CDL could get partners for $1 billion divestment, says JP Morgan

City Developments may get capital partners as part of divestment plan (Photo: CDL)

SINGAPORE (THE EDGE SINGAPORE) - Following the results of the developers for FY2023 for the year to Dec 31, 2023, JP Morgan has said that City Developments’ net profit was some $30 million below its forecast because of higher interest cost.

CDL’s FY2023 profit before tax rose by 90% y-o-y $353 million because of lumpy earnings on the back of the completion of executive condominium Piermont Grand in 1H2023 and profit from the sale of the Shirokane site in Tokyo.

CDL acquired Shirokane in September 2014 for JPY30.5 billion or the equivalent of $355.5 million at the time, and divested the site for JPY50 billion ($450 million) in 3Q2023.

On Feb 28, CDL’s management announced a $1 billion divestment target for this year, in the hope of narrowing the discount between its share price and NAV of $10.12.

CDL also provides an RNAV, which was $17.21 as at Dec 31, 2023.

Since then, Mingtiandi has reported that CDL acquired Hilton Paris Opéra in France from a Blackstone fund in a deal which values the asset at EUR244 million ($356 million). CDL acquired St Katharine Docks in 2023 for the equivalent of $636 million (GBP395 million).

This year’s $1 billion divestment target may include rental housing, student accommodation, residential land bank and non-core hotels. CDL has yet to build out a fund management arm that provides it with a steady stream of fee income to offset its lumpy developoment income and profit, in particular from executive condominiums.

Since a public REIT is unlikely at this juncture, CDL could initiate a private REIT. On Feb 19, CDL subsidiaries City Atlasgate UK and City Pinnacle UK applied for their respective shares to be admitted to The International Stock Exchange Authority (TISE listing).

Following the TISE Listing, the companies became UK REITs, which are more tax-efficient structures. For instance, Elite Commercial REIT has done this but it has not affected the units in issue on the Singapore Exchange.

City Atlasgate owns UK purpose-built student accomodation while City Pinnacle owns UK commercial assets. These may include CDL’s office properties such as 125 Broad Street and Aldgate House. CDL could inject these assets into a private REIT rather than a public REIT where it may be able to get capital partners.

“CDL is open to entering into strategic partnerships to establish funds seeded with some of CDL’s assets,” JP Morgan says.

In this event, it need not sell down its entire stake but hold on to around 20% in the manner of CapitaLand Investment, as an example.

“Proceeds from asset sales will be used to reduce debt, distributed via special dividends and potentially a share buyback,” JP Morgan says, adding that CDL’s share price is down to levels where it may activate a share buyback.

UOL Group’s financials appear more robust than CDL’s in terms of gearing, and operating and free cash flow. Even then, according to JP Morgan, its core Patmi in FY2023 fell by 19.8% y-o-y to $277.2 million, which was below expectations of 80% of JP Morgan’s expectations, and 87% of consensus estimates.

Weaker development income in Singapore and overseas coupled with higher administrative expenses, up 31% y-o-y, were the culprits according to the JP Morgan report.

For FY2023, JP Morgan expects UOL’s hospitality division to drive an earnings recovery before more significant contributions from new residential sites in 2H2024 and 2025. UOL’s share price has suffered because it was removed from the MSCI on Feb 29.