<News Analysis> CapitaLand Investment Limited : Waiting to pounce

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 the group’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 to higher 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.