Archive | Securities – overseas

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.

ARA Asset Management

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.

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.

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”.

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.”

M&C offer documents
First Sponsor

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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Kiwi Property sells Majestic to Investec fund

Kiwi Property Group Ltd has secured an agreement to sell the Majestic Centre in Wellington for $123.2 million to Investec Property Ltd, as the responsible entity for the Investec Australia Property Fund.

As part of the sale arrangement, Investec will appoint Kiwi Property to manage the office tower, which has undergone one of New Zealand’s largest seismic upgrades. It’s Investec’s first New Zealand purchase.

Kiwi Property chief executive Chris Gudgeon said yesterday: “We are immensely proud of what we have achieved for the tenants of the Majestic Centre, raising the seismic performance rating of the office tower to 100% of new building standard.

“Notwithstanding, the Majestic Centre was identified for sale as part of our capital recycling programme. Proceeds from the sale, which is due to settle in December, will be used to pay down bank debt, providing further flexibility for Kiwi Property to invest in line with our strategy.”

In the company’s annual accounts to March 2017, the value of the 21-storey Majestic Centre increased to $119.4 million, but a net value loss of $5 million was recorded after allowing for capex on the seismic upgrade programme completed in January. The building, at 100 Willis St, has a net lettable area of 24,469m² (2322m² retail, 22147m² office) & 240 parking spaces and typical floorplates of 1000m².

Kiwi Property is due to release its result for the September half-year next Monday, 20 November. At the moment it’s showing the Majestic Centre has 92.1% occupancy, a weighted average lease term of 6.8 years & net rental income of $7.1 million.

The buyer, Investec, said it was acquiring the property on an initial yield of 7.1% and with average annual contractual rental escalations of about 2.75%. It said the property was 98% occupied and had a long weighted average lease expiry of 6.6 years.

Investec is a South African investment bank which has a dual listing in Johannesburg & London. It floated the Investec Australia Property Fund on the Johannesburg Stock Exchange in 2013, launching with an $A130 million portfolio of 8 industrial & office properties.

That portfolio now comprises 25 properties worth $A942 million, and fund chief executive Graeme Katz said yesterday that was a scale at which management believed an ASX listing could be considered.

He added: “We continue to believe in the case for investing in good quality investment properties in Australia & New Zealand. The fund’s current equity yield of 8.2% is attractive for South African investors, especially as it is underpinned by the region’s favourable macro-economic conditions, property yield spread over historically low funding costs locked in and income returns in hard currency.”

14 November 2017: IAPF portfolio value approaches $A1.0bn mark through acquisition & value uplift

Attribution: Kiwi & Investec releases.

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Goodman-GIC joint venture settles Bayleys House purchase

The joint venture between the NZX-listed Goodman Property Trust & Singapore sovereign wealth fund GIC Pte Ltd has settled its $62.3 million purchase of Bayleys House in the Wynyard Quarter.

The deal was announced on 12 May.

The acquisition of Bayleys House and the $86.2 million purchase of the neighbouring Datacom Building, which settled in May, take joint venture company Wynyard Precinct Holdings Ltd’s portfolio to 7 buildings worth over $470 million.

The 6-storey 8106m² Bayleys House backs on to the Fonterra Centre, also in the portfolio. Fonterra at 109 Fanshawe St, and Bayleys at 30 Gaunt St, also front Halsey St in the VXV Precinct which has been developed by ASX-listed Goodman Group on leasehold land owned by Viaduct Harbour Holdings Ltd.

The 7-storey 16,735m² Datacom building is across VXV Plaza from Bayleys, on the corner of Gaunt & Daldy Sts.

Predominantly leased to real estate specialist Bayleys, technology provider IBM & law firm Mayne Wetherell, Bayleys House’s leases incorporate fixed review structures and have a weighted average term of 9 years. The ground-lease obligations are structured for a period of 15 years.

Goodman Group undertook the development on a build-to-lease basis. The purchase price reflects an initial yield of 7.6% on contract rentals, and additional fitout rent increases the passing yield to 8.8%.

Earlier story:
14 May 2017: Goodman-GIC joint venture adds Bayleys House to portfolio

Attribution: Company release.

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Goodman-GIC joint venture adds Bayleys House to portfolio

The joint venture between the NZX-listed Goodman Property Trust & Singapore sovereign wealth fund GIC Pte Ltd has added Bayleys House in the Wynyard Quarter to its portfolio.

That acquisition for $62.3 million, and the $86.2 million purchase of the neighbouring Datacom Building, which settled on Friday, take joint venture company Wynyard Precinct Holdings Ltd’s portfolio to 7 buildings worth over $470 million.

