SGX investors put their trust in Far East’s yield play

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HONG KONG (Dow Jones Banking Intelligence) – Order taking began last week for the IPO of Far East Hospitality Trust (“Far East HT”) in Singapore. Pricing is currently scheduled for August 16, with listing on August 27. The offering is large and visible and was already substantially covered at the time of launch by cornerstone investors. This could provide a well-needed boost to Singapore’s primary market, which has so far this year seen a number of deals pulled, cancelled or otherwise postponed.

These have included attempted IPOs by Formula One Holdings, Manchester United Football Club (now in the market with a U.S. offering, albeit temporarily suspended) and, most recently, Reliance Globalcom B.V.’s ‘s $1 billion Global Telecommunications Infrastructure (“GTI”) Trust.

Far East HT is in the market to raise up to approximately US$580 million equivalent through an offer of stapled securities. As is common for securitization vehicles for hotels, this includes a real estate investment trust (REIT) that will invest in a diversified portfolio of income-producing real estate in Singapore. This will comprise primarily hospitality and/or hospitality-related assets. Stapled to the REIT will be a business trust. Both the REIT’s manager and the business trust’s trustee-manager will be controlled by the Far East Organization (“FAO”) group of companies.

FAO is the largest private property developer in Singapore, having as at December 31, 2011 sold over 42,000 residential units–or the equivalent of one in six private homes there. It also owns ten million square feet of net lettable area across a portfolio of investment properties and holds 60.4% of Yeo Hiap Seng Limited, a public-listed manufacturer and distributor of food and beverage products. Importantly, FAO also has the largest number of rooms among mid-tier hotel operators in Singapore, with a market share of 12.2% in 2011. It also had the leading market position for serviced residences, for which it accounts for 20.9% of the market.

Far East HT’s initial portfolio will comprise 11 properties, including seven hotels comprising a total of 2,163 rooms and four serviced residences encompassing 368 units. The vehicle offers a prospective distribution yield of up to 6.8% at the top-end of the indicative range of S$0.86 to S$0.93 per stapled unit. This represents a premium of 60 basis points over local competitor CDL Hospitality Trusts – but comes at a discount of 110 basis points to the recently listed Ascendas Hospitality Trust, which also invests across Asia, Australia and New Zealand. Both securities have performed well in 2012.

This yield is backed by high occupancy rates, forecast at 84.9% for 2013 for the hotels and at 90.0% for the serviced residences. Average daily revenues are also expected to reach a seven-year high at S$183 and S$223 respectively. Singapore should be a prime beneficiary of the growth in business (including MICE) and leisure travel in the region, as well as in medical tourism.

Ten cornerstone investors have committed to subscribe for more than 53% of the transaction. These include a number of familiar names in the insurance (AIA), pension fund (APG Strategic) and fund management (JF Asset Management, Lion Global Investors and NTUC Income, among others) industries. As is usual in Singapore, they will not be locked up.

The deal should do well. The story is straightforward. The yield is reasonable – if not overly generous – and the offer has the backing of good names without compromising aftermarket liquidity, as is so often the case in Hong Kong these days. Moreover, the amount to be raised remains manageable, unlike the billion-dollar offer targeted only a few weeks ago by GTI Trust, which it failed to raise despite an appealing double-digit yield – and support from a few leading sovereign wealth funds.

The FAO name should also ensure some degree of participation on the part of local investors. If successful, Far East HT’s IPO could become the largest in Singapore this year–after the $2 billion+ secondary listing there of Malaysia’s IHH Healthcare Berhad.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Banking Intelligence on 6 August 2012 and is reproduced with permission.]