Archive | Securities – overseas

2 new Blackstone funds have $US9.4 billion to invest in Asia

US fund manager Blackstone Group LP closed investment in 2 Asian funds this week – its first Asian private equity fund, Blackstone Capital Partners Asia, on Tuesday, and its second Asian opportunistic real estate fund, Blackstone Real Estate Partners Asia II, on Wednesday.

At $US2.3 billion, the private equity fund is comparatively small – the real estate fund has $US7.1 billion of capital commitments. But the whole of Blackstone’s private equity business has $US111 billion of assets under management.

Coupled with associated commitments from its global buyout fund, Blackstone’s capital partners fund has a minimum of $US3.8 billion of equity to invest in Asia.

Blackstone’s global head of private equity, Joe Baratta, said: “The region continues to experience strong growth compared to other major markets, presenting compelling investment opportunities across sectors.”

Blackstone Real Estate global co-head Ken Caplan said the real estate fund was the largest it had ever dedicated to real estate investing in Asia. He said it gave Blackstone flexibility to pursue a range of opportunities and commit capital with speed & scale.

Blackstone’s real estate business has about $US120 billion in investor capital under management. Its portfolio includes hotel, office, retail, industrial & residential properties in the US, Europe, Asia & Latin America. It also operates a real estate finance platform, including management of the publicly traded Blackstone Mortgage Trust.

Link: Blackstone Group

Earlier stories:
18 May 2018: Goodman & Singapore fund sell VXV portfolio to Blackstone
2 February 2018: Blackstone’s Arena Living buys Mt Eden Gardens
17 February 2016: Blackstone buys Lendlease’s NZ retirement villages

Attribution: Company releases.

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Unibail-Rodamco completes Westfield deal

Unibail-Rodamco SE completed the acquisition of Westfield Corp Ltd at the end of last week to create an owner of 102 shopping centres in 13 countries – including some offices & convention spaces, a €62 billion ($NZ104 billion) portfolio.

It doesn’t include the former Westfield mall assets in Australia & New Zealand, moved to the Scentre Group in 2014.

The enlarged mall-owning entity based in Amsterdam & Paris, Unibail-Rodamco-Westfield, describes itself as “the premier global developer & operator of flagship shopping destinations”.

88% of its portfolio is in retail, 7% in offices and 6% in convention & exhibition venues. 56 of its malls are flagships in Europe & the US.

Links:
UnibailRodamco
Westfield

Earlier stories:

25 May 2018: One last step for UnibailRodamco takeover of Westfield
13 December 2017: Unibail-Rodamco strikes deal to buy Westfield

Attribution: Company release.

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One last step for UnibailRodamco takeover of Westfield

Westfield Corp Ltd securityholders voted overwhelmingly on Thursday to approve the mall owner’s acquisition by UnibailRodamco SE and the demerger of OneMarket Ltd.

The vote to proceed won support from 97.55% of shares, 93.85% of securityholders. UnibailRodamco shareholders voted 95% in favour on 17 May.

The whole process is due to culminate in implementation of the takeover on Thursday 7 June, but the deal remains subject to final court approval of the acquisition scheme of arrangement. That’s due back in the New South Wales Supreme Court next Tuesday, and the entire deal is scheduled to go through in Australia on Wednesday.

Unibail-Rodamco will acquire all Westfield’s securities for $US2.67 cash plus 0.01844 new Unibail-Rodamco stapled shares per Westfield security, which by default are to be issued in the form of Unibail-Rodamco-Westfield CDIs (Chess depositary interests), listed on the Australian Securities Exchange, and will be fully exchangeable with the new group’s stapled securities listed in Amsterdam & Paris.

Westfield will simultaneously demerge retail technology offshoot OneMarket Ltd on the basis of one OneMarket share for every 20 Westfield securities held.

Trading in the new CDIs will open on the ASX next Thursday, and trading in OneMarket shares will open on a deferred settlement basis on Thursday.

Westfield Corp has its headquarters in Sydney but all its 35 malls, worth $A35 billion, are in the US & UK. When Westfield Group split in 2014, the Australia-New Zealand part of it went into SCentre Group Ltd. That’s outside this deal.

Unibail-Rodamco & a newly created Dutch real estate investment trust (reit) holding Westfield’s US operations will become stapled entities.

Adding Westfield’s $A35 billion portfolio to UnibailRomdamco’s €43 billion gives a portfolio value of $NZ110 billion. UnibailRomdamco has 67 malls, plus 13 office buildings and 11 convention & exhibition centres totalling 4.6 million m² of gross lettable area.

Image above: Westfield’s 175,000m² Stratford City mall, which is also to have 1200 apartments. In the background is London Stadium, built for the 2012 Olympics and now home to West Ham United football club.

Links:
UnibailRodamco
Westfield

Earlier story:
13 December 2017: Unibail-Rodamco strikes deal to buy Westfield

Attribution: Company releases.