The recently completed 6-storey 8106m² Bayleys House backs on to the Fonterra Centre, also in the portfolio. Fonterra at 109 Fanshawe St, and Bayleys at 30 Gaunt St, also front Halsey St in the VXV Precinct which has been developed by ASX-listed Goodman Group on leasehold land owned by Viaduct Harbour Holdings Ltd.

The 7-storey 16,735m² Datacom building is across VXV Plaza from Bayleys, on the corner of Gaunt & Daldy Sts.

John Dakin, chief executive of the Goodman trust’s manager, Goodman (NZ) Ltd, said the partnership strategy provided scale for the trust and gave it greater exposure to Auckland’s fastest-growing commercial precinct.

“Featuring large flexible floorplates and incorporating sustainable architectural elements & energy-efficient building systems, the lowrise office property is designed to a 5 green star rating. It is also expected to achieve a 5-star NabersNZ base building rating when assessed in 12 months’ time.”

Predominantly leased to real estate specialist Bayleys, technology provider IBM & law firm Mayne Wetherell, Bayleys House’s leases incorporate fixed review structures and have a weighted average term of 9 years. The ground-lease obligations are structured for a period of 15 years.

Goodman Group undertook the development on a build-to-lease basis. The purchase price reflects an initial yield of 7.6% on contract rentals, and additional fitout rent increases the passing yield to 8.8%.

The acquisition, which remains conditional on the approval of the landowner, is expected to settle in June.

On settlement, the joint venture’s portfolio will contain 88,000m² of office space for about 20 tenants. When future lease commitments are incorporated, the portfolio will have an occupancy rate of 96% and a weighted average lease term of over 9 years.

Earlier stories:
27 March 2015: Fletcher & Goodman sign up for new Wynyard Quarter building
7 November 2014: Goodman Group buys another Wynyard development block

Attribution: Company release.

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Frank Lowy & sons talk the ingredients for future retail

Westfield Corp Ltd chair Frank Lowy told the company’s annual meeting in Sydney last week its focus on flagship assets had kept it ahead of the competition. His sons, Peter & Steven, who are co-chief executives, elaborated – including a new focus on apartment development at some sites.

Westfield restructured in 2014, creating Westfield Corp as owner of its northern hemisphere assets and Scentre Ltd as owner in Australia & New Zealand, all still flying the Westfield flag.

Westfield Corp made $US1.4 billion profit in 2016, including over $US1 billion in revaluation gains, which Frank Lowy said was largely driven by the value generated from its development programme: “Our strategy is to create & operate flagship assets in leading markets that deliver great experiences. We are focused on innovation. Our aim is to create a digital platform that complements our physical portfolio and provides a better connection between retailers, brands & consumers.”

Decline of the secondaries

He said 2 factors were impacting the US retail environment: “The first is the decline of what we refer to as secondary centres, and the second relates to the US department store business.

“On the issue of secondary centres – it has been evident to us for some time that the US is ‘over-retailed’. Put simply, there is too much retail space in that market. This has put pressure on any retail asset which is not considered to be the primary asset in the relevant market.

“At Westfield, for more than a decade, we have been discussing publicly the division of the shopping centre industry – between flagship assets & secondary assets.

“Since 2010 we have been steadily reducing our investment in secondary assets and increasing our focus on the best assets in the best markets – the assets we refer to as flagship centres.

“The difference in performance between flagship centres & secondary assets is obvious when you look at our portfolio metrics. Our flagship assets, which today represent 82% of our portfolio, command higher rents and have higher levels of occupancy & sales growth.

“In executing our flagship asset strategy since 2010, we have divested 29 secondary centres in the US & UK, with a total value of $US 7 billion. We have also joint-ventured 22 assets, raising $US4.6 billion of additional capital. Those proceeds have been reinvested in our $US9.5 billion development programme which is now underway – all with the aim of creating the highest quality retail portfolio in the world.

“When our current development programme is completed in 2020 or 2021, we expect that 90% of our portfolio will comprise flagship centres, with 9 of those centres expected to achieve sales of more than $US1 billion, pounds or euros each year.

Department stores finding new life in malls

“The second factor impacting US retail is the well publicised decline in the US department store business. As most of you know, Westfield has been involved in the shopping centre business in the US since 1977. Since the mid-1980s, we have witnessed a decline in the importance of the department store business in that market. The current weakness is the culmination of a trend which has been in progress for a very long time.

“It is now generally accepted that retailers in the US, including the department stores, need less physical stores to service the markets in which they operate. Recognising this trend, in recent years we have bought back department store space and repurposed that space to introduce new & more productive retailers – retailers who have greater capacity to attract shoppers to our centres. Our expectation is that this trend will continue in future years.

