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Sunday, 22 July 2012

Ascendas Hospitality Trust

Ascendas Hospitality Trust ("AHT" or "Company") is offering 437,325,000 stapled securities in its IPO at $0.88. 355.143m stapled securities will be via placement and 82.182m via public offering. The market cap of AHT will be around S$994.699m. The reason why it is called "stapled" is because it consists of 2 components, a REIT and a Business Trust. It is important to note the difference between a REIT and a Business Trust. You can read some of the differences here or there

To me, the most important reason why I prefer REIT over Business Trust is because a REIT needs to payout 90% of its income as distributions to its unitholders whereas a Business Trust has no such requirement. As such, a Business Trust can cut its payout ratio drastically after its IPO. In addition, a REIT has certain gearing limit to protect unitholders whereas there are no such limit being imposed on a Business Trust to safeguard the interest of unitholders.  However, it is interesting to note on page 7 of the prospectus that the distribution policy of AHT is to distribute 100% of its distributable income up till 31 March 2014 and at least 90% thereafter. The distributions will be made on a semi-annual basis for the periods ending 31 March and 30 Sep.  

Business Trust is able to pay "distributable cash" out of its operations and does not need to be 'profitable'. As such you can see on page 47-48 of the prospectus that while AHT is expected to make a net loss of 31.5m for FY2013 and a net income of only 11.38m in FY2014, it has forecasted distributable income of $32m and $57m for FY 2013 and FY 2014 respectively as it adds back all the non-cash items such as depreciation and amortization.

The portfolio of income producing real estate is predominantly for hospitality purposes across Asia (China, Japan), Australia and New Zealand. The size of the IPO was reduced after it removed a property in Korea due to legal issues. According to the prospectus, the projected annualised yield for FY2013 is 7.9% and 8.0% for FY 2014. The IPO will close at 12pm on 24 July and starts trading on 27 July at 2pm.

The Company has a strategic collaboration with Accor for technical expertise and subject to the terms of the agreement, Accor will grant AHT the first right of refusal for any properties put up for sale that are wholly owned by Accor.

Structure of AHT

Not sure if i am reading this correctly but i definitely don't like the current structure where most hotels are parked under the "business trust" although if i am the Manager, i will also try to do that as it will give me more flexibility. In addition, at least 40% of the management fee can be paid in the form of Stapled Securities....hmmm... another tool to play with in case the yield target cannot be met?

 There will be an over-allotment option of up till 73.403m stapled securities which will be used for stabilisation exercise post IPO.

Cornerstone investors

One hedge fund called Splendid Asia Macro Fund ($10m), Singapore Press Holdings ($15m) and Accor ($49.5m). What a weird combination as i don't think the hedge fund will be long term investor, of course i may be wrong.

Other listed peers and Fair value

Ascendas REIT is trading at 6.1%, Ascendas India Trust at 7.5%.  Ascott REIT is trading at 7.2% and CDL Hospitality Trust at 5.8%. Since AHT is more a business trust than a REIT, i will try to call a spade a spade. It shouldn't be trading at the yields of a REIT but more at the yields of a Business Trust. Personally i am looking at exposure into Hospitality Trust but this is certainly not a structure that i like and the fact that the Sponsor is waiving its entitlement to price the deal at a higher yield doesn't help. In addition, most business trusts in Singapore have also not performed well post listing.

At 7.9%, i think AHT is fairly valued with limited upside. Assuming a fair value trading range of between 7.5% to 8.5% yield, the counter will trade between 82-93 cents.  I will give it a one chilli rating and probably would have given it a miss....but unfortunately i am already allocated some under the placement tranche. I certainly hope AHT will not be the culprit that "closed" the IPO window.

My rating for Ascendas Hospitality Trust


Jeffrey said...

Very objective and transparent piece of analysis. Even though u hv placement shares subscription, u still review the ipo in an objective manner. Well done!

2Y Capital said...

Thanks Jeff. Appreciate your kind words. :-)

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