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Goodman & Singapore fund sell VXV portfolio to Blackstone

The joint venture between the Goodman Property Trust & Singapore sovereign wealth fund GIC has sold its VXV office portfolio along Fanshawe St in the Auckland cbd to funds managed by US asset manager Blackstone Group LP for $635 million.

The gross sale price of $635 million – $165 million above the estimated value after 2 buildings were added to the portfolio last June – reflects a passing yield of 6.6%.

GIC entered the joint venture, Wynyard Precinct Holdings Ltd, in 2014, making its first investment in New Zealand property. Goodman held 51% and GIC 49% of the venture.

The VXV commercial precinct is on the Victoria Park end of the Wynyard Quarter, which has turned a former industrial & port district into a smart & upmarket office, café & residential precinct. The VXV portfolio comprises 7 lowrise office buildings containing about 88,000m² of space.

John Dakin, chief executive of the Goodman trust’s manager, Goodman (NZ) Ltd, said today: “This is a defining transaction for our business as it completes a repositioning programme that has established the Goodman Property Trust as the country’s leading provider of high quality industrial space. Following this & other contracted sales, Goodman’s $2.2 billion portfolio will be almost 100% invested in the Auckland industrial market.

“We have made tremendous progress with our development programme over the last 5 years, with more than $670 million of new projects improving an already high quality portfolio. The $1.2 billion of asset sales funding this development activity have also deleveraged the balance sheet. With an expected loan:value ratio of below 20% following this sale, we have substantial capacity for future development & investment opportunities.”

The transaction, which remains subject to Overseas Investment Office & freehold landowner approval, is expected to settle late in the 2019 financial year (in the first quarter of next calendar year) and will add about 2.5c to the trust’s pro forma net asset backing. The settlement timing means the sale is not expected to have a material impact on earnings or distributions for the 2019 financial year.

Earlier stories:
2 February 2018: Blackstone’s Arena Living buys Mt Eden Gardens
27 June 2017: Goodman-GIC joint venture settles Bayleys House purchase
14 May 2017: Goodman-GIC joint venture adds Bayleys House to portfolio
>17 February 2016: Blackstone buys Lendlease’s NZ retirement villages

27 March 2015: Fletcher & Goodman sign up for new Wynyard Quarter building
7 November 2014: Goodman Group buys another Wynyard development block
7 November 2014: GIC buys into Goodman waterfront partnership

Attribution: Company release.

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Singapore reit manager ARA buys 19.5% Cromwell stake

Singapore-based real estate fund manager ARA Asset Management Ltd has agreed to buy the bulk of a 23% stake in ASX-listed Cromwell Property Group from a Johannesburg investor, Redefine Properties Ltd.

The transaction is subject to approval of the Australian Foreign Investment Review Board.

Cromwell manages $A11.2 billion of assets and operates in Australia, New Zealand & 10 European countries. In New Zealand, Cromwell owns 50% of syndicator & funds manager Oyster Property Group Ltd.

ARA has agreed to buy 19.5% of Cromwell for $A405.87 million at $A1.05/share, leaving Redefine with 3.06% of the Australian company.

Redefine chief executive Andrew Konig said: “For us, it is about optimising capital efficiency while still benefiting from future distributions & the redevelopment of certain quality assets in Australia.”

ARA manages $S40 billion of assets and recently embarked n a global expansion programme, establishing platforms in Europe & Japan.

Chief executive John Lim said: “Asia Pacific remains a focus for ARA even as the company expands its footprint globally. We entered Australia in 2015 and have been steadily increasing our investments in the market over the last 3 years. Australia continues to offer strong investment & capital-raising opportunities to support the growth of our funds platforms.

“We are attracted to the strength & depth of Cromwell’s platforms, track record of pursuing value-enhancing real estate strategies & strong corporate governance.”

ARA is one of the largest real estate investment trust managers in Asia ex-Japan, managing 5 listed reits – Fortune, dual-listed in Singapore & Hong Kong; Suntec & Cache Logistics Trust, listed in Singapore; and Hui Xian & Prosperity, listed in Hong Kong. The group also manages 6 privately held reits in South Korea and 9 private funds investing in Asian real estate, and provides property management services and convention & exhibition services, including managing the Suntec Singapore Convention & Exhibition Centre.

Links:
ARA Asset Management
Redefine

Attribution: Cromwell, ARA, Redefine, Mingtiandi, Straits Times.

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Kiwi Property sets bond rate, settles Majestic sale

Kiwi Property Group Ltd has set the interest rate for its $125 million issue of 7-year fixed-rate senior secured bonds at 4.33%/year.

The offer closed yesterday and trading in the bonds will open on Wednesday 20 December.

S&P Global Ratings has assigned an issue credit rating of BBB+ to the bonds.

Majestic sale settled

Kiwi Property said on Monday it had settled the $123.2 million sale of the Majestic Centre in Wellington to Investec Property Ltd, as the responsible entity for the Investec Australia Property Fund. Kiwi Property will continue to manage the building for Investec.

