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Perennial Real Estate Holdings (PREH): A nibble?

Tuesday, April 7, 2015

Regular readers would remember how I once bought units in Perennial China Retail Trust (PCRT), how I sold a part of my investment when its unit price moved up and how I sold my entire investment a couple of years later in 2014.

What motivated me to invest in PCRT in 2012 was the much lower unit price it was trading at the time compared to its price at IPO and while it made progress in its business, its income distributions were largely unchanged. However, when it was clear to me that the income distributions were not going to be sustainable, I made my exit.

Of course, we know that PCRT was eventually delisted and its assets are now part of a larger entity, Perennial Real Estate Holdings (PREH). Backing PREH are big names in the corporate world, Mr. Kuok Khoon Hong, Mr. Ron Sim and Mr. Pua Seck Guan. Together, they hold a combined interest of about 70% in PREH. Some of us might have noticed some persistent insider buying in PREH and that was the reason why a friend recently told me that I should go take a look.

Well, I vaguely remember that PREH owns some Singapore assets as well. So, it is a more complicated creature compared to PCRT. It could be a daunting task to analyse and also because so many of its assets in China are still being developed. Anyway, I decided to start by looking at its financial results dated 13 Feb 2015 and see if I could cut short the process by looking at the numbers which could matter more. See financial results: here.

From 28 Oct 2014 to 31 Dec 2014, revenue was reported as $14.966 million. Just to make it easier for me, I will think of this as 2 months' worth of revenue. Assuming nothing changes, revenue would be $89.796 million for the full year. Now, I try to derive the earnings.

Administrative expenses ballooned due to the offer to buy over PCRT. Removing that non-recurring portion, we could see expenses at $40 million for the full year. Finance costs could be about $60 million for the full year.

Associates' contributions (disregarding fair value gains) would amount to about $8 million for the whole year, all else remaining equal. Similarly, I have ignored fair value gains on PREH's fully owned investment properties to the tune of some $46 million.

Now, if we put all these together, we will get:

Revenue $89.796 million
+ Associates' contributions $8 million

- Expenses $100 million
= A small full year loss of about $2 million

Whether PREH is able to become profitable would depend on their ability to increase asking rents for their investment properties in Singapore and China. It would also depend on whether they are able to sell some percentage of their investment properties to realise capital gains which was suggested by Mr. Pua Seck Guan when he was still running PCRT then in order to fund income distributions to unit holders. That would really have been a partial return of capital but it would also have been a useful exercise to see if the valuation of PCRT's assets was actually realistic.

Since the release of its financial results dated 13 Feb 2015, PREH also acquired stakes in House of Tan Yeok Nee and smallish stakes in Chinatown Point and 112 Katong. It also recently announced the purchase of AXA Tower in Singapore. We could see revenue receiving a boost as these are investment properties that would be generating rental revenue.

Of course, we won't be wrong to suspect that there will also be more debt on its balance sheet and that finance expense should increase. How much of an impact would these have? At the moment, I simply don't know.

What is known is that PREH inherited PCRT's Chinese portfolio and the challenges have not changed. There are still many development projects which are yet to be completed and these have to be paid for.

The funds required for the various projects are estimated to be about S$1.5 billion. That is a lot of money. If we look at the liabilities section of the balance sheet, PREH is already heavily geared. Having said this, they are well located projects situated on transportation nodes.

There are many assumptions for PREH to do better. Mr. Pua Seck Guan has a very good track record in his career and now he has the backing of Mr. Kuok and Mr. Sim. Having strong backers definitely helps especially when circumstances for real estate either in Singapore or China are somewhat challenging now. Could PREH have bitten off more than they could chew?

There are some calls to buy into PREH now because it is trading at a big discount to RNAV. Well, PCRT was also trading at a big discount to RNAV. A big difference is that PREH now owns, in part, some investment properties in Singapore which are generating recurring income but these are also bought with borrowed funds.

