US-based property groups are homing in on Singapore as a capital-raising venue and could yet dominate initial public offerings (IPOs) in the Lion City during the second quarter.
Hoping to take advantage of the positive momentum propelling the sector, Eagle Hospitality Trust is preparing to lodge its prospectus with the Singapore Exchange (SGX).
The indicative $550 million deal (including greenshoe) has wrapped up pre-marketing and looks set to become Singapore’s first US hospitality pure-play real estate investment trust (Reit).
And shortly behind is a second US office-based Reit IPO from KBS Realty Advisors, which teamed up with Keppel Corp to list the Keppel-KBS Reit in 2017.
Together with Manulife US Reit, that would bring the number of Singapore-listed US Reits to three – and a handful more could follow after a recent spate of M&A activity.
One is a mooted $500 million future spin out of the US office assets owned by Ascendas-Singbridge, which is in the process of being sold to CapitaLand. The other is a second US hospitality offering from Singapore-based ARA Investment Management following its acquisition of a portfolio of US-based Hyatt hotels from Lonestar in December.
What all the prospective listing candidates share in common is a desire to capitalise on is the sector’s outperformance. Year-to-date, the FTSE ST Reit Index is up 10.8%, compared with a 4.7% rise in the Straits Times Index (STI).
Reit valuations have been boosted by changing expectations about the direction of US interest rates. More and more analysts are now forecasting cuts later this year after two of three closely watched segments of the US yield curve inverted (the two-year over the five-year and the three-month over the 10-year).
In the past, this has typically signaled a US recession one to two years down the road. Falling interest rates always boost yield instruments like Reits, although a faltering US economy bodes less well for the growth prospects of the US-based property groups that back them, let alone their tenants.
Eagle Hospitality's own history bears witness to the market’s previous boom and bust. The company was listed on the New York Stock Exchange until early 2007 when it was taken private at the height of the subprime debt bubble by a group of investors (Apollo, JF Capital and Aimbridge) with loans financed by doomed Bear Stearns. But it did not end well.
The portfolio of 13 hotels (mainly Marriott and Hilton) skirted foreclosure before ending up in the hands of one of their creditors, Blackstone. The private equity group then sold most of them on to Los Angeles-based Urban Commons, which is also in the process of renovating the iconic British cruise liner, the Queen Mary, docked on Long Beach since 1967.
Urban Commons has spent the past few years adding to the hospitality portfolio it is now listing. This has been valued at $1.27 billion and comprises 20 hotels under the Marriott, Hilton and InterContinental brands.
In its pre-marketing research, lead manager DBS assigned the group a fair value of $750 million to $800 million. This is based on a range of 0.9 to 1.0 times price to 2019 book.
In terms of the dividend yield, the offering has a fair value of 7% to 7.5% for 2019 and 7.3% to 7.9% for 2020. At the mid-point of the 2019 range, this equates to a hefty pickup of 520 basis points over 10-year Singapore government bond yields.
It also places the deal about 100bp over Singapore’s six locally owned hospitality Reits, which have all turned in strong performances so far this year, led by Ascendas Hospitality Trust.
POSITIVE LOCAL MOMENTUM
Ascendas Hospitality Trust is currently trading on forward yield of about 6.4% and is now back to its January 2018 trading levels. For most of last year, local analysts favoured Singapore hospitality Reits on the grounds that RevPAR (revenue per available room) was on the turn after a four-year downturn.
That has turned out to be the case, although an average 2.3% increase in 2018 was not quite as good as expected. Analysts still retain their 'buy' recommendations on the sector based on a lack of new supply (2.8% increase in rooms forecast in 2019).
However, the main benchmark for Eagle Hospitality will be US-listed hospitality Reits where projected RevPAR rates are much lower. Citi forecasts that the sector will average 1.4% in 2019, for example.
In its pre-marketing materials, Eagle Hospitality projects a 8% uptick in RevPAR in 2019 followed by a more modest 2.9% rise in 2020. If it happens, it will largely be thanks to the $189 million it has spent on Asset Enhancement Initiatives (AEIs) to its 5,420 hotel rooms, many clustered on the US West Coast (34.2%).
The group’s overall projection of 4.15% distribution growth during 2019 should also be underpinned by its acquisition of a further six hotels. Current gearing stands at 36%, of which 75% of debt is fixed, with an average cost of 4.2%.
US comparables such as Park Hotels and Resorts and Chesapeake Lodging Trust currently yield around the mid-7% range.
In the US, hospitality Reits ranked the third-worst performing sub-sector during 2018, according to FTSE Nareit data. The sub-sector dropped 12.82% over the course of the year: only office and shopping centre Reits performed worse.
However, the Reit data provider’s most recent monthly report shows that US hospitality Reits outperformed all of their peers in the first two months of the year, rising 17.34%.
Can they keep up the momentum? A number of analysts have recently cautioned investors to watch out for better entry points as companies take advantage of current valuations to raise cash.
DBS said as much to clients in mid-February in relation to Singapore Reits. Credit Suisse has followed suit this month, particularly in relation to retail-focused ones.
“We believe equity raising provides a better entry point for Reits,” it concluded.
Singapore’s US-focused Reits have also witnessed a strong rebound after their stock prices plummeted during 2018 as investors fretted about potential US tax changes. The issue has now been cleared up and both Manulife and Keppel-KBS have re-bounded 19% and 29.3%, respectively, from their late December lows. Neither, though, has completely bounced back to last year's peak trading levels.
For Singapore investors, the unknown quantum of US regulatory changes may yet come to be seen as a risk factor, which demands a pricing premium for assets that fall under it.