IREIT stake acquisition provides more than just recurring income growth for CityDev, says Jefferies

SINGAPORE (May 3): Jefferies is maintaining “buy” on City Developments (CDL) with a target price of $12 based on 0.84 times book value.

This follows news of the developer acquiring a 50% stake in IREIT Global’s manager, along with a 12.4% stake in the REIT from Tikehau Capital and another investor for a total consideration of $77.8 million.

On completion of the acquisition, CDL and Tikehau Capital will own IREIT’s manager equally.

To recap, the acquisition is part of CDL’s plans to develop a fund management business while as it winds down its profit participation securities (PPS) under the leadership of CEO Sherman Kwek. The aim is to attain $900 million in EBITDA from recurring income within 10 years.

In a report on Thursday, analyst Krishna Guha says he sees the acquisition of IREIT and its manager as complementary to CDL’s existing presence in Europe, and in line with stated corporate strategy to achieve assets under management of $5 billion by 2023.

“The partnership with Tikehau will help source investment opportunities in Europe and grow AUM. The stake complements [CDL’s] presence in Europe. It has exposure to hotels and offices through CDL HT and First Sponsor Group, and potential partnership/consolidation may not be ruled out,” says Guha.

Furthermore, the analyst notes how the price of the deal at 76 cents per unit represents a 1.33% premium over IREIT’s 29 April closing price of 75 cents. The pricing for CDL’s stake in the trust manager also comes at a slight premium, he adds, versus that of the recent merger deal between ESR-REIT and Viva Industrial Trust.

“ESR paid $62 million for annualised fee of $8.2 million or about 7.5 times versus 9.5 times for IREIT trust manager. The stake in trust manager will be equity accounted for and the stake in IREIT will be a financial investment. Management feels that current stake in REIT and the trust manager is strategic and the levels are appropriate. It is mindful of not consolidating the REIT in view of the current accounting regime,” notes the analyst.

“We like the group's effort to grow fund management platform and expand its network of capital partners. The deal is in line with few consolidation related transactions that we have seen in recent times… The group conservatively holds investment properties at cost. While the residential segment in Singapore is slow, Singapore residential accounts for less than 15% of group RNAV,” he adds.

As at 2.52am, shares in CDL are down by 3 cents at $8.97 while IREIT units are trading 1.94% lower at 76 cents.