Regal Hotels International Holdings Ltd plans to launch a real estate
investment trust (REIT) soon, bundling five of its Hong Kong hotels to bankroll
an expansion in China's booming tourism sector.
The envisioned REIT, in which Regal aims to keep a 40 to 60 per cent stake,
would then take in hotel properties to be built in the world's fourth-largest
economy, a senior executive said yesterday.
The five hotels are worth HK$16 billion (US$2.06 billion) collectively, based
on a replacement cost valuation, said Poman Lo, the firm's executive director.
That would equate to a book value per share of about HK$1.70, versus the HK$0.21
that Regal is now trading at.
"By launching this REIT, Regal will end up with a fairly good amount of cash
for expansion in greater China," Lo said.
"We want Regal Hotels and the REIT to grow together."
Lo told Reuters that her firm intended to keep a 40 to 60 per cent stake in
the REIT.
Regal's shares began climbing yesterday afternoon, hitting a peak of HK$0.81
for a gain of more than 6 per cent after the market reopened following the noon
break.
Asia's hoteliers are wrapping properties into real estate funds to fund
expansion in a regional industry growing 10 per cent annually and worth US$115
billion in revenue a year.
And the Beijing Olympics in 2008 has spurred construction in China, where an
increasingly wealthy middle class is eager to travel and which the World Tourism
Organization reckons would become the largest tourist destination on the planet
by 2020.
"I can say the major obstacles have been overcome," Lo told a business
conference earlier.
"And we aim to launch this REIT as soon as we can."
Sources have said Regal's REIT would launch in November and be worth more
than US$500 million. Deutsche Bank, Goldman Sachs and Merrill Lynch are
sponsoring Regal's offering, sources have said.
Riding a trend
REITs of offices, shopping malls and warehouses are catching on across Asia,
and some bankers believe investors would relish also dabbling in a thriving
tourism industry.
Hong Kong-based Cheung Kong (Holdings) and Far East Consortium International
Ltd are among those considering hotel spin-offs.
Regal planned to inject hotels to be built on the mainland into its REIT. The
firm is now scouring locations in Beijing - where it is building the capital's
tallest building - Shanghai, Guangzhou, and northeastern Shenyang.
On its home turf, Regal runs five hotels housing 3,350 rooms - 8 per cent of
the city's count as of end-2005 - and was adding another 475. The firm claimed
an average occupancy of 80 per cent in the first half of 2006.
Hong Kong has enjoyed a boom in tourism since the mainland began easing
individual travel restrictions three years ago.
According to Savills Research and Consultancy, visitor arrivals to the city
are expected to grow to 27.8 million in 2007 and 29.4 million in 2008, from a
forecast 25.8 million in 2006.
But room supply would lag that growth, with a projected 53,340 rooms in 2007
and 55,772 in 2008, versus 50,749 this year.
"The REIT would be structured to give both a fixed rent and a variable
element," Lo said without elaborating.
Because occupancy fluctuates and is susceptible to anything from air traffic
control strikes to disease outbreaks, hospitality REITs normally set up a
sale-leaseback agreement under which the hotel operator pays fixed rent to the
trust.
To allow potential income growth for investors, CDL Hospitality set up by
City Developments introduced a variable element.
It gets 20 per cent of revenues and 20 per cent of gross operating profit
from its five hotels, with a base guarantee.
