The current strong demand for defensive real estate paper has sparked something of a rush among Hong Kong developers seeking to monetise part of their portfolios through a separate listing.
The latest company to join this spin-off trend is New World Development, which said in an announcement last Friday that it is “considering the possibility of a separate listing of certain [of the group’s] hospitality assets” on the Hong Kong stock exchange.
It added that it hasn’t yet decided which assets will be included in the new entity, what structure to use, and indeed whether or when to proceed with the proposed spin-off. However, the fact that the company chose to flag its plans through an official announcement at this early a stage suggests that it is keen to show investors that it too intends to make the most of the current trend.
According to sources, New World has mandated five banks to help with the spin-off. Deutsche Bank, HSBC and J.P. Morgan have been hired as joint global coordinators, while BOC International and Standard Chartered will have the role as joint bookrunners. The proposed spin-off and listing isn’t expected until the second half of this year.
New World’s announcement comes after similar – albeit somewhat more advanced – announcements from Great Eagle Holdings in January and Hopewell Holdings last month. It also followed the successful listing of Mapletree Greater China Commercial Trust (MGCCT) in Singapore last Wednesday, which highlighted the demand for property assets among equity investors.
MGCCT raised $1.3 billion from its IPO, which was heavily oversubscribed and attracted more than 300 institutional investors. The real estate investment trust (Reit) gained 10.8% on the first day and yesterday closed 13.4% above the IPO price.
Great Eagle said it will do the spin-off through the use of share-stapled units, a structure similar to a business trust that was pioneered by PCCW when it spun off its Hong Kong telecom assets in November 2011. Contrary to Singapore, Hong Kong doesn’t have regulations in place to issue business trusts, but share stapled units allow issuers to list an almost identical vehicle within the framework of the existing listing and takeover rules.
This type of vehicle also allows more flexibility than a real estate investment trust (Reit) in terms of what kind of assets can be included.
Following its announcement in January, Great Eagle said on Monday that it has submitted a listing application to the Hong Kong stock exchange after receiving approval from the exchange to go ahead with the proposed spin-off.
The listing vehicle will be called Langham Hospitality Investments Group and will comprise three hotel properties: The Langham, Hong Kong; Langham Place Hotel, Hong Kong; and Eaton, Hong Kong.
The Langham and Langham Place Hotel are both described as “High Tariff A” luxury hotels, while the Eaton is a “High Tariff B” hotel located in the Yau Ma Tei district in Kowloon ― a popular tourist area in close proximity to well-known open-air local markets.
The three hotels have a total of 1,629 rooms, and last year they had a weighted average occupancy rate of more than 89%.
Great Eagle intends to retain at least 51% of the new entity after the listing and said it has named Deutsche Bank and HSBC as joint sponsors for the listing.
Similar to what PCCW did when it spun off HKT Trust, Great Eagle said that there will be a preferential offering of share stapled units in Langham Hospitality for its existing shareholders. Its shareholders also have to approve the spin-off. However, as the Lo family controls approximately 60.6% of the company, Great Eagle said it intends to seek a written approval from them, rather than convene a meeting of all shareholders.
While the initial three hotels are all located in Hong Kong, Langham Hospitality will have a mandate to invest in hotels across Asia. The trust will pay 100% of its distributable income for the period from the listing date until the end of this year and for the years 2014 and 2015 and at least 90% thereafter.
In the announcement, Great Eagle said it believes the spin-off will help to unlock the value of the hotel properties for its shareholders and will allow the different management teams of the trust and the parent to focus more effectively on their distinctive businesses. It will also create a separate investor base for the hotel properties and provide more funding flexibility as the trust will have its own fundraising platform.
And at the same time, Great Eagle will raise funds through the spin-off that can be used to expand its other businesses.
Great Eagle will not have direct ownership of any hotels in Hong Kong following the spin-off of Langham Hospitality, but will continue to own an extensive international hotel portfolio under the Langham Brands. All of these hotels are located outside Asia, except for the Langham Xintiandi in Shanghai, in which it owns 33.3%, and a hotel development project in Dalian in China, which is part of a multi-purpose development that is still under construction. Great Eagle holds a 50% interest in the Dalian project.
Langham Hospitality will be have a right of first refusal to acquire completed stand-alone hotels in Asia that are managed under the Langham brands and in which Great Eagle owns at least 75%. It will also have the right to acquire other hotels developed by the parent and to participate in investment opportunities offered to the group. These rights will last for five years or until Great Eagle’s stake in Langham Hospitality falls below 30%, whicheven happens first.
The trust will be managed by an indirect wholly owned subsidiary of Great Eagle.
Great Eagle is also the sponsor of Champion Reit, which has been listed in Hong Kong since 2006. Champion Reit owns two assets, including the retail space at Langham Place in Mong Kok, which is connected to the Langham Place Hotel. The second asset is a grade-A office property at Citibank Plaza close to Central.