Hopewell seeks $780 million from property unit spin-off

The IPO comes as the property sector takes a dive due to concerns about rising interest rates, but even so, it was accompanied in the market yesterday by Ascendas Hospitality Trust, which raised $113 million to finance an acquisition.
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The Hopewell Centre
<div style="text-align: left;"> The Hopewell Centre </div>

Hopewell Hong Kong Properties yesterday launched the management roadshow and bookbuilding for a Hong Kong initial public offering of between HK$5.2 billion and HK$6.05 billion ($670 million to $780 million).

It is the second IPO this month to offer exposure to the Hong Kong property sector, but contrary to hotel-focused Langham Hospitality Investments, which priced last week, this is not a yield play.

Rather, it is a pure spin-off of Hopewell Holdings’ entire property portfolio in Hong Kong, including two major development projects in the city’s Wan Chai district that are expected to be completed in 2015 and 2018 respectively. Hence it is offering a lot of future growth, according to analysts.

Whether that will be enough to overcome the current jitters in the property sector remains to be seen. Property stocks have taken a substantial beating in the past week-and-a-half amid a growing belief that the US is nearing the end of its quantitate easing period. This has led to concerns of rising interest rates, which has pushed up US Treasury yields.

Not too surprisingly, real estate investment trusts (Reits) and other yield plays have suffered the most, but the past couple of sessions have also seen a sharp sell-off in traditional property developers and landlords. Among the companies considered to be the closest comparables to Hopewell HK Properties, Swire Properties has fallen 7.8% since Tuesday and Hysan Development has lost 5.4%.

And in a move that could damage the investor confidence for market newcomers, Langham Hospitality dropped 9.2% in its trading debut yesterday to HK$4.54. The trust raised $549 million from a Hong Kong IPO last week that was priced at the mid-point of the range (HK$5 per unit) for a 2013 yield of 6%.

A day earlier Asian Pay Television Trust (APTT) fell 5.2% in its Singapore debut, although it did recover some of those losses yesterday when it edged up 2.2%. APTT, which is the first Singapore business trust to focus on media assets, raised $1.1 billion from an IPO that was priced to yield 8.5% for 2014.

The challenging environment may have had an impact on the size of Hopewell HK Properties’ IPO. While sources close to the offering have previously said that the parent company was looking to sell about 30% of the property unit, the actual deal size is no more than 18.5% of the company, or 21.3% if the 15% greenshoe is fully exercised.

One source said yesterday that the parent, which is controlled by well-known Hong Kong tycoon Gordon Wu, wasn’t keen to sell more at current valuations. However, others noted that it also saw no need to raise more money than to cover its capital expenditures for the next couple of years.

According to the term sheet, Hopewell HK Properties is offering 340 million new shares at a price between HK$15.30 and HK$17.80 each. Based on the consensus forecasts among the five bookrunners, this translates into a discount of 33% to 43% versus the 2103 pre-money net asset value (NAV). If the money raised from the IPO is included, the discount will drop slightly to 29% to 38%.

By comparison, Swire is trading at a discount to the estimated NAV of about 28%, while Hysan is trading at a discount of about 38%. Like Hopewell HK Properties, both of these are viewed primarily as property investors, and Hysan is regarded as the most similar in terms of the type of properties it has in its portfolio. However, while Hopewell’s flagship properties are located in Wan Chai, Hysan’s focus is on neighbouring Causeway Bay.

Hopewell HK Properties will have 10 properties in its portfolio at the time of listing, including Hopewell Centre, its flagship retail and office tower in Wan Chai, and the KITEC retail, convention and exhibition centre in Kowloon Bay.

The portfolio also includes one hotel, a luxury apartment building and a new landmark hotel and conference project in Wan Chai — Hopewell Centre II — that is expected to be finished in 2018 and will cost about HK$9 billion to develop. Adjacent to that is 22 Queen’s Road East, which is an Urban Renewal Authority-sponsored redevelopment project that comprises 835,000 square feet and is also expected to cost HK$9 billion to complete. Hopewell HK Properties is developing this in a 50-50 joint venture with Sino Land.

Hopewell HK Properties hasn’t signed up any cornerstone investors. Instead, the structure of the IPO is quite focused on retail investors and existing shareholders of Hopewell Holdings, which suggests that the company is keen to make the most of its well-known brand name.

