CITY Developments Limited (CDL) has come up with a novel way of monetising its Sentosa Cove assets in a soft property market, even as it anticipates more overseas acquisitions over the next few years.
The Singapore-based developer cobbled together a club deal with US investment giant Blackstone and Malaysia's CIMB Bank, which along with senior bank loans, amount to S$1.5 billion.
Through a complex structure, these investors are effectively buying the present and future cashflows of a five-star hotel, retail property and residential project - collectively known as the Quayside Collection.
Cityview Place Holdings, which owns the Quayside Collection, is 100 per cent owned by CDL's wholly owned unit Baynes Investment.
Under the deal, CDL, Blackstone and CIMB formed a special purpose vehicle Sunbright Holdings to infuse S$750 million for a capital instrument called profit participation securities (PPS). Separately, DBS Bank and OCBC Bank will provide S$750 million in senior loans to Sunbright.
The PPS have a five-year tenure and carry an annual fixed payout of 5 per cent interest. In addition, PPS holders will receive cashflows from Cityview over the five-year period - specifically, Cityview will distribute profits from its business operations as dividends to Baynes, which will transfer such cashflow to Sunbright.
Under the proposed agreement inked between Baynes and Sunbright, the new investors do not own equity in Cityview, so the latter's ownership structure remains unchanged while CDL will still manage its properties upon completion of the deal.
In terms of investment breakdown, Blackstone's Tactical Opportunities Fund will invest S$367 million while CIMB will contribute S$102 million for the PPS. CDL is also putting in S$281 million through wholly owned unit Astoria.
After the transaction is completed, Cityview will repay a shareholder loan of S$700 million to CDL. Excluding revaluation gains on investment properties, CDL's net gearing ratio will be pared to 25 per cent from 36 per cent.
CDL chief executive Grant Kelley told BT that while the group is not in a rush to raise funds, given its cash hoard of around S$3 billion, it is going to be "acquisitive in the next number of years".
The move also signals CDL's progression towards fund management, which several developers have already done, Mr Kelley added. "This should, in time, help us to attract a higher PE (price to earnings) multiple, more akin to an asset manager than a property developer."
Kishore Moorjani, managing director of Blackstone who leads Asian efforts for the US$5.5 billion opportunities fund, noted that this is "the first truly hybrid product" underscored by high-quality assets that are cash-generating with no development risks.
Being a "long-term bull" in Singapore, Blackstone is looking for opportunities across sectors, Mr Moorjani said, but declined to comment on market rumours on Blackstone's interest in other high-end condos here.
Analysts note that CDL is following the footsteps of its competitors such as CapitaLand and Keppel Land that have large unlisted fund management arms - an area that CDL is "late in the game", though it was the first to launch a listed hotel-based Reit here in 2006.
It also makes sense for CDL to wait for the market to recover, instead of monetising the assets through the conventional way of divesting when current yields are low, they reckon.
The three properties in the Quayside Collection have been operational for over two years. W Singapore hotel is deemed the crown jewel, given that it is Ebitda (earnings before interest, tax, depreciation and amortisation) positive, said OCBC analyst Eli Lee.
The 240-room hotel has been enjoying strong bookings, while Quayside Isle, the only F&B and retail property in Sentosa Cove, has its net lettable area of 44,121 square feet fully tenanted.
But only 25 out of the 228 units at the 99-year-leasehold The Residences at W Singapore have been sold. Some 106 unsold units are leased at "comfortable rents compared to District 9 and other CCR (core central region) areas", Mr Kelley said. There are no restrictions on developers renting out unsold units at Sentosa Cove.
In projecting future cashflows, CDL and the investors have assumed that the residential units would be sold at no less than S$2,400 per square foot (psf). Units there were last sold by the developer at a median S$2,810 psf in 2010. But the most recent sales of other Sentosa Cove condos have slipped below S$2,000 psf.
Mr Kelley said that CDL has no plans to replicate the PPS instrument to other assets in the near term, given that investors need to be comfortable with the underlying cashflows they are getting for the PPS to work. There are no plans to list Sunbright or the PPS.
Meanwhile, CDL has been diversifying its portfolio across geographies and asset classes. It has invested in properties in Australia, China, the UK and the US and more recently Japan. Mr Kelley said that the group plans to beef up its presence in the five key overseas markets.
"We plan to invest in asset classes that we know and markets that are mature, so that we can make good returns on a risk-adjusted basis," he added. "We also focus on gateway cities to make sure we can have scale in our acquisitions."