City Developments

City Developments: (S$7.37) Second PPS transaction helps to unlock more value
City Dev (CDL) is partnering with Keppel-managed Alpha Asia Macro Trends Fund II to establish its second profit participation securities (PPS) scheme on an initial 40:60 basis with three of CDL’s prime office assets, worth $1.1b.

The three assets are Central Mall’s office tower ($218m), 7 & 9 Tampines Grande ($366m), and Manulife Centre ($487.5m). Occupancy across the three properties stood at 98% and will continue to be managed by CDL.

CDL and Alpha will contribute $133.3m and $200.2m for their respective stakes in the PPS and receive fixed coupons of 5% per annum for five years. In addition to this fixed coupon, Alpha will receive preferred IRR of 12.6% p.a. while CDL will receive the balance cashflow until its initial capital is repaid.

Thereafter, further upside will be shared between CDL and Alpha on a 60:40 basis. This means that CDL will continue to benefit from future gains after delivering the promised returns to Alpha. This includes future potential divestments, etc.

The transaction is largely seen as a positive with Maybank-KE noting that the PPS serves as an avenue for CDL to recycle capital, expecting gains of about $0.25/share. The proceeds from the sale will enable future investments and lower CDL’s net gearing to 0.21x from 9M15’s 0.29x.

The house maintains its Buy call and lifts its TP to $10.64 from $10.40.

The counter is currently trading at a 22.7% discount to its NAV of $9.53 and sits on Market Insight’s Value portfolio.