Earlier story:
15 November 2017: Kiwi Property sells Majestic to Investec fund

Attribution: Company releases.

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Cromwell makes placement to Singaporean investors in its new European reit

Brisbane-based Cromwell Property Group announced an $A170 million strategic placement on Monday to SingHaiyi Group Ltd & Haiyi Holdings Pte Ltd, entities associated with Gordon & Celine Tang of Singapore.

The Tangs are cornerstone investors in the Cromwell European real estate investment trust (CEReit), which listed on the main board of the Singapore Stock Exchange on 30 November.

SingHaiyi Group, which specialises in property development, real estate investment, real estate co-investing & real estate management services, is also listed on the Singapore main board. Haiyi Holdings is the Tangs’ private holding company. Their interests span Singapore, US & Europe.

Cromwell chief executive Paul Weightman said the company would use placement proceeds to repay short-term debt associated with its investment in CEReit and for general corporate purposes, including investment in value-adding opportunities in the portfolio and potential acquisition opportunities.

The Tangs will get 175 million new Cromwell stapled securities at A96.91c, a 4.9% discount.

ASX-listed Cromwell has become a global real estate investment manager. At 30 June, it had market capitalisation of $A1.7 billion, a direct property investment portfolio in Australia valued at $A2.3 billion and total assets under management of $A10.1 billion in Australia, New Zealand & Europe.

Cromwell bought a 50% stake in New Zealand syndicator Oyster Property Group Ltd in 2014 and Michelle McKellar took over as Oyster.

Ms McKellar established CBRE’s New Zealand operation in 1987 and later was the Hong Kong-based managing director of CBRE’s Greater China operations. She was subsequently chief executive of Jen Group and is a founding director of China-based Dash Brands. She’s been a Cromwell director since 2007.

The initial portfolio for Cromwell’s European reit comprises 74 properties with an aggregate lettable area of approximately 1.1 million m² and a total appraised value of €1.354 billion as at 30 April. The 74 properties are in 5 countries – Denmark, France, Germany, Italy & the Netherlands – and are concentrated on office, light industrial & logistics.

Cromwell has historic New Zealand ties – in the 1980s, NZSX-listed Corporate Investments Ltd, headed by Peter Masfen, created an associated listed company, Corporate Equities Ltd, to invest in Australia. Corporate Investments survived, evolving into wine company Montana Group (NZ) Ltd, and Corporate Equities went through a couple of changes before turning into Cromwell with a recapitalisation in 1998.

Link:
Cromwell Property Group

Earlier story:
6 June 2014: Cromwell buys half of Oyster, McKellar to chair it

Attribution: Company releases.

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Unibail-Rodamco strikes deal to buy Westfield

European mall owner Unibail-Rodamco SE has entered into an agreement to buy Westfield Corp, the northern hemisphere part of the former Westfield Group which has interests in 35 shopping centres in the US & the UK and total assets under management of $US32 billion.

The announcement was made yesterday in Sydney, Amsterdam & Paris. The transaction requires the approval of shareholders in both groups and is expected to close in the first half of 2018.

When Westfield split in 2014, the Australia-New Zealand part of it went into SCentre Group Ltd. That’s outside this deal.

Sir Frank Lowy AC, who’s 87 and cofounded Westfield in 1960, will retire as chair of Westfield and his sons Peter & Steven Lowy will retire as co-chief executives, but will retain other roles. The group will have its headquarters in Paris & Schiphol (Netherlands), and 2 regional headquarters in Los Angeles & London.

On completion, existing Unibail-Rodamco shareholders are expected to hold about 72% of the group’s stapled securities and Westfield securityholders- including Lowy family interests – will hold about 28%.

Unibail-Rodamco & a newly created Dutch real estate investment trust (reit) holding Westfield’s US operations will become stapled entities. The group intends to establish Chess depositary interest listed on the Australian Securities Exchange, which will be fully exchangeable with the new group’s stapled securities listed in Amsterdam & Paris. Westfield securityholders will be able to elect whether to receive the scrip consideration in Unibail-Rodamco stapled securities or the group’s CDIs.

$US72 billion portfolio

The transaction implies an enterprise value for Westfield of $US24.7 billion, and a total value of $US7.55 (or $A10.01)/Westfield security based on UnibailRodamco’s closing price of €224.10 on Monday, representing a 17.8% premium based on Westfield’s closing security price of $US6.41 ($A8.50) on Monday, and a 22.7% premium based on Westfield’s volume-weighted average closing security price of $US6.1516 over the last 3 months. 38.7 million Unibail-Rodamco stapled securities will be issued to Westfield securityholders to fund the scrip consideration and $US5.6 billion will be paid as the cash consideration, resulting in a 65% stock, 35% cash consideration mix.

