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70 cents offer for Frasers Hospitality Trust  – is it yet another low ball offer?

REITs, SG

Written by:

Alex Yeo

Frasers Hospitality Trust (FHT) is a REIT with 14 properties and 9 cities with a portfolio value of S$2.0 billion. FHT approached its sponsor Frasers Property Limited (FPL) for a proposal to optimise value for its unitholders, and FPL has provided an offer of S$0.70 in cash to privatise FHT.

The offer is at a price to book premium of 1.07x and is also a premium to the trading metrics as below.

The offer is mainly conditional upon FHT’s unitholders and regulatory approval. There is also a material adverse effect clause to protect FPL and allow FPL to not proceed with the offer should FHT’s net tangible assets decline by more than 10% or $125.9 million.

Similar to any other acquisition, it is currently not compulsory for FHT’s unitholders to tender their units as FPL currently does not have 90.0% of FHT’s units.

It will only become compulsory once (or if) FPL obtains 75% of votes during its EGM. FPL and its concert parties currently own about 62.5% of FHT and are not allowed to vote.

This means all it takes is for 75% of the minorities to say Yes for the vote to be supported.

Alvin also shares his thoughts here:

Expected timeline of FHT’s possible delist

Should the offer go smoothly, FHT would be delisted by the 4th quarter of this calendar year.

Should there be any change to the existing offer or change in conditions such as the material adverse effect clause kicking in, then the timeline would be extended.

Why is Frasers Property acquiring FHT?

FHT has provided 8 clear reasons across 3 broad points in the slide above as to why the offer will be attractive to existing unitholders.

Since IPO, FHT has carried out 3 acquisition totalling approximately S$565 million and asset enhancement initiatives(AEI) across 6 properties, totalling S$60 million. Yet, total portfolio valuation grew only S$587million from IPO till FY21. This means that despite management’s best efforts, its cash output for its acquisitions and AEI did not lead to value growth but instead saw value decline by S$38 million.

Both net asset value (NAV) per unit and distribution per unit (DPU) have also declined significantly.

FY16’s NAV was $0.864 while the current NAV is $0.648, an erosion of 25%. DPU declined from 7.6 cents to 1.0 cents in FY21, this is mainly attributed to the pandemic.

Our insights for FHT’s unitholders

1) What is the total profit/loss for FHT’s unitholders vested since IPO?

Unitholders who subscribed for the shares at $0.88 in 2015 and subsequently for the rights issue in 2016 at $0.603 at a ratio of 32 units for every 100 units of share owned would have theoretical ex-rights(TERP) cost price of S$0.81. This is compared to the TERP NAV of S$0.77.

While this offer is clearly a capital loss for investors, the overall investment is buffeted by a total DPU since IPO of $0.2955, received over 7 years. Hence an investor since IPO who subscribed for the rights issue would have a total return of S$0.9955 vs a TERP cost price of S$0.81.

2) Victim of macroeconomic conditions or poor management?

We wanted to verify if FHT is truly a victim of the macroeconomic climate and broader listing dynamics as alluded to in their reasons above or are the management really that bad.

While it is clear that the DPU has declined significantly, another simple way we looked at was the fair value gains/losses of the assets. Note that this amount is different from the S$38 million value decline stated above as that included amount spent on AEI and other necessary capital expenditures which are included into the value of the investment property.

The fair value gains/losses provided below provide a more accurate picture of the performance of the underlying portfolio.

Financial YearFair value gains/(losses) in S$m
2015116.7
201621.1
2017(1.4)
201897.5
2019(15.6)
2020(136.8)
2021(4.6)
Total76.9
2015-2018233.9
2019-2021(157)

From here its quite clear that the portfolio was severely affected by the pandemic as it recorded an overall fair value gains before the pandemic but only losses in FY 2020 and FY 2021. It also did not do well in FY 2019 as the performance of the assets were lacklustre.

The S$157 million in fair value losses played a huge part in causing the NAV to decline to approximately S$0.648 as stated by FHT. We did a rough computation and noted that this S$157 million is worth approximately 8 cents per unit.

This means that should FHT’s properties be able to achieve its pre-pandemic levels of profitability, assuming very simply that other factors such as capitalisation rate and foreign exchange rates remain the same, the NAV per unit would have been S$0.728.

I suppose we did not need to go into this calculation to make the point as to whether FHT would fare better as it is obvious that hospitality REITS would gradually recover should the world continues reopening.

This calculation however provides a gauge as to the theoretical upside of the portfolio. Should FHT be able to fully recover from the pandemic and return to its pre-pandemic value, the NAV would see a recovery as well. An additional 8 cents of NAV at the offer value of 1.07x P/B would bring the value per unit to $0.786, which is still slightly below the TERP price of S$0.81.

This begs the question as to whether FPL is trying to delist FHT before its potential recovery.

What should FPL shareholders know

The proposed acquisition are both EPS and NTA dilutive as FPL has assumed a finance cost of 4% per annum (which is probably quite reasonable in this current interest rate environment). The reason why it seems to be dilutive for FPL is because FHT didn’t do well in FY21 due to the pandemic.

FPL’s rationale was of a long-term strategy, centred on leveraging its synergistic multi-asset class capabilities to create value. As Hospitality remains one of the FPL’s core businesses, FPL takes a long-term view of the returns from its investments. While the FPL Group is cognisant of the prevailing factors which may negatively impact the recovery trajectory of the hospitality sector, the FPL Group remains cautiously optimistic about the long-term growth potential of the hospitality sector.

The addition of FHT’s portfolio will also allow FPL to increase its investment in hospitality assets at locations that FPL is already familiar with.

What can FHT and FPL investors do?

From the onset, this seems like a case of FPL, as the sponsor rescuing FHT’s unitholders from an underperforming investment. FHT has also provided 8 reasons why they sought the deal from FPL.

Some FHT investors may feel that with the reopening in place and travel recovery just around the corner, this is a low ball offer designed for FPL to take the asset back before the recovery occurs. For such investors, you can choose not to tender your investment as FPL would not be able to compulsorily delist the REIT without a 90% stake.

For other FHT investors who think this is a good chance to exit their investment at a premium to the broader market, you may reposition your cash into other market opportunities or even another hospitality REIT to ride on this potential wave of recovery.

For FPL investors, there is not much one can do. While it looks like its dilutive from the onset, it is a small acquisition to its broader portfolio which could provide synergistic gains and also for the opportunity to ride on the potential wave of recovery.

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