May 13, 2022

Key highlights

•  Key businesses report a 17% rise in revenues in 1Q22, benefiting from economies re-opening borders

•  Positives (i) strong multiples achieved for exit of Vietnam Fund, (ii) hike in recurring fees for fund management business, (iii) significant capacity to acquire assets.

•  Where we are watching (i) impact of a prolonged China slowdown, (ii) potentially slower but more disciplined acquisition approach (CLI & REITs), (iv) M&A of platforms to grow FUM. Stock is trading at 1.2 P/NAV, BUY call and TP of S$4.0 maintained.

CapitaLand Investment Limited (CLI) 1Q22 business update

•  Fee related business increased 17% to 262m, mainly due to a 28% rise in lodging management fees to S$55m and a 28% rise in fund management fees to S$132m.

•  1Q22 FRE/FUM 51 bps (vs 50 bps in 1Q22) Real estate investment business (REIB) increased by 28% to S$403m.

•  Overall funds under management (“FUM”) remained stable at S$86 billion, stable q-o-q.

Key observations

Fund Management – driven up by event driven fees; divestment momentum in line with targets.

•  Fund Management Fee related business (“FM FRE”) was driven higher mainly due to an event driven fee due to the exit of thegroup’s Vietnam Value-Add Fund which generated an IRR of 34%

•  Overall recurring fees from the management of its listed REITs and private equity funds remained increased by 15% y-o-y due tohigher NOIs and AUM.

•  The group has divested over S$1.6bn and on the way on the S$3.0bn target, mainly from the sale of 79 Robinson transaction. The group has retained 79% of divestments into FUM, acquired by their off-take vehicles, which will drive higher fees in 2H22. This strategy has worked well for the group and will drive overall profitability and AUM growth for CLI in the medium term.

Real estate investment business – A keen eye on China

•  Revenues were higher largely due to improve performance from the properties (largely in the lodging and multi-family space) with acquisitions in China (datacenter and selected assets).

•  Outlook remains mixed for now with its properties in Singapore enjoying better metrics (traffic, positive reversions and steady occupancy rates) while China outlook is dependent on the current COVID-zero policy enforced by the Chinese government with periodic lock-downs like in Shanghai where the group’s properties are currently shut and will have an impact on near term operational performance.

•  We anticipate that rental rebates will be needed to be disbursed selectively to their tenants which will have a near term impact to numbers.

Lodging : Strong momentum to continue in 2H22; with Japan and China lagging for now

•  RevPAR is up 34% due to a broad improvement across the portfolio (except for China); Lodging management. fee is up 31% to S$55m.

•  We reckon that RevPAR performance is somewhat 30%-40% behind pre-COVID levels but should be quickly met within 2H22- 2023. However, Japan and China operations are still not close to pre-COVID yet due to travel restrictions in those countries but should rebound strongly once borders re-open.

Balance sheets – ample capacity for acquisitions:

•  Close to S$8.1bn in deployable capital to fund acquisition opportunities

•  Net debt / Equity of 0.48x with healthy ICR ratio of 6.2x

•  The group all in cost of debt is 2.6% with 59% hedged into fixed rates.

•  Long weighted average debt expiry of 2.6 years shield the group from interest rate volatility.

Where we are watching:

Impact of a China Slowdown: Recycling strategy delayed

•  The group has diversified its geographical base over time but China still forms about 32% of assets for its REIB which will inevitably be impacted from the policy response (lockdowns and disruptions) towards containing the spread of COVID-19 within China.

•  We anticipate cashflows to be impacted in the near term with the risk of a prolonged lock-down situation to be negative for the group’s ability to continue to curate fund structure and/or recycle capital to their platforms.

Acquisitions & M&A : More cautious and disciplined

•  The group and its managed REITs continue to remain on the hunt for acquisitions but are turning more cautious given the higher cost of capital (both debt and equity markets volatility has spiked in recent times).

•  With interest rates on the rise, the impact on capital values is also something to watch although management is focusing on the cash-generation ability of its portfolio of assets which will prove to be resilient.

•  Listed platforms, especially those that trade below NAV/NTA in the Asia Pacific region are potential M&A targets.

CRITICAL EQUITY FACTORS (CF) CF 1: Growth in recurring fees on expanding funds under management (“FUM”)

We project CLI to attain an overall funds under management (“FUM”) of S$100bn by 2024

As management fees are a function of AUM, CLI’s ability to grow its AUM will be directly correlated to its ability to grow its recurring income base. Therefore, we see a close correlation between CLI share price and its quarterly / half-yearly EBIT. Given that a majority of its income and recurring in nature, higher revenues will drive profitability, ROEs and potentially dividends.

Ability to acquire across market cycles.

