A large part of Keppel Corp’s proposed acquisition of Singapore Press Holdings (SPH) is about boosting Keppel Capital’s assets under management (AUM) and as a result, its fee income. Keppel Capital’s AUM would potentially grow by 27% from $37 billion to $47 billion through the addition of SPH REIT, SPH’s other retail assets, student portfolio and senior living.
During a results briefing on July 29, Christina Tan, CEO of Keppel Capital, had said that she hoped Keppel Capital’s AUM would rise to $50 billion by 2022. That target already looks out of date. Tan says her next target is $100 billion, but she declines to provide a time frame for that.
Why the focus on growing AUM?
Keppel Capital is a real estate investment manager (REIM). The REIM model was referred to several times during a CapitaLand briefing on July 19. The REIM platform is scalable, as a REIM continues to garner fees from its AUM, hence listed REIMs tend to trade at higher price-to-NAV and priceto-earnings multiples.
SPH owns prime assets on its balance sheet which its management failed to monetise, securitise and recycle, but Keppel Capital obviously can.
“The increase is about $10 billion in terms of new AUM. So for the current SPH REIT, I think the revenue from the management fees is approximately $18 million to $20 million. If we were to assume 50 basis points [bps] of fees in terms of bps for the remaining $6 billion of assets, that would approximately be between $25 million to $30 million in terms of fees. So all in, we are expecting another $50 million of fees in terms of revenue topline,” Tan estimates. Ebitda margins for Keppel Capital’s AUM are at 50% to 60%, Tan adds.
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Besides the $1.4 billion purpose built student accommodation (PBSA), SPH also owns a senior living portfolio, 70% of Seletar Mall valued at $480 million on a 100% basis, and 50% of Woodleigh Mall now under construction. The latter and The Woodleigh Residences are probably carried at $554 million in SPH’s balance sheet, but a construction loan is assumed for the construction.
Separately, Keppel Capital has expressed an interest to manage funds that include alternative asset classes such as infrastructure and renewables. As part of its Vision 2030, Keppel is increasingly focused on renewable energy. During a results briefing on July 29, Tan had said renewables is an asset class under alternative assets.
“We are looking to grow to, and have set the target of, 7GW (of renewable energy assets). We are looking to acquire more in terms of platforms, rather than just building organically. I think in many ways, with Keppel’s asset monetisation, re-investments into some of these asset classes will be pretty important for Keppel Capital. That will help us grow our fee income as well as our AUM,” Tan had said.
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SPH’s assets that are attractive to Keppel Capital are traditional property assets, and most of them may be ripe for recycling. Since 2018, SPH acquired a PBSA portfolio. In its FY2020 annual report, SPH announced that its PBSA portfolio comprises 7,723 beds across 28 assets valued at $1.4 billion.
“What is attractive for us regarding the SPH portfolio is that it comprises different assets. Some of them could be quite liquid and can be monetised immediately; but at the same time, there are also assets like the PBSA portfolio which we can also securitise in quite short order. So I think the timing can be quite quick, quite soon — within the next three years, as an example,” Loh Chin Hua, group CEO of Keppel, said during a media and analyst briefing on Aug 2.
Attractive $1.4 bill PBSA portfolio
“For PBSA, we have commissioned appraisals for the assets. The portfolio has been very resilient during Covid and there has been an increase in the number of applications which has grown by 8%,” says Tan.
According to her, the UK student population base is two million of which 1.18 million are studying away from home. “The number of international students has increased by more than 500,000, and there is a huge demand for PBSA. The portfolio is doing very well and we are expecting more than 90% in terms of occupancy for the academic year 2021-2022. En suite bedroom average rentals are up 17%. We are quite happy to adopt the PBSA portfolio and to be able to grow it further through deal acquisition capabilities because we have offices in US and Australia, where PBSA trends are strong,” Tan elaborates.
Despite some oversupply in certain cities, Tan believes the overall demand supply situation is positive, with the number of students requiring PBSA at 1.7 million compared to PBSA supply of 700,000.
Another REIT merger?
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Retail assets within Keppel Land such as i12 Katong in Singapore could be recycled into SPH REIT. SPH owns 70% of Seletar Mall, and 50% of Woodleigh Mall. Seletar Mall is likely to be stabilised and ready to be recycled into the REIT.
“SPH also has Seletar Mall, and Woodleigh Mall that is under construction. When it is completed, it can also lend itself to potential monetisation. Of course, there is a part of The Woodleigh Residences. Sales are ongoing, so of course, over time, a portion of that asset will also be monetised,” Loh says. The Woodleigh Residences is 70% sold and will be completed in 2023.
At some point, should the boards of SPH REIT’s and Keppel REIT’s managers decide, a merger between the two could materialise.
