New Century Reit defies tough markets with IPO of up to $254 million

The Carlyle-backed hotel-focused trust is offering a yield above 9%. If successful, it will be the first Reit to list in Hong Kong in two years.

New Century Real Estate Investment Trust, a China-based hotel trust, kicked off the management roadshow and institutional bookbuilding yesterday for a Hong Kong initial public offering that is seeking to raise between HK$1.64 billion and HK$1.97 billion ($212 million to $254 million).

If successful, it will be the first real estate investment trust (Reit) to list in Hong Kong since Hui Xian Reit in April 2011. Hui Xian raised $1.6 billion through a renminbi-denominated IPO ahead of the listing.

New Century Reit, which is sponsored by New Century Group and the Carlyle Group, is offering a clean yield of 6.50% to 7.80% for 2013, according to a term sheet. But the actual yield will increase to 7.62% to 9.14% as significant holders Huge Harvest and Carlyle Blue Sky will waive their dividend entitlements for the next two years.

Like for other Reits, a high yield is a selling point and New Century Reit’s expected yield does compare favourably with its main comparables. However, it remains to be seen how investors view this yield enhancement. In the past, they have shown again and again that they prefer a clean yield that gives them a more stable long-term return, rather than a headline-grabbing high yield for the first couple of years.

In the risk section of the draft prospectus, New Century Reit noted that the yield enhancement mechanism will only apply for a limited period of time. When the waivers expire, the dividend per unit and/or the price of the units may be adversely affected, it said.

Hong Kong-listed Regal Reit is trading at an implied yield of 6.6% for 2013, according to Bloomberg data. Langham Hospitality Investments, the hotel-focused trust that raised $549 million from a Hong Kong IPO last month, priced its offering at a 2013 yield of 6.04%, but after falling 18.8% since its debut, it is currently trading at an implied yield of 7.4%.

New Century Reit will own five hotel properties in China at the time of listing. They are four five-star hotels: New Century Grand Hotel Hangzhou; New Century Resort Qiandao Lake Hangzhou; New Century Grand Hotel Ningbo; and New Century Grand Hotel Changchun; as well as one four-star hotel, New Century Hotel Xiaoshan Zhejiang.

The Reit is offering 469.9 million new units at a price between HK$3.50 and HK$4.20 each. Ten percent is set aside for the Hong Kong public, while the remaining 90% will be sold to institutional investors.

The Reit will consist of 772 million units after the IPO, according to the term sheet, which indicates a post-IPO public float of 60.9%. After the IPO, the New Century group will own 23.5% of the trust, while Carlyle will hold 15.6%, according to a source.

There is a 15% greenshoe option that if exercised in full could increase the size of the deal to as much as $292 million.

New Century Reit’s primary objective is to provide stable distributions to unitholders and to achieve stable revenue, according to the draft prospectus. New Century Hotel Management will manage and operate the initial hotel properties and pay rent to the subsidiaries of New Century Reit for an initial term of 10 years, it says.

Notably, it also points out that Bank of China, Zhejiang Branch, has agreed to provide an irrevocable guarantee in the amount of Rmb216 million ($35 million) per year, which is the amount of the base rent, to the Reit for five years.

Meanwhile, the five initial hotel properties are expected to enjoy strong organic growth thanks to its premium-quality hotel portfolio, strong brand name and favourable hotel locations, according to a syndicate research report. The total hotel income and gross operating profit are expected to post 2010-2015 compounded annual growth rates of 8.2% and 10.4%, respectively, it says.

New Century Group is the largest domestic, private-sector, star-rated hotel group in China as measured by the number of hotel rooms in operation or under development. The Carlyle Group is a global alternative asset manager that has been a strategic investor in the hotel business of New Century Group since 2007.

Morgan Stanley and Standard Chartered are global coordinators for the IPO. BOC International, Bocom International, CCB International and Galaxy Securities join them as bookrunners.

The deal comes at a tough time both for global stock markets and the Hong Kong IPO market. Following a decline of more than 1% in US stocks, Asian markets fell yesterday, with the Hang Seng Index finishing down 2.9%. The index has shed more than 13% from a recent peak in late May.

Also just last week, Hopewell Hong Kong Properties, which was seeking to raise at least $670 million, pulled its IPO after the market and its closest comparables fell significantly during the bookbuilding. It was the second company to call off a Hong Kong IPO in the past few weeks after auto parts maker Mando China.

According to the current timetable for New Century Reit, the roadshow and bookbuilding will continue until next Thursday (June 27), when the pricing is expected. The Hong Kong public offering is expected to start next Monday and end on Thursday. The listing is slated for July 5.

Elsewhere in Hong Kong, Freetech Road Recycling Technology, a China-based asphalt pavement maintenance services company, has priced its Hong Kong IPO at the bottom of the range and raised HK$631.8 million ($81.4 million). It is scheduled to start trading next Wednesday (June 26).

The company fixed the price at HK$2.43 each, after the deal was marketed in a range between HK$2.43 and HK$3.32 for a deal size of up to $111.2 million.

The institutional tranche received support from high-quality accounts, and the order book closed with a subscription ratio in the low-single-digits. The Hong Kong retail tranche was about seven times covered, according to a source.

CICC, Citic Securities International and Guotai Junan International arranged the deal.

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