With troubles behind it, CDL can enter 2022 with a spring in its step

THE Covid-19 pandemic hit hotels hard. While property giant City Developments Limited's (CDL) property development and investment properties segments were profitable in the first half of 2021, its hotel operations posted a loss of S$143 million.

Operating metrics of CDL's hotels improved in Q3 2021, with revenue per available room (RevPar) up 117 per cent from a year ago to S$92. However, RevPar for CDL's hotels is 42 per cent below that of S$157 in pre-pandemic days of Q3 2019.

But there is good news on the hotels front. Perhaps testifying to the abundance of liquidity chasing hard assets and investor confidence that hotels can bounce back, CDL received several unsolicited and competing offers for Millennium Hilton Seoul, a 5-star hotel near Seoul's downtown business district, and its adjoining land plot

On Monday, CDL announced that an entity managed by IGIS Asset Management, one of South Korea's largest real estate managers, will buy Millennium Hilton Seoul and the adjoining land for 1.1 trillion won (S$1.26 billion).

The proposed sale of the South Korean assets marks CDL's fourth hotel divestment of the Millennium & Copthorne Hotels portfolio since its privatisation and the largest hotel divestment to date.

Crucially, CDL expects to recognise an estimated gain of S$530 million, net of taxes and related transaction costs, from this proposed sale, which should be completed by end-February 2022.

Shareholders of CDL and other hospitality asset owners here have much to cheer that large and profitable deals are being done in the hotel segment in spite of uncertainties over the timing and strength of recovery of international travel.

The proposed divestment will have a positive impact on CDL's net asset value (NAV). More importantly, the proposed deal reminds investors that CDL's share price is grossly under-valued.

Based on closing share price as at Dec 13, 2021, CDL traded at a discount of 24 per cent to its NAV per share as at Jun 30, 2021 of S$9.22.

The discount is 50 per cent to revalued NAV per share of S$14.22 assuming fair value gains on investment properties had been factored in and the hotels continue to be stated at cost, and an even wider 59 per cent to revalued NAV per share of S$17 if revaluation surpluses of the hotel portfolio had also been included.

CDL is not unique among listed property groups for trading below book value. Indeed, while one can hardly buy any physical property asset at a significant discount to valuation in Singapore, one can buy shares of property groups including those of reputable and established ones like CDL at a large discount to book value. The NAV and revalued NAV figures quoted above for CDL exclude any potential profits from its large portfolio of development properties.

The market was shown a way to address the discount to book value issue by CapitaLand earlier this year. Under a restructuring, its development business was privatised while the investment management and lodging business was listed under CapitaLand Investment (CLI).

Prior to announcing its restructuring, CapitaLand traded at a discount to book value. As at Dec 13, 2021, CLI traded at an 11 per cent premium to its NAV per share of S$3.07.

But other listed groups here are hardly in a position to emulate CLI, which has around S$84 billion of funds under management as at end-September 2021.

CDL wants to grow its fund management business but it is a long way away from the scale of CLI's. CDL targets growing its fund management business to reach US$5 billion (S$7 billion) in assets under management by 2023.

As a new year approaches, CDL's shareholders could have much to look forward to as recent moves by the board and management of CDL may help drive better share price performance.

The group took a bold step to exit its troubled investment in China-based Sincere Property Group for a consideration of US$1 earlier this year.

For financial year 2020, CDL had booked a S$1.78 billion impairment for losses attributable to Sincere - effectively writing down 93 per cent of its total investment in Sincere.

With the proposed sale of the South Korean assets, CDL is showing that it can unlock the value of its assets and recycle capital. Perhaps more profitable asset divestments may follow.

Looking ahead, CDL's shareholders can look forward to the group monetising assets and growing its fund management business should efforts to list a real estate investment trust here with UK commercial assets be successfully executed.

Meanwhile, investors may also have much to cheer from CDL's efforts in the Singapore market.

In 1972, the Hong Leong Group, under the leadership of founder, the late Kwek Hong Png, acquired a controlling interest in CDL. Under him, CDL emerged as a major property developer in Singapore.

Today, CDL is led by his son Kwek Leng Beng and grandson Sherman Kwek, who are executive chairman and group chief executive officer respectively.

CDL is now diversified across many countries. But Singapore continues to be a reliable market for the group. For the nine months ended Sep 30, 2021, the group sold a total of 1,382 units with total sales value of S$2.5 billion, a 30 per cent increase in units sold and a 76 per cent increase in total sales value over the same period last year in Singapore.

At the launch weekend of CanningHill Piers in River Valley Road, which is jointly developed by CDL and CapitaLand Development, a total of 538 units - or 77 per cent - out of the 696 homes were sold at an average selling price of around S$3,000 per square foot for total sales value of over S$1.18 billion.

CDL has been actively replenishing its residential land bank in Singapore this year, emerging tops with its joint venture partner for government land tenders at Northumberland Road and Tengah Garden Walk.

The hotel operating environment globally will likely remain challenging. But investors can be buoyed that CDL has a strong pipeline of development projects in a hot Singapore residential property market and the group is able to successfully recycle capital by divesting assets at juicy premiums to book value.

READ MORE: CDL unit to sell 5-star hotel Millennium Hilton Seoul, adjoining land for S$1.26b