It has set aside 15% of the shares for retail investors to begin with, compared to the usual 10% for a Hong Kong IPO. Of that, about 1% will be offered to employees. Another 10% will be sold to Hopewell Holdings’ existing shareholders through a preferential offering on the basis of one new share in Hopewell HK Properties for every 25 existing shares in Hopewell Holdings.

It will also be easier-than-usual for retail investors to trigger a clawback, as this will require a subscription ratio of just 10 times. If triggered, the size of the retail tranche will be automatically increased to 30%. It may increase further to 40% if the retail portion is 30 times covered, and will go to 50% if it is more than 65 times covered.

After the spin-off, Hopewell Holdings will have two property assets in China in addition to its stake in Hopewell HK Properties: Hopewell New Town, a residential and commercial project in Guangzhou; and the Liede Integrated Commercial Project, which is located in Guangzhou’s commercial business district. The company has said that it intends to continue to identify new projects in China and overseas to drive its future growth.

The parent company also owns a 1.2 gigawatt coal-fired power plant in the Guangdong province and a 68.1% stake in Hong Kong-listed Hopewell Highway Infrastructure, which builds and operates expressways, tunnels and bridges in China’s Pearl River Delta region.

Many real estate specialists have been prevented from investing in the company since its additional assets mean it is technically viewed as a conglomerate. Before the spin-off about one-third of the revenues were generated by the property unit, while another 35% to 40% came from the toll road business. The separate listing will solve that issue and will also provide better clarity on Hopewell HK Properties’ credit profile for rating agencies.

And on top of that, the spin-off is expected to release value for existing shareholders. According to one source, Hopewell Holdings is currently trading at a 45% discount to NAV and after adjusting for the infrastructure portion, which arguably shouldn’t trade at much of a discount, the Hong Kong property portfolio is valued closer to a 58% discount. So, there could be as much as 25% to 45% upside based on the 33% to 43% discount to NAV that is implied by the price range.

The institutional bookbuilding will close on June 11 and the final price will be fixed after the US close that day. The trading debut is scheduled for June 19.

BOCI and Credit Suisse are joint global coordinators for the deal, as well as joint bookrunners together with Citi, HSBC and J.P. Morgan.

Ascendas Hospitality Trust
Despite the challenging market environment for property stocks, and Reits in particular, Hopewell HK Properties was joined in the market yesterday by Singapore-listed Ascendas Hospitality Trust, which was seeking to raise at least S$200 million ($158 million) to part-fund its recent acquisition of the Park Hotel Clarke Quay.

After the sharp drop in property stocks the previous day, the timing clearly wasn’t the best and may explain why the deal included both a placement of new shares and a smaller preferential offering to existing unitholders — instead of just a placement. Ascendas Hospitality itself fell 2.6% on Wednesday and is now down 12.7% from this year’s high of S$1.06 in mid-March.

However, the placement also accounted for 20% of the existing share capital, which suggests that it wouldn’t have been able to issue any more new units without approval from its shareholders.

The Reit offered to sell approximately 161.9 million new units (or stabled securities, as they are technically called) through the placement to raise at least S$143.3 million ($113 million) and said the preferential offering, which will be completed over the next few weeks, will raise at least S$56.7 million ($45 million) to meet its total target of S$200 million.

The two-for-25 preferential offering, which is non-renounceable, will be fully underwritten by the sponsor, Ascendas Land.

The units in the placement were offered at a price between S$0.885 and S$0.915, but given the market backdrop, there was never really any question that the price would be fixed anywhere but at the bottom — especially since the discount was pretty tight. And indeed it was.

At S$0.885, investors got to buy the units at a 4.3% discount to Wednesday’s close of S$0.925 and a 4.6% discount to the adjusted volume-weighted average price S$0.9274 on the same day. The latter price is adjusted for an estimated dividend distribution to existing unitholders. Ascendas Hospitality was suspended from trading yesterday to carry out the deal.

The bookrunners already had order indications for a majority of the deal when the books opened at 7.30am Hong Kong time yesterday, which may explain why they chose to go ahead at this time.

The deal stayed open until the early evening, by which time it had attracted about 30 investors. According to one source, the buyers included large existing unitholders, private banking clients and other “good quality” institutions and the deal was fully allocated at the bottom of the price range.

DBS and Standard Chartered were joint global coordinators for the offering, while UBS joined them as a bookrunner.

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