CDL charts next steps for Sincere, hotels after S$1.92b loss

CITY Developments Limited (C09) : C09 0% is focusing on a new chapter of growth and transformation, having booked substantial impairment losses on Sincere Property Group, hotels and investment properties. 

The road ahead for the Singapore-based real estate giant may include unlocking “deep value” in its London subsidiary’s hotel portfolio, nursing Sincere back to health, a potential Singapore listing of a new real estate investment trust (Reit) with UK commercial assets, and growing its presence in the private rented sector.

A one-off, non-cash S$1.78 billion write-down on CDL’s investment in China-based Sincere “distorted” the group’s half-year and full-year results, CDL said on Friday.

The impairment dragged the group into a net loss of S$1.92 billion for the second half of last year, versus a S$202.6 million profit in H2 2019. 

Full-year net loss amounted to S$1.92 billion for 2020, reversing from a S$564.6 million profit in the year prior. This was CDL’s first full-year loss since the early 1970s.

CDL hopes to put the Chinese firm’s troubles behind it soon. Executive chairman Kwek Leng Beng declared at the results briefing: “We should not keep talking about Sincere… We must now forget about all these old subjects… We must look forward.”

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He added that he wants to move on to the next chapter to grow the company, and there are “many things to do” and “things are moving fast”.

Sincere may face significant liquidity challenges, given its debts in the next 12 months and China’s “three red lines” policy to cap borrowings for real estate developers. CDL last month formed a special working group to restructure Sincere’s loans and liabilities.

Earlier this week, in the first step to improve Sincere’s liquidity, CDL said it would acquire the Chinese company’s stake in Shenzhen Longgang Tusincere Tech Park.

For now, CDL will not pump new funds into Sincere - until the Chinese property firm has been “resuscitated” with a “stabilised” debt situation, said Goh Ann Nee, chief transformation officer in the executive chairman’s office.

Sincere also remains “a very good strategic platform” for CDL to expand into China, she said. She hopes to be able to provide more details on Sincere’s debt restructuring by June. 

Although Sincere owns many assets, consent from its chairman Wu Xu is required before CDL can monetise them; “unfortunately”, he “has a different view from us”, Mr Kwek said. He hopes Mr Wu will cooperate more with CDL.

Mr Kwek also said there are potential white knights looking at Sincere. “Who knows, maybe Sincere might become a very ideal entity that everyone will wish to buy,” he added. 

Ms Goh noted that there may well be “a very interesting light at the end of the tunnel for CDL” in the China market, and write-backs could be possible in the future. Nonetheless, group chief executive officer Sherman Kwek said CDL is scaling back some investments in China until it sees how things pan out with Sincere.

On top of the Sincere impairment, CDL made S$99.5 million in impairment losses on hotels and investment properties last year, and a S$35 million allowance for foreseeable losses for property development projects.

The group’s net asset value per share was S$9.38 as at Dec 31, 2020, down from S$11.60 a year ago, as it adopts the policy of stating investment properties at cost less accumulated depreciation and impairment losses. If the group had factored in fair-value gains on its investment properties and the revaluation surpluses of its hotels, the revalued net asset value (RNAV) would be S$16.88.

“There is deep value in M&C’s (Millennium and Copthorne Hotels) assets, which form the bulk of these revaluation surpluses,” the group said. 

Mr Kwek Leng Beng noted that the M&C hotels have not been revalued and “have much upside potential to be realised”. Now that M&C is fully owned by CDL, the group will review the British subsidiary’s entire portfolio and seek to unlock the intrinsic value of the group’s RNAV “at the right time”, he added.

Group revenue for H2 2020 fell 43.5 per cent on the year to S$1.04 billion, with hotel operations making up 81 per cent of the decline.

On the fund management end, the group is still exploring the establishment of a Reit with UK commercial assets, to be listed in Singapore. 

First announced in March 2020, plans for this potential Reit listing were pushed back in view of the Covid-19 pandemic, “till the capital markets were more stable”, said Mr Sherman Kwek. The group’s existing commercial assets in London include 125 Old Broad Street and Aldgate House, which will be held by the Reit.

CDL has not confirmed the size of the Reit as it is “still hunting for a third asset”, which could come from either an acquisition by CDL or from a partner, said group chief investment officer Frank Khoo. It is trying to go for something that is “more sizeable”, given that “bigger is better” in attracting more institutional investors, he added.

The group is also eyeing a lower gearing. If the UK Reit lists in Singapore this year and if the group makes further divestments, “that will bring more cash onto our balance sheet and start to really bring our gearing down”, said Mr Sherman Kwek.

CDL’s board proposed a final dividend of S$0.08 per share for 2020, and a special final dividend of S$0.04 per share. The total full-year dividend would thus be S$0.12 a share, down from S$0.20 in 2019.

Shares of the mainboard-listed company lost S$0.15 or 2 per cent to close at S$7.36 on Friday.