During a results briefing on Feb 25, City Developments (CDL) chairman Kwek Leng Beng appeared to look inwards when at least two questions on how its management intended to narrow the valuation gap between CDL’s trading price and its net asset value (NAV) and revalued NAV (RNAV), popped up.
“The key is we must find the right strategy for growth. Once you have that strategy, then your share price cannot fluctuate betwen $7.10 and $6.80,” says Kwek. According to CDL’s financials for FY2021 (the company has a December year-end), as at Dec 31, 2021, NAV stood at $9.28, down 1.1% y-o-y.
The company’s policy is to state investment properties at cost less accumulated depreciation and impairment losses. If fair value gains on investment properties had been factored in and the group’s hotels continue to be stated at cost, RNAV would be at $15.70, up 10.1% y-o-y.
Furthermore, if revaluation surpluses of the hotel portfolio based on FY2021 internal & external valuations had been included, RNAV would have been $18.61. These RNAVs are based on external valuations for 88% of its investment properties and 63% of its hotel properties. CDL’s share price traded at $7.06 as at Feb 28.
“How do we find a key strategy? We have to find the right one. At this moment, I can’t tell you which is the right one. We cannot assume.”
However, Kwek says having divested Millennium Seoul Hilton for $1.26 billion and Tanglin Shopping Centre for $828 million in a collective sale to Indonesian businessman Tanoto, and with the likely sale of Shirokane within a year, the company will have plenty of cash. “Then we will reinvest. We don’t want share price to be $7.10–$6.80. It shows we don’t have a right strategy,” adds Kwek.
See also: Send Notif Breaking NewsQA Foreground3
About three hours earlier, at a CapitaLand Investment (CLI) briefing, group CEO Lee Chee Koon outlined his view of last year and plans for the next few years. “Last year, we had to run our usual business, sell properties and bid for land while there was still a lockdown. We still had to give rental rebates and we had to undertake restructuring,” he recounts.
“The thesis was that we were not happy with CapitaLand’s share price which averaged at 20%–25% discount to NAV. We wanted to privatise the development business to allow shareholders to enjoy upside as we continue to build momentum on the asset management business,” Lee says. “The share price has held up quite well, proving the thesis has been right. The key is about executing it right.”
As at Dec 31, 2021, CLI’s NAV, stood at $3.12 while net tangible asset (NTA) excluding intangibles like goodwill stood at $2.93. CLI ended at $3.69 on Feb 28.
See also: Send Notif Breaking NewsQA Foreground2
As at March 31, 2021, CLI’s pro forma NAV was $2.86. Hence, CLI’s share price has moved above both its pro forma NAV and its last published NAV.
The discount dilemma
There was a time in the 2000s when CDL traded above its NAV simply because it was one of perhaps a couple of developers to state its investment properties at cost less depreciation. Over the years though, fund managers started focusing on return on equity (ROE) and return on invested capital (ROIC).
About 10 years ago, CapitaLand — now unlisted — started introducing metrics such as cash patmi — that is the earnings excluding revaluation gains and losses but including realised gains and losses on divestments.
In FY2021, CLI’s cash patmi was $1.113 billion versus cash patmi of $540 million in FY2020. In FY2021, CLI’s total patmi was $1.349 billion compared to a loss of $559 million in FY2020. Total patmi includes revaluation gains and losses. CLI also reports operating patmi. This is largely regular income including fee income from its REITs, funds and lodging business. Operating patmi rose 12% y-o-y to $497 million in FY2021.
In comparison, in FY2021, CDL reported patmi of $97.7 million. The largest contributor to CDL’s ebitda was property development.
Planning for an ROE of 8%
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
A magical figure for ROE appears to be 8%. This was a target set by CapitaLand’s then group CEO Lim Ming Yan back in 2013. It was a challenging target then but was initially achieved by CapitaLand in FY2019, just before Covid hit. FY2021’s ROE was 8.7%.
“Our medium term ROE target is to get to 8%. It’s not easy for us and we can’t get there overnight. We are not targeting double-digit ROE. However, in recent months and years, we’ve placed a strong emphasis on capital recycling,” explains CDL group CEO Sherman Kwek. “Our equity base is $10 billion so we have a big base to struggle with. This is to do capital recycling and we are going to work hard on this.”