“Keppel REIT and SPH REIT are quite sizeable and can operate on their own. But if you look at some examples in the REIT sector, there have been quite encouraging outcomes when a commercial REIT comes together with a retail REIT. This is not just for Keppel to advocate,” Loh says, adding it is up to the separate boards of Keppel REIT’s and SPH REIT’s managers.
“We remain supportive to the two REITs as to how they can work more closely together including synergistic ways to create an integrated platform. But this is a decision both REITs have to take on their own. If they think a combination can create more value for both sets of unitholders that will be considered and supported by Keppel,” Loh reiterates.
Loh is referring to the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust to form CapitaLand Integrated Commercial Trust (CICT) which was completed in November last year. CICT is Asia’s second largest REIT after Link REIT, with AUM of $22.4 billion and a market capitalisation of $14 billion.
Larger REITs are more liquid and attract an institutional following. Keppel REIT’s AUM is around $8 billion, and SPH REIT’s is $4 billion. Their combined market capitalisation would reach $6.5 billion to $7 billion. A combination of Keppel REIT and SPH REIT would lead to a REIT with $12 billion in AUM, making it the third largest REIT by AUM after Ascendas REIT which has AUM of $15.9 billion.
Not a pure REIM
Like CapitaLand Investments (CLI), Keppel Capital is unlikely to be a pure REIM. For instance, CLI will be a sponsor to six listed REITs, and a number of funds, with real estate AUM of $115 billion, and funds under management of $78 billion.
The S-REIT model started with a developer-sponsor where the sponsor supports the REIT with a pipeline, equity fund raising, other forms of capital raising, and in the case of CapitaLand, joint ventures including redevelopments, joint new developments and acquisitions. Like CapitaLand, Keppel Capital is committed to supporting its REITs.
The consideration for SPH that Keppel is paying is $2.237 billion, of which $1.08 billion is in cash, and $1.156 billion is with Keppel REIT units (see Page 7, “Property-focused SPH to be acquired by Keppel after hiving off media assets”). The NAV and net tangible asset value of the SPH group after the media business restructuring (announced in May), based on the 1H2021 results, are $3,354 million and $3,233 million, respectively. SPH will be delisted after the acquisition.
The transaction takes Keppel’s stake in Keppel REIT down to 20% from 46%. SPH shareholders will also get 0.782 SPH REIT units, such that SPH ends up holding around 20% of SPH REIT. Hence, when Keppel acquires SPH, it will hold 20% of SPH REIT as well.
“We have said before to analysts and investors that Keppel does not need to hold such a large 46% stake in Keppel REIT. This is much higher than our stakes in the other listed REITs and business trust under Keppel Capital. We continue to hold a positive long-term outlook of the commercial sector with our approximately 20% stake in Keppel REIT. We remain fully committed to growing Keppel REIT and our interests are aligned with those of Keppel REIT unitholders,” Loh says.
Keppel could get an uplift from a transaction announced on Aug 4, with ESR Cayman acquiring ARA Asset Management for US$5.2 billion ($7 billion) in a mainly share deal. ARA is a pure REIM. ARA reported a net profit of $156.8 million in FY2020, and its NAV as at Dec 31, 2020, stood at $1.03 billion, excluding its perpetual securities. ESR is pricing ARA at around 7x ARA’s NAV which is higher than listed REIMs, and at more than 40x price-earnings multiple (P/E ratio). However, in 1HFY2021, ARA’s unaudited net profit is reportedly US$166 million, giving a trailing 12-month net profit of US$271.9 million. This translates into a P/E ratio of 19 times. Whatever the case, Keppel is likely to be undervalued after the SPH acquisition.
Since the transaction is mildly dilutive to Keppel’s NAV, although it is EPS and ROE accretive, Loh points out that there are important assets in SPH that are not included in the NAV. “This would include the REIT management platform and the potential REITS that we can create from the existing portfolio,” Loh says.
In an update on SPH, CGS-CIMB has valued SPH’s management company at $167 million. Interestingly, the most recent sale of a management company is by the owner of Dasin Retail Trust’s manager. Sino-Ocean Capital acquired 70% of Dasin Retail Trust’s manager for just $8.3 million. Dasin Retail Trust has AUM of $2.3 billion in the Greater Bay Area, China, but observers have suggested the sale could have been distressed.
In terms of fees, Tan had said that Keppel Capital does not have a breakdown between a target for REITs and private funds. “We like the evergreen fees that we are getting from the listed REITs, but in terms of private funds, we like the carried interest that we earn as well. So maybe it’s more of a 50:50 kind of mix between the two things,” she said during Keppel’s results briefing in July.
“We do not really plan in terms of the asset mix between private funds and listed REITs because it all depends on where investors’ interests lie.”
The acquisition of SPH by a scheme of arrangement, announced on Aug 2, will need shareholders’ approvals, and is premised on SPH’s shareholders voting for a restructuring of its media business into a not-for-profit organisation.
