Frasers Hospitality Trust (FHT) was among the better managed hospitality trusts in the sector, with strong commitment from its sponsor. Back in 2016, Frasers Property (FPL) and the TCC Group, which together held some 63% in FHT, had supported the latter during an equity fundraising.
Yet, FPL is now offering minority investors 70 cents for their stapled securities to privatise FHT. The privatisation is to be implemented by a scheme of arrangement. FHT owns 14 properties in nine cities. Of these, six are serviced residences with the rest being hotels.
During a media briefing on June 13, Eu Chin Fen, CEO of FHT’s manager, acknowledged that she faced obstacles in growing distribution per security (DPS) and net asset value. “Muted growth in key markets is one of the reasons despite pursuing yield accretive acquisitions and AEIs,” says Eu.
A major negative for FHT is the strengthening Singapore dollar against the currencies of geographies where FHT owns hotels, Eu indicates.
Since IPO, FHT has stayed committed to delivering DPS and NAV growth. Eu says: “We’ve made yield accretive acquisitions of $570 million and AEIs of $60 million over the years but despite this, we have not delivered growth.”
This is because the Singapore dollar strengthened more than the growth in RevPAR. “The strengthening of the Singapore dollar has adversely impacted our DPS and NAV despite our efforts to acquire assets to deliver growth,” Eu acknowledges. “We achieved valuation upside but this was offset by Singapore dollar strength.”
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In addition, despite countries reopening borders, inflation caused by the Russia-Ukraine war, rising interest rates and higher costs all around are likely to remain significant challenges. “With countries reopening borders, we are seeing a gradual recovery. But the timing of the recovery remains uncertain and it will take some time to recover back to pre-Covid levels. The ongoing war has compounded supply chain disruptions and led to increases in inflation. All these increases in costs mean interest rates will continue to rise and will add to topline pressures because of recession risk and bottom line pressure because of increased costs,” Eu continues.
Rising interest rates are likely to increase finance costs while rising risk-free rates are likely to pressure FHT’s trading price.
Eu points to FHT’s small size as an inhibiting factor. As a result, FHT’s lack of liquidity and low free-float market capitalisation imply that it will be an uphill task to get into the FTSE EPRA NAREIT Developed Index.
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Since its IPO at 88 cents in 2014, FHT has had one rights issue that revalued its unit price to 81.3 cents. At a 70 cents exit offer and including DPS of 29.7 cents since IPO, investors at IPO would make a gain of 22.7%. This is better than the more meagre 20.7% and 7.9% return by CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FHT) during the same period. Ascott Residence Trust returned more than 48.9%.
ARA US Hospitality Trust is the smallest hospitality trust but remains listed for the time being. Unlike the stapled securities of the other hospitality trusts, ARA US Hospitality Trust is a full-on business trust with no master leases to stabilise its volatile income. This was because its original promoter, ARA Asset Management, was not a sponsor per se, but a property manager that had an asset-light model.
At any rate, the 70 cents exit offer for FHT by FPL translates into 1.07 times price to book value and is the highest multiple for a listed hospitality trust. No surprise then that Maybank Research advises investors to accept the offer.
On the other hand investors looking for a better offer could be disappointed. “If the deal falls through we will continue business as usual and pursue our existing strategy . It will not stop us to review strategic options as we go along," Eu says.
