CDL plans to spruce up flagship office building

Group's net profit for Q4 slips due to absence of gains booked for Q4 FY2015 from monetising 3 office assets

PROPERTY and hotels group City Developments Ltd (CDL) is planning a major refurbishment of its flagship Singapore office property in Raffles Place, turning an imminent outflow of some tenants into an opportunity to spruce up the ageing building.

CDL deputy CEO Sherman Kwek, speaking to reporters after the group posted weaker fourth quarter and full year earnings, said works at Republic Plaza are likely to begin in Q4 2017 and may stretch up to four to five years in a phased revamp. As tenants move out, the space they vacate will be renovated.

The works planned include modernising the lift system, a makoever for the lobby and other common areas as well as raising the building's technical specifications to keep up with the new competition. "Certainly now when the office market is still not in the best shape it is a good time for us to make use of this downturn to enhance our assets," said Mr Kwek.

The Bank of Tokyo-Mitsubishi UFJ (BTMU), the anchor tenant in the building, is likely to vacate the 150,000 square feet it occupies in Q4 this year. In Q3 this year, ING and Itochu, which occupy 70,000 sq ft and about 30,000 sq ft respectively, will leave Republic Plaza.

At City House, an even older office asset of the group, "we are looking at some innovative things", Mr Kwek hinted but declined to elaborate before plans are firmed up. However, a redevelopment is not on the cards as there is no unutilised plot ratio, said CDL's group general manager Chia Ngiang Hong.

At Republic Plaza, more than 60,000 sq ft of the space to be vacated by BTMU has been leased to Distrii, a leading operator of co-working spaces in China that is making its first international foray. Last month, CDL agreed to take a 24 per cent stake in Distrii.

Mr Kwek revealed that mamahome, one of China's fastest growing online apartment rental platforms and in which CDL last year took a 20 per cent stake, has set up a Singapore office and plans to launch a local Singapore website in Q2 this year. mamahome is in discussions with CDL as well as other developers to list completed but unsold residential inventory on its site.

CDL posted 40.6 per cent drop in fourth quarter net earnings to S$243.78 million despite a 36.5 per cent revenue rise to S$1.17 billion. The lower profit was posted on an absence of substantial gains booked for Q4 FY2015 from CDL's second profit participation securities (PPS) platform which involved the monetisation of three of the group's Singapore office properties.

Profit before tax including share of after-tax profit of associates and joint ventures from property development doubled to S$242.60 million in Q4 FY2016 from S$115.86 million in Q4 FY2015. However, profit from rental properties slipped to S$100.81 million from S$349.06 million following the monetisation of the three Singapore office assets in Q4 FY2015. Hotel operations posted a S$9.25 million loss before tax - against a S$9.12 million profit before tax previously. The hotel business was affected by ongoing refurbishments, increased supply of rooms inventory in gateway cities where CDL's hotels subsidiary Millennium & Copthorne Hotels (M&C) operates, concerns over terrorist attacks in Europe and increased competition from non-traditional lodging options. Impairment losses were also required for several properties. The weak sterling, the reporting currency for M&C, also had an adverse impact when M&C's results were consolidated at the CDL group level.

For the year ended Dec 31, 2016, CDL's group net earnings fell 15.5 per cent to S$653.22 million, while revenue surged 18.2 per cent to a record S$3.91 billion.

The counter ended 42 Singapore cents higher at S$9.66 on Thursday. CDL released its results before the market opened.

CDL's chief executive Grant Kelley said: "We will continue to pursue our funds management and capital recycling programme which may take the form of another PPS or traditional private equity structures. PPS ... suits what we would call asset realisation and the private equity vehicle is more (for) asset acquisition."

CDL is maintaining its full-year dividend payout at 16 Singapore cents per share. This constitutes 22.7 per cent of the 70.4 Singapore cents earnings per share for FY2016.

When quizzed about prospects for a higher payout ratio, CDL's executive chairman Kwek Leng Beng noted that the group needs a war chest to make opportunistic acquisitions amid current global uncertainties.

"We (Kwek family) are the major controlling shareholder and if I can get better dividends, why not? I am looking after the interests of all shareholders as a whole.

"I am concerned about Brexit; it can become worse before it becomes better. Then we have President Donald Trump, who has been a controversial figure ... He is a good businessman but how soon can he implement all the right strategies? Your guess is as good as mine. Don't forget the TPP (Trans Pacific Partnership) is another issue." The US Fed is also poised to hike interest rates. "The world is facing disruptors everywhere. The world economy is uncertain. I welcome all these because this is where I want to bottom fish. I have done it before and I hope I can do it again."

Mr Kelley also highlighted that 1.9 per cent dividend yield (16 cents payout for FY2016 divided by CDL's S$8.28 share price at end-2016), combined with the 8.2 per cent rise in the share price last year, resulted in an 10.1 per cent total shareholder return.

CDL booked its maiden profit from the Hong Leong City Center project in Suzhou in the fourth quarter, following the completion of the first phase, and the progressive handover of units to buyers.

In Singapore, the group has sold 56 units in the North Tower of Gramercy Park condo in Grange Road since its soft launch last May and now plans to launch the South Tower by H1 2017. Subject to market conditions, the group intends to roll out its New Futura condo along Leonie Hill Road in H2 2017.

Source; Business Times, 24 Feb 2017