There is an estimate that the RNAV per share is $1.83. So, at $1.05, the stock is trading at a 43% discount to RNAV. RNAV is what an analyst thinks the stock should be worth in future based on revaluation exercises. Is it realistic? I read a 19 page report dated 4 February 2015 by PhilipCapital and I feel that they have been pretty realistic with valuing PREH's assets in Singapore.

As for the assets in China, PhilipCapital made assumptions as to percentages of certain development properties which would be sold by PREH and they seem to have opted for more conservative estimates with regards to asset values too. Read PhilipCapital's analysis: here.

Now, assuming that the RNAV of $1.83 per share is realistic, we would then have to ask ourselves if a 43% discount to RNAV is good enough for us to buy into PREH. If we are buying this in the hope that Mr. Market would pay a price closer to its RNAV in future, are we prepared to wait? For how long must we wait? I don't know. Will there be dividends in future as we wait? There could be, especially, if they sell bits (or chunks) of their investment properties although they could also very well opt to pare down borrowings. There is no certainty of a dividend.

I have bought into OUE Limited at slightly more than 50% discount to valuation. I have bought into Wing Tai Holdings at about 56% discount to valuation. Will I now buy some PREH at a 43% discount to valuation? I have a feeling that if not for the persistent insider buying, PREH's stock price would have declined to a much lower level by now. Will insider buying let up? Again, I don't know.

PREH is definitely not an investment for income and I don't think that they are likely to pay a dividend anytime soon. PREH is still very much in its growth phase, just like how PCRT was in its growth phase. PREH might have stronger backing compared to PCRT but there are still many unknowns.

Of course, we could choose to put our faith in Mr. Pua Seck Guan's judgement like Mr. Kuok and Mr. Sim have done and invest in PREH. Why get headaches from trying to analyse the business? Truly, I got a mild headache after my amateurish attempt which lasted several hours.

In conclusion, I probably don't have the kind of vision that these esteemed gentlemen have and I know for a fact that I do not have the deep pockets that they have. If I should invest in PREH, I would make sure it is a smallish position similar in size to my investments in OUE Limited and Wing Tai Holdings.

A nibble? Maybe.

Related post:
PCRT: Full divestment.


jojo said...

I see RNAV quoted in property developer-related articles all the time. Whilst I understand RNAV to be Revalued NAV and equates to "Book value of development property + revaluation surplus", I have the following queries:-
1) Do we compute the ratio ourselves? If yes, can we find BV of Devt Pty & Revaluation surplus easily in quarterly & annual reports?
2) Or are they already computed & readily available in quarterly & annual reports?
Sorry for asking silly questions, but this newbie has looked up online and am blurred. So AK to the rescue! :) hope you don't mind. Thanks.

jojo said...

Hi AK,
Don't know if you received my earlier query re RNAV (as I didn't see it posted) but could you confirm if we have to compute the ratio (RNAV = Book value of development property + revaluation surplus) ourselves? If yes, are the BV of Devt Pty & Revaluation Surplus available in 1/4ly & Annual Reports? Or is RNAV already computed & readily available in 1/4ly & Annual Reports? Thanks very much for your help.

AK71 said...

Hi jojo,

I think a developer's RNAV is anyone's guess. You will see different RNAVs being waved around by different research houses for the same developer. ;p

So, it is important for us to read different opinions, if available, and arrive at our own conclusion if the RNAVs are realistic. Not an easy thing to do.

If a research house can demonstrate that their RNAV is conservatively estimated, I would go with them. I rather be conservative when it comes to valuations to avoid disappointment. :)

AK71 said...

This brings us to the present-day Capitol integrated development, comprising the revamped theatre, Capitol Building and Stamford House, which will now house The Patina, a 157-key hotel; the luxury Eden Residences will sit atop the retail mall Capitol Piazza (Neue), in place of the torn-down Capitol Centre.

Ong Choon Fah, chief executive at DTZ Southeast Asia, said: "Theatres can't quite make money by themselves. To have a viable, sustainable business model, you have to cluster them, string them with some retail, hotel and residences so the numbers will stack up commercially to make it viable. A residential component also enables the developers to sell off land, so it helps their cash flow and reduces their risks."

