Should you take up the Frasers Hospitality Trust privatisation offer?

TL;DR

• Frasers Property has announced an offer to privatise Frasers Hospitality Trust at $0.70 per unit. 
• The EGM and scheme meeting will be held on 12 September 2022, and will require a 75% approval from unitholders. 
• We would take up the offer given the attractiveness of the offer price, limitations to FHT’s growth if it remains listed given its small size, as well as uneven recovery across FHT’s key markets. 
• With the current market price of FHT at S$0.70, some investors may also consider selling the units directly in the market, especially when the likelihood of a higher competing offer is low. 

If you are a Frasers Hospitality Trust (FHT) unitholder, you’d probably have received the documents for the extraordinary general meeting (EGM) and scheme meeting which will be held on 12 September 2022. 

If you are still wondering whether to take up the offer, here’s a quick guide to walk you through. 

Why is Frasers Property making an offer for Frasers Hospitality Trust?

Earlier in June, Frasers Property announced that it is making an offer to privatise FHT at S$0.70 per unit. 

The offer came through after FHT said in April that it was undergoing a strategic review to enhance and unlock value for its shareholders.

The options explored include potential mergers and acquisitions, sale of assets, as well as sale of the entire FHT platform to a third party or its sponsor.

Following much consideration, FHT decided that selling to its sponsor Frasers Property would make the most sense.  

Why we would take up the offer

We would take up the offer given the attractiveness of the offer price, limitations to FHT’s growth if it remains listed given its small size, as well as uneven recovery across FHT’s key markets. 

#1 – Offer values FHT at above its book value

Frasers Hospitality Trust’s share price was at S$0.70 as at the market close on 23 August, the same as the offer price.

At the current share price and offer price, it would imply a price to net asset value (NAV) multiple of 1.07x. 

This is above the current valuation multiple of other Singapore listed hospitality trusts, which are trading at an average price to NAV multiple of 0.90x. 

It also represents a 49% premium over the 3-month volume weighted average price (VWAP) of FHT prior to the announcement of the offer. 

This is significantly higher than the average 34% premium of precedent S-REIT transactions, which is why the Business Times has called this transaction “a playbook for how sponsor groups should reposition a failing REIT.”

#2 – FHT’s small size compared to its peers has led to growth constraints

Unfortunately, FHT is the second smallest hospitality trust listed on the SGX based on its free float market capitalization.  

FHT faces a challenge where it has not been able to be included in major stock market indices due to its relatively small market capitalization. 

Here, FHT’s Chief Executive Officer Eu Chin Fen estimates that to be able to be included the FTSE EPRA Nareit index, FHT will have to grow by a float size of S$1.8 billion.

This is important because unless it is included in an index, the trust will likely continue to struggle with low liquidity as there might be less institutional investors keen to invest in it.

Management believes that the lack of liquidity has led to a lower valuation for the REIT. This has increased the cost of capital for FHT and made it harder for it to make acquisitions.  

#3 – FHT is seeing varied recovery across its key markets

While countries are re-opening borders, FHT is seeing mixed recovery across its key markets of Singapore, Australia, UK, Japan and Malaysia. 

Here, markets such as UK and Singapore have recovered at a slightly faster pace compared to Malaysia and Australia.

In Singapore, the revenue per available room in 1H FY2022 is at about half of the pre-Covid level in FY2019. 

However, in Malaysia, the revenue per available room is still down close to 75% compared to the pre-Covid level.

With growing recession concerns, the management of FHT believes that there is much uncertainty on how their portfolio of hotel assets will perform in future. 

Would we just sell in the market instead? 

Given that FHT is currently trading at the offer price, you’d naturally be thinking of selling it in the market rather than to wait for the scheme of arrangement to go through. 

One of the differences is the brokerage fee incurred when selling in the market, which should not be significant unless you are a large shareholder or are still using a traditional broker with high fees. 

By continuing to wait, you might also be hoping that a better offer from other parties might come along.

However, as we shared earlier, the offer price is already at a valuation premium to other hospitality REITs and precedent S-REIT transactions.

This might mean that the probability of a competing offer coming through might be low. 

What do unitholders need to do?

The transaction will require a 75% approval from unitholders at the EGM to be held on 12 September. 

Do note that the last date for the lodgment of the proxy forms is on 10 September (10am).

If successful, FHT will be delisted in the fourth quarter of this year. 

Should you be keen to understand more about the transaction before deciding, you can also attend a SIAS – FHT dialogue session to be held at 7pm on 31 August 2022. You may register for the hybrid event here.  

What other REITs would we look at after taking up the offer?

If you are looking at REITs which are trading at a significant discount to book value and have exposure to the hospitality sector, then Far East Hospitality Trust might be worth taking a look. 

We shared our thoughts on Ascendas REIT earlier as a defensive place to hide with the uncertain economic outlook ahead.