Although CapitaLand Investment’s (CLI) patmi dropped 6% y-o-y to $331 million in 1HFY2024 for the six months to end-June, and City Developments’ (CDL) surged by 32% to $87.8 million, the underlying fundamentals and metrics showed a different picture. CLI has a lower gearing and interest cover ratio versus CDL, and positive operating and free cash flow.
CLI has restructured into a real estate investment manager (REIM) and the journey to a Blackstone-like business model remains a work in progress. Andrew Lim, group COO of CLI, says the restructuring involves the three Cs: capital raising, capital recycling and capital rebalancing. Of the trio, capital raising and capital recycling have always been part of CapitaLand’s DNA.
Its results briefing on Aug 14 revealed some new messages. CLI is likely to change its geographical exposure via capital rebalancing, change its capital structure and reach a point where its income from its fee income-related business (FRB) is able to offset its income from the real estate investment business (REIB) as the balance sheet lightens.
China comprised an outsized portion of CapitaLand’s business and contributions to earnings. CLI will have a lower reliance on China. Singapore will always be more meaningful for CLI. The target is for China, Korea, Japan and Australia to comprise (no more than) 20% each of exposure.
Eye on diversifying
On Aug 14, Lim said: “Our story to our stakeholders is we want to be a diversified capital manager and Asia is a heterogeneous marketplace. With China, we are very clear. We want to achieve a better balance. We can reduce China exposure or raise everything outside of China. We prefer the latter.”
CLI is planning a “China for China” strategy to lower its exposure from 30% to 20%. Many of its China funds are in USD. “We need to reduce the capital employed and pivot from USD to RMB and get to a China for China product,” Lim explains.
On Aug 13, CLI announced its sixth onshore RMB fund, the China Business Park RMB Fund III (CBPF III). The initial equity commitment is RMB1.2 billion ($220 million) and the seed asset of Ascendas iHub in Suzhou Industrial Park. CLI has secured an onshore major institutional investor as the fund’s anchor investor. CLI will maintain a sponsor stake in CBPF III.
“The sixth RMB fund — where we sold down a balance sheet asset, created funds under management [FUM] and converted USD to RMB — serves as a template,” Lim says.
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The other change is to raise income from FRB to offset declines in REIB. FRB comprises fee income from listed REITs, private funds, commercial (previously property) management, and lodging management. REIB comprises income from CLI’s Sponsor stakes in listed funds, its general-partner stakes in the private funds, and its effective stakes in on-balance sheet assets.
Paul Tham, group CFO of CLI, acknowledges that FRB needs to get to a point where it can offset the drop off in REIB income. “The inflection point for FRB will get faster when we do M&A and listed funds see more event-driven fees,” he says, referring to the REITs being able to get to a cost of capital where they can grow with accretive acquisitions. As at 1HFY2024, CLI’s FRB contributed 63% to operating patmi of $296 million.
A surprising change is that CLI plans to shrink its equity base for ROE to reach a double-digit figure. “Our mandate allows us to buy-back 5% [or 254 million shares] of our base. Our goal is to get to a double-digit ROE. If we make $1 billion in profit, our equity base should be $10 billion. We will look at those as boundaries,” says Lee Chee Koon, group CEO of CLI. “A 12-cent dividend is sustainable.”
Tham believes that shrinking the equity base will not impact CLI’s position in the MSCI indices. “Most investors will attribute a double-digit multiple on fee management business, of around 15x, compared to real estate price-to-book [P/B] ratios. As we shift our exposure to growing fee income, the market cap can increase because the multiple could rise over time as [fee income] is more valuable than the P/B. We should grow in weightage in the MSCI. If we reduce our equity base and increase our ROE, the market will look at us more favourably,” he explains.
Although CLI’s 1H2024 operating patmi of $296 million was below expectations, CLSA reckons the stock is undervalued. “With the rates outlook peaking and the share price ascribing a 5x EV/Ebitda [EV is enterprise value] on its fee business, we view CLI as undervalued,” CLSA says in an Aug 14 report, adding that it sees a target of $3.60.
CDL’s divestment programme
Over at CDL, the message from both group CEO Sherman Kwek and group CFO Yiong Yim Ming is the plan to move ahead with the group’s $1 billion divestment programme. Among the properties to be divested are the legacy UK properties acquired 9–10 years ago for around $1 billion. These include Teddington Riverside in Richmond, Stag Brewery Mortlake in Richmond, 31&33 Chesham Street in Belgravia, 100 Sydney Street in Chelsea, and Ransome’s Wharf in Battersea.
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“For the legacy residential sites, the bigger sites are waiting for planning permission. On the rest of the divestments, they will be at market value; we have to take impairments from time to time,” Yiong says.
“On divestments, markets are tough. It’s about finding the right buyer. Jf the big one happens this year, we will be close to the $1 billion target. [For the time being], inclusive of divestments in 1H2024, divestments are likely to be $400 million to $500 million,” Kwek says.
In an update, CLSA says: “Year-to-date, the group has invested $1.1 billion mainly in property developments in Singapore while divestments have reached $271 million, short of management’s target of $1 billion divestments in FY2024. Management intends to maintain a final dividend of 8 cents for 2H2024.” In 1H2024, CDL announced a dividend of 2 cents per share.