She added, too, that few investors would want to invest in a theatre building alone, given Singapore's small and not-so-mature arts market. "It's not your West End London. You can't have the same show running every night. It'll run for maybe a few weeks, and then off it goes."

A spokesman for Capitol Investment, the joint-venture developer, said that the sums invested in the rotational floor technology opens up fresh avenues for revenue yields. With the configuration of seating so versatile, the theatre will now also be suitable for conventions, seminars, functions and MICE events.

"We want to ensure the theatre is yielding not only at night, but at all times, which is why we invested in this system."


AK71 said...

Perennial Real Estate Holdings: It has entered into a 40:60 joint venture (JV) with China's private healthcare operator Guangdong Boai Medical Group Co to acquire, develop and manage healthcare services business in China. Guangdong Boai Medical Group is a subsidiary of China Boai Medical Group (Boai), one of the biggest private hospital/medical services operators in the country.

The Singapore company, through its wholly owned subsidiary Perennial HC, will acquire a 40 per cent stake in the JV for 286.7 million yuan (S$62 million) while the remaining 60 per cent stake will be held by a wholly owned subsidiary of Boai. Perennial will fund its 40 per cent stake through internal funds and bank borrowings.

The JV's first acquisition from Boai will be Modern Hospital Guangzhou, a leading private tumour and cancer hospital. The equity injection will be used to expand the hospital, boosting its bed capacity from 246 at present to nearly 300, as well as to fund its future growth plans, the group said in a release on Friday morning.


AK71 said...

The old Capitol Theatre has just reopened, after a billion-dollar facelift. Along with a retail mall, the development will also include residences and a hotel. Owners of Capitol said they are adopting a strategy of bringing in new-to-market brands, as tenants, to complement its theatre and lifestyle offerings.

Japanese apparel retailer, 45r, is among the new names open for business at Capitol Piazza, the retail section of Capitol. Capitol's strategy is to source new-to-market brands and concepts, or retailers which did not previously have a presence in Singapore.

Capitol has obtained more than 80 per cent of leasing commitments to date - 65 per cent of which are new-to-market brands - with the remaining tenant renovations expected to be completed by September this year.


AK71 said...

Local property group Perennial Real Estate Holdings said on Tuesday (Aug 4) it has received planning permits for proposed enhancement works at TripleOne Somerset and AXA Tower.

The plans for TripleOne Somerset, a predominantly-office cum retail development off Orchard Road, include increasing the retail area and converting up to 32,000 square feet of gross floor area into medical suites. Perennial also intends sell office space by dividing the area into smaller strata units, commencing with one office tower.

As for AXA Tower in the Shenton Way area, the enhancement involves increasing total net lettable area by 85,000 square feet to about 760,000 sq ft.

The retail area at level 1 and basement 1 will be enlarged, and a new two-storey annex block will be built to house medical suites. The firm also intends to strata sale the office spaces to maximise the value of the prime asset.

Perennial focuses primarily on large scale mixed-use developments in China and Singapore. Besides TripleOne Somerset and AXA Tower, its other Singapore properties include CHIJMES and Capitol Singapore. The group also holds stakes in and manages 112 Katong mall and Chinatown Point mall.


AK71 said...

In addition to rental income from the newly-opened Capitol Piazza (80% leased), TripleOne Somerset has received planning approval for its planned AEIs, including increasing its retail footprint and utilising up to 32,000sf of GFA for medical suites. There are also plans to strata sell one of its office blocks.

For AXA Tower, planning permit has been received to increase the property’s NLA by 85,000sf as well as to house a new 2-storey annexe block for up to 32,000sf of medical suites space.

In addition, in China, repositioning of the Perennial Dongzhan Mall into a medical and healthcare hub is underway. To date, both wings of the development have been topped out and expressions of interest received for >90% of leaseable area set aside for healthcare services, ahead of its completion in 2016. Meanwhile, the pre-sale permits for part of the residential component at Plot D Chengdu HSR development has been obtained. Profits from these developments should boost earnings when launched.