The enlarged Unibail-Rodamco will own & operate a portfolio with a total gross merchandise value of over €61.1 billion ($US72.2 billion) and a pro forma proportionate net rental income of €2.3 billion ($US2.6 billion) for the 12 months to 30 June 2017. The shopping centre portfolio will represent 87% of the pro forma group’s gross merchandise value alongside Unibail-Rodamco’s existing office (7%) and convention & exhibition (6%) portfolios, both located in Paris.

Unibail-Rodamco, created in 1968, is Europe’s largest listed commercial property company, with a presence in 11 EU countries and a portfolio of assets valued at €42.5 billion as of 30 June 2017. It owns & operates 69 shopping centres and has €8.1 billion of development projects, including Mall of Europe in Brussels & Überseequartier in Hamburg.

Sir Frank Lowy.

Commenting on the transaction, Sir Frank Lowy said it was “the culmination of the strategic journey Westfield has been on since its 2014 restructure. We see this transaction as highly compelling for Westfield’s securityholders & Unibail-Rodamco’s shareholders alike. Unibail-Rodamco’s track record makes it the natural home for the legacy of Westfield’s brand & business. We look forward to seeing Westfield continue to grow as part of the world’s premier owner of flagship shopping destinations.”

Future control structure

Unibail-Rodamco will maintain its 2-tier board structure – a supervisory board & a management board. Colin Dyer, who retired as president & chief executive of real estate consultancy JLL in October 2016, will continue to chair the supervisory board. 2 Westfield board members, including Peter Lowy, will join it. A newly created advisory board, to be chaired by Sir Frank Lowy, will provide the group with independent advice from outside experts on its strategy.

The management board will consist of group chief executive Christophe Cuvillier & group chief financial officer Jaap Tonckens. The senior management committee will include top executives of both Westfield & Unibail-Rodamco.

Steven Lowy.

Steven Lowy will chair the board of OneMarket (formerly Westfield Retail Solutions) when a 90% interest in Westfield’s retail technology platform is spun off into a newly formed ASX-listed entity. The Unibail-Rodamco Group will retain the remaining 10% interest. OneMarket will have $US200 million in cash at 31 December.

Links:
Unibail-Rodamco
Westfield Corp

Attribution: Joint release.

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Independent Millennium & Copthorne UK directors agree on privatisation price

London-listed Millennium & Copthorne Hotels plc’s independent directors agreed on Friday to an improved – fourth – takeover offer from its 65.2% shareholder, the Hong Leong Group of Singapore headed by Kwek Leng Beng.

Hong Leong chair Kwek Leng Beng.

The independent directors rejected the first 2 offers outright, without taking them to minority shareholders.

In the third offer (the first taken to minority shareholders), Hong Leong, through a subsidiary of the Kwek family’s original Singapore development business, City Developments Ltd, offered 552.5p/share cash in October (545p/share + 7.5p special dividend), which some shareholders argued still didn’t reflect the value of its extensive property portfolio. The offer was raised by 12.2% on Friday to 620p (600p plus the special dividend raised to 20p), valuing the whole company at £2.014 million.

Hong Leong acknowledged the criticism but responded that Millennium & Copthorne should be valued as a hotel company, not on asset value.

That’s an interesting argument, given that asset value is derived from the quality of properties on which hotel operations can be based, and hotel returns can be based on the quality of premises which customers enjoy.

But it begs a question not answered in the buyout documents: If M&C hasn’t maintained its portfolio adequately and now has to spend extra-large sums to make hotels useable, where is the gain for Hong Leong?

The answer lies in Hong Leong’s long-term strategies, which small Singaporean investors knew when they followed it down to New Zealand: it starves its maintenance fund as far as practicable, maintains low dividends and looks to long-term capital gain which can be bumped up with maintenance catchup.

M&C owns, operates, invests in or franchises 137 hotels around the world, including 22 in New Zealand, where it’s been extremely cautious before carrying out any upgrade throughout its 25 years here, and its expansion programme has moved at glacial pace.

The ultra-conservative upgrade policy was matched for many years by a low share price, although in the last year the Millennium & Copthorne NZ price rose 20%, from $2.34 to $2.81 (and went just over $3 in late February-early March). Millennium & Copthorne Hotels NZ is 70.8%-owned by the London company, and owns 66.6% of a second NZX-listed company, land developer CDL Investments NZ Ltd.

CDL Singapore said its 620p final offer was a 39% premium over the closing share price of 446.7p in August, when it made its initial unpublicised proposal, and a 36% premium from when the offer period began on 6 October. Friday’s offer came 75 minutes before the deadline the London exchange’s takeovers panel had imposed.

Trading in the London-listed company opened at 578p on Friday and closed at 613.5p (1p above the offer when the special dividend is excluded). Its low over the last 12 months was 410p.

CDL said making its bid to fully privatise the company was in the best interests of all shareholders, “given the many challenges M&C faces today”.

Those challenges are chiefly attributable to the group’s conservative management style. The first reason given for privatising – “M&C faces multiple challenges and a highly competitive landscape” – is no different from when Hong Leong entered the hotel sector 3 decades ago.

