CITY Developments Ltd (CDL) is said to be attempting its third profit participation securities (PPS) structure, this time involving a portfolio of 48 apartments in three projects in the Core Central Region completed earlier. The potential deal is seen as the latest instalment of the group’s capital-recycling strategy.
The 48 apartments – at Cliveden at Grange, St Regis Residences Singapore and One Shenton – have a total portfolio size of about S$350 million, a significantly smaller scale than CDL’s previous two PPS exercises. On a portfolio basis, the latest effort works out to around S$2,300 per square foot on strata area, BT understands. The units are substantially leased.
The listed property group is said to have appointed JLL to scout around for potential investors for the PPS structure. These are likely to be institutional and private equity investors; however, high-net-worth individuals and family offices may also be potential candidates.
CDL is expected to team up with the incoming investor(s) – with CDL taking the minority stake in the partnership to acquire the portfolio for a sum that is expected to be around S$350 million. About 50 per cent of the acquisition price is likely to be funded by gearing. CDL will arrange the borrowing, or senior debt; DBS and OCBC, which provided the senior debt in the earlier two PPS deals by CDL, are likely to reprise their role, say market watchers.
Assuming the potential deal is structured along similar lines as the group’s first two deals, CDL and its co-investors will foot some capital by subscribing for securities in the form of junior bonds with a tenor of five years. This time around, CDL is said to be offering to guarantee its co-investors a 3 per cent per annum coupon. In addition, the investors will receive a 7 per cent per annum preferred return (which is not guaranteed), amounting to a total internal rate of return of 10 per cent per annum.
The plan would be for the joint venture (between CDL and its co-investors) to sell the apartments by the fifth year. From the proceeds of the asset disposal, the first priority would be to repay the bank borrowings. After this, CDL’s co-investors will be repaid their capital (predominantly the junior bonds), followed by the preferred 7 per cent return. Only after this will CDL be repaid its capital investment. Following this, CDL and its co-investors will split whatever balance cashflows based on some agreed ratio.
PPS is a fixed-term instrument that provides investors both yield and capital gains play. Some also see it as a form of refinancing, or even financial engineering.
“It allows the issuer to kick the can down the road. If the issuer were to divest the assets outright today, it would not get the price it wants. So PPS allows the issuer to buy some time, in the hope that prices will strengthen within a five-year horizon,” said an industry observer. “This structure allows CDL to lighten its balance sheet and free up cashflow for reinvestment into, say, overseas markets as part of its capital recycling strategy.”
Another veteran property consultant, DTZ’s South-east Asia CEO Ong Choon Fah, said that PPS could be a good solution for owners of prime assets to tide through the current soft market.
“When the property is in a prime location and you feel the market will come back, PPS enables you to do some financial engineering and monetise your asset in the meantime.”
When contacted, CDL’s spokeswoman said: “While we are constantly reviewing ways to optimise our portfolio and recycle capital, these are ongoing work in progress and more details will be shared if and when a deal for our next PPS is signed.”
As part of the group’s diversification strategy, CDL is growing its funds management business and exploring various PPS structures to achieve its target of S$5 billion funds under management by 2018, she added. Already, the group has reached the half-way mark of this goal by unlocking S$2.6 billion of assets through its first two PPS exercises – the Quayside Collection assets on Sentosa Cove in December 2014, and three office assets last December.
“The group has a portfolio of attractive assets in the residential, commercial, retail and industrial sectors which can be potentially packaged under the PPS programme,” CDL’s spokeswoman noted.
The 48 apartments in the portfolio that is being bundled for what could potentially be CDL’s next PPS deal comprise 22 units at Cliveden at Grange, a freehold project completed in 2011; 12 units at St Regis Residences, a 999-year leasehold condo built in 2008; and 14 units at One Shenton, which was completed in 2011 on a site with 99-year leasehold tenure starting from October 2005.
One Shenton and Cliveden at Grange were developed by fully-owned subsidiaries of CDL. It has one-third share in a joint venture that developed St Regis Residences (the other shareholders being Hong Leong Holdings and TID.)
At Cliveden at Grange, CDL also owns, through a special purpose vehicle (SPV), 44 units in two blocks. The SPV was previously held jointly by CDL and Wachovia Development Corporation, but CDL later bought out Wachovia’s stake. The 44 units are substantially leased. Cliveden at Grange comprises 110 units.
Property consultants say the S$2,300 psf portfolio price for the 48 units across the three developments seems to be on the high side. That said, the proposed PPS structure has its attractions for potential investors.
Market watchers venture that CDL is likely to style the deal as a securitisation of the present and future cashflow from the apartments – just as it did for its maiden PPS in late 2014 for its Quayside Collection assets (comprising unsold apartments, a hotel and some retail space) in Sentosa Cove.
Under this structure, there is no change in the properties’ ownership, which remains with CDL for the duration of the structure. CDL also continues to manage the asset (including overseeing its leasing).
With no change in the property ownership, the 3 per cent buyer’s stamp duty as well as the 15 per cent additional buyer’s stamp duty would also not be payable on the PPS transaction price for the apartments.
The other draw to investors in the PPS structure is that they are guaranteed the fixed coupon from CDL. Moreover, in entering a deal like this, CDL and its co-investors would be confident of upside in the price of the assets within the five-year duration of the instrument; if this scenario manifests, they stand to reap capital gains when they exit via divestment of the properties. Mechanisms would also be in place for a potential extension of the securities beyond the fifth year.