Local property companies are a diverse bunch. Some are not developers in the conventional sense. CapitaLand Investment’s (CLI) management, for instance, has plans to shrink its balance sheet to make it more liquid and raise ROE. The upside will likely be a large measure of sustained cash earnings through fee income.
The traditional developers UOL Group, City Developments Ltd (CDL) and Ho Bee Land H13 have varied strengths and weaknesses and these are now showing up even more so when their overseas assets have to be written down.
The most notable difference is their accounting policies. UOL, Ho Bee, most developers, and Singapore REITs (S-REIT) report fair value changes annually. CDL uses historical cost accounting, where assets are held at cost and then depreciated. Nonetheless, the high-interest rate environment has taken a slice off their valuations and earnings.
Despite sidestepping the non-cash volatility of fair value gains and losses, CDL’s patmi fell by 75% y-o-y in FY2023 ended December 2023. Group CEO Sherman Kwek said during its results briefing that he plans to divest $1 billion in 2024.
“We believe key divestment options include divesting stakes to a partner or fund in the global living sector portfolio, which has now achieved a sizeable scale of $2.6 billion, and divesting some of its overseas commercial and hotel assets into a private fund or REIT,” says an update by RHB Research.
For instance, the purpose-built student accommodation portfolio acquired in December 2022 for the equivalent of $357 million and its Japanese private rental sector properties could be packaged as a private equity fund or private REIT that would attract institutional investors and high-net-worth individuals.
Balance sheet differences
Notably, in FY2023, CDL’s interest costs ballooned by 72% y-o-y to $491.6 million, causing its net gearing ratio (Net debt/Equity) to rise above 1, settling at 1.03 times as of Dec 31, 2023.
A more acceptable figure to investors is the gearing of 61%, which includes the revaluation surplus should it adopt a fair value accounting standard. During the results briefing, Kwek said he did not want gearing to cross 70%, hence the plan to divest $1 billion.
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“Gearing moved up 10 percentage points to 61% from 51%. It’s not the highest we’ve been, though and not the highest among property developers in Singapore, like 90% or 100%.” He assures investors that CDL is not about to cross the 70% mark.
In comparison, CLI, which adopts a fair value accounting standard, announced a gearing of 0.56 times while UOL, which adopts a similar format to CLI for property valuations, announced a gearing of 0.24 times, down from 0.26 times a year ago because of the sale of ParkRoyal Kitchener at a hefty profit of $452 million.
In a statement, CDL said net finance costs doubled and eroded the profits as the average interest rate increased to 4.3% per annum for FY2023 from 2.4% for FY2022. The statement added that rate cuts “should take place before the end of this year and this would help to alleviate the pressure”.
The high average interest rate of 4.3% could be due to the relatively higher cost of commercial property debt in the UK. For instance, S-REITs with UK property are believed to have refinanced at around 6% in 2023. Last year, CDL acquired St Katharine Docks for the equivalent of $636 million, 1NQ for $125.7 million and Morden Wharf for $129.6 million.
UOL’s strong point
Another attribute that UOL has over and above its low gearing and comparatively lower cost of debt compared to other developers is its ability to landbank in areas that the local population is interested in buying. UOL group CEO Liam Wee Sin recognises that property is local. When landbanking, he looks for transport infrastructure such as buses and trains, good schools, amenities, and the ability to curate a good product.
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On the capital management front, despite a significant jump in UOL’s average cost of debt to 3.69% in FY2023 from 2.24% in FY2022, interest cover was five times which is high for a developer with an asset-heavy balance sheet.
UOL’s lower average cost of debt is probably a result of its asset-liability management versus its peers. Its mainly Singapore focus implies that any refinancing was probably at a lower price than the developers with UK property.
For instance, during the results announcement by the banks, their management stated that competition for good credits has led to declines in loan yields. Another advantage is UOL’s greater liquidity as evidenced by its cash flow statement. In both 2022 and 2023, the company reported positive operating and free cash flow.
Similarly, CLI has also been reporting positive operating and free cash flow. More than that, following the change of its structure from a developer-investment manager to a real estate investment management (REIM) company, CLI hopes to eventually leave the lumpy impact of fair value gains and losses behind.
CLI’s fee income stream
To recap, CLI has four businesses from which it derives revenues, mainly fees. These are commercial management (which is the property management arm), listed funds management (mainly from REITs), private funds management, and lodging management. In FY2023 ended December 2023, lodging management fees contributed $331 million, commercial management $329 million, REIT management $299 million and private funds $111 million.
Although CLI’s total patmi fell to $181 million (–79% y-o-y) in FY2023, its operating patmi was relatively stable, losing only 6% to $681 million.
Andrew Lim, CLI’s COO, says: “Operating patmi is at a level which shows there is a resilience to the recurring income. We set out to deliver a steady recurring fee income base and despite the economic challenges and financial difficulties operating patmi is at a stable level.”
“We will only buy when it is good for unitholders and LPs (limited partners). We can set targets such as $200 billion in funds under management or $3 billion in recycling, but we will execute only if it is feasible,” he adds.
For the time being though, CLI has not quite managed to insulate itself from fair value gains and losses. It still has some $8.6 billion of assets on its balance sheet. These include popular properties such as ION Orchard. China remains a large chunk of CLI’s business. Based on real estate assets under management of $134 billion, China comprises 34%. Year to date, based on funds under management of $100 billion, China accounts for 31%. However, contribution to operating ebitda in FY2023 has fallen to 15% from 21% in FY2022.
Paul Tham, CLI’s CFO reckons that ROE will rise to double-digit levels once CLI has divested the $8.6 billion on-balance sheet asset. “These are assets with 4% to 5% yield. As we divest those assets and redeploy them into seeding new funds, the funds would generate closer to 20% ROE,” he reasons.
The higher CLI’s ROE, the better its share price could trade, market watchers suggest. Lee Chee Koon, CEO of CLI, says: “As senior management, we are not happy with the performance of the share price. All of us are significant shareholders in CLI. So naturally we want the share price to perform “
“Last year was definitely a challenging year for us in terms of what is fundraising, what is for disposal and when looking for acquisitions. But we also have to continue to stay very disciplined in making sure that whatever we do, it’s focused on building the long-term enterprise value for the company,” he adds.
Shareholders of Ho Bee are also likely to be unhappy with the company’s share price. Shares in Ho Bee are trading at a steep discount to the reported NAV of $5.42. The last time prices were at this level was in December 2012.
A slice out of Ho Bee
So, what happened? Ho Bee booked a revaluation loss of $472.2 million in FY2023. More important is the absence of liquidity. Ho Bee has some $479.7 million of debt that will mature this year. However, its cash holding is $172 million and its current ratio (current assets to current liabilities) is at 1.12x as at Dec 31, 2023.
The Edge Singapore’s senior analyst Thiveyen Kathirrasan says Ho Bee has a few options. For one thing, its operating cash flow in FY2023 was $380 million, and the quality of its cash flow is decent as revenue is around $445 million. Moreover, the company reported positive free cash flow.
Against this, Ho Bee should be able to raise its gearing from 0.8 to 0.9, which would enable Ho Bee to borrow a further $360 million. This, coupled with cash flow generation, should be able to cover the maturing debt.
On the other hand, the Chua family owns 75% of the company. At such a hefty discount to NAV, a privatisation could be done at a premium to the share price and it would still be at a discount to NAV. But can the Singapore and/or UK properties fetch book value? As it stands, The Scalpel, Ho Bee’s flagship building, may continue to cut into its valuations.
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