The second – “significant capital investment is needed which could adversely impact M&C’s earnings” – is entirely attributable to Hong Leong’s choices over a long period, as controlling shareholder. It’s never asked minorities what it should do.

Hong Leong runs all its listed entities with large majorities, usually around two-thirds, and it’s had a history of being loath to increase dividends, thus retaining small bands of external investors in there because they can see capital value rising.

Hong Long gave as its third reason: “Taking M&C private will make the company a more nimble & efficient organisation and will provide it with the ability to further leverage CDL’s significant infrastructure & resources.”

The whole hotel operation, including the New Zealand business, has been run as Hong Leong has wanted it to. It’s had numerous opportunities to show “nimble & efficient”, but has mostly chosen not to.

This reason tells minorities that, when the potential for greater gains arises, thanks for your support but you’re out.

Hong Leong’s more detailed reasoning demonstrates past ineptitude, on the surface, but the group also has a tradition of keeping debt levels well down. At the June half-year balance date, CDL Investments NZ was a debt-free company holding over $71 million ready to invest in new subdivision land when prices turned downward.

As an example of the Hong Leong reasoning, that cash should be seen for what it is, a bunch of dollars unchanged from face value, whereas its real value is as a fund (held back from uses such as dividends) to enable investors to reap greater returns long-term.

Friday’s offer announcement came with reasoning from Hong Leong and a backgrounder from the independent directors of the London company, along with their reasoning on valuation.

Hong Leong’s reasoning:

A) M&C faces multiple challenges & a highly competitive landscape:

CDL believes that M&C currently faces multiple challenges, including intensifying competition from largescale asset-light hotel conglomerates &geopolitical instability across the regions in which it operates.

In the UK, the business faces a challenging demand outlook given the uncertainties presented by Brexit, and the economic environment. Corporate bookings & demand for meetings, conferences & exhibitions are an area of particular concern. Moreover, as a result of Brexit, many experienced European employees in the hotel & catering industries are expected to relocate to other European Union countries, resulting in a shortage of skilled labour. The increases in the national living wage (an obligatory minimum wage in the UK) which were implemented on 1 April 2016 and will be in effect for 4 years until 2020, will further accelerate the cost pressures faced by M&C in the UK.

In the US, the business faces challenges of (i) potential declines in UK & EU tourist travel due to weakened £/€ forex rates; (ii) excess hotel supply in key locations such as New York; and (iii) pressure on margins caused by the rise of online booking platforms.

In Asia, M&C faces a number of issues including escalating political tensions, resulting in a dampening of demand in Seoul & Tokyo driven by fears of military conflict on the Korean Peninsula, and a significant decline in Chinese outbound tourism.

B) Significant capital investment is needed which could adversely impact M&C’s earnings:

To maintain M&C’s competitiveness, CDL believes that significant maintenance expenditure is required across many of the M&C Group’s properties. In a number of cases where refurbishment plans have been announced, works have been delayed and several properties have not had significant new investment for many years.

CDL believes that a significant proportion of the capital expenditure required by the M&C Group is in relation to projects that would be designed to maintain core infrastructure & customer service levels rather than generate incremental returns. Accordingly, whilst a programme of material capital investment may adversely impact M&C’s earnings & cashflows in the near term, there can be no guarantee that it would necessarily deliver improved returns in the medium term.

C) Taking M&C private will make it a more nimble & efficient organisation and will provide it with the ability to further leverage CDL’s significant infrastructure & resources:

To meet M&C’s challenges & long-term financial requirements, CDL believes that M&C’s hotel business can be best navigated if the company becomes a private entity.

If M&C is taken private, CDL can then provide M&C with direct access to CDL’s larger infrastructure as a diversified, global real estate operating company. CDL believes that M&C can leverage on CDL’s network, financial resources and its reputable execution capabilities to effect a quicker turnaround. M&C can then also benefit from CDL’s longstanding track record & experienced inhouse team of project experts who can execute a renovation of parts of M&C’s portfolio with lower cost and at a quicker pace. Nimbleness & flexibility will be a distinct advantage in the highly competitive operating environment that M&C faces.

D) M&C is operated & valued as a hotel company:

The market & analyst community have noted the discrepancy between the value of M&C shares based on present & future hotel earnings and on a net asset valuation. During the 2 years prior to the commencement of the offer period, M&C has traded within a narrow trading range with an average closing share price of 444p.

CDL believes that in view of its intent to retain an asset ownership model, coupled with M&C’s lack of scale & scope to replicate an asset-light business model, M&C’s net asset value has not, and will not be realised, either practically or operationally. Moreover, M&C’s significant capex requirements will likely present further earnings & cashflow headwinds in the years ahead.

