FHT privatisation offers value for FHT’s securities holders but not shareholders of Frasers Property

INVESTORS looking for plays on international travel may soon find themselves with one fewer option on the Singapore Exchange.

On Sep 12, stapled securities holders of Frasers Hospitality Trust (FHT) will meet at an extraordinary general meeting to decide whether to approve the proposed privatisation of FHT via a scheme of arrangement.

The deal is a good one for FHT unitholders as the offeror, which is a wholly-owned subsidiary of Frasers Property Limited (FPL), is paying more than book value. FHT unitholders will receive S$0.70 in cash for each FHT stapled security that FPL and TCC Group Investments do not already hold.

FHT is smaller in scale relative to its peers – ranked 32nd by free float market capitalisation among real estate investment trusts (Reits) and business trusts as at Apr 7 – in a market where size is essential to liquidity and substantive growth. Over the 3-year period to Apr 7, FHT traded at a discount to net asset value (NAV) of 25 per cent.

The scheme consideration represents a premium of 43.8 per cent over the 12-month volume-weighted average price per stapled security up to and including Apr 7, the last full trading day prior to FHT’s announcement of its strategic review. It also implies a price-to-adjusted NAV as at end-May of nearly 1.1 times. The said NAV captures latest independent valuations, which have taken into account the possible recovery of the trust’s properties from Covid-19.

Based on end-June valuations and prices as at Sep 6, 2022, FHT’s peers with larger total assets, namely CDL Hospitality Trusts and Far East Hospitality Trust , traded at a discount to NAV of 2.3 per cent and 27.4 per cent, respectively.

Questionable case for FPL

But could the successful privatisation of FHT be a pyrrhic victory for FPL?

FHT owns 14 assets, comprising hotels and serviced residences across Singapore, the United Kingdom, Australia, Malaysia, Germany and Japan. Hospitality is a core business of FPL, and the FHT deal allows FPL to up its investment in locations it is already familiar with.

But FPL is spending over half a billion Singapore dollars to raise its FHT stake from 25.8 per cent to 63.3 per cent.

With rising interest rates and mounting economic risks, should FPL, which had net-debt-to-equity of 70.5 per cent as at end-June, conserve its cash instead? Should it be paying above book value for additional exposure to FHT’s portfolio?

The hospitality sector faces headwinds, and sector growth has been minimal in FHT’s operational markets since the trust’s IPO. The financial performance and valuations of the FHT properties in local currency terms may be hit if the Singapore dollar strengthens against currencies such as the British pound, Australian dollar, euro, Malaysian ringgit and Japanese yen.

The timing and speed of a full recovery of FHT’s assets from the impact of Covid-19 are uncertain. Also, ongoing geopolitical tensions and inflationary pressures could lead to a fall in consumer spending on discretionary goods and services, while rising interest rates could result in higher costs of capital.

Moreover, FPL may be an inefficient vehicle to hold completed hospitality properties. The market has already substantially marked down the value of FPL’s assets: FPL trades at slightly over 0.4 times its end-March NAV, based on its share price of S$1.07 as at Sep 6, 2022.

Perhaps, FPL should deploy its funds elsewhere. The industrial and logistics property business, which benefits from the expansion of e-commerce, may have greater potential.

FPL first ventured into this sector in 2014. As at end-March, the logistics and industrial segment accounted for 32 per cent of FPL’s total property assets of S$34.3 billion. The hospitality segment made up 14 per cent.

FHT’s independent directors are to be lauded for addressing the market’s underpricing of the trust. FPL’s board should learn from FHT’s board and work on ways to bridge the gap between its share price and its NAV.

FPL could go private, as suggested by my colleague Ben Paul in a commentary dated Aug 29. FPL chairman Charoen Sirivadhanabhakdi and his spouse, Khunying Wanna Sirivadhanabhakdi, hold a deemed interest of around 87 per cent in FPL. If chairman Charoen and his family plan to privatise FPL, they can refer to the FHT scheme and make an offer at above book value.

Another way for FPL to unlock value could involve privatising the development business, injecting hospitality assets into a private fund, and keeping investment properties and Reit management in a listed vehicle.

FPL has helped to raise the bar for how sponsor groups can reposition a failing Reit. Next up, FPL can show family-owned property groups how to restructure to optimise value for all shareholders.

(The writer holds shares in FPL)