On Feb 25, the younger Kwek reiterated CDL’s GET (Growth, Enhancement and Transformation) strategy. For the growth part, instead of focusing on data centres and logistics assets, which have capital pouring in, CDL is opting for the private rented sector (PRS). According to a press release on Dec 17, 2021, CDL acquired a 250-year leasehold site from Paradise Circus Limited Partnership (PCLP) in Birmingham. The 6,760 sq ft site will be developed into a residential tower with 370 build-to-rent units. The cost of GBP6.5 million ($11.8 million) translates to about GBP18 psf on gross internal area of 359,329 sq ft. To be named Octagon, this development is CDL’s third PRS project in the UK since 2019.
The first was CDL’s acquisition of the development site for the 665-unit project in Leeds called The Junction. This was followed by CDL Hospitality Trusts’ (CDLHT) acquisition of the 352-unit forward-funded project in Manchester in August 2021 named The Castings.
Altogether, the company has a pipeline of over 1,300 units in its UK PRS portfolio. Land cost for PRS projects are typically lower but development cost is likely to be higher, the younger Kwek says. CDL also acquired two PRS projects in Yokohama. With CDLHT’s pivot to PRS which provides more stable returns than hotels, CDL’s PRS projects can provide CDLHT with a pipeline.
“For the PRS strategy, we have an internal target in mind. We need to achieve scale for this platform to be meaningful and we are still small. We have 1,700 units,” Sherman Kwek says.
On the enhancement part, Fuji Xerox Towers is being redeveloped under the CBD Incentive Scheme, and Central Mall and Central Square will be redeveloped under the Strategic Development Incentive Scheme.
Elsewhere, Palais Renaissance, King’s Centre and Tower Club in Singapore and Jungceylon in Phuket will undergo asset enhancement initiatives (AEIs). The sale of the Seoul Hilton and Tanglin Shopping Centre should provide sufficient capital for these redevelopments.
On the transformation front, CDL’s AUM target of US$5 billion ($6.78 billion) by 2023 remains on track, with the potential listing of an S-REIT comprising of UK commercial properties.
Analysts have asked whether CDL’s investment properties in Singapore can be spun off into a REIT or fund. “For this, we defer to chairman. We were the first Singapore company to list a hospitality REIT. If you want to list a Singapore-focused office REIT, it’s got to have a unique differentiating point,” Kwek says.
In FY2021, the bulk of CDL’s earnings continued to derive from property development. Out of an ebtida of $706.9 million, $322 million was from property development. CDL announced a launch pipeline of 2,350 units.
Of these, the developer plans to launch Piccadilly Grand & Galleria, Tengah Garden Walk EC and the residential component of Fuji Xerox Towers redevelopment this year, and Upper Bukit Timah Road and Jalan Tembusu next year.
UOL stays development focused
Over at UOL Group, its shares are trading price at $6.98 while as at Dec 31, 2021, while NAV and NTA stood at $12.04 and $11.99 respectively. Says Liam Wee Sin, group CEO of UOL: “We are looking to extract value through AEIs and hopefully the share price will react positively. We are looking at making sure we undertake what is likely to impress our shareholders in terms of unlocking value and giving them desired returns in due course reconstitution our portfolio is more correct such as divesting some of our assets at the same time acquiring new ones that are more strategic.”
UOL’s revenue for FY2021 ended Dec 31, 2021, rose 32% to $2.6 billion with higher contributions from property development and hotel operations. Property development saw the biggest revenue increase of 67% to $1.6 billion on higher progressive revenue recognition from Avenue South Residence, The Tre Ver, Clavon and The Watergardens at Canberra in Singapore and revenue recognition from sales of units at The Sky Residences in London. Revenue from property investments was down marginally to $502.2 million in FY2021.
UOL’s net profit in FY2021 rose sharply to $307.4 million from $13.1 million a year ago. This came on the back of fair value and other gains of $73.8 million, compared to fair value and other losses of $246.7 million in FY2020.
Narrowing the discount
Developers which are trading at significant discounts to their NAVs may want to take a glance at Hongkong Land, which was trading at signficant discounts to its NAV. On Sept 6, 2021, Hongkong Land, which was trading at US$4.20 at the time, announced a US$500 million share buyback programme. This narrowed the hefty discount between its trading price and June 30, 2021, NAV of US$14.75. Hongkong Land last traded at US$5.36. It is still a hefty discount but a smaller one than on Sept 6.
Photo: Albert Chua of The Edge Singapore
