As a real estate investment manager (REIM), CapitaLand Investment (CLI) derives its earnings from fee income-related business — also known as fee-related earnings (FRE) — and its rents and sales from its real estate investment business (REIB).
The fee income is mainly from its listed REITs, private funds and lodging management (LM) fees. The REIB comprises mainly CLI’s properties and the stakes in its REITs it holds on its balance sheet, including $10 billion of assets that the company had at the time of its listing in 2021 when CapitaLand split its business into development and real estate management.
CLI’s listed funds are an integral part of CLI’s business model. They are CapitaLand Integrated Commercial Trust (CICT), CapitaLand Ascendas REIT (CLAR), CapitaLand Ascott Trust (CLAS), CapitaLand China Trust (CLCT), CapitaLand India Trust (CLINT) and CapitaLand Malaysia Trust (CLMT). These listed funds also showed a steady increase of 10% y-o-y in recurring REIT/asset management fees and property management fees.
CICT and CLAR are focused on developed markets with Singapore at their core. CLAS is global with an Asia-Pacific focus. CLCT, CLINT and CLMT are emerging market REITs focused on individual geographies.
In 1HFY2023 ended June, fee income contributed $519 million to total CLI’s revenue, up 9% y-o-y, while REIB contributed $932 million, down 3.6% y-o-y. The resulting total revenue (less eliminations) of $1.345 billion was down marginally. With the 21% rise in finance costs to $239 million — albeit lower than the likes of City Developments, UOL Group and Ho Bee Land — operational patmi was down 1% to $344 million while cash patmi was 19% lower at $351 million.
Out of the $519 million in FRE, CLI’s listed funds contributed $151 million or 29% in 1HFY2023, down 1% y-o-y. Property management fees contributed a further 29% or $152 million (+1% y-o-y) while LM FRE contributed 30% or $159 million, up 35% y-o-y, with the remainder from private funds.
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CLI’s total ebitda of $757 million in 1HFY2023 was down 13.3% y-o-y. Out of this, the operating ebitda of its REIB was $511 million, to which the listed REITs, on-balance sheet investments and private funds contributed 62%, 27% and 11% respectively.
CLI on fees versus DPU of REITs
When asked if there is a conflict between CLI’s growth strategy and its fee income on one hand, and the DPU delivered by its REITs on the other, Andrew Lim, Group Chief Operating Officer of CLI, says: “The conflict is perceived and there shouldn’t be one. DPU affects us directly. If we take a stand that we push an asset down, it is judged independently. We would be putting ourselves in a position which is very vulnerable if we would be seen to have acted negatively by independent unitholders over whom we have no control.”
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Related party and interested party transactions between REIT and sponsor are voted on by independent unitholders with the sponsor abstaining. Hence, if the asset is sub-par, unitholders can vote against the acquisition.
Lee Chee Koon, group CEO of CLI, says CLI will retain a 20% to 25% stake in its REITs. “We believe we need to show alignment. DPU and DPU growth makes a difference to CLI’s earnings,” he adds.
“One of the strengths of the Singapore market and the ecosystem is the legislation that sits behind the S-REITs which safeguards the interests of minority unitholders. This differentiates the Singapore market from many other markets. The perception of sponsors having disproportionate control or influence is mitigated to a great extent. The unitholders decide. If we do something contrary to the benefit of the REIT, we may win in the short term, but lose in the long term,” Lee reasons.
In 2020, when CapitaLand Mall Trust merged with CapitaLand Commercial Trust to form CICT, the former CapitaLand waived $100 million in fees. Similarly, in 2019, when Ascott Residence Trust merged with Ascendas Hospitality Trust to form CLAS, CapitaLand waived 50% of the fees.
“In major transactions we undertook — like the merger between ART and Ascendas Hospitality Trust — because there was a conflicting mandate, we waived the fees. For the merger between CMT and CCT to create CICT during Covid-19, we waived $100 million in fees. We believed retail would be challenged and nobody knew how things would unfold. And then the office sector had work-from-home issues. But the portfolio shows the underlying resilience of CICT today,” Lee continues.
At any rate, unitholders appear to support CICT’s manager overwhelmingly. In an EGM to vote on a new Singapore property management agreement in May between CICT’s manager, the REIT represented by HSBC Institutional Trust Services and CapitaLand Retail management, 99.95% voted for the resolution. The new agreement is for 10 years starting June 1.
Strong performances by REITs of CLI
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CICT reported a 1.5% y-o-y rise in DPU (but down 1.1% h-o-h) to 5.3 cents in 1HFY2023 ended June, on the back of a 10.2% rise in NPI (net property income) to $353.2 million. Ironically, retail sales, in particular in CICT’s downtown malls have improved, as visitor arrivals improve steadily — albeit without the Chinese to date — and locals throng Orchard Road.
CQ @ Clarke Quay is undergoing AEI that is likely to be completed in 2HFY2023. CQ is home to Zouk. Raffles City (RCS) is rebounding after losing Robinsons as an anchor tenant in 2021. In the meantime, its hotel towers are believed to be doing very well.