CIMB Research, 4 August 2015.

AK71 said...

Local developer Perennial Real Estate Holdings is making its foray into Africa through a joint venture deal with Shangri-La Asia to develop an integrated mixed-use complex in Ghana worth more than US$250 million (S$352 million).

In a statement on Friday (Aug 21), Perennial said it will acquire a 55 per cent stake in a 49,874 square metre (sqm) site from Shangri-La Asia for S$21.3 million. The site is located in the prime airport district of Accra, the capital of Ghana.

Both parties plan to develop the site into an integrated mixed-use development which will include a hotel, residential towers, an office tower, a shopping mall and serviced apartments.

The development, with a gross floor area of 162,000 sqm, will be funded through the sale of the residential and office components to minimise the total capital outlay and optimise cash flow of the joint venture partners.

Still, part of the development cost will be funded by internal funds and external borrowings.

Perennial CEO Pua Seck Guan said: "The adoption of a part-sell part-hold strategy, coupled with the relatively high development margin, provide a compelling investment opportunity for Perennial to put in place a future engine of growth with minimal capital outlay."


AK71 said...

Perennial Real Estate Holdings is offering for subscription S$150 million of three-year retail bonds which carry a fixed rate of 4.65 per cent per annum.

The public offer will open for subscription at 9am on Tuesday and will close at 9am on Oct 21. The retail bonds are expected to be issued on Oct 23 and are expected to commence trading on Oct 26.


Rebel said...

So Mr AK71, Are you applying for the 4.65% bond?

fooztreasures said...

what do you guys think of the latest 3yr bond offering?
yield is so-so, but tenor is short.
seems quite ok for a bit of diversification, since it is capital guaranteed (i think?)..

AK71 said...

Hi Rebel and Fooz,

Please see latest blog post on PREH's bond offer. Freshly baked. ;)

Tan Wee Boon said...

Perennial Real Estate Holdings is acquiring a 20 per cent stake in Aidigong, a Chinese maternal and child health management company.

The integrated real estate and healthcare company says it aims to expand its healthcare services in China to ride on growth opportunities from China's new two-child policy.

Perennial will acquire its shares from existing Aidigong shareholders Dongguan Common Splendor Asset Management Partnership and Ms Zhu Yufei, founder and chairman of Aidigong.

Perennial is paying 135.4 million yuan (S$28.7 million) for the stake.

This was arrived at after taking into account the business valued at 650 million yuan, which translates to about 9.7 times Ebitda - a measure of operating profit - of earnings forecast for this year.

Following the acquisition, Perennial will be the second largest shareholder of Aidigong, after Ms Zhu who will hold a 44.3 per cent stake.

Aidigong will also become an associated company of Perennial.

Established in 2007, Aidigong is a maternal and child health management company that combines traditional and contemporary methods in caring for mothers and newborns.

It currently operates two maternal and newborn health centres in Shenzhen and one post-natal treatment centre in Beijing.

The acquisition will enable Perennial to "invest directly in the growing medical and healthcare industry" and create a "new class of real estate assets to meet the growing demand for medical and healthcare space" in China.

Mr Pua Seck Guan, chief executive of Perennial, said that the company hopes to capture growth opportunities from China's two-child policy and the "resultant projected growth in annual births, and the demand for quality post-natal care for mothers and newborns by the affluent Chinese consumers".

China's two-child policy took effect on Jan 1 this year.

Under the new policy, about 90 million Chinese women are allowed to have a second child. Some 50 per cent of them are aged 40 and older.

Xinhua News reported in January that the Chinese government is ramping up maternal and child healthcare resources and services in response to an expected increase in later-age pregnancies and complications.

Kevin said...

Hi AK,

CEO Pua Seck Guan just bought 100K ordinary shares from the stock market at S$0.84438 per piece today. ;)

AK71 said...

Hi Kevin,

Thanks for the update.

The CEO obviously is very confident of PREH's prospects and is eating his own pudding!

Like my investment in OUE Limited, for example, I hope that the value in PREH will be unlocked for shareholders in due course.

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