Sunday, May 26, 2013

Soar Like Great Eagle

Langham Hospitality Trust (LHT), a fixed single investment trust, is anticipated to make its debut on HKEx on 30 May. Book building this week priced LHT at 6% a year, somewhat middle of the marketing range of 5.7 - 6.6%, implying a market capitalisation of c. HK$10 billion.

Its parent entity, Great Eagle (41 HK) should benefit from an uplift in sum of parts valuation. It is trading at a huge discount of 40% to book.
Post the spin off, Great Eagle would have net cash of HK$3.7 billion (assuming 51% ownership of LHT). The hotel management and licensing fees from LHT will also augment its recurring income stream from Champion REIT.

Furthermore, Great Eagle is anticipated to use part of the proceeds to fund its overseas hotel expansion plans. Great Eagle currently has four hotels in North America, including Langham hotels in Chicago, Boston and LA. One is under development in New York. The Singapore market has been receptive to its REITs holding offshore assets. For example, Ascott Residence Trust has assets in UK, Spain and other parts of Europe. Over the longer term, Great Eagle could inject its American assets into LHT.

In the nearer horizon, given its strong balance sheet at net gearing of 1%, Great Eagle should be in a good position to make a substantial payout. Its shareholders were rewarded following two earlier divestments (2006: 29% payout for Citibank Plaza to create Champion REIT and 2008: 53% payout when Langham Place mall and office was sold into Champion REIT subsequently).

The controlling Lo family still owns c 61% of Great Eagle, so we anticipate a sizable payout closer to the upper end of the range of HK$ 5 - 10 per share. Hence, Great Eagle at HKD33.70 remains a hold at least until its interim results in August 2013 when the special dividend could be announced.



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