Langham Hospitality Investments, the hotel-focused trust that is being spun off from Hong Kong property developer and investment company Great Eagle Holdings, has raised HK$4.26 billion ($549 million) after pricing its initial public offering at the mid-point.
At a final price of HK$5 per unit, the trust will deliver a yield of 6.04% to investors this year, rising to 6.4% for 2014, according to the average syndicate forecast. This means it is offering a yield premium to other key hotel-focused real estate investment trusts in Singapore and Hong Kong, even though syndicate analysts argue that the quality of its assets suggests it ought to be the other way around. Also, the supply/demand dynamic of the Hong Kong hotel market puts Langham Hospitality in a better position to grow its assets in the next few years, they say.
And institutional investors seemed to like what they saw. As reported earlier, the 85% of the deal set aside for them was fully covered before lunch on the first day, without counting any orders from private wealth-type clients. And when the order books closed at the end of business on Tuesday, the institutional tranche was well-oversubscribed at the final price, according to sources. In fact towards the end of the bookbuilding, the bookrunners were telling investors that they needed to place their orders at HK$5 at least or they would miss out on an allocation for sure.
But even though that was where the price was fixed in the end, a number of investors still missed out since the deal was tightly allocated. According to the same sources, about 40% of the institutional tranche went to the top-10 accounts, which were all long-only funds. And the top 20 accounts took about 60%, leaving less than half the shares to be divided among the rest of the more than 150 institutional investors.
As a result, a number of accounts got zero shares and many ended up with minimal allocations. One source said about 65% of the institutional tranche went to long-only funds, including a number of real estate specialists. In addition to the long only investors, there was also a lot of demand from private banking clients and hedge funds.
Retail investors were less keen on the deal than could perhaps have been expected, given the links to high-profile Hong Kong tycoon Lo Ka Shui, who is the founder and controlling shareholder of Great Eagle. However, many of them may have chosen to prioritise the IPOs of China Galaxy Securities and Sinopec Engineering instead, which together attracted about $7.1 billion of retail cash.
And since these two companies only started trading on Wednesday and Thursday this week, it may have been difficult for retail investors to redeploy the money that was repaid from these two deals into Langham Hospitality — even though the offering was kept open for an extra 24 hours (until noon yesterday) due to a “black rainstorm” warning earlier in the week.
Sources said the retail subscription ratio was approaching 15 times, but in the end didn’t exceed that level, which would have triggered an automatic clawback. As a result, the retail tranche was kept at 10%. The lack of a clawback means that retail investors committed less than $880 million to the deal.
Even more surprisingly, the preferential offering to existing Great Eagle shareholders, which accounted for 5% of the total deal, was slightly undersubscribed. Perhaps they felt that they are already getting a share of the returns from the three hotels in Langham Hospitality’s initial portfolio as Great Eagle will continue to own at least 51% of the trust. Perhaps many of them simply missed the fact that they were entitled to subscribe to one unit in the trust for every 15 shares they own in Great Eagle — anecdotal evidence suggested that the latter may well have been the case.
The unsubscribed units in the preferential offering will be reallocated to the main institutional tranche.
Langham Hospitality sold 852.174 million new units through the base deal, which is equal to 42.6% of the trust. There is also a 15% greenshoe that may increase the portion of the trust in public hands to 49% and the total proceeds to as much as $631 million at the final price.
The units were offered at a price between HK$4.65 and HK$5.36, which translates into an actual yield of 5.6% to 6.5% after adjusting for the fact that Great Eagle will waive a portion of its dividends in the next five years. As yield enhancements go, this was a fairly minor adjustment, designed to offset the dilution of the dividend distribution caused by capital being set aside to cover asset enhancements. Once the money is put to use it should have a positive impact on earnings and the dividend waiver will be reduced gradually to reflect that.
Excluding the dividend waiver, the 2013 yield would have been 5.6% instead of the actual 6.04%.
By comparison, Singapore-listed CDL Hospitality Reit and Far East Hospitality Trust trade at 2013 yields of about 5.8% and 5.4% respectively, while Hong Kong-listed Regal Reit is offering a yield of around 5.7%.
Langham Hospitality will pay 100% of its net profit adjusted for non-cash items as well as cash retained for the asset enhancement reserve, capex, debt servicing and covenant compliance, as dividends for the rest of 2013 and 2014, and at least 90% thereafter.
The decision to fix the price at the mid-point, even though there was sufficient demand to price anywhere in the range, may have been partly influenced by the sell-off in Asian equities yesterday. Markets across the board took a big hit on a combination of weak manufacturing data out of China and talks that the US may ease off on its economic stimulus earlier than expected.
The sell-off was led by Japan where the Nikkei 225 index tumbled 7.3%, but it looked grim elsewhere as well. In Singapore, the benchmark index lost 1.8% and Hong Kong’s Hang Seng Index fell 2.5%
The poor markets took a toll on Sinopec Engineering, which had the misfortune to have scheduled its trading debut for yesterday. The stock opened 2.1% higher, but with the rest of the market falling around it, the demand wasn’t strong enough to keep it up. It fell below the HK$10.50 IPO price after about 30 minutes and finished the day 0.4% lower at HK$10.46, which would have been disappointing to investors, but wasn’t all that bad given the extent of the sell-off around the region.
Sinopec Engineering raised $1.8 billion from Hong Kong's largest IPO so far this year.
Galaxy Securities, which gained 6% in its debut on Wednesday, fell 1.8% yesterday to HK$5.52, which left it 4.2% above the IPO price of HK$5.30.
Langham Hospitality has three hotel properties in its portfolio at launch — The Langham, Langham Place Hotel, and Eaton — which are all located on Hong Kong’s Kowloon peninsula. They have a combined valuation of HK$17.746 billion ($2.29 billion).
The vehicle is not listing as a Reit, but is using a structure known as a fixed single investment trust or a share stapled unit structure that is similar to a business trust. Hong Kong doesn’t have regulations in place to list business trusts, but this structure allows issuers to list an almost identical vehicle within the framework of Hong Kong’s existing listing and takeover rules.
Like business trusts, a fixed single investment trust is more flexible than a Reit in terms of what kind of assets can be included and how much debt it can take on. And like both Reits and business trusts, it allows dividends to be paid from cash flow as opposed to from accounting profit, hence increasing the yield compared to a normal company.
The structure was pioneered by PCCW when it spun off its telecom assets in November 2011.