July 5, 2022

Fast tracking lodging management growth 

• CLI to acquire serviced apartment operator Oakwood Worldwide

• Transaction will benefit CLI from immediate fee contribution, with potential to drive further revenue and operational synergies

• Reiterate Add, with an unchanged TP of S$4.59

Buys Oakwood Worldwide from Mapletree Investments 

Capitaland Investments (CLI) announced that its wholly-owned subsidiary The Ascott is acquiring serviced apartment operator Oakwood Worldwide (Oakwood) from Mapletree Investments for an undisclosed sum. Oakwood is a leading global serviced apartment provider with a presence in more than 15 countries. Its portfolio comprises 81 properties with about 15k units under management. Oakwood’s flagship properties include Oakwood Premier Tokyo and Oakwood Coex Center Seoul. The transaction is slated to complete in 3Q22.

Potential to drive revenue and operational synergies 

The transaction should enhance Ascott’s stable of lodging offerings with exposure to new markets such as Cheongju in South Korea, Zhangjiakou and Qingdao in China, Dhaka in Bangladesh, and Washington DC in USA. Oakwood and Ascott’s complementary footprint and product offerings could also result in significant synergies between the two extended stay serviced residence providers. Furthermore, Oakwood’s properties can be onboarded onto Ascott’s loyalty programme, Ascott Star Rewards, to accelerate customer base expansion, drive direct distribution as well as expand the suite of product offerings available for Ascott members. The ability to drive revenue and cost efficiencies within the expanded portfolio could improve the operating margins of the Oakwood portfolio in the medium term. 

Immediate fee contribution to CLI from operational units 

The acquisition will boost Ascott’s global portfolio to more than 150k units under management, close to its target of 160k units by 2023F. Of Oakwood’s 15k units under management, 8.5k are operational and should contribute immediately to Ascott and CLI’s fee income streams. In the longer run, this deal could expand Ascott’s network of asset owners and strategic alliances to drive growth as more than 90% of Oakwood’s asset owners are new to Ascott.

Reiterate Add rating 

We keep our FY22-24F EPS estimates unchanged pending the completion of the transaction, and maintain our RNAV-based TP at S$4.59. We believe that as CLI continues to lighten its balance sheet and accelerate the growth of its fee income business, there is room for a further re-rating of the valuation of its fund management business. Key downside risks include slower-than-expected scaling up of its funds under management (FUM) or dampened real estate outlook that could weaken its fund performance and hamper its pace of capital recycling activities.

ESG in a nutshell 

According to Refinitiv 2020 rankings, CLI scored C for overall ESG, with Environmental and Social Pillars at B-, and Governance at D; its ESG controversies is rated A+. CLI has adopted Capitaland Group’s 2030 Sustainability Master Plan, which focuses on building portfolio resilience and resource efficiency, growing dynamic human capital, and accelerating sustainable innovation and collaboration. These objectives can be achieved through integrating sustainability in CLI’s real estate life cycle, strengthening innovation and collaboration to drive sustainability, leveraging sustainability trends and data analytics, increasing engagement and communication with key stakeholders and monitoring progress to ensure transparency. It has set out an objective of reducing its carbon/energy/water intensity to 78%/35%/45% vs. a 2008 baseline by 2030.

It also aims for 100% of its properties to be green-rated by 2030 and for renewable energy to comprise 35% of its energy usage by 2030. As at Feb 2022, CLI has secured a total of S$3.7bn of sustainable finance, including sustainability-linked loans, green loans, green bonds and perpetual securities, and targets to reach S$6bn. CLI intends to deploy interest savings from these loans towards its green initiative. CLI is included in the Global 100 Most Sustainable Corporations in the World Index, Carbon Clean 2020, Global Sustainability Yearbook, Global Real Estate Sustainability Benchmark, Dow Jones World and Asia Pacific Sustainability Indices, MSCI ESG Leaders Index, and FTSE4Good Index.

Keep your eye on

Based on Refinitiv’s rankings, CLI scored low on environmental innovation (D-) and community scores (D+).

Implications

We believe that as CLI continues to raise its E and G efforts and reporting standards, its ESG ranking should likely continue to improve.

ESG highlights

According to Refinitiv’s 2020 rankings, CLI ranks 65 th out of 95 Singapore companies and 9th against its real estate peers. In 2021, CLI achieved a 52% reduction in carbon emissions intensity, 42% lower energy intensity, and 53% reduction in water intensity. All these are compared against a 2008 baseline. In addition, 3% of its energy usage was from renewable sources. 42% of its portfolio have achieved green certification. The group has consistently increased the use of renewable energy and has installed solar panels atop seven of its buildings in Singapore to date, generating a total of 11,462 MWh of renewable energy.

Implications

Its 2030 Sustainability Master Plan includes building portfolio resilience and resource efficiency, enabling thriving and future-adaptive communities, and accelerating sustainability and collaboration. These objectives include low carbon transition, water conservation and resilience, waste management and circular economy, dynamic human capital and sustainable operational excellence and financing as well as technology and innovation. We believe CLI’s continued ESG efforts will be a differentiating factor among the more discerning investors. We have not applied any premium/discount for ESG in our fundamental valuations.

Trends

CLI stands out for its product responsibility (A-) and CSR strategies (B+) scores.

Implications 

We have not applied any premium/discount for ESG in our fundamental valuations. However, as the group continues to build on its ESG efforts, we believe these could lead to improved operational efficiencies and financial performance.

ADD by CGS-CIMB Research.  Share price closed at S$3.78