E) CDL intends to maintain M&C’s twin strategy as both a hotel owner & operator:

This twin strategy was implemented long ago and has been the bedrock of M&C’s business model for over 20 years. This strategy has been reiterated in several of M&C’s announcements & financial statements. CDL believes in maintaining M&C’s current business model and working steadfastly towards streamlining its operations and improving its performance, while also investing capital expenditure where required.

The generation of recurring income from M&C has been a critical part of CDL’s operating performance, as it provides a buffer against the volatility & cyclical nature of CDL’s residential development business. Today, recurring income is even more important as margins on new residential projects are being reduced due to higher land costs & ongoing property cooling measures in several key gateway cities, particularly in Singapore.

It should be noted that CDL has already invested resources and established a separate, standalone business group in UK to work independently on its development projects, comprising UK sites which CDL had progressively acquired selectively, since 2013. Further, CDL believes that keeping both the hotel & development businesses operationally separate is aligned with CDL Group’s long-term policy & strategy.

F) Irrespective of CDL’s strategy, there would likely be significant impediments to a conversion or repurposing strategy for M&C’s hotel assets:

Different countries have different regulatory requirements, rules & restrictions, capital gains tax, income or corporate taxes as well as approval processes for property development that can be overly onerous & time-consuming. These can incur significant costs and would carry certain political & economic risks, if CDL wished hypothetically to redevelop or reposition M&C assets. Thus, CDL is actively discouraged from pursuing this approach.

For example, as a developer, CDL is acutely aware that the shortage of affordable housing in London will create pressure to provide for affordable housing components in future residential developments (including the proposal to seek 35% of new residential accommodation to be provided as affordable housing). Whilst CDL expects this alone will severely impact the financial viability of any potential redevelopment activities, CDL also notes that several London boroughs have adopted policies to resist the loss of hotel accommodation, and any uplift in floorspace may be subject to community infrastructure levies.

Furthermore, for hotels held on a long-term leasehold basis, the landowner with the reversionary interest may look to extract significant premia & higher ground rents on any potential redevelopments. Moreover, any extension of the hotels beyond their current building envelope may affect third party rights to light, resulting in potential injunctions or compensation payments. Collectively, and irrespective of M&C’s attractiveness as a recurring income portfolio, these factors will continue to disincentivise CDL from pursuing any residential conversion strategy.

Similarly, in New York City, CDL notes the moratorium on the conversion of hotels with more than 150 rooms into condominiums in order to stem potential job losses from hotel closures is an impediment to any conversion or repurposing strategy. The moratorium was imposed in 2015 for 2 years, and was recently renewed for a further 2 years until 2019.

In Singapore, residential developers are subject to various cooling measures, which impose taxes & other regulatory constraints on developers. Of particular note, the qualifying certificate (QC) scheme imposes a series of escalating penalties on certain residential developers in Singapore, including CDL, if they do not complete their development within 5 years and do not sell the units within an additional 2 years post-completion. The QC penalties are equivalent to 8% of the land value in the first year of extension, increasing to 16% for the second year and 24% for the third year & beyond.

These restrictions in the key cities of London & New York, as well as Singapore, highlight the severe impediments to pursuing a conversion or repurposing strategy for M&C’s hotel assets.

Background to & reasons for the M&C independent directors’ recommendation to accept the offer:

The independent directors said they’d rejected the initial offer in August outright, rejected the second with respect to value, and said they’d “sought to better understand the intentions of CDL with regards to its potential future ownership of M&C in a private context, specifically as to whether any attempt would be made to sell or repurpose operating hotels within the group”.

They said they’d had regard to a number of valuation methodologies to assess a fair market value of M&C as a hotel owner & operator.

“Whilst an assessment of the underlying assets of M&C is a relevant reference point (as set out below), it is important to note that M&C has traded, and continues to be valued by the market, primarily on an earnings basis. M&C has historically traded at a sizeable discount to reported net book value (defined as total assets less total liabilities & minority interests, as set out in the M&C annual & quarterly reports) since the financial crisis of 2008 and for most of its 21-year history as a listed company.

“In addition, the M&C independent directors have been mindful that a number of the M&C Group’s assets have not had significant new investment for many years. For instance, updates on the refurbishments of the Millennium Mayfair (originally announced in November 2010) & Millennium Knightsbridge (originally announced in July 2014) were announced in February 2016 for £80 million & £50 million respectively. Since then, both projects were delayed further in order for the board & management team to review their scope & costing.

“The refurbishment of the Millennium Knightsbridge is now projected to start in 2018 whilst the works at the Millennium Mayfair have just commenced, with a reduced scope of £40 million.

“With regard to these & other properties marked for refurbishment, capital expenditure will be required to improve the standards & facilities at those properties in line with customers’ expectations of M&C and also to maintain the returns on these assets.

“Some of this expenditure will need to be directed at the core infrastructure of the assets, such as their mechanical, electrical & plumbing systems. As such, it is expected that a portion of the capital expenditure required in respect of the M&C Group hotel estate will not necessarily deliver improved returns on those assets in the medium term.

