CapitaLand Investment (CLI) 9CI relies on capital for investments into its private equity funds — as the moniker indicates. And, following the original CapitaLand’s restructure into a real estate investment manager (REIM), capital is a key component driving its fee-related business (FRB), from which CLI receives fee-related earnings (FRE). These fees are from its listed REITs and property trusts, private funds, lodging portfolio and property management.
In FY2022 ended Dec 31, 2022, total patmi fell to $861 million compared to $1.35 billion in FY2021. This was mainly due to the absence of significant divestments in China. In 2021, CLI divested partial stakes in six Raffles City properties in China, which took total divestments to $13.6 billion. In FY2022, including the sale of CapitaSky to CapitaLand Integrated Commercial Trust (CICT) C38U and a fund, divestments amounted to just $3.1 billion.
Nonetheless, operating patmi (excluding divestments and revaluations) in FY2022 rose 23% y-o-y to $609 million. Revenue rose 25% y-o-y to $2,876 million, boosted by higher contributions from FRB and real estate investment business (REIB). FRB revenue grew 6% y-o-y to $955 million, supported by higher FRE from private funds and lodging management. REIB revenue rose 40% y-o-y to $2.11 billion on the back of improved occupancy and room rates for lodging properties.
The reopening of China and the rest of Asia, and resumption of international travelling, resulted in the group’s lodging properties seeing a boost. In addition, contributions from student accommodation and rental housing properties in the US and Japan, as well as higher fee revenue from lodging management business, also underpinned the higher revenue.
Headwinds receding
Paul Tham, CLI’s group CFO, readily acknowledges the challenges the company faced last year: “2022 was a challenging year for real estate markets. Two main things really did have an impact on us. The first was around inflation and interest rates. In the second half of the year, we saw significant uplift of rates by a lot of central banks globally. And that put a lot of pressure on us, particularly in terms of transactions. We have a large REIT portfolio, and the increasing interest rates put a lot of uncertainty and a slowdown on our transaction volume.”
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As interest rates peak this year — economists are forecasting two more hikes by the Federal Reserve — risk-free rates could start to ease, and capital partners may be keen to explore investment opportunities.
Secondly, CLI traditionally has a large China business. China’s zero-Covid policy, coupled with geopolitical tensions, had the effect of not mobilising capital into the country, Tham says. As a case in point, China’s contribution to Ebitda declined from 28% a year ago to 11%in FY2022, while developed markets’ contribution grew to 82%. “Obviously, with a lockdown, that meant a direct impact on us and our lodging business in terms of rental relief. And that did have a drag effect on financials,” Tham concedes.
Now, though, China is opening up. “We’ve announced a couple of new funds, which is really foreign capital going into China,” he adds. On Feb 22, CLI announced a new data centre fund, CapitaLand China Data Centre Partners (CDCP), which has committed to investing in two hyperscale data centre development projects in Greater Beijing. Upon completion of the projects, they will add approximately $1 billion to CLI’s funds under management (FUM).
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On Feb 23, CLI announced it had set up the CapitaLand China Opportunistic Partners Programme (CCOP Programme), with a total of $1.1 billion equity committed to investing in special situation opportunities in China.
Lee Chee Koon, group CEO of CLI, shares that the FY2022 earnings were indeed impacted by the rising interest rates, as well as China’s zero-Covid approach, which led to lower capital recycling activities and higher rental rebates to support the group’s tenants in China. In addition, earnings were down due mainly to foreign exchange loss due to the stronger Singapore dollar, as well as fair value loss from revaluation of investment properties.
Meanwhile, Lee points out, the group turned its focus to enhancing its asset and fund management capabilities. Hence, it launched its RMB-denominated funds and has set up new logistics and self-storage fund platforms in Southeast Asia.
The group has a target of $100 billion in FUM by FY2024. Including the CapitaLand CDCP and CCOP Programme, CLI’s embedded FUM would be $96 billion, moving it closer to its FUM target.
The group is also aiming to reach 160,000 total units under its lodging management business by the end of this year. It is well on the way to achieve that number, with 159,000 units as at end-December 2022. Riding on the rebound of international travel, FY2022 revenue per available unit (RevPAU) jumped 40% y-o-y to $110, close to the pre-pandemic level in 2019.
Kevin Goh, CEO of The Ascott, CLI’s lodging arm, is optimistic that China’s reopening will boost the lodging business’ performance in the coming year as the country continues to reopen. He hopes the boost from China could “help offset potential headwinds from the other markets”.
Rationale for DIS
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CLI has declared a core dividend of 12.0 cents per share and a special dividend-in-specie (DIS) of 0.057 CapitaLand Ascott Trust (CLAS) HMN units per share valued at 5.9 cents per share, bringing the total dividend for FY2022 to 17.9 cents.
According to Tham, the DIS allows shareholders to ride on the improving lodging sector as global travel recovers. This is also an opportunity for shareholders to participate in the growth of Asia Pacific’s largest lodging trust, he indicates. However, in the short term, the DIS could pressure CLAS’s prices.
The way Tham sees it, the distribution of CLAS units is also part of the group’s ongoing transformation towards a more capital efficient structure. The DIS is expected to optimise CLI’s stake in CLAS from 37.53% to 29.05%, which Tham comments is a “comfortable” shareholding, in line with the other REITs and trusts in which the group has stakes of about 20s or high-teens.
On the outlook, the group is optimistic on China and its reopening and is hopeful about a recovery in the China market this year. Furthermore, Tham shares that in the longer term, the group has about $10 billion of assets that are ripe for divesting. “Easily half of the assets to recycle will be from China,” Tham says.
Adding on, Lee acknowledges that China is “always investable” and will continue to be “a big part of CLI’s business”.
While the group has big plans for China, it is also placing a good focus on India. The group believes that India is “a lot more than what people give credit for”, with its quality tenant market, and is “the next thing to watch out for”. The group has plans to expand its data centre business in India.
On the results, RHB Group Research analyst Vijay Natarajan sees net profit a slight miss to street estimates, mainly due to lower fee income and lower contribution from the group’s China market. However, the dividend is an upside surprise with the DIS of CLAS units.
Natarajan notes that fund activity has picked up towards the end of 2H2022 and early-2023, with CLI setting up a $2 billion China business park fund and $1 billion China data centre fund. He also sees the group’s lodging segment as a bright spot, with strong growth in FY2022, and in line with CLI’s management’s expectation, this is expected to continue into FY2023.
“Overall market reaction to this set of results should be subdued as positives from higher dividend is offset by lower final numbers and net asset value,” says Natarajan.
As at 12.00pm on Feb 23, shares in CLI were trading about 1.6% lower at $3.79, giving the stock a P/B of 1.4x and P/E of about 17x.
