Pre-marketing underway for two more yield-focused IPOs

OUE Hospitality Reit is aiming to raise at about $700 million from a Singapore listing, while NW Hotel Investments is targeting up to $800 million from its Hong Kong IPO.

Despite the tough market environment for yield-focused property plays lately, bankers started investor education for two more potential listings yesterday. Both are being spun off from well-established brands and bankers involved in the two deals are hoping that the quality of their assets in combination with a reasonable valuation will be sufficient to attract investors.

In Singapore, property developer Overseas United Enterprise (OUE) is spinning off a hotel and an immediately adjacent shopping mall along Orchard Road through a real estate investment trust. The vehicle, which will be named OUE Hospitality Reit, is aiming to raise about S$900 million ($720 million), according to sources.

Meanwhile, in Hong Kong, New World Development is putting three five-star hotels into a fixed single investment trust (the Hong Kong version of a business trust) with the aim of raising $700 million to $800 million. The trust will be named NW Hotel Investments and at the time of listing its portfolio will include the Grand Hyatt Hong Kong and the Renaissance Harbour View Hotel, which are both located in the Wan Chai district on Hong Kong Island and the Hyatt Regency, TST, which is located across the harbour in Tsim Sha Tsui.

The poor market backdrop for Reits and business trusts in general right now is definitely a challenge. The Singapore FTSE ST Reit Index has fallen 10% since May 22 on concerns that the US Federal Reserve is about to cut back on its bond repurchases, after rising 39% in the previous 12 months.

But the two deals will also need to overcome the fact that Langham Hospitality Investments Trust, the latest property-focused yield play to complete an initial public offering, has traded poorly since its debut in Hong Kong just over a week ago. The hotel-focused trust, which is sponsored by Hong Kong property developer Great Eagle Holdings, fell 9.2% on its first day and, as of yesterday, it was down 12.6% from its IPO price.

However, it has edged slightly higher in the past two days, albeit in fairly light volumes. Meanwhile, one source noted that US Reits have also stopped falling in the past couple of sessions, which could be an early sign that the market may is stabilising.

For sure, many observers argue that the sell-off in Reits and business trusts is nothing more than a healthy correction after a run-up that had left many Singapore Reits trading at a premium to their net asset value. Their view is that the low interest rate environment will be a reality for quite some time yet and that Reits will continue to provide returns well above the risk-free rate in their respective countries.

Others believe that the correction has quite a bit further to go and that the Reit market will decline quite a bit further before it turns around again.

Whoever is right, one has to question whether coming to the market while the correction is still continuing is perhaps the wisest thing to do. For one, a lot of the momentum players that help support IPOs in a positive market are currently on the side-lines. On the other hand, there are quite a few Singapore dollar-denominated income-seeking funds that need assets to invest in and as long as the valuation is attractive, they are expected to continue buying.

And deeming from the stream of listing-hopefuls that have hit the market in the past couple of weeks, both in Singapore and Hong Kong, issuers are clearly not that concerned. Or perhaps the desire to get their deals done by the half-year mark, in order to avoid having to update their financials, is just too strong.

In addition to OUE Hospitality Reit, NW Hotel Investments and Langham Hospitality, Carlyle-backed New Century Reit started pre-marketing last week for an IPO that could raise $250 million to $300 million, according to sources. And in Singapore, media company Singapore Press Holdings has been gauging investor interest in a retail-focused Reit for a week already. The company said in an earlier statement that it expects SPH Reit to raise about S$540 million ($432 million) from the sale of 30% of its total units to public investors.

Meanwhile, Hopewell Hong Kong Properties will close the order books at 5pm Hong Kong time today for an IPO of between $670 million and $780 million. However, this is not a Reit or business trust, but a traditional property company that is being spun off from Hong Kong-listed Hopewell Holdings. The company will hold Hopewell’s entire property portfolio in Hong Kong, including two major development projects that are expected to be completed in 2015 and 2018 respectively, and is viewed more as a growth play.

