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Does Ascendas Hospitality Trust’s Recent Private Placement Deal Benefit Unitholders?

In my series on private placement deals, I will be using some of the recent private placements happening in Singapore as case studies for investors to better understand how such deals can affect existing shareholders for the companies and listed-entities involved.

This week, I’m looking into Ascendas Hospitality Trust’s (SGX: Q1P) private placement exercise announced on 31 March 2014. The trust had wanted to raise around S$50 million to fund its proposed acquisition of the Osaka Namba Washington Hotel Plaza and had sought to do so by issuing more units of itself.

All told, the trust had issued 73.53 million new units at S$0.68 each in the deal (for a total of S$50 million) that was concluded in early April. The issue price represented a discount of 3.5% from the average price of S$0.705 per unit that the trust had traded at in the few days prior to the announcement of the deal. The trust had used the main bulk of the proceeds from the private placement (some 91.6% of it) to purchase the hotel while the rest had been used for the relevant expenses and tax payments.

So, with the background of the private placement given, had existing unit holders (prior to the private placement) of Ascendas Hospitality Trust gotten a good deal?

What is Osaka Namba Washington Hotel Plaza?

First, we have to understand the asset that Ascendas Hospitality Trust had sought to purchase. The Osaka Namba Washington Hotel Plaza is a hotel that’s currently being managed by the Washington Hotel Group. Ascendas Hospitality Trust had purchased the property for S$110.8 million, which translates to about S$159,000 per room. The manager of the trust expects the acquisition to improve the distribution per unit of the the trust even after accounting for the dilutive effects of the private placement (the trust had around 1.0346 billion units outstanding prior to the deal). From the trust’s number crunching, the acquisition will increase the trust’s pro-forma distribution per unit from 4.07 cents to 4.15 cents for the 9 month period ended 31 Dec 2013. This translates to an increase in the pro-forma annualised yield for unitholders from 7.5% to 7.7%.

The trust is collecting rental from the hotel under a master lessor programme and the rental income accruing to the trust is expected to be around S$8.1million per year. However, this lease term is expiring on 31 Dec 2015 which is only about one and a half years away.

Risks for unitholders

How can this deal turn bad for unitholders? Firstly, there’s the risk of the master lease expiring; if the manager of Ascendas Hospitality Trust is unable to negotiate a favourable renewal of the lease for its unitholders, then distributions that could have come from the hotel might fall dramatically. Secondly, as the Japanese government is attempting the largest stimulus package the country has seen, there are currency risks for the trust that come with the acquisition; if the Japanese yen is to weaken in the future due to the stimulus package, the translated rental income from the property might cease to be attractive for unitholders.

Foolish Summary

It is too early to know whether unitholders will benefit from this acquisition. As mentioned earlier, there are pertinent risks involved with the acquisition. However, unitholders might yet enjoy an improved yield if the trust manages to pull the acquisition off.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.