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HK’s Far East to spin off hotels into US$513m Reit

It’ll own up to 75% of the trust and expects HK$1.22b gain from the move

(HONG KONG) Far East Consortium International Ltd plans to spin off its hotels into a property trust worth at least US$513 million to raise funds to repay loans and start new property projects.

The planned initial public offer (IPO), announced by the firm in a statement on Tuesday, could struggle to draw investors, who have been sceptical about real estate investment trusts (Reits), preferring listings by Chinese developers who promise fast earnings growth.

But Reits, which give bond-like returns by paying most of their rent to investors, can be good defensive plays at a time when markets are choppy.

‘Given Hong Kong’s low interest rate environment, Reits act as high yield plays, which can attract investors’ interest,’ said Ginger Capital analyst Meko Zhu.

Far East did not say how much its trust was likely to yield, but Regal Reit, the only hotel portfolio of Hong Kong’s six listed property trusts, is forecast to give a 10 per cent dividend yield for 2008 at its current share price – or more than seven percentage points over local 10-year bonds.

Reits in Singapore and Japan are trading at around 2.2 percentage points more than domestic bonds.

Regal had to scale down the size of its share sale last March and is trading at 20 per cent below its IPO price. But this year, the trust’s share price is little changed, compared to a 10 per cent drop in the Hang Seng Index.

Far East said that it would hold up to 75 per cent of its hotel Reit, which will own seven hotels in Hong Kong, including Cosmopolitan Hotel, Cosmo Hotel and Lan Kwai Fong Hotel.

The trust will have an option to buy another three hotels in Hong Kong and two in the Chinese provinces of Sichuan and Hubei.

For investors, a hotel Reit is typically different from investing in a hotel operator in that it offers a guaranteed base rent – from the lease to the hotel operator – with a share of extra income if there is high room occupancy.

This gives investors a stable income, and protection from downturns, but only limited upside if the business flourishes.

In the last five years, landlords across Asia, particularly in Japan and Singapore, have been keen to spin off buildings into Reits to fund expansion at a low cost of capital.

In most places, investors liked their high dividends and potential for income growth as property markets and rents rose.

Hong Kong’s Reit market kicked off in November 2005 when the city’s first property trust, the Link Reit, launched a hugely popular IPO.

But investors quickly became wary as developers such as Cheung Kong (Holdings), Henderson Land Development and Great Eagle Holdings Ltd employed financial tricks to artificially lift the yield of their Reits.

Critics accused the firms of using the securities to sell buildings at above-market prices.

Far East Consortium said that it expected to realise a net cash inflow of HK$3.72 billion (S$682.4 million) from the Reit spin-off, and a gain of HK$1.22 billion.

The firm added that it would now focus on developing hotels outside Hong Kong and China, as well as property development.

The company has appointed HSBC and Deutsche Bank as sponsors, with Somerley Ltd and Kingsway Group as financial advisers for the deal.

 

Source: Reuters (Business Times 17 Jan 08)

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