FPL, on June 13, 2022, offered to take FHT private at 70 cents per stapled security. The offer at the time represented a premium to FHT’s last-announced NAV of around 65 cents. It also stood above FHT’s historical trading multiples since its initial public offering (IPO). That said, it should be noted that FHT was listed in 2014 at 88 cents per stapled security with a forecast yield of 7%.
Yet, Gan believes investors would derive better value from FPL’s offer, which represents a premium of 11% to its NAV, which has been marked to market. The offer was also based on FHT’s most recent valuation.
He points out that FHT’s first distribution per stapled security (DPS) upon listing was at 7.56 cents for an approximate 15-month financial period from July 14, 2014 to Sept 30, 2015. In FY2019, before Covid, the trust’s last DPS was at 4.41 cents. For the FY2024 ended Sept 30, 2024, FHT’s DPS fell by 7.5% y-o-y to 2.26 cents. For the 1HFY2025, FHT’s DPS plunged by 13.7% y-o-y to 1.09 cents.
“We think it’s a very good deal that we’ve actually put forward to the stapled security holders for consideration,” says Gan, who pointed out that the 11% premium compares favourably with the benchmarks the trust had measured, as disclosed in the scheme document. “Even the average of precedent S-REIT privatisation is only about 1.04 times,” he stressed.
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‘Nowhere near where we used to be’
The way Gan sees it, hospitality REITs are “nowhere near where [they] used to be” due to several factors, including higher interest rates and global inflation and adverse forex. He adds that these are the reasons behind the dwindling distributions post-Covid. “And it's so challenging to bring [DPS] back up because we were like swimming against the tide.”
Yet, compared to his peers in the industry, Gan believes FHT has done “pretty well”.
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“When we look at [the] results, everybody suffered. It’s just a matter of magnitude [and] who suffers more… But it’s no consolation, if you ask me, because when we look at our results, we are nowhere near where we used to be,” he says.
“In fact, our peers are trading at a discount right now… So it’s all about value proposition,” he adds.
The weaker foreign exchange (forex) due to the stronger Singapore dollar (SGD) is also another factor FHT has to contend with. As at FHT’s 3QFY2025 business update, the trust is in six jurisdictions. While RevPAR has improved post-pandemic, FHT's results, in terms of DPS, are ‘marginally similar’ with valuation upside in local currencies compensating for weaker forex, Gan notes.
On the higher interest rates, Gan says the trust is unlikely to see rates coming down soon. Even so, the trust is also less likely to see any immediate impact since the trust takes a longer-term view on funding with tenors of over three years.
Investor support
Gan, who spoke to The Edge Singapore on Aug 6, a day after a dialogue with the Securities Investors Association (Singapore) or SIAS and FHT’s stapled security holders, said people were “receptive” to the offer.
“A lot of investors were taken aback that [the last privatisation attempt] didn’t go through,” says Gan. “It was [akin] to freak election results.”
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He added that since the last attempt, which missed the 75% mark by a mere 0.12 percentage points, investors had called to say they thought it was a “done deal” and did not send in their vote. According to Gan, these same investors indicated that they will put in their votes this time.
When asked about the factors that led to the slight miss, Gan attributed it to a combination of Singapore’s reopening its economy in 2022, coupled with events such as the F1. At the time, hotel room rates were “flying off the roof”. However, rates have since moderated.
He adds that some investors mentioned previously that they wanted to ride the upside with recovering room rates on the back of pent-up demand. Although on hindsight, the surge was a one-off before rates fell.
On minority investors who feel that the offer may have undervalued FHT, Gan stressed that the trust was “transparent” throughout the process, getting independent valuers to value their properties and so on.
“Of course, some investors were very happy [and] said they’ll support [us]; some said [they were expecting] better but didn’t say much… But I think they’re generally happy,” he says.
When FHT’s last privatisation attempt didn’t go through, it was back to business for the trust, which continued to be listed and operated per usual.
If this offer doesn’t go through, it’ll be business as usual as well, although FHT will continue to face the same structural issues, constraints and challenges, Gan says.
He adds that one of FHT’s key challenges is its low free float, which has led to the trust not trading well. This then becomes a vicious cycle where FHT’s stapled securities are not trading well, thus leading to a low market capitalisation. With that, the trust is unable to get into an index, which then depresses its unit price, thereby leading to trade below NAV.
The low market cap will also impede FHT’s ability to acquire effectively, Gan adds, noting that FHT has the lowest and smallest debt headroom.
“Our portfolio is about $2.1 billion with a gearing level of 35%. If we were to achieve 40%, it’s about a $187 million debt headroom,” he says. He adds that FHT’s biggest peer, CLAS, is “much bigger” and thus has more debt headroom to buy and or conduct major transactions.
With declining yields, asset enhancement initiatives (AEIs), cost optimisation, there is only “so much you can do”. On AEIs, which are needed to improve the trust’s performance and so on, there’s always a trade off. Properties that undergo AEIs will have to close their hotels for six months, which means there is a loss of income.
Gan also believes FHT faces uncertainty in future income with no uplift, although costs and capital expenditures will grow.
On inorganic growth, such as mergers and acquisitions, Gan says FHT has been looking at a “fair bit of deals” in the last 2.5 years, although it “hasn’t been easy to compete” against the likes of family offices and private equity funds. The purchase also has to be yield accretive for it to be meaningful.
Regulatory requirements also mean that REITs have to be mindful of its gearing limit of 50%, compared to other companies, including public listcos, which have the option of raising their ratios to 80% or 90%. For FHT, the trust’s internal limit is 40% to 45% to “leave some buffer”. Companies also don’t have to issue distributions and translate their distributions to SGD, thereby saving on forex.
Looking back, Gan remembers sitting on the podium at the last scheme meeting, wondering what happened. “I don’t think [that] in Frasers’ journey, or my personal journey, we’ve come across [missing the threshold] by this little.”
“Most of the time, when you do deals like that, it should go through. Look at the records of commentators and analysts, it was a credible deal [at] 1.07 times NAV… The independent financial advisor (IFA) said the offer was fair and reasonable,” he adds.
On the three-year gap, Gan said the trust needed time to try again after its first failed attempt. The trust also had new independent directors (IDs) and needed them to settle down and look at the offers objectively.
When asked if he knew what FPL would do with the properties should the privatisation go through, Gan simply said that he wasn't privy to their plans, although he noted that FPL said it regarded hospitality as one of its core asset classes.
