Is Frasers Hospitality Trust’s Latest Rights Issue Right For Unitholders?

A major development occurred at Frasers Hospitality Trust (SGX: ACV) earlier this month on 9 September: The trust announced its plans for another acquisition in Australia after it acquired the Sofitel Sydney Wentworth hotel in July 2015.

While the Sydney hotel was a yield-accretive acquisition for Frasers Hospitality Trust, the latest acquisition is not going to be yield accretive (more on this later). And, this makes it trickier for unitholders to decide if the deal makes sense or not.

Here’s what investors need to know about the purchase.

Frasers Hospitality Trust’s latest acquisition target is Novotel Melbourne, a 380-room hotel located in the heart of Melbourne’s central business district on Collins Street. The property, which seats on freehold land, was built in 1992 and has a gross floor area of 20,860 square metres. The property is valued at A$239 million and the trust’s purchase price is slightly lower at A$237 million.

What makes this deal interesting is that instead of funding it with a combination of debt and equity, Frasers Hospitality Trust will be fully funding it with proceeds from a rights issue.

Along with the Novotel Melbourne acquisition, Frasers Hospitality Trust also proposed to issue 32 rights stapled securities for every 100 existing stapled securities. The rights securities would be priced at S$0.603 per stapled unit, which is a 23.7% discount from the last closing price of S$0.79 for the trust’s units before the announcement. The trust wants to raise gross proceeds of around S$266.3 million.

Frasers Hospitality Trust’s last completed fiscal year stretched from 14 July 2014 to 30 September 2015 (FY2015) as the trust was listed only on 14 July 2014. Based on the trust’s calculations assuming the Novotel Melbourne deal was concluded on 14 July 2014, the trust’s distribution per stapled security would have fallen from 7.56 cents to just 6.29 cents.

The yield on Frasers Hospitality Trust’s units, based on the price of S$0.79, would thus fall from 7.9% to 6.9%. The trust’s net asset value per stapled security (assuming the Novotel Melbourne deal was done on 30 September 2015), would also fall from S$0.864 to S$0.788.

On a positive note, there are plans for asset enhancement initiatives for Novotel Melbourne which might improve the hotels’ valuation and revenue generation capability in the future. Moreover, unitholders of Frasers Hospitality Trust are getting a sharp discount for the rights units compared to its closing price before the announcement was made.

In addition, both Frasers Centrepoint Ltd (SGX: TQ5) and the TCC Group – the trust’s sponsor and major shareholder, respectively – have indicated their support for the rights issue; they have committed to contribute nearly 70% of the proceeds that Frasers Hospitality Trust wants to raise from its rights issue.

Foolish Summary

Compared to its previous deals, this acquisition by Frasers Hospitality Trust is certainly not as perfect as unitholders would like it to be. Investors would need to weigh the positives and the negatives before making a decision on whether the trust’s move makes sense.

Frasers Hospitality Trust’s units are priced at S$0.705 each currently.

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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.