“Furthermore, certain large development projects, including the proposed developments in Sunnyvale, California (redevelopment originally announced in November 2005) and Seoul, South Korea (acquired in April 2013), will require significant capital expenditure in the short to medium term in the event they proceed.

“These projects are also expected to have longer-dated return profiles, reflecting the time taken to complete construction and to scale up operations. About £290 million was earmarked for these projects, comprised of £200 million for Sunnyvale & £90 million for Seoul, as disclosed in February 2016, although both projects have since been placed under review as part of value engineering exercises to help reduce their scope in light of the challenges facing the business & the current macro-economic environment.

“Accordingly, the M&C independent directors have identified a number of areas where planned capital expenditure projects have been delayed and where the anticipated levels of investment required may not yield immediate returns.”

Post-offer intention statements & property valuations

The independent directors said CDL had confirmed that it intended to maintain M&C’s current business model, in particular to run the business as an owner & operator of its hotel portfolio, and also confirmed it had no intention to sell or repurpose any of M&C’s hotels in London or in New York.

The independent directors asked CDL to confirm that intent would run for 3 years, rather than the one year initially stated, and CDL agreed to their request.

Nevertheless, the independent directors sought valuations from CBRE Hotels Ltd of certain wholly owned key assets – the Copthorne Tara Hotel, Millennium Gloucester Hotel and The Bailey’s Hotel in London, and the Millennium Broadway (including the Hudson Theatre), Premier Hotel and Millennium Hilton One UN Plaza Hotel in New York.

In selecting those properties, the independent directors said they had regard to several factors, including:

  • the relative proportion of the total non-current assets of M&C represented by each one
  • the time period since an independent valuation of them was last undertaken
  • the importance of the gateway cities of London & New York to M&C’s strategy
  • M&C’s ownership interest in the valued properties, and
  • their trading performance, in particular the New York properties which, as of 30 September 2017, were lossmaking.

The independent directors also had regard to the fact that a sale of assets needs to take into account tax & transaction costs, which can be significant in asset transactions. Indeed, they said, “if the valued properties were to be sold at the values indicated in the valuation report, M&C expects such sales would incur corporation tax charges of about £49.2 million in respect of the London properties & about $US34.1 million (net of available tax credits) in respect of the New York properties, such liabilities being expected to crystallise on a disposal.

“These estimated tax charges assume that the properties are sold via asset sales, that no rollover relief would be available or impact the amounts charged and that no specialised tax planning strategies are implemented. They also do not take into account any personal property or other transfer taxes that may apply.”

The table below summarises their book values at 30 September 2017 and the market valuations as set out in the valuation report:

Presenting the final offer to shareholders

While the independent directors sought some external valuations, they said they’d assessed the value of the final offer by reference to M&C as an ongoing hotel owner & operator.

And, they said, they “continue to believe that such values [as those from CBRE] are unlikely to be realised either in a listed M&C with CDL as a controlling shareholder, or indeed by CDL following a successful offer (based on public statements made by CDL & its 3-year post-offer intention statement”.

Links:
Offer documents

Related story today:
H-Reit & First Sponsor take lead in Hong Leong expansion

Earlier story:
7 August 2017: CDL more than doubles land investment warchest

Attribution: Company release.

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H-Reit & First Sponsor take lead in Hong Leong expansion

The London-listed parent company of various hotel investment arms in the Hong Leong Group of Singapore has proposed privatising itself, but that wouldn’t change the status of listed entities it holds stakes in, including 2 in New Zealand.

A revised privatisation proposal was put to investors on Friday by Millennium & Copthorne Hotels plc, which has expressed concern at the cost of upgrading a number of hotels in its 137-hotel portfolio.

Its controlling shareholder, Hong Leong (through City Developments Ltd of Singapore), said privatisation was the best option.

Meanwhile, 2 other listed entities in the group have been expanding. The CDL Hospitality Trusts, a stapled group comprising the CDL Hospitality Real Estate Investment Trust (H-Reit) & CDL Hospitality Business Trust, bought a hotel in Munich for €98.9 million in June.

And last Wednesday, 6 December, First Sponsor Group Ltd – in which shareholders in NZX-listed Millennium & Copthorne Hotels NZ Ltd found themselves with small stakes 3 years ago – bought about 95% of a hotel in Frankfurt for €85 million, along with City Developments Singapore & Ho family interests.

Both H-Reit & First Sponsor are listed in Singapore. H-Reit’s manager is M&C Reit Management Ltd, a Millennium & Copthorne Hotels plc subsidiary.

H-Reit adds Munich to its spread of hotels

H-Reit launched a $S255.4 million rights issue when it signed up for the 4-star 337-room Pullman Hotel Munich, and its 7 office & 4 retail tenancies, but fully funded the purchase with debt.

