The strategic review outlined the two options or “buckets” available. One was for FHT remaining listed and the other for a privatised FHT.
In the second bucket, the FHT managers, the board and the financial advisers looked at whether it made sense for FHT to be privatised by divesting its assets and returning capital to stapled securityholders; divesting FHT as a platform to a third party; merging with another platform or privatisation by the sponsor through a scheme of arrangement (SOA).
“We needed a speedy deal and certainty of a deal. If FHT remained listed, we faced a lot of challenges. The board has concluded that privatisation is the most viable option to unlock value for stapled securityholders,” Gan says.
FPL is offering 71 cents per stapled security for the stapled securities it does not own, via an SOA.
See also: IREIT Global issues $85 mil green notes at 6% due 2028 to fund Berlin Campus construction
Rationale for privatisation
Gan described many challenges and adverse developments since FHT was listed in 2014.
Hospitality trusts have generally underperformed S-REITs due to investor preference for asset classes with more defensive income streams and longer weighted average lease expiries (WALE). Hospitality trusts are exposed to business volatility and hotels have to regularly undergo asset enhancement initiatives (AEIs) to remain relevant.
See also: Mapletree Logistics Trust completes divestment of 1 Genting Lane; total AUM at $13.3 bil
According to Gan, other REIT asset classes attract significant capital flows and institutional investors. Liquidity is a challenge for FHT and hospitality trusts. “S-REITs in other asset classes are therefore better positioned to attract large capital flows and trading volumes. Scale directly impacts the cost and availability of capital,” he says.
A REIT’s cost of equity and free float market capitalisation determine index inclusion and institutional investor participation, potentially lowering the cost of equity. The larger a REIT, the greater its debt headroom, enabling it to fund yield-accretive acquisitions and grow its distributions per unit (DPU).
Downside of overseas expansion
Due to the limited size of the Singapore market, S-REITs need to expand overseas to grow. This in itself has proven to be a major downside for FHT. The Singapore dollar’s appreciation against many currencies and rising interest rates and inflation have offset any increases FHT has recorded for its revenue per available room (RevPAR).
“If you look at RevPAR for all our properties, it has recovered to pre-Covid levels. In most cases, we have exceeded pre-Covid. Sadly, our results show our DPS [distribution per security] has not grown meaningfully. We have gone through inflationary pressures, such as higher labour and utility costs. Forex has worked against us. Since Covid, forex has further depreciated and interest rates have also increased and taken away our DPS growth,” Gan describes.
The Covid pandemic also impacted valuations, Gan continues. The P/NAV of hospitality trusts have underperformed industrial, logistics and commercial REITs.
FHT was listed in 2014 to provide investors exposure to a geographically diversified portfolio of hospitality assets in prime locations within key gateway cities across Asia, Australia and Europe. Since then, an unfavourable macroeconomic environment has evolved for the asset class. In 2022, FPL attempted to take FHT private via an SOA, but the scheme was unsuccessful, with only 74.8% of independent stapled securityholders voting for the scheme. Since then, the macroeconomic environment has undergone further adverse changes, which have made it more difficult for the FHT’s managers to grow FHT’s DPS meaningfully, Gan points out.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Attractive premium
The SOA proposed on May 14 allows stapled securityholders to immediately realise their investment at a premium to NAV. “The offer price is 71 cents, which is an 11.1% premium to the last NAV we announced,” Gan says.
The P/NAV of 1.11 times implied by the offer price represents a premium of 56.8%, 45.4%, 47.2% and 28.6% to the historical one-year, three-year and five-year average P/NAV multiples of FHT. Moreover, investors who invested in FHT at IPO and subscribed for FHT’s rights issue in 2016 would have a total return of 27.8%.
The 1.11 times P/NAV is also higher than S-REIT privatisations since 2020, including Paragon REIT that was announced on Feb 11, Soilbuild Business Space REIT announced on Dec 14, 2020, and Accordia Golf Trust announced on June 29, 2020.
In addition to 71 cents, stapled securityholders will also be entitled to the “clean-up” DPS of 1.0257 cents.
“This is a very generous offer. Minorities got lucky that FPL returned with a second, better offer,” an analyst remarks.
TCC, the legal and beneficial owner of 36.72% of the stapled securities, has given an irrevocable undertaking that the offeror will not acquire the relevant TCC stapled securities and that it will not sell, transfer, give or dispose of all or any of the relevant TCC stapled securities.
The scheme will be decided solely by independent stapled securityholders, whereby approval by a majority in number (>50%) representing at least 75% in value of the total number of scheme stapled securities held by scheme stapled securityholders present and voting either in person or by proxy is required.
The expected date of the scheme meeting for stapled securityholders is late July. The scheme also requires approvals from the High Court in Singapore and the Foreign Investment Review Board in Australia.