“The department stores also recognise the value of locating their stores in our flagship assets. At the moment, a number of different department stores are opening new stores in our developments whilst closing many stores in other locations. It is these factors which have driven us to reposition the Westfield portfolio toward flagship assets to ensure that the changes in the retail environment have a positive, rather than a negative, impact on the company.

In 2016 our flagship centre strategy was in evidence with the launch of Westfield World Trade Centre. Westfield owned the retail component of the Twin Towers on 9/11 and the journey to its rebirth was long & complex, but the result is something that our company, and the city of New York, can be very proud of. Our centre forms part of an incredible landmark, something befitting the history, culture & people of New York.

Westfield advances digital programme

“In 2016, we took a further step in the evolution of our digital programme. In the shopping centre industry we know we must constantly change & evolve. In the digital world we must move at a faster pace, constantly testing new technologies, and using our data to deliver the best experience.

“To achieve this we have created Westfield Retail Solutions to take a broad approach to digital products, data analytics & all aspects of the Westfield business to create seamless solutions for our consumers, retailers and brand partners.”

Peter Lowy.

Peter Lowy told the annual meeting: “On completion of our development programme, we will have a portfolio of between $US45-50 billion, with 9 centres expected to have annual retail sales in excess of $US1 billion and average flagship specialty sales of over $US1000/ft² ($NZ15,480/m²).

Residential opportunities

“It is worth noting that, in additional to our retail development programme, we have significant residential rental opportunities. We have identified the opportunity to build about 8000 apartments in the US & UK on land already in our portfolio. We plan to partner with third-party capital to fund the construction of many of these opportunities. These opportunities will enhance the value of our portfolio by maximising the value of our existing real estate. In 2018, we expect to commence a 1200-apartment project at Stratford in London and a 300-apartment project at UTC in San Diego.”

Big brands become the new retailers

Steven Lowy.

Steven Lowy said: “We operate in an increasingly connected world, where technology & consumer behaviour moves at a much faster pace than was the case a decade or 2 ago. Retail formats are continually adapting, and not always in predictable ways. It is true that online retailing and the use of digital technology is on the rise. But it’s equally true that this is opening up new & exciting opportunities for Westfield.

“New retail formats that didn’t exist a few years ago are now among the most popular features of our shopping centres. Companies that were never regarded as ‘retailers’ are taking space in our centres – car companies like Ford, Citroen & Tesla are creating exciting new spaces to showcase their latest products. A host of global brands like Pepsi, JP Morgan Chase, Samsung, Lexus & Senheisser now feature on our state-of-the-art digital advertising screens and launch new products from London to New York to Los Angeles & San Francisco.

Other global brands are also increasing their presence in Westfield centres. Technology companies like Apple & Microsoft and the global fashion & cosmetics brands like Zara and H & M and Sephora.

“The food, leisure & entertainment aspect of our business has undergone a revolution – where once we merely provided a shopfront for a retailer selling food, we now host vibrant food concept stores like Eataly, which provide a whole new level of product & experience. In fact, food & dining now plays a vastly more important role in our centres than it used to. At Stratford in London, there are more than 80 food retailers.

“We are able to do this, to stay at the forefront of our industry and respond quickly to change, because we have continued to execute a consistent strategy. This strategy boils down to 2 key objectives: to continually improve the quality of our physical assets while integrating digital & other new technology to deliver great experiences. Both elements of this strategy are reflected in the makeup of our senior executive team.

New type of executive

“Of course, we continue to rely heavily on our traditional real estate & shopping centre management expertise. But we have also recruited executives from the digital, entertainment & advertising sectors. [Westfield Retail Solutions executive director] Don Kingsborough has been building a technology team drawn from companies like Google & PayPal, and we recently acquired a small Broadway production company to build our capacity to create even better experiences in our centres.

The £600 million redevelopment of Westfield London is 6 months ahead of schedule and we expect the project to launch in early 2018. Upon completion, it will be the largest shopping centre in Europe. Our 2 London centres already generate around £2.2 billion of retail sales from 75 million annual customer visits. The $1.1 billion expansion of Valley Fair started last year. Valley Fair is currently one of the most productive centres in the US, with annual specialty sales of around $US1200/ft² ($NZ18,575/m²).

“The chairman briefly described the major changes underway with department stores globally, but especially in the US. Again, by anticipating this long-term trend, Westfield has been able to benefit.

“As underperforming department stores close in less attractive markets, they are opening new stores in our flagship development projects. We will see a new Nordstrom store open at Century City in Los Angeles and another at UTC in San Diego. Bloomingdales will open a new store at Valley Fair in Silicon Valley. France’s biggest department store, Galeries Lafayette, will open their first store in Italy in our new centre in Milan, and John Lewis will have a new store at Westfield London.”

Westfield Corp

Attribution: Company AGM speechnotes.

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