REDEMPTION has finally come for the long-suffering holders of City Developments Ltd (CDL) preference shares. Just not the kind they were hoping for when they subscribed for these pref shares nearly 20 years ago.

 

Early this month, the mainboard-listed property developer announced that it will buy back up to 33.1 million pref shares, or about 10 per cent of its entire 330.9 million pref shares under a share purchase mandate approved by shareholders in April. Each shareholder is entitled to sell 10 per cent of his holdings under an equal access scheme.

 

In its offer document, CDL said that this off-market offer &ndash at S$0.78 a share &ndash will allow the company to exercise greater control over its share capital structure. It also noted that the trading volume of these shares has been generally low, with an average daily trading volume of some 18,833 shares, 15,206 shares, 45,912 shares and 29,606 shares during the past one-month, three-month, six-month and 12-month periods respectively.

 

In the light of such illiquidity, this offer &ldquo will provide preference shareholders with a cash exit opportunity to tender their preference shares for acceptance by the company and monetise such preference shares&rdquo , CDL noted.

 

Most minority shareholders are unlikely to be impressed by the logic or price of this offer. These pref shares are a pot of gold, but only CDL can conjure the rainbow that leads to it. To understand why investors would be keen to hang on to their pref shares, one would have to go back 20 years.

 

In February 2004, CDL announced a major corporate exercise that involved a special cash dividend, an issue of bonus warrants and a renounceable rights issue of pref shares. Shareholders were given the right to buy two pref shares for every five ordinary shares they held at S$1 each. The pref shares will pay net dividends of not more than 3.9 per cent a year. They may be converted to ordinary shares at the company&rsquo s discretion. On conversion, a shareholder would get 0.136 CDL ordinary share for every pref share. On top of that, the company will pay shareholders 64 cents as special dividend for each pref share upon conversion.

Mathematically, this is how it works: For every 1,000 pref shares, the investor will get 136 CDL ordinary shares, plus a special cash payout of S$640. Based on the closing share price of S$6.39 on Wednesday (Nov 15), these shares are valued at S$869. As an illustration, if these shares were to be converted on Nov 15, each share will yield S$1.509. This is more than 50 per cent higher than the pref share&rsquo s closing price of S$0.975 on Nov 15, and almost double that of the off-market offer price of S$0.78.

 

Lowball offer

Now here&rsquo s the rub: CDL wants only 10 per cent of your pref shares, and will pay you 20 per cent less than market. That&rsquo s not even factoring the potential of a pref share conversion to ordinary shares, which admittedly may never happen since the company - not shareholders - is the only party entitled to exercise the right of conversion.

 

If there is any doubt at all, the company has made it clear that it is not going to happen any time soon. In the offer document, it said: &ldquo CDL does not have any current intention to exercise its right to convert the preference shares to ordinary shares.&rdquo

 

Unless you hold a substantial number of pref shares and need to free up some cash, this buyback offer is not for you. Best to hang on to your shares and earn in perpetuity (as long as there is no conversion) a fixed annual sum of 3.9 cents a share, which the company has never failed to pay. 

 

Return wise, the pref shares yield 4 per cent based on the current market price of S$0.975 and 5 per cent based on the S$0.78 offer price. In comparison, the average dividend yield of CDL ordinary shares is 1.312 per cent per annum for the past five years. 

 

What does one make of the half-hearted offer? Yes, the rationale is in the offer document. But it is very much a cookie-cutter statement that can be found in numerous share buyback or exit offer documents. 

 

Beyond the stated reasons, could it also be a case of assuaging disgruntled investors who are holding a large number of pref shares? When the renounceable rights issue was launched in 2004, it was stated that CDL may exercise the right to convert the pref shares at any time from the second anniversary of the issuance. Some institutional investors might have bought or subscribed for the pref shares in the belief that conversion would happen, if not sooner, then later. Today we know for a fact that no conversion will take place even after 20 years, so it can&rsquo t be pleasing to some investors who may need to exit after a predetermined investment time horizon. 

 

Possible mandatory offer 

In the foreseeable future, a conversion is unlikely for two reasons:

 

First, CDL would have to cough up about S$212 million to convert the shares (330.9m x S$0.64). Although the property behemoth will have no difficulty setting aside this sum, the cash could be put to more productive use. For example, just this week, CDL said it had acquired a private rental housing project in Manchester for £ 75.6 million. 

 

Second &ndash which is really the crux of the issue &ndash the conversion of 330.9 million pref shares will result in the creation of 45 million ordinary shares, amounting to 4.7 per cent of the enlarged share capital. Of this, half &ndash and that&rsquo s a conservative estimate &ndash is held by the Hong Leong group.  

 

Under Singapore&rsquo s takeover code, a mandatory general offer is triggered in the event that any party who, together with others acting in concert, holding not less than 30 per cent but not more than 50 per cent of the voting rights, acquires in any six-month period additional shares of more than 1 per cent.

 

According to the FY2022 annual report, the group&rsquo s stake in CDL stands at 48.6 per cent. A pref share conversion will surely tip Hong Leong&rsquo s stake past the 1 per cent incremental threshold.

 

No doubt the Kwek families that control Hong Leong are extremely wealthy. But mounting a general offer for CDL, which has a market capitalisation of S$5.8 billion, would entail taking out bridging loans and such to finance it, at a time when interest rates are elevated. Not to mention a waste of time and money.

 

The bottom line is, CDL&rsquo s off-market equal access offer is a non-starter for the mom-and-pop investors, unless they hold few shares and want a clean exit. It will be interesting, though, to see if any of the big boys &ndash Hong Leong included &ndash will bite. The offer is open for acceptance until 5.30 pm on Nov 23.