“The hotel benefitted from the repositioning. Hospitality is on fire. That was a nice contributor [in 1HFY2023],” Tony Tan, CEO of CICT’s manager, had said on Aug 2.
By a quirk of fate, during the pandemic, the hotel operator negotiated for a lower base rent, with a larger portion of profit-sharing. That has benefitted RCS as hospitality rebounded across Singapore this year. In 2QFY2023, CICT’s integrated properties, which include RCS, recorded a 21.8% y-o-y rise in NPI to $84.2 million. (RCS comprises two hotel towers, an office tower and a mall.)
Elsewhere, CLAS reported growth in all its lines — revenue, gross profit (the equivalent of NPI), distributable income and distributions per stapled security (DPS). In 1HFY2023, CLAS’s revenue rose 30% to $346.9 million; gross profit was 31% higher y-o-y to $154.5 million; distributable income rose 26% to $96.3 million and DPS was up 19% y-o-y to 2.87 cents. Still, annualised DPS would be less than 2019’s DPS of 6.4 cents.
Unpopular capital-raising
Capital-raising is unpopular with unitholders. So far this year, CLAR raised $500 million via a placement and CLAS is raising $300 million in a combination of a placement and preferential offering; CLINT raised $150.1 million in a preferential offering. CLMT raised the equivalent of $68.3 million in a placement.
Part of the reason for the decline in CLI’s patmi in 1HFY2023 was attributed to muted capital recycling opportunities. However, on Aug 2, CLAS’s manager announced the proposed acquisition of The Cavendish London, Temple Bar Hotel in Dublin and Ascott Kuningan Jakarta for $530.8 million from CLI.
According to Serena Teo, CEO of CLAS’s manager, although the acquisitions have only modest accretion of 1.8% to DPS (distributions per stapled security), and investors suffer a dilution immediately, The Cavendish is undergoing an AEI which will raise its asset value, and provide greater accretion to DPS and net asset value eventually.
Some of the proceeds from the equity fundraising will be used for AEIs on Novotel Sydney Central and Citadines Holborn-Covent Garden London. The AEIs are expected to lift asset values and yields. Novotel Sydney Central’s AEI includes a “brownfield initiative” to increase room inventory by 28%.
CLAS’s manager expects Novotel Sydney and The Cavendish AEI to boost property value by $385.5 million post-completion and stabilisation. CLI owns 37% of CLAS after a distribution-in-specie in February.
Fewer gripes on private funds
Along with its results announcement on Aug 11, CLI announced it had secured about $1.3 billion equity commitment from institutional investors for three of its private funds, bringing total equity raised to $3.2 billion this year. Up to Aug 10, the amount raised is a 28% increase compared with the $2.5 billion raised in 2022.
The new third-party equity raised comprises $870 million secured for CapitaLand China Opportunistic Partners (CCOP) programme, $134 million for CLI’s regional core-plus fund, CapitaLand Open End Real Estate Fund (COREF), and $263 million for its new India business park development fund, CapitaLand India Growth Fund 2 (CIGF2) announced on Aug 10.
The CCOP programme was established in February to invest in special situation opportunities in China. The total equity committed to it is $2.1 billion and CLI holds a 20% stake. In February, CLI divested a partial stake in a logistics development in Foshan to the CCOP programme and is currently in the process of divesting an additional partial stake in the Foshan property to the CCOP programme. CLI had acquired the logistics development in May 2022 as a seed asset for the CCOP programme.
In February, CLI established a China data centre development fund, CapitaLand China Data Centre Partners (CDCP). CLI has a 20% stake in CDCP which has committed to investing in two hyperscale data centre development projects in Greater Beijing, and upon completion of the projects, will add approximately $1 billion to CLI’s FUM. The total equity committed to CDCP is $530 million.
COREF was formed in September 2021 and has invested in Japan, Singapore and Australia. In April, CLI entered into a forward purchase agreement with an established Osaka-based residential developer to acquire six multifamily assets in Central Osaka for the equivalent of $141.4 million.
Some market watchers are neutral on CLI, given its significant presence in China. Out of 34 private funds, 13 are China-focused and China contributes 18% to 1H2023’s ebitda of $757 million.
Morgan Stanley has an “overweight” rating on CLI with a target price of $4.10. Part of the rationale is that CLI’s AUM is on track to reach $100 billion by 2024. In addition, CLI is pivoting to higher-return funds in response to shifting LP (limited partners) demand amid higher interest rates.
CLI’s LM FRE “comprised more than 30% of fee revenues in 1HFY2023, growing more than 30% y-o-y, and is poised to lead fee growth for the rest of the year,” Morgan Stanley notes.
According to Morgan Stanley, “China is recovering and rent reversions for CLI’s China mall and office properties could swing from negative to positive next year.”
The general view is that borrowing costs could peak. CLI’s cost of debt rose to 3.8% in 2QFY2023 from 3.6% in 1QFY2023 but is unlikely to rise further as new Singdollar borrowings can be secured at around 4% and interest rates in China are falling. On August 15, the People’s Bank of China cut the rate on its medium-term lending facility by 15 bps to 2.5%.
“Some foreign players have started to withdraw from China and people are comfortable placing capital with us. We need to maximise that advantage,” CEO Lee says.
