R&F Owners Sell Property Management Unit to Country Garden in $1.3B Deal

Under pressure from the slow-motion collapse of competitor China Evergrande and needing to pay off RMB 12 billion ($1.86 billion) in capital market debt in the next 12 months, the controlling shareholders of Guangzhou R&F Properties worked out a pair of deals today that allowed them to loan HK$8 billion ($1.03 billion) to their Hong Kong-listed developer, while potentially pocketing HK$2 billion in change.

A private company controlled by R&F chairman Li Sze-lim and vice chair Zhang Li has agreed to sell R&F Property Services HK, a real estate management spinoff of the developer, to cross-town rival Country Garden Services for up to RMB 10 billion, according to an announcement to the Hong Kong exchange Monday afternoon by the unit of Country Garden Holdings.

Just four minutes later, R&F Properties announced that its chair and vice chair would be providing the developer with HK$8 billion in financing over the next one to two months.

“With the financial support from the Major Shareholders and the expected positive progress from corporate actions in the coming months, the Group is highly confident to continue to improve the financial profile of the Group by the end of the financial year,“ R&F said in its notice to the exchange.

Management Empire

Under the terms announced by Country Garden Services, it will pay up to RMB 7 billion during this year for the rights to the 86 million square metres (926 million square feet) that R&F Property Services already has under management, and up to RMB 3 billion more in return for contracts covering another 66 million square metres set to come under its management umbrella. The compensation is set to be paid in four instalments stretching into 2022.

“The Acquisition will supplement the business of the Group, strengthen the Group’s advantages in certain areas (mainly in first-tier, new first-tier and second-tier cities in the PRC), further expand the business scale and coverage of the Group, improve the regional economies of scale of the Company, and facilitate the development of the commercial property management business of the Group,” Country Garden told the exchange.

The deal hands over 100 percent of the equity in R&F Property Services to Country Garden Services and puts an end to Li and Zhang’s hopes for an initial public offering for the property management unit, which some analysts had predicted could raise HK$5.5 billion, after a prospectus for the IPO was filed in April. JP Morgan Securities in Hong Kong is serving as financial advisor to the vendors, according to the notice to the Hong Kong exchange.

Property management IPOs have been a favourite fundraising vehicle for mainland developers in recent years, with Evergrande having raised $1.8 billion from listing its services spinoff in November last year. China Vanke has been exploring a potential $2 billion property services IPO in Hong Kong, and Yuexiu Services raised nearly $222 million when it listed on the HKEX in June.

Double Downgrade

R&F Properties continued to expand aggressively in recent years, including spending $2.9 billion in 2017 to buy 77 hotels from Dalian Wanda Group when China’s largest commercial developer was under financial pressure.

Now the developer controlled by Li and Zhang is having its own turn under the debt spotlight, with Fitch Ratings having downgraded the issuer default ratings for R&F Properties to negative from stable on 14 September.

“The Negative Outlook reflects Guangzhou R&F’s limited access to funding amid ongoing refinancing needs in the coming 12 months,” Fitch said in announcing the downgrade.

Moody’s had also downgraded the developer on 3 September. “Guangzhou R&F’s liquidity is weak,” the ratings firm said. “The company’s cash holdings of RMB 28.8 billion (including RMB 16 billion restricted cash) as of June 2021 and estimated operating cash flows through the end of 2022 will not be sufficient to cover its debt repayments in the next 12-18 months.”

Never Waste a Crisis

Despite the financial pressure facing R&F, chairman Li and vice chair Zhang have found ways to reap gains amid the turmoil.

While the total consideration to be paid by Country Garden Services to secure R&F Services depends in part on the 2021 financial performance of the target company, it provides the pair of entrepreneurs with quick cash for a set of service companies that they had acquired from R&F Properties through a series of 2020 transactions.

In all, Li and Zhang paid about RMB 300 million to purchase the Datong Hengfu, Tianjin Huaxin and Guangzhou Tianli property management units that comprise R&F Properties, through a series of transactions that concluded in April 2020.

After the quartet of management firms had been united as Guangzhou Fuxing Group, which is owned 50 percent by Li and 50 percent by Zhang, under the direction of its board, R&F Properties then signed a framework agreement with the group in February of this year to secure property management for its portfolio.

That agreement provides for Guangzhou Fuxing, which is now a subsidiary of R&F Property Services, to receive up to RMB 1.35 billion this year from R&F Properties, in return for its management duties. The deal, which did not specify future fees, noted that R&F Properties Group had paid RMB 287 million to its property management division for services in 2018, followed by RMB 409 million in 2019 and RMB 553 million for the first 10 months of 2020.

In its statement, R&F Properties said that Li and Zhang were providing financing to the company in the form of shareholder loans, and the detailed terms of the arrangement were not disclosed.

Christopher Caillavet provided research for this story.