 

CITY Developments Limited : C09 -0.16% (CDL) on Thursday (Nov 2) proposed undertaking an off-market purchase of its preference shares at S$0.78 apiece under an equal access scheme.

 

The property developer will buy back up to around 33.1 million preference shares, or about 10 per cent of its entire preference shares in issue as at Apr 26, 2023 &ndash the day the group&rsquo s share purchase mandate was approved.

 

Each preference shareholder will be entitled to sell 10 per cent of his or her entire holdings, the group said in a bourse filing.

 

The offer will be open for acceptance from Nov 9 &ndash the date the letter to preference shareholders will be dispatched. It will close at 5.30 pm on Nov 23, which is also the record date, based on an indicative timeline.

 

CDL said all preference shares purchased or acquired in connection with the offer will be cancelled. As these shares do not carry general voting rights, there will be no implications arising from Singapore&rsquo s takeover and mergers code.

 

The off-market equal access offer will allow the company to exercise greater control over its share capital structure. It noted that the trading volume of these shares has been &ldquo generally low&rdquo .

erence shareholders with a cash exit opportunity to tender their preference shares for acceptance by the company and monetise such preference shares,&rdquo CDL added.

 

CGS CIMB analyst Lock Mun Yee has kept her " add" call and $8.97 target price on City Developments, following its largest private rental sector (PRS) transaction in Japan to date.

 

On Sept 28, the company announced it is acquiring a portfolio of 25 residential assets across the 23 wards in Tokyo for ¥ 35 billion ($321.9 million). 

 

The portfolio just acquired has 832 residential apartments and 4 retail units. The assets have an average age of less than 2 years and are all located within a 10-minute walk from a train station. The portfolio now has a 97% committed occupancy and offers stable rental income. The sellers are affiliates of BGO, a leading global real estate investment manager.

 

CDL had earlier bought something similar in Osaka. Upon the acquisition, CDL' s Japan assets under management will be lifted to $644 million.

 

" With an enlarged portfolio, CIT is poised to benefit from a recovery of Japan&rsquo s economy and net migration into Tokyo," writes Lock in her Sept 28 note.

 

According to property consultant Savills&rsquo September Japan residential market updates, average residential occupancy rates in the 23 wards of Tokyo is at 96.6% as at 2Q23, the highest level since the pandemic started and almost at the highs seen in pre-pandemic times.

 

The way Lock sees it, the latest acquisition is in tandem with CDL' s growth strategy, and the Japan market has been under investors&rsquo radar given the still-positive yield spread over funding cost. 

 

The purchase is estimated to lift CDL' s AUM in the ' living' sector to $1.7 billion and its overall AUM to $3.4 billion.

 

CDL did not disclose the transaction yield. However, based on Savills&rsquo report, Lock figures that average residential yields could range from 2.5% to as high as 3.7%. 

 

See also: Citi ups TP while DBS keeps ' buy' call on Singtel following long-awaited divestment of loss-making Trustwave

 

" Based on this range, we believe this acquisition will likely be earnings accretive for CDL," notes Lock.

 

For now, she is keeping her FY2023 to FY2025 earnings forecast for CDL unchanged. Her target price of $8.97 is pegged a 45% discount to revalued NAV. 

 

For Lock, potential re-rating catalysts for this stock are faster-than-expected AUM growth and quicker uptick towards its 8% ROE target. 

 

On the other hand, downside risks to include demand for its commercial space dragged by slow macro outlook, and demand for its residential projects affected by more property cooling measures.

 

City Developments Limited (CDL) has purchased the interests in 25 high-quality freehold residential assets in Japan for JPY35 billion ($321.9 million). The interests were purchased from the affiliates of BGO, a leading global real estate investment manager, and will form a part of CDL&rsquo s private rented sector portfolio.

 

The properties comprise a total of 836 units, including four retail units. They have an average age of less than two years old and are located in Tokyo&rsquo s 23 wards. All of the 25 assets are located within a 10-minute walk from a train station. Three of the assets are located in ultra-prime residential areas within Tokyo&rsquo s central five wards.

 

The investment, which is CDL&rsquo s largest private rented sector transaction in Japan, is said to have strong investment potential due to the recovery of economic activities and rising demand for rental accommodation in Tokyo. &ldquo Amidst the current global uncertainty, Japan has become an attractive destination for global institutional investors, securing the portfolio' s potential to benefit from both steady rental growth and sustainable capital appreciation,&rdquo says CDL in a Sept 28 statement.

 

&ldquo Japan&rsquo s favourable interest rate environment presents a timely and strategic opportunity for the group to expand our residential rental portfolio through a rare off-market transaction for well-performing assets,&rdquo says Sherman Kwek, CDL&rsquo s group CEO.

 

&ldquo Despite economic volatility over the past few years, our Japan residential portfolio has remained resilient, with stable rental growth and strong occupancy of above 95%. This investment marks the group&rsquo s entry into Tokyo&rsquo s rental housing market, enabling us to further scale up in this asset class while leveraging on the sector&rsquo s strong growth potential,&rdquo he adds. &ldquo This move is aligned with our strategy of expanding in the global living sector to enhance our recurring income.&rdquo

 

Following the completion of the transaction, CDL&rsquo s Japan private rented sector portfolio located across Tokyo, Osaka and Yokohama has tripled to 38 assets with a total of over 2,100 units. The portfolio has an asset value of over JPY70 billion.