Buying into cash flow is nothing new in certain industries, but rarely do we see such a transaction in private real estate.
That is why The Blackstone Group’s investment in a club whereby the investors have bought the present and future cash flows of a portfolio of income-yielding assets from Singaporean developer City Developments Limited (CDL) is notable.
The New York-based private equity behemoth was the majority investor in an S$1.5 billion (€970.38 million; $1.2 billion) vehicle called the Profit Participation Security (PPS), investing S$367 million via its Tactical Opportunities Fund. The remaining capital was raised from Malaysia’s CIMB Bank, a bunch of senior loans and CDL’s own house capital.
Through the PPS, the investors have made investments in the present and future cashflows of an integrated real estate project being developed by CDL, a Singaporean property developer, on Sentosa, an idyllic resort island in Singapore. Known as the Quayside Collection, the portfolio comprises luxury residences, a five-star hotel and a retail mall.
“This is a first of its kind hybrid instrument, akin to a convertible bond which has not been seen in real estate yet, been seen in real estate yet,” Kishore Moorjani, head of tactical opportunities for Asia at Blackstone, told PERE.
The investors will be paid a fixed coupon of 5 percent for the five-year tenure of the instrument, in addition to cash flows from the assets. CDL is also required to distribute the profits earned through its business operations during this period as dividends to the capital providers.
Explaining the rationale behind investing in a structure he termed as “quasi-securitization”, Moorjani said: “CDL was not stressed or distressed and trying to sell these assets at any price; they were trying to achieve a capital solution. By having a combination of some coupon and some other elements we were able to reduce our risk enough that we felt comfortable tolerating a slightly lower return than we would in the PERE business.”
Moorjani did not disclose the expected returns but, according to Nick Crockett, the Singapore-based executive director of CBRE Capital Advisors, such an investment could yield returns between 10 to 12 percent.
The seven-storied W Singapore hotel, opened in 2012, currently enjoys high occupancy while Quayside Isle, the retail property spread over 40,000 square feet is also fully leased, according to a statement by CDL. There is still some vacancy in the residential units, however.
In an interview with the Singapore-based newspaper The Business Times, Grant Kelley, chief executive of CDL, said that “25 of the 228 residential units have so far been sold, while 106 unsold units have been leased at comfortable rents compared to other CCR (core central regions).”
On how then the projections for future cash flows from the properties would be estimated, Kelley said it was based on the assumption the units would be sold at around $2,400 per square foot.
Importantly for the firm, he said, CDL has retained complete ownership of the properties as well as their asset management. And, in a further twist, CDL invested S$281 million of its own capital through its wholly owned unit called Astoria.
In Crockett’s view, it is uncommon to see a property owner participate in a financial instrument to this degree, especially when the asset has not been completely exited: “This is a unique structure where the group has used the capital markets to suit what they want to do,” he said.