New sponsors of Ara H-Trust, Cromwell E-Reit unlikely to quickly lift their depressed valuations

INVESTORS may have mixed feelings about the recently announced sale of ARA US Hospitality Trust (ARA H-Trust) and Cromwell European Real Estate Investment Trust (Cromwell E-Reit) by their respective sponsor groups.

On the one hand, the change in control of these property trusts could mark the beginning of a new phase of their growth and development.

On the other hand, it seems unfair that the former sponsors have been able to cash out after a protracted period of underperformance by selling the external managers of these trusts.

If the new sponsor groups behind ARA H-Trust and Cromwell E-Reit do not succeed in quickly generating better returns, they could face a backlash from minority investors.

More generally, there could be a further erosion of confidence in the external-manager model adopted by locally listed property trusts; and louder calls for manager internalisation initiatives.

After the market closed on May 27, the manager entities of ARA H-Trust announced that they are being sold by ARA Asset Management, which is part of Hong Kong-listed ESR Group, to a company ultimately owned by property tycoons Gordon Tang and Celine Tang.

ARA Asset Management simultaneously agreed to sell more than 110.2 million stapled securities of ARA H-Trust – representing a nearly 19 per cent stake in the trust – to a company linked to the Tang family.

This will increase the stake in ARA H-Trust held by the Tangs to 28.3 per cent, comprising nearly 163 million stapled securities.

A subsequent filing revealed that the Tangs are paying US$5.2 million for the managers of ARA H-Trust; and US$34.2 million for the 19 per cent stake in the trust – which translates to US$0.31 per stapled security.

This is 10.7 per cent more than ARA H-Trust’s closing price of US$0.28 on May 27.

ARA H-Trust has since slipped lower. It closed on Friday (May 31) at US$0.275, down nearly 1.8 per cent since its change in sponsor was announced.

Only a couple of market days prior to the ARA H-Trust deal, Cromwell E-Reit changed hands in a similar fashion.

Before the market opened on May 23, Cromwell E-Reit’s manager announced that Australia-listed Cromwell Property Group had agreed to sell its European fund management platform along with its stake in the Reit to Stoneweg Global Platform, a Luxembourg alternative investment fund.

The announcement said Cromwell Property Group will receive a total of 280 million euros (S$411 million). Its 156.2 million units of Cromwell E-Reit, representing a 27.8 per cent stake, would be sold for 1.52 euros per unit.

This implies that Cromwell Property Group’s European platform – comprising the manager and property manager of Cromwell E-Reit, and other associated co-investments – is being valued at more than 42.5 million euros.

Cromwell E-Reit closed on Friday (May 31) at 1.43 euros, down nearly 3.4 per cent since its change in sponsor was announced.

Stubbornly weak valuations

Judging from the market’s reaction – or rather, lack of reaction – to the transactions, it is probably fair to say there is little optimism that the new sponsors of ARA H-Trust and Cromwell E-Reit will be able to immediately deliver stronger performance.

Both ARA H-Trust and Cromwell E-Reit own faraway assets that are unfamiliar to many investors in Singapore. Cromwell E-Reit owns commercial properties scattered across Europe, with a book value of almost 2.3 billion euros at the end of 2023.

ARA H-Trust owns hotels in the United States franchised under three major hotel chains: Marriott International, Hyatt Hotels Corporation and Hilton Worldwide Holdings. Its portfolio had a book value of US$751.4 million at the end of last year.

Both property trusts also happen to be laden with debt. Cromwell E-Reit ended Q1 2024 with an aggregate leverage of 41.3 per cent, while ARA H-Trust’s aggregate leverage stood at 44.1 per cent.

In the wake of the pandemic and subsequent rise in interest rates, the market values of both property trusts have taken a beating.

Cromwell E-Reit is trading at a 2023 distribution yield of nearly 11 per cent, and a 32.5 per cent discount to its net asset value (NAV) as at Mar 31. ARA H-Trust is trading at a 2023 distribution yield of 12.5 per cent, and a discount to its Mar 31 NAV of 61.3 per cent.

Cromwell E-Reit and ARA H-Trust may well see their market valuations rise over time, as the operating backdrops for their portfolios improve and the strategies their respective managers are pursuing bear fruit.

ARA H-Trust is riding the post-pandemic recovery in hotel occupancy and room rates, and its manager has been actively optimising its portfolio.

Cromwell E-Reit has pivoted towards light industrial and logistics assets over the last few years – a move that has helped support its performance even as interest rates climbed.

Still, it isn’t clear to me that the market values of these property trusts will ever fully reflect the values of their underlying assets; or that there is anything their new sponsors will be able to do to quickly make that happen.

Shifting sponsor priorities

This brings me to why the new sponsors of ARA H-Trust and Cromwell E-Reit are acquiring control of these property trusts.

Spoiler alert: It probably has little to do with wanting to unlock value for minority investors.

One key factor is that the previous sponsors of these property trusts wanted to get out. Cromwell Property Group said last week that the sale of its European platform marks the conclusion of a A$1.6 billion (S$1.4 billion) divestment programme to reduce its gearing and focus on its core competencies in Australia and New Zealand.

ESR Group has also said it is streamlining itself following the completion of its acquisition of ARA Asset Management in 2022. On Mar 11, ESR Group announced the sale of ARA Private Funds – which is focused on traditional office, retail and hospitality assets – for US$270 million.

It said the sale was the first of US$750 million worth of non-core businesses under ARA Asset Management that have been earmarked for divestment, in order to enable the group to better focus on “new economy” assets.

On the other hand, ARA H-Trust and Cromwell E-Reit have the potential to enhance the business profiles of their new sponsors.

Cromwell E-Reit’s manager said last week that Stoneweg Group, which was established only in 2015, would become a stronger pan-Europe and US asset management platform with some eight billion euros under management.

ARA H-Trust could bring significant value to the Tangs, whose real estate interests include SingHaiyi Group and Acrophyte (formerly known as Chip Eng Seng Corp) – both of which were once listed on the Singapore Exchange.

Besides owning hotel properties, Acrophyte has also developed its own hotel brand called Momentus.

Where does this leave minority investors? Unless ARA H-Trust and Cromwell E-Reit garner much stronger market valuations soon, more questions are likely to be raised about whether the external-manager model allows for the interests of sponsors and investors to be properly aligned.

This, in turn, could further fuel calls for a clear pathway to be forged for property trusts to internalise their management function at the behest of minority investors.