Last month, Frasers Centerpoint Ltd (SGX: TQ5) announced a proposal to engage in a sale-and-leaseback-agreement for its Sofitel Sydney Wentworth Hotel with Frasers Hospitality Trust (SGX: ACV). Given that the deal’s between two-related parties and that Frasers Hospitality Trust’s the one that’s buying over the hotel (Frasers Centrepoint’s the manager, sponsor, and a part-owner of Frasers Hospitality Trust), it’s worth considering the deal from the perspective of the trust. Earlier today, slide decks related to the deal were released by both parties. According to the presentations, Frasers Centerpoint’s intention is to sell its 75-year leasehold interest in the hotel, along with…
Given that the deal’s between two-related parties and that Frasers Hospitality Trust’s the one that’s buying over the hotel (Frasers Centrepoint’s the manager, sponsor, and a part-owner of Frasers Hospitality Trust), it’s worth considering the deal from the perspective of the trust.
Earlier today, slide decks related to the deal were released by both parties. According to the presentations, Frasers Centerpoint’s intention is to sell its 75-year leasehold interest in the hotel, along with all the related furniture, furnishings, and equipment, to Frasers Hospitality Trust for A$224.0 million (around S$230 million).
The trust will then enter into a master lease agreement with Frasers Centrepoint for 20 years. The agreement has a fixed and variable rent-component to it (for clarity’s sake, Frasers Centrepoint will be the one paying rent to Frasers Hospitality Trust) and it also comes with an option to extend for a further 20 years.
Frasers Hospitality Trust’s plan to fund the acquisition involves the issue of new stapled securities of itself to be sold in a private placement.
From its presentation, the trust might be issuing up to 150 million new stapled securities to the ultimate controlling shareholder of both the trust and Frasers Centrepoint, TCC Group. After the placement, the free float of the trust is projected to increase from 453.8 million to 544.5 million. TCC Group is an investment vehicle controlled by Thai billionaire Charoen Sirivadhanabhakdi.
With respect to the Sofitel Sydney Wentworth Hotel deal, the main concern for minority owners of Frasers Hospitality Trust will be this: Is the deal dilutive or accretive for minority investors in terms of the trust’s distributions on a per stapled security basis?
Minority investors might want to rest easy with this acquisition. Frasers Hospitality Trust’s number-crunching revealed that its distributions per stapled security (DPS) for the fiscal year ended 30 September 2015 (FY2015) will increase from 6.158 Singapore cents to 6.163 cents on a pro-forma basis. Based on the trust’s current price of S$0.86, the pro-forma DPS translates to a yield of around 7.2%.
Given what we’ve seen, the deal seems to be beneficial for both Frasers Centrepoint and for Frasers Hospitality Trust. The company is able to sell off a non-core assets to help improve its balance sheet while the trust would be able to gain access to a property that can help grow its distributions for investors. Both parties should be quite happy with the deal as a result.
Frasers Hospitality Trust and Frasers Centrepoint had both held Extraordinary General Meetings (EGMs) earlier today to seek their respective investors’ approval in relation to the Sofitel Sydney Wentworth Hotel deal. We’d soon know if investors in both companies had given the greenlight for the sale-and-leaseback to go ahead.
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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 writer Stanley Lim owns shares in Frasers Centrepoint Limited.