New Century reit offers guaranteed rental returns

New Century attempts to attract investors for its investment trust by guaranteeing minimum rental returns for the first five years

PUBLISHED : Monday, 24 June, 2013, 12:00am
UPDATED : Monday, 24 June, 2013, 4:59am

Listing candidate New Century Real Estate Investment Trust, the world's first China-based hotel reit, is providing a guaranteed minimum rental of 216 million yuan (HK$273 million) for the first five years in a bid to drum up investor interest amid a slump in equity markets worldwide.

The reit aims to sell 469.91 million units in a price range of between HK$3.50 and HK$4.20 per unit and expects to raise between HK$1.64 billion and HK$1.97 billion to finance the acquisition of hotels. The yield could range between 6.5 and 7.8 per cent this year, depending on the offer price.

"It is the first time a reit will offer a guaranteed rental income. It is a savvy marketing strategy to lure investors," said Kenny Tang Sing-hing, a general manager at AMTD Financial Planning.

With a possible distribution waiver from existing majority shareholders New Century Group and Carlyle, the yield could range between 7.6 and 9.2 per cent from the listing day to the end of this year.

The unit price performances of most high-yield reits were hit when the financial market mood turned sour after Federal Reserve chairman Ben Bernanke revealed that the United States would start pulling back later this year on the massive stimulus that it has been injecting into markets since 2008.

Hotel reit Langham Hospitality dropped to HK$3.93 last Friday, down 21 per cent from its HK$5 debut on May 30. Regal Reit fell 0.85 per cent to close at HK$2.33, and other high-yield securities such as Yuexiu Reit fell 0.73 per cent to HK$4.08 and Champion Reit dropped 0.58 per cent to HK$3.39.

But Link Reit, the biggest local property trust by market capitalisation, bucked the trend. It rose 0.94 per cent to end the week at HK$37.55.

New Century Reit plans to spend more than 90 per cent of the proceeds of its capital-raising exercise to acquire four five-star hotels and one four-star hotel in Hangzhou, Ningbo and Changchun, with a total of 2,021 rooms and a total gross floor area of 321,000 square metres, from Initial Hotel Properties, which is 60 per cent owned by New Century Group and 40 per cent held by the global alternative asset manager, Carlyle.

The average occupancy rate for the five targeted hotels was 60.8 per cent last year, down from 63.6 per cent in 2011.

Revenue per available room (revPAR), an indicator of profitability in the hotel business, was 357 yuan, slightly up from 355 yuan in 2011.

New Century Group, the mainland's largest domestic private hotel owner in terms of hotel rooms, has 107 star-rated hotels in operation or under development with about 31,542 rooms. After the completion of the listing, New Century will hold 18 per cent of the reit, and Carlyle 12 per cent.

New Century Reit is also eyeing the acquisition of two other hotels from New Century Group - the 381-room New Century Grand Hotel Xuzhou, and the 355-room New Century Grand Hotel Kaifeng.

It will distribute 100 per cent of its distributable income for next year to unit holders. From 2015, it will distribute at least 90 per cent of total distributable income to unit holders.

The units will be open for public subscription from today and will close at noon on Thursday. They will begin trading on July 5.

"It is not an optimal time for IPOs as global market turbulence has scared investors away. That's why the company needed to offer very attractive terms to entice investors," said Phillip Capital Management fund manager Li Kwok-suen.