We like CLI’s unique business model of a manager of both private funds and REITs. This enable the group to be active through business cycles and have the ability to acquire opportunistically. CLI managed REITs and private funds with diverse real estate strategies ranging from value-add to core investment opportunities, allowing the group to be tap opportunities in both market upcycles and down-cycles as its REITs and private funds can be active at various parts of the market cycles.

Growing its private equity business.

CLI recently beefed up its leadership team with senior hires in the private equity space which we see the group launching new product suites and strategies to diversify its AUM base. Opportunities to diversify into the alternative real estate space (i.e. data centers, multi-family and lodging) and infrastructure will be asset classes that are complementary to the group’s current focus. Growth may come in the form of M&A or new funds products that maybe launched in the coming years.

S-REITs are well positioned for growth.

CLI’s portfolio of REITs under management are one of the largest S-REITs which enjoy strong liquidity and trade at a conducive cost of capital, which positions them to acquire accretively and grow its AUM. We estimate that the REITs will on average acquire up to S$4billion in new properties per annum, from 3rd party, sponsor or from CapitaLand Development.

Asset recycling.

As a sponsor to its managed REITs, CLI act as a warehouse of potential asset injection opportunities. These assets may come from its balance sheet and/or from its private funds if they decide to divest over time. We estimate close to S$10 billion worth of assets that could potentially be monetised, either to their listed S-REITs or new private funds.

In fact, the group has been able to divest and keep FUM within CLI’s funds ecosystem and the group continues to earn recurring fees from an expanded FUM base. In 2021, the group have recycled x bn worth of assets but have kept c.90% within its FUM which is positive for the overall group. Most of these properties on the balance sheet of CLI which maybe offered for sale in the medium term.

CF 2: Managed REITs remaining on an acquisition warpath

The trading performance of its managed REITs will be key for CLI’s ability to grow FUM and recycle capital

Key driver of income.

CLI is one of the premier REIT managers in Asia, managing 5 REITs (4 listed in Singapore and 1 listed in Malaysia) with a combined funds under management (“FUM”) of S$ 53.4 billion as of 3Q21 and growing. Their managed REITs are amongst the largest in Singapore and are generally seen as proxies for their respective asset classes. The REITs are invested in various asset classes but anchored in the commercial (c.21% of FUM) and new economy assets (c.33% of FUM) and retail (28.6% of FUM).

S-REITs continue to remain on the acquisition path as REITs double down on “new economy assets”.

Given the availability and conducive capital markets conditions have fuelled the expansion in CLI’s S-REITs real estate assets under management over the past years. Amongst the managed S-REITs, Ascendas REIT (“AREIT”), CapitaLand China Trust (“CLCT”) have been the most active amongst the S-REITs. These REITs have embarked on a strategy to pivot their exposure towards more “new economy assets” i.e. in the logistics, business parks and data-centre space. Ascendas India Trust (“AIT”) has also been on an acquisition warpath, building up a pipeline of forward purchase agreements and expanded its investments into logistics, industrial and data center space. Collectively, A-REIT, AIT and CLCT have acquired c.S$4.7bn of new economy assets in the past few years.

Estimated growth of $3.0bn in AUM till 2024. We estimate in our forecast, S$3.0bn in AUM till 2024, acquisition across its portfolio of REITs. 80% of the acquisition estimates from AREIT, CICT and ART.

CF 3: Lodging division remaining on an multi-year uptrend

Ascott Limited rebound in operational performance coupled with growing portfolio to 160,000 keys will drive long term returns.

CF 4: Return on Equity

With a more capital efficient model, we see CLI’s ROE remaining on a rise in the coming years.

VALUATION

Our valuation is based on Sum-of-the-parts (SOTP) and we derive a target price of S$4.00.

Where We Differ

We remain optimistic that CLI is able to meet its S$100bn AUM target by 2024.

Key Risks to Our View

• Resurfacing of COVID-19 which could lead to risk to cashflows for the group’s investment properties and hotel disruptions, FX risk, and lower asset value.

• Markets accords higher valuations for REIM. Listed peers in the REIM space usually trade a premium in terms of P/NAV and and P/E to traditional property developers which we believe is due to their more capital efficient business model and with better visibility in earnings base. Since the de-merger, CLI has traded well. On a P/NAV basis, CLI has traded up by c.18%% from the day of its listing and now trade at c. 1.2x P/NAV, which is a 40% premium to the average 0.7x P/NAV that CAPL trade at over the past 5-years. The stock has also closed the gap with listed REIM, which average about 2.5x P/NAV.

Balance sheet:

• Debt to equity to remain low. We have assumed debt to equity ratios to remain below 0.4x and improve over time.

• Capex/investments: We have assumed a maintenance capex of 0.1% of AUM per annum on existing assets on the balance sheet coupled with 5% strategic stake for every S$1 billion in new FUM to be raised.

• Where We Differ: We remain optimistic that CLI is able to meet its S$100bn AUM target by 2024.

BUY by DBS Group Research.  Share price closed at $3.79.