A source said yesterday that the bookbuilding for Hopewell HK Properties is going “all right”.

OUE Hospitality Reit
OUE, which is controlled by Stephen Riady, is selling two properties to the Reit: The Mandarin Orchard Singapore, an upscale hotel with 1,051 rooms that is valued at S$1.19 billion; and the Mandarin Gallery, a retail mall next to the Mandarin Orchard that features four levels of high-end boutiques, shops and restaurants and is valued at S$540 million.

The minimum price for the two properties will be S$1.705 billion, which represents a 1.4% discount to the appraised valuation.

The Reit will then sell 67% of its total units to public investors, or up to 70% if the greenshoe is exercised.

In a circular to its existing shareholders, OUE said the sale of the two properties will allow the company to unlock the value of these assets and will result in a significant amount of proceeds that can be used to pursue growth opportunities, fund the company’s future business plans and reduce its existing borrowings and gearing. A portion of the proceeds will also be returned to shareholders through a special dividend.

At the end of last year, the two properties had a combined net book value of just S$655.5 million.

It is expected to be offered at a premium yield to Singapore-listed Far East Hospitality Trust and CDL Hospitality Trusts, which are both focused on hotels and currently trade at 2013 yields of about 6% and 6.2%. This is partly due to the current market environment. In the longer-term, however, OUE Hospitality Reit should trade at a higher valuation than both of these because of its exposure to retail assets, which tend to be less volatile and therefore command a tighter yield, syndicate analysts argue.

OUE Hospitality Reit will have a mandate to invest in hospitality and hospitality-related properties (defined mainly as retail properties that are connected to a hotel) across Asia. It will have a right of first refusal to acquire other such properties from the OUE group in the future and for now, OUE has identified three assets that it may sell to the Reit: the Crowne Plaza hotel at the Changi Airport, the Meritus Mandarin hotel in Haikou, China, and the Meritus Shantou hotel, also in China.

These three hotels had a combined valuation of approximately S$413 million at the end of last year and currently have 956 rooms. However, the Crowne Plaza is undergoing a re-development that will add another 200 rooms on an adjacent plot of land.

OUE’s existing shareholders will need to approve the establishment of the Reit at an extraordinary general meeting on June 25. At present, that is also the day when the bookrunners are expected to open the deal to institutional investors.

By then, they are hoping to have put in place a number of cornerstone investors to support the transaction. The order books are expected to remain open until July 3 and the listing is tentatively scheduled for July 11.

Credit Suisse, Goldman Sachs and Standard Chartered are the joint global coordinators, as well as joint bookrunners together with Bank of America Merrill Lynch, Deutsche Bank and OCBC.

NW Hotel Investments
The three hotels in NW Hotel’s portfolio have a combined valuation of HK$21.4 billion ($2.8 billion) and will hold about HK$9 billion of debt at the time of listing.

According to a source, the trust is aiming to sell about 43% of its units to public investors before any exercise of the greenshoe. At the time of listing, New World Development will still own 36.5%, while Chow Tai Fook Enterprise, the investment company controlled by New Word’s chairman Cheng Yu Tung, will own another 20.5%.

Like Langham Hospitality, NW Hotel will list through a share stapled unit structure (also referred to as a fixed single investment trust), which 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.

Given the six-month lock-up requirement on cornerstone investors in Hong Kong IPOs (there is no such requirement in Singapore), NW Hotel is unlikely to be able to sign up cornerstones as long as the market remains this volatile, sources say. However, the bookrunners are aiming to have a number of anchor investors lined up by the time the deal launches.

The institutional order books are currently set to open on June 24, one day before OUE Hospitality Reit. The listing is expected in early July.

Deutsche Bank, HSBC and J.P. Morgan are joint sponsors and joint bookrunners together with BOC International and Standard Chartered.

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