Hotel Properties Limited announces SGD NC5 perpetuals at an IPG of 5.75%

Hotel Properties Limited (HPL) plans to issue new SGD NC5 perpetuals at an initial price guidance of 5.75%, for accredited and institutional investors only.

This bond will be subordinated and unsecured. The issuer and this new issue are unrated. Proceeds from this new issuance will be used to refinance existing borrowings and financing working capital requirements; regarding the former, this new issuance comes right after they called their previous 4.4% perpetuals yesterday (22 October 2024).

This bond will come with a first call and reset date on 30 October 2029, five years after the issue. Following that, it will reset every five years thereafter, with a step-up margin of 100bps. Investors should note that this bond also comes with standard dividend pusher and dividend stopper clauses.
We previously covered this issuer when they did a new 5y issue in April 2024. Investors who wish to have more context on the company may consider reading the article linked below.

Related article: HPL announces SGD 5y bonds at FPG of 5.10%

Financial highlights

(Note: Unless otherwise stated, dollar [$] amounts are in SGD, growth rates are YoY, and results are as of 1H24 [30 June 2024].)

HPL delivered stronger (+9%) revenues of $347m in 1H24 compared to $319m in 1H23. Hotel revenues (which typically accounts for a large portion of revenues [96% in 1H24]) were the main driver with a similar +9% increase (Chart 1). However, this was slightly offset by higher cost of sales, with gross profits coming in just +5% higher to $82m. Management attributed the growth in revenues and gross profits to the opening of Six Senses Kanuhura Maldives following a major refurbishment, and better performances by a majority of the company’s hotels and resorts.

Turning to costs, HPL generally reported higher costs including administrative expenses (+9% to $37m) and finance costs (+8% to $50m). The increase in finance costs was due to a combination of higher borrowings (covered in credit highlights below) and interest rates.

Finally, HPL’s share of results of associates turned positive (from -$16m to $1m) due to fair value and divestment gains from investment properties. Taking the combination of (i) stronger revenues; (ii) slightly higher costs; and (iii) positive share of results, HPL managed to improve its profit before tax from -$9m in 1H23 to $2m in 1H24, while net losses also narrowed from -$17m to -$3m in the same period. However, if we exclude the positive share of results, HPL’s profits would actually have worsened, and their operating cashflows would have roughly stagnated (become slightly less positive).

Chart 1: HPL mainly derives its revenues from hotel operations

Credit profile

HPL’s cash position (reported as ‘cash and bank balances’) grew slightly to $104m in 1H24, up by +9% from FY23. Looking at HPL’s cash flow statement, this was primarily due to positive financing cashflows arising from additional borrowings (compared to repayment of borrowings), but also supported by positive operating cashflows as highlighted above. This is also reflected in HPL’s balance sheet, where total debt came in at $1.7b in 1H24, higher than in FY23 ($1.5b), and net debt (total borrowings less cash) increased similarly from $1.4b to $1.6b. As for HPL’s gearing profile, HPL’s net-debt-to-equity ratio came in at 69% in 1H24, higher than the 59% in FY23 on the back of higher debt levels. (Note: HPL does not have regulatory requirements for gearing.)

We previously highlighted that a significant proportion of its investment properties appear to be mortgaged as collateral for credit facilities. As of FY23, $1,308m of its properties were pledged in this way which represents about 99% of its investment properties valued at $1,320m. This means that HPL will have little room to acquire additional secured borrowings in future if it wishes to.

(Note: HPL did not reveal the amount pledged as of 1H24 as they typically reveal it just once a year in their Annual Report. Investment properties were valued the same in 1H24 compared to FY23 as they deemed the key inputs and assumptions remain applicable and reasonable.)

We also note that finance costs have continued to increase (as described above), especially as HPL continues its ongoing refinancing efforts. Finance costs were reported at about $50m in 1H24, with operating cashflows at about $57m, suggesting that a big proportion of operating cash inflows may have to be directed towards covering interest payments. The ratio of operating cashflows to finance costs worsened to 1.1x in 1H24, lower than the figure in both 1H23 (1.3x) and FY23 (1.4x).

In addition, HPL has a sizeable amount of debt due in the coming year: $293m, including $73m in secured borrowings and $220m in unsecured borrowings (Table 1). HPL’s cash position ($104m as highlighted above) is insufficient to cover current borrowings, and considering ongoing financing costs, we think HPL will have to refinance these borrowings rather than reduce its debt levels. The large proportion of unsecured current borrowings (percentage of total current borrowings) may also contribute further to higher financing costs.

To summarise, we repeat our view that HPL is a higher-risk issuer with fairly high debt levels and limited room to acquire more secured financing. While its recent revenues and profits have been on an improving trend, partially helped by fair value gains especially for Singapore in FY23, we think HPL will need to demonstrate further improvements in profitability in order to improve its broader credit profile.

Table 1: HPL’s cash and borrowings

Ongoing case against Managing Director

HPL has confirmed that its Managing Director Ong Beng Seng has been charged in court on 4 October 2024, but also concurrently emphasised that Hotel Properties Limited itself has not been charged. The company’s Nominating Committee has reiterated its belief that he remains suitable to continue as Managing Director.

Regarding this, we agree there should not be a direct impact on HPL’s financials per se. On the other hand, it is also important to note that Ong Beng Seng has been instrumental to HPL’s success thus far as its co-founder, Managing Director, and substantial shareholder; hence, it may be premature to fully rule out all impacts on HPL. We would consider this an ongoing issue for bond investors to take note of, but think investors should continue to focus more on the issuer’s fundamentals (e.g. earnings and credit profile).

Thoughts on new issue

We compare this new issue to existing bonds from HPL itself, as well as those from Shangri-La, another hospitality name which is also dependent on travel demand within Asia. HPL and Shangri-La currently only have senior unsecured bonds outstanding (excluding this new perpetual issuance by HPL), but for these senior bonds (as expected), HPL spreads appear much wider compared to those for Shangri-La, which is a result of the much more levered profile of HPL.

Specifically, we look at HPLSP 5.100% 03May2029 Corp (SGD) and SLHSP 3.500% 29Jan2030 Corp (SGD) for their comparable tenors (i.e. close to 5 years), and note their yields of 4.75% and 3.49% respectively, compared to the benchmark 5y SGS yield of 2.666%. Investors into this new perpetual issuance would be getting a yield pickup of about 1% compared to the HPL 2029 bonds, with the downside of (i) subordination risks; and more importantly to us (ii) non-call risks relating to these perpetuals. We think this yield pickup of 1% compared to its 2029 seniors appears insufficient especially if we consider the final price guidance (FPG) is likely to come in lower than the IPG of 5.75%, and we find this perpetual relatively unattractive versus its seniors.

As HPL and Shangri-La do not have outstanding perpetuals, we also compare this new issuance with perpetuals from CapitaLand Ascott Trust (ARTSP). The difference in yields is even more stark, with ARTSP 4.600% Perpetual Corp (SGD) having a yield-to-next-reset of just 3.84%. As such, this new HPL perpetual issuance clearly offers a yield pickup over the ARTSP perpetuals, as well as a 308bps spread over the benchmark 5y SGS yield (2.666%), but we think this new issuance is fairly priced considering this issuer’s leveraged profile and the fact that the FPG is once again likely to come in below the IPG.

Table 1: HPL and other bonds

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ARTSP 3.070% Perpetual Corp (SGD). The analyst who produced this report holds a NIL position in the abovementioned securities.

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