Frasers Hospitality Trusts decides to do a rights issue to acquire Novotel Melbourne in Collins for A$237 million.
This deal is strange because it is not an accretive deal on the first day.
When we say it is not accretive, it means as an existing shareholder, your dividend per share will go down, as a result of this acquisition, instead of up.
This hotel is located in the prime Collins Street in the heart of Melbourne central business district, which is surrounded by prime and A-grade commercial offices and retail malls.
Frasers Hospitality is not purchasing from their parent but LaSalle Asset Management.
According to the Australian press, LaSalle wanted to sell this and the retail fashion and dining precinct as separate deals or together.
The press stated that Frasers Hospitality have wanted to edge into this Melbourne district for some time and purchasing this hotel looks to fulfill that goal and to grow their assets under management.
Breaking down the numbers
FHT will be issuing 32 shares for 100 shares you own as a shareholder. This should bring in SG$265 mil, which will fund the acquisition with some money left over.
Since the whole transaction is funded by equity, we want to see if this acquisition value adds to the shareholder from the yield perspective.
To do that, this new asset must return better than the existing equity, in this case, the dividend yield.
FHT has a rather high dividend yield of 7.9%.
FHT did a recent acquisition of a German Hotel, funding it with preference shares. After the acquisition of Novotel Melbourne, the dividend per share yield will fall to 7% based on the dilution.
If you reverse engineer the figures, the NPI yield of this new property is just 5%.
Why would FHT Manager make such an acquisition?
The Manager’s Narrative of the Benefits of this Deal
The manager illustrated that the benefits of this deal is that it will improve the liquidity of the traded shares. The amount of shares will increase, FCL trust and FCL parent TCC Group will both subscribe to the rights issue but will not subscribe excess rights.
This will also diversify their income stream.
From Daiwa’s analyst report, management have stated they have eyed a presence in Melbourne for a long time and that this location is very prime.
The terms to them is also attractive at a post AEI NPI yield of 6.4% versus recent hotel transactions in Sydney of between 4.2% to 6.2%
On one hand, Frasers should be rather familiar with that area, consider Frasers Commercial’s recent purchase of office build is diagonally opposite this Novotel Melbourne hotel.
Still it is strange for them to bring up diversification of income stream.
If we look at FHT’s presence, they do not look like they are concentrated. Rather, like Ascott REIT (dividend yield 6.9%) , their income stream looks diversified and provide some damping if there are poor tourism outlook in a particular country.
Would purchasing another hotel greatly enhance the shareholders for this reason?
Daiwa manage to teased out a post AEI NPI yield which is much higher than the increase in distributable income yield of 5%. The management do not seem ready to forecast the future NPI yield. They use a historical figure which is rather meaningless now.
Summary
Whether a deal is accretive or not to the existing shareholders may not be known in one year. Some purchases made by Capitaland Mall (dividend yield 5.3%) only became accretive after some years of traffic growth.
Management have painted a picture that the growth in this prime area is good. Perhaps we would see this asset become accretive 4 years down the road.
As an existing shareholder, I certainly wouldn’t be happy to see my forward dividend yield drop from 7.9% to 7.0%. I have a feeling, if we factor in the post-AEI better rates, the dividend yield drop might be lower.
The TERP will be $0.72 and the rights are renouncible, which means if you do not wish to subscribe to the rights you can sell of the rights once it is listed on the SGX.com
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fcy
Monday 3rd of October 2016
Does it make a difference in your considerations given the fact that the Thai tycoon Khun Charoen owns effectively 87.7% in this REIT? Also, not easy to buy good assets at high yield.....
Kyith
Saturday 8th of October 2016
hi FCY,
I think you are confusing FHT with FCL. Chaoren owns 88% of FCL and probably close to 40% of FHT. not able to buy accretive assets is a problem for all, but their problem was since IPO, the price did not go up and hence they leverage room to scale up did not take place.
If you can do not post full articles on your blog. from what i understand it affects your ranking.
Siew Dai
Thursday 15th of September 2016
Dear Kyith, I also found the acquisition to be mystifying. The NPI yield, as you pointed out, is a lot lower than the DPU yield. Either the purchase price was too high (perhaps they really really really liked the property) or there is a plan to increase the NPI yield post-acquisition (which they didn't expand on). Accor looks set to continue operating the asset post-acquisition under the Novotel brand, so I am not sure they will be able to increase room rates that much if the asset continues within its current star rating category. As you said, there was no prospective DPU yield provided only a pro forma adjustment on historical results. In my opinion, the investment case put forth for existing shareholders wasn't at all clear in what the attractions are, as the numbers show that existing shareholders' DPU yield will fall from 7.9% to 7%.
FFE
Friday 16th of September 2016
Siew Dai,
NPI yield lower than DPU yield doesn't mean that it's necessary non-accretive.
The main reason why it's non-accretive is because they are fully funding it via the funds raised through rights. They are not using leverage at all.
Eg, if a 45% loan at 2% interest rate is taken, the acquisition will become accretive.
My take is that the Reit wants to reduce the gearing of the trust and its most palatable to raise funds to buy an attractive property and at the same time reduce the gearing than to raise funds solely to reduce the gearing.
So look at it this way, the Reit is raising funds from you that buy a property that will only give u 5% but your previous funds in the Reit is still giving your 7.9%.
Regards, FFE