Frasers Centrepoint Limited to Spin-Off Hospitality Assets into REIT: What’s At Stake for Investors?

Property developer Frasers Centrepoint (SGX: TQ5) will be holding an extraordinary general meeting for its shareholders this Wednesday, 28 May 2014. The meeting’s held to vote on the company’s proposal to divest its hospitality assets into a hospitality-focused real estate investment trust.

Frasers Centrepoint is no stranger to REITs as it’s currently the manager of two: Frasers Centrepoint Trust (SGX: J69U) and Frasers Commercial Trust (SGX: ND8U). The former predominantly owns retail malls located in Singapore, while the latter owns commercial real estate found in Singapore and Australia.

The REIT proposal

As early as February this year, Frasers Centrepoint had already made known its desire to possibly spin-off its hospitality assets into a REIT. In March, the company had received an “eligibility to list” letter from regulators and this upcoming EGM would be its next step in the process to set-up a new REIT.

Frasers Centrepoint’s plan is to sell the leases of six of its serviced residences to the new REIT. These six leases would have a 75-year tenure each and they are for the following pieces of property: 1) Fraser Suites Singapore, 2) Fraser Suites Sydney, 3) Fraser Place Canary Wharf, 4) Fraser Suites Queens Gate, 5) Fraser Suites Glasgow, and 6) Fraser Suites Edinburgh.

From the number crunching done on the value of the properties by independent third-parties, the company will be injecting about S$620 million worth of assets into the REIT, with half of the value coming from Fraser Suites Singapore alone. In addition, the REIT will also be getting six other assets from TCC Group, the private investment vehicle of Thai billionaire Charoen Sirivadhanabhakdi. These assets are: 1) Intercontinental Singapore, 2) Novotel Rockford Darling Harbour, 3) Park International London, 4) Best Western Cromwell London, 5) ANA Crowne Plaza Kobe, and 6) Westin Kuala Lumpur. Sirivadhanabhakdi happens to be the majority owner of Frasers Centrepoint with a controlling stake of some 87.9%.

If the proposal for the REIT goes through and it is set up smoothly, Frasers Centrepoint will be receiving a mixture of cash and new units of the REIT upon the sale of its assets. At the end of all those transactions, Frasers Centrepoint is looking to own around 22% of the new REIT. But perhaps more importantly for investors in Fraseres Centrepoint, the company will emerge as the sole manager of the REIT and that would mean new revenue for the company that stems from REIT-management fees.

The rationale behind the proposal

The main reason offered by Frasers Centrepoint for creating such a REIT is that it allows the company to unlock some of the value in its hospitality assets. Currently, it owns more than 8000 apartments in more than 30 cities around the world. With the cash raised from the asset sales, the company can pay down some of its debt and use the proceeds to pursue other higher growth ventures. For instance, the gearing of the company is expected to drop from 40% to 33% after the transaction.

Another strong reason for the creation of the REIT is that a hospitality-focused REIT can create a more efficient platform for Frasers Centrepoint to manage hospitality assets.

Foolish Summary

As mentioned earlier, Sirvadhanabhakdi is the overwhelming majority owner of Frasers Centrepoint and so, the voting that’s supposed to be done on Wednesday is more of a formality. That said, it’s still important for investors of Frasers Centrepoint to know any possible business-implications behind the spin-off.

In any case, it seems that the market likes what it’s seeing with the REIT-proposal as Frasers Centrepoint’s share price has rallied about 40% higher since its lowest point in February this year.

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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 owns Fraser Centrepoint Ltd.