BRDB getting fair deal for assets?

By THE STAR

Hogging the spotlight this week was Bandar Raya Developments Bhd’s (BRDB) acceptance of Ambang Sehati Sdn Bhd’s proposal to buy over its assets for RM914mil, subject to shareholders approval.

Much of the argument and confusion has centred on the valuation of the assets and on BRDB’s ability to make up for the loss of income from its investment properties.

The assets in question are BR Property Holdings Sdn Bhd which owns the successful Bangsar Shopping Centre and Menara BRDB as well as the CapSquare Retail Centre and the Permas Jusco Mall. With the proposed disposal, the board proposes to pay a special dividend of 80 sen net per share or RM390mil. While most analysts agree that this is a generous payout, they are more concerned with the company’s earnings stream moving forward.

Should this deal be wrapped up by the first quarter of 2012 as targeted, BRDB stands to gain cash of RM860mil.

This is because Ambang Sehati will acquire all the assets and liabilities of BR Property, which will see BRDB netting RM430mil in cash and the repayment of RM430mil in borrowings and dividends from BR Property to BRDB.

Of this, BRDB plans to reduce its borrowings by RM320mil, pay out RM390mil in the special dividend and use the remaining RM168mil for working capital. BRDB’s borrowings will drop from 0.71 times to 0.38 times, or from approximately RM1bil to RM248mil.

Ambang Sehati, which owns 18.8% in BRDB, is a private vehicle of Datuk Mohamed Moiz Jabir Mohamed Ali Moiz, who is chairman of the property firm.

BRDB chief executive officer Datuk Jagan Sabapathy has said the proposed sale of the group’s investment properties for RM914mil was also based on an initial yield of 6% for the retail assets and 6.5% for the office, was fair.

“At this price and this yield, it is fair. We get to sell our assets at 6% yield, while most people do it at 7%,” Jagan told StarBizWeek recently.

A reasonable deal

“When we first announced this deal, I knew we were going to get walloped. People would say it was a related party transaction and we were selling our best assets,” says Jagan.

“I always believe that we do not sell in a down market. Different people have different horizons. No one has lost money buying properties – but its about their holding power. As BRDB is a public-listed company, it is my job to maximise returns for my shareholders,” says Jagan.

He adds that selling BSC was particularly emotional for him, as he has spent a decade of his life with BSC.

“However, do we ignore the offer by Moiz just because he is a substantial shareholder of the company? It is the fiduciary duty of the board to entertain everybody who puts an offer on our table. There has been more than enough time for people to come to me in the last two weeks to put in another offer. The board has a duty to look at it. No one has come forward to put in a bid,” he says.

Jagan says it is easy for the naysayers to claim that the deal is not fair.

“Lets just say we put it in an open tender, and we get a lower price. What happens then? The board will have to take responsibility. At a yield of 6%, we knew we had to consider this deal,” says Jagan.

On the dividend of 80 sen net per share, Jagan added that every shareholder who was holding on to its shares now would be happy.

“They are getting 80 sen net per share. That is equivalent to a 11 year payout in one year. On average, BRDB has been paying dividends of 7.5 sen every year,” says Jagan.

Jagan added that as the company’s gearing now drops to 0.38 times from 0.7 times, it gives the company plenty of flexibility to lookout for more land deals and gear up if necessary.

“Now we have reserves to grow the company. With our existing projects, we have more than enough to compensate our earnings from those four assets,” he says.

Currently, the sale of the assets in question at RM914mil, make up 29% of BRDB’s total asset base.

Despite making up almost 26% of BRDB group’s total assets, they only contribute less than an average of 5% to BRDB’s total revenue and profit before tax for the last three years.

After three years in operation, Capital Square Mall is still bleeding, with the mall losing RM8mil last year. Pikom, (The National ICT Association of Malaysia) has taken over CapSquare mall, and is in the midst of turning it into an Information Technology Centre. As this deal with Pikom spells more sustainability, rental yields will have to go down, to compensate for the longer term nature of the lease.

Is 6% fair?

In the world of real estate, valuers now use the capitalisation rate to value properties. This term is loosely interchangeable with “yield”. Thus, when valuers speak of yield in valuing a property, they are in fact referring to the capitalisation rate. The capitalisation rate is the ratio between the rental income produced by an asset, divided by its capital cost (the original price paid to buy the asset or alternatively its current market value).

In the case of BRDB, the assets in question were valued based on a yield (capitalisation rate) of 6% for the retail assets and 6.5% for the office asset. The capital cost was also the market value of all the properties as of Sept 1, 2011.

CB Richard Ellis Malaysia executive chairman Christopher Boyd says that nowadays, the determinant of the value of a property is gauged by its yield.

This is a departure from the old days where value was determined on a ringgit per sq ft basis.

“Properties are valued on a yield basis because typically, they are now purchased for investment purposes,” explains Boyd.

If a property generates rental income of RM1mil per year, its value will thus be determined by the yield.

“A 10% yield would mean that the property is valued at RM10mil. A 5% yield would value the property at RM20mil while a 20% yield would value the property at RM5mil,”

In other words, a lower yield fetches a higher price, while a higher yield fetches a lower price. It is an inverse relationship.

“So the rental amount is fixed. It is the yield that changes. In Malaysia, the asking yield is typically between 6% and 7%. Most of the large institutions will target for a 7% yield,” he says.

He added that Sunway Real Estate Investment Trust (REIT), which has properties valued at about RM3.7bil, was REITED at a yield of 6.93% in 2010.

This shows that BRDB’s valuation of 6% is at ballpark figure.

Sources say that Pavilion Kuala Lumpur, which is slated to be Malaysia’s largest initial public offering for a REIT, could be valued at a yield of 7%. Details are still sketchy at this point, but sources say the assets under it could be worth between RM4bil and RM5bil.

According to Hartamas Valuation & Consultancy Sdn Bhd managing director Ricky Lee, the lower the yield, the more secure and sustainable the income flow is, thus translating into a higher market value.

Lee says an investor can compare other secured yields in other types of investments such as fixed deposits, government bonds and the Employees Provident Fund (EPF) which were all below 6%, indicating the degree of security and sustainability of the investment.

“A very high yielding investment normally carries higher risk which in turn would command a lower value.”

– Malaysia Real Estate News

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