Strong demand for Frasers Hospitality IPO

Singaporean Reit sector displays improved momentum as Frasers Hospitality Trust attracts strong demand.
The Westin hotel, Kuala Lumpur, owned by Frasers
The Westin hotel, Kuala Lumpur, owned by Frasers

Frasers Hospitality Trust cleared the first leg of its S$367.9 million (US$296 million) initial public offering on Monday, paving the way for the listing of Singapore's first real estate investment trust in almost six months and boding well for other property-backed deals in the pipeline.

An institutional tranche, comprising 136.64 million stapled share units, closed 21 times oversubscribed according to one banker. About 55 accounts were allocated stock with a strong tilt towards the top 12 accounts, which took between S$5 million and S$10 million apiece. 

A group of cornerstone investors were also allocated 232.95 million of Frasers Hospitality's stapled share units but with no lock-up period they are effectively an add-on to the institutional tranche, bringing this portion of the base deal size up to 89% of the total.

The cornerstone investors comprise DBS Bank, DBS Private Bank (on behalf of unspecified clients), Malaysia's Fortress Capital Management, Singaporean property group Metro Holdings, Gordon Tang and his family, plus Chinese property developer Tong Jinquan of Shanghai Summit Holdings who is now estimated to have purchased more than S$1 billion in S-Reits over the course of the year. 

Frasers Hospitality's retail IPO will run from Tuesday through to July 10, with listing scheduled for July 14. Its success could add to the improved momentum in Singapore and help other property-backed IPOs currently in the works, including Japan's Accordia Golf Trust and German office property trust I-REIT Global.

The retail portion of the Frasers Hospitality deal accounts for 11% of the base deal. The greenshoe option amounts to a further 19.5% and, if exercised, will take Frasers Hospitality's freefloat of shares to 38%.

Of the company's remaining shares, 22% will be held by parent group Frasers Centrepoint Ltd (FCL) and 40% by TCC Hospitality, the privately held arm of Charoen Sirivadhanabhakdi, one of Thailand's richest men. Sirivadhanabhakdi spun FCL out of Fraser & Neave after he won control of the Singapore-listed conglomerate in 2013.

The IPO's lead managers are DBS, Morgan Stanley, Standard Chartered and United Overseas Bank.

Valuation premium

At S$0.88 per stapled unit, Frasers Hospitality has been valued on an estimated 2015 dividend yield of 7% and a price-to-book ratio of 1.06 times. At first glance, this places the stock in the middle of its basket of S-Reit comparables.

The most expensive S-Reit is Far Eastern Hospitality Trust, which is currently trading on an estimated 2015 yield of 6.7% and has been fairly static in the month since Frasers Hospitality first launched pre-marketing.

The biggest mover over the same time period has been CDL Hospitality Trust, whose shares have gained about 3% and is now trading on an estimated 2015 dividend yield of 6.8%. This means the stock has leapfrogged Ascott Residence Trust, which has been fairly flat over the past month and is currently trading on a 2015 yield of 6.9%.

At the other end of the scale is Ascendas Hospitality Trust, which is trading on an estimated 2015 dividend yield of 7.45% and OUE Hospitality Trust on 7.8%. 

However, Frasers Hospitality becomes the most expensive hospitality S-Reit if an IPO discount of up to 10% is factored into the equation.

During road shows some investors also noted how Frasers Hospitality's up-front dividend yield is inflated by financial engineering because its chief asset, the InterContinental Singapore, is guaranteeing income support until November 2015. Without this, the 2015 estimated dividend yield would drop from 7% to 6.5%. It also owns the Westin Kuala Lumpur and the ANA Crowne Plaza Kobe hotels.
Frasers Hospitality’s gearing is also likely to have put some investors off since it is the highest of its five-strong peer group. They average 32.9% compared with Frasers Hospitality’s 41.7%, although this is expected to ease to 40% within six months once a tax refund is received.

But a big selling point for investors is Frasers Hospitality’s immediate pipeline and the acquisition hunger of its parent, FCL, which recently put in a $2.41 billion bid for Australia’s Australand. This pipeline of 17 hotels and serviced residences could boost the initial portfolio by a further 127%. 

Investors also seem to have remained sanguine about the global interest rate outlook. At the beginning of the year, there was almost universal agreement that US Treasury yields would rise during 2014.

Instead they have done the opposite, with benchmark 10-year Treasury yields dropping from 3.05% on December 31 to 2.53% on Monday. 

As one banker told FinanceAsia, “[Frasers Hospitality’s] success shows that the death of the yield product has been greatly exaggerated.”

This article has been amended to reflect that Frasers Hospitality Trust raised S$367.9 million in its IPO.

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