CITY Developments (CDL) has struck a deal with Alpha Investment Partners, Keppel Land's property fund management arm, to create a joint office investment platform through its second Profit Participation Securities (PPS) transaction.
This is CDL's second PPS. In December last year, CDL also set up a PPS structure to monetise the cash flow from its Quayside Collection assets - comprising hotel, retail and residential assets - in partnership with Blackstone Tactical Opportunities Fund and CIMB. The deal was worth S$1.5 billion.
This time, the deal value is a shade lower, with assets from a different sector. CDL said that the investment platform would acquire three of CDL's prime office assets for S$1.1 billion. Alpha and CDL will co-finance the portfolio in the ratio of 60:40.
The three assets are: Central Mall office tower, divested for S$218 million; 7 & 9 Tampines Grande, divested for S$366 million; and Manulife Centre, divested for S$487.5 million.
CDL unit Bestro Holdings will subscribe for S$133.3 million of securities in the platform, while Alpha fund AAMTF II will contribute S$200.2 million. Lenders DBS Bank and OCBC will provide S$750.1 million in senior loan facilities. CDL declined to disclose the cost of debt.
PPS is a fixed-term vehicle, designed to provide both yield and capital gain. Under it, CDL and Alpha will be entitled to a fully secured fixed coupon payout of 5 per cent interest per annum for a period of five years - coming from income produced by the properties, which are 98 per cent occupied.
The eventual intention is to dispose the assets when market conditions are optimal. When this happens, AAMTF II will get its preferred returns of up to an internal rate of return of 12.6 per cent per annum, including the 5 per cent annual coupon already paid. CDL, after getting back its principal, will then take 60 per cent of any further profits on disposal. AAMTF II takes the rest.
In a teleconference call, CDL CEO Grant Kelley told The Business Times: "This structure is very standard in the private equity world. It gives the investor the comfort that it is going to make a good return, and gives the sponsor - in this case, CDL - an incentive to get the maximum value for the assets."
He added: "One of the things we found last year when we put together our first PPS with Blackstone and CIMB was that there is very deep capital for Singaporean-based assets among private equity real estate players. We believe there is a deep reservoir of capital available for these types of deals."
CDL expects the office market to be in better shape in 4-5 years' time. Growth in the capital value of Singapore's offices should replicate, over the next five years on an annual average basis, the 10-year average historical growth rate of about 6.5 per cent, Mr Kelley said, although he noted that there could be periods of volatility within that time period, including a period of oversupply in 2016 and 2017. By the latter stages of the PPS, from 2018 to 2020, he expects market supply and absorption to re-align and once again be in equilibrium.
The objective of the exercise is two-fold: to recycle capital, and to strengthen the firm's fund management capabilities, CDL executive chairman Kwek Leng Beng said in a statement. "Over the past two years, we have been advancing our two-pronged diversification strategy of developing new overseas and investment platforms. By building on the success of our first PPS transaction last year, this new initiative allows us to recycle capital for our growth plans.
"In line with CDL's long-term investment perspective, we are committed to realising the capital appreciation potential of our real estate assets. By partnering our co-investor Alpha in this new PPS platform, we continue to remain a substantial investor in these prime assets."
There was already some expectation in the market that something like this might happen. Earlier this year, CDL said in its results statement that it was "actively exploring the possibility" of one or more deals this year to further develop its fund management strategy.
Asked if the market should expect CDL to launch more of such instruments going forward, Mr Kelley said only if there is demand in the market for the product.
"At the moment, capital has formed heavily around very sophisticated private equity guys like Alpha and Blackstone. Certainly, we have other assets that we can contemplate but we wouldn't set any hard and fast rule that we'll do the same with another set of assets."
Analysts BT spoke to spoke positively of the deal. DBS's Derek Tan said that this was an "excellent" way for CDL to extract value from an otherwise not-so-good portfolio. "It gives CDL some time to assess its options and plan an eventual exit, given that it may not be the best time in this market to offload assets. Meanwhile, CDL gets cash upfront to redeploy in the UK where it has been beefing up its presence."