapore-based investors to its $223 million IPO.
CDL Hospitality Trusts has become the second real estate investment trust in Singapore to complete an initial public offering in just over one week after attracting orders for almost two times the amount of units available.

Investors were said to have liked CDLÆs focus on hotel assets, which essentially makes it a play on SingaporeÆs growing tourism industry. The initial portfolio comprises four hotels, including the Orchard Hotel and the Grand Copthorne Waterfront Hotel, as well as a shopping arcade attached to the Orchard Hotel.

Sources say the sponsor of the trust, Millennium and Copthorne Hotels, had agreed last night with bookrunners BNP Paribas Peregrine and DBS to price the offering at the bottom of the indicative range for a total deal size of S$352.8 million ($223 million).

The bookbuilding had been extended earlier this week by three days to allow more investors to overcome their lingering concern about the general market direction. However, according to one source, the bottomûend pricing was not a reflection of the level of the demand. The source noted that the order book was about 1.5 times covered at the top end of the S$0.83 to S$0.90 range.

ôThey could have priced anywhere as the book contained little price sensitivity but the (sponsor) had an objective to see this vehicle do well in the secondary market and wanted to leave a little bit extra on the table for the investors,ö the source says.

The final price valued CDL Hospitality, which will be AsiaÆs first hotel REIT, at a 2.5% premium to its net asset value at the end of December 2005. It also pitched the vehicle at a 2006 yield of 6.37%, which is well above an average 5.5% for the other REITs listed in Singapore. For 2007, the yield is expected to increase slightly to 6.69%.

Frasers Centrepoint Trust, a Singapore-based REIT focusing on retail properties which completed its $169 million IPO last week, offered a 5.5% yield from the period from listing until September 30 this year and 5.68% for the next fiscal year to September 30, 2007.

CDLÆs yield projections are based on a commitment to pay out 100% of distributable income for 2006 and 2007 and on company forecasts that distributable income will amount to S$18.5 million ($11.7 million) this year and more than double to S$39.1 million in 2007.

Starting from 2008, the trust will pay out at least 90% of its distributable income, according to the preliminary listing document.

The trust offered 425 million units, which represented 60.9% of the share capital. Of that, a yet to be determined portion was to be set aside for Singapore retail investors in a public offering that will open next week. According to sources, the retail portion would be small, perhaps only 15 million to 20 million units, or 3.5-4.7% of the total offer.

The remainder, was allocated to primarily Singapore-based institutional investors, who were already familiar with the hotels that make up the initial portfolio and who were said to ôunderstandö the growth potential for the local tourism and business traveler industry.

ôBecause they depend on average room rates, hotels are more volatile (than retail or office properties), but basically there will be no new supply of hotel rooms in Singapore for the next three years,ö says one observer. At the same time, the construction of the planned integrated casino and entertainment resorts at Sentosa island and Marina Bay are expected to contribute to a pickup in demand, he adds.

Some of the units also went to investors in the Middle East, Europe and, to a lesser extent, in the US. Observers also note that hedge funds were back in the game after being largely absent on some of the REIT offerings in June.

Aside from a general improvement in global equity markets following comments from the US Federal Reserve last week that were interpreted as a signal that interest rates are now indeed very close to their peak, the demand for CDL was also specifically believed to have been underpinned by Banyan TreeÆs climb above its issue price a couple of days ago.

The luxury hotel, resort and spa operator in early June priced its $232 million IPO in the middle of the range at S$0.97 per share. Amid the difficult market environment, the shares fell 12% when they debuted on June 14 and aside from a rebound on the second day that took it briefly above the IPO price, the price had hovered below there since. On Tuesday this week (July 4), the price finally edged above S$0.97 to a close of S$0.99 and yesterday it finished at S$1.05.

The level of demand for CDL is likely to have surprised HSBC, which stepped down from its joint bookrunner role just before the launch of the deal. Reportedly, the bank didnÆt believe the IPO could be done within the indicated valuation range in a market that was still at the tail end of a six-week correction and where volatility levels had spiked.

Cambridge Industrial Trust pulled its $180 million IPO in mid-June after it failed to attract enough interest among institutional investors.

DBS, which were also involved in the Singapore offers earlier this year for Banyan Tree and Pacific Shipping Trust û both of which were up against fading investor interest û stuck with it, however, and BNP Paribas Peregrine stepped in to replace HSBC.

Unusually, CDL comprises two separate trusts that are paired together as one unit. The key part is CDL Hospitality REIT (H-REIT), which invests in real estate used for ôhospitalityö purposes including hotels, motels, other lodging facilities, serviced residences and resorts.

It will also include CDL Hospitality Business Trust (HBT), which will be dormant at the time of listing but may eventually end up holding certain of H-REITÆs hotels, if the latter isnÆt able to find a ômaster lesseeö for any of them, as well as other hospitality projects that donÆt fit into H-REIT.

The trust is scheduled to start trading on July 19.
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