Vincent Yeo, a former Millennium & Copthorne NZ director and H-Reit chief executive, said of the purchase: “Munich is a compelling destination for our first acquisition in continental Europe, allowing H-Reit to benefit from a potential economic recovery in the region through exposure to the largest economy in Europe. Besides being an important business hub & trade fair destination within Germany, Munich is also home to famous cultural & sporting attractions.”

Mr Yeo said the acquisition of an effective interest of 94.5% in the property allowed H-Reit to penetrate a highly sought-after hospitality market while enjoying a spread between the attractive property yield (5.6%) & ultra-low borrowing rates.

He said the rights issue would allow the trust to pursue other growth opportunities, through acquisitions & asset enhancement initiatives. The trust’s gearing rose from 36.8% in March to 42.6%, dropping back to 33.6% post-rights issue, with an enlarged regulatory debt headroom of $S577.2 million.

The hotel will be leased based on a management lease agreement for 20 years following a 4-year refurbishment. Mr Yeo said the lease structure provided both downside protection & upside participation where rent received is around 90% of the net operating profit of the hotel, subject to a guaranteed fixed rent of €3.6 million. The guaranteed fixed rent is subject to inflationary adjustments with a floor at €3.6 million.

H-Reit has $S2.5 billion of assets – 17 hotels & 2 resorts containing 5077 rooms – one hotel in New Zealand, the Grand Millennium Auckland, 6 hotels in Singapore and a retail mall adjoining one of them, 5 hotels in Brisbane & Perth, 2 hotels in Tokyo, 2 in the UK & 2 resorts in the Maldives, and now the Munich hotel.

First Sponsor adds Frankfurt to Chinese & Dutch investments

When Millennium & Copthorne NZ decided to sell its 34% interest in China investor & developer First Sponsor in 2014 – less than a year after deciding to invest $US34 million in it – it did so by creating 2 sets of shares for its own shareholders, one set a continuing interest in the NZX-listed company and the other set a stake in First Sponsor as it listed in Singapore.

3 years on, 19 of First Sponsor’s 2197 shareholders on record at the March 2017 balance date held 96.45% of the shares. 80% was in the hands of Hong Leong & Ho family interests. The 1951 holders of fewer than 10,000 shares had a combined 0.75% of the company.

At listing, First Sponsor’s focus was on China, in particular the development of its properties in Chengdu in Sichuan Province, where Millennium & Copthorne NZ had invested 7 years earlier, starting with money from the sale of assets acquired in Australia through Kingsgate International Corp Ltd, the formerly NZX-listed hotel company which used to run the Hyatt Kingsgate Hotel in Auckland (now the Pullman) and had been controlled by the Ho family of Singapore.

First Sponsor opened 2 hotels, part of the Millennium Waterfront project in Chengdu, last Christmas and has undertaken a number of transactions in the Netherlands. In October, First Sponsor said all 7302 residential units & 297 of the 371 commercial units within the residential development of the Millennium Waterfront project launched to date had been sold.

First Sponsor chief executive Neo Teck Pheng said: “On the back of the successful sale performance of the Millennium Waterfront project in Chengdu, the group is further pleased to report that 272 residential units of the 30%-owned Star of East River project in Dongguan, first launched for sale in late September, were fully snapped up on the first day of sale. The group is optimistic about the sales performance of the remaining 949 residential units, which are expected to be launched for sale during the course of 2018.”

Then, last Wednesday, First Sponsor signed an agreement to buy the Méridien Frankfurt Hotel in Germany, along with City Developments Singapore & the Ho family’s Tai Tak Sdn Bhd, for €85 million, including transaction costs. The hotel comprises 2 buildings – one historic, built in 1905 & containing 80 rooms, the other 220-room building erected in the 1970s. It’s leased until 2040 to MHP Parkhotel GmbH under a Méridien franchise granted by Starwood.

First Sponsor chair Calvin Ho Han Leong said: “First Sponsor has successfully diversified from a China-centric real estate player to become a significant property player in the Netherlands since entering the Dutch market in 2015. As First Sponsor continues to build our property holding business segment’s recurrent income stream, our first foray into Germany, together with Tai Tak & CDL, marks another exciting chapter of our European growth story.”

Links:
M&C offer documents
First Sponsor
H-Reit

Related story today:
Independent Millennium & Copthorne UK directors agree on privatisation price

Earlier stories:
7 August 2017: CDL more than doubles land investment warchest
20 June 2016: Rendezvous hotel to become Grand Millennium
26 December 2014: Millennium & Copthorne to buy rest of Australian business from Ho family
1 August 2014: Loss on final involvement in China cuts Millennium & Copthorne NZ profit
11 July 2014: First Sponsor reduces float, Millennium & Copthorne NZ scheme approved, Maori Trustee sells out of partnership
18 June 2014: Maybe exotic, but Millennium & Copthorne solution’s an oddball one
28 May 2014: Millennium & Copthorne return of capital likely to give NZ investors individual stakes in Chinese developer

Attribution: First Sponsor, H-Reit, M&C documents.

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