CapitaLand Investment sank 7% on the announcement of its earnings. This is not something you typically see, especially for a Singapore blue chip stock.
Since then, the stock price has rebounded slightly, although the company is still down 5.6%.
So, what exactly happened? Let’s take a look at their business, but first here’s a quick intro:
What does CapitaLand Investment do?
CapitaLand Investment (CLI) is a new entity formed as a result of the restructuring of CapitaLand Limited, and it was listed on the SGX-ST on 20 September 2021. This transaction created one of Asia’s largest real estate investment managers (REIMs).
Since then, the company has grown, with a 32% increase in share price (even after accounting for the drop). you can read CapitaLand’s growth story here.
CLI’s business model consists of two key business platforms Fee-Income Related Business (FRB) and Real Estate Investment Business (REIB).
1) Fee-Income Related Business
This division includes Listed Funds Management, Private Funds Management, and Lodging Management. Together, they provide a recurring fee-based revenue stream that is steadily increasing.
- Listed Funds Management
- CLI’s listed funds business consists of five REITs and business trusts listed on the Singapore Exchange and one on the Bursa Malaysia, with a total market capitalisation of S$33.9 billion.
- Private Funds Management
- CLI also manages over 20 private funds across a wide range of real asset classes.
- Lodging Management
Finally, CLI’s wholly owned lodging business unit, The Ascott Limited (Ascott), owns a diverse portfolio of serviced homes, coliving properties, hotels, student housing, and rental housing properties, in addition to its hospitality assets.
This portfolio has been expanding rapidly, contributing an ever-increasing portion of CLI’s fee-based income through asset-light lodging management and franchising contracts.
2) Real Estate Investment Business
CLI’s other segment, REIB, delivers a consistent flow of rental revenue from approximately 1,000 business parks, commercial, and lodging facilities owned by CLI globally, with 90% of these assets located in Asia (Singapore, China, and India), which are its core markets.
This differs from FRB in that the funds in which CLI invests own the assets, whereas in REIB, CLI owns the assets. In other words, FRB is more asset-light than REIB in the eye of CLI. Nonetheless, the FRB and REIB work hand in hand since REIB assets offer a potential pipeline for their listed funds and private funds.
The big picture: What happened?
From the headlines, you would have seen that CLI’s profit dropped 38%. That is insane, but don’t worry; let’s look at the numbers one by one.
To start, CLI’s revenue and operational PATMI* had increased significantly year over year. Operating PATMI increased 31% to S$346 million in the first half of 2022.
*Profit After Taxation and Minority Interests (refers to profit from business operations excluding any gains or losses from divestments, revaluations, and impairments)
The better operating performance was due to higher fee income from fund and lodging management. This comes as CLI reports significant improvement at its retail properties in Singapore and Malaysia as a result of the relaxing of COVID-19-related restrictions, as well as an increase in Revenue per Available Unit Recovered (RevPAU) for its lodging division.
However, after adjusting for gains or losses from divestitures, revaluations, and impairments, CLI’s overall PATMI for 1H 2022 was S$433 million, a 38% reduction year on year. This comes as a result of reduced portfolio gains of S$87 million from asset recycling compared to S$438 million in the exceptionally active 1H 2021 period.
Going down to its segments, the first is FRB, which is part of the operating PATMI. This was the only segment that performed well, increasing revenue by 16% and EBITDA by 67%.
Breakdown even further: FRB growth was driven primarily by its Private Funds and Lodging Management, which had revenue increases of 81% and 37%, respectively. This is a positive sign; in fact, Revenue per Available Room (RevPAR) for its lodging has already rebounded to 86% of pre-COVID-19 2Q 2019 levels.
The other segment is REIB which likewise forms part of operating PATMI. Unfortunately, this segment did not fare as well, with a 16% reduction in EBITDA. The primary culprit for this is China’s Covid zero policy, particularly in Shanghai, where CLI has the most exposure. This segment has been hit by extended rental rebates and decreasing contributions from China’s lodging businesses.
Fortunately, from its previous segment, CLI managed to recover the losses in REIB, and as a result, we observed a positive growth in operating PATMI.
Moving forward, nevertheless, everything is not lost for this segment. As shared here, committed occupancy for many of these assets remains high, even in China.
Slump in asset recycling
There was another reason for the decline. This is due to its asset recycling, a non-operational component. For context, how CLI generates profit here is by investing in properties. After holding for a period and enhancing the properties, it would divest, capturing the premium as a profit.
Due to the current market sentiments, asset divestiture slowed to $1.6 billion (S$1.26 billion sale of 79 Robinson Road Singapore to CICT and S$340 million sale of JCube to CapitaLand by CICT). As a comparison, 1H 2021 divestment value stood at S$11.3 billion.
Ultimately, this resulted in portfolio gains of S$133 million, compared to S$532 million the previous year. As a result, the company’s bottom line suffered greatly.
Nonetheless, I do not believe this is cause for concern. You can’t sell today; you can just sell tomorrow. CLI properties will not suddenly disappear.
Also, investors should not rely solely on last year’s figures because 2021 was an exceptional year due to the recapitalisation of the Raffles City portfolio, so do not expect it to return to the previous level.
What figure can we expect?
Well, the management appears to be confident that it will at least meet the S$3 billion annual target for capital recycling. It was also indicated during the press conference that there’s still a projected $5 billion divestment in China. So, assuming things improve in China, we may anticipate around $3 to $8 billion of divestment in 2022.
Nonetheless, I’d want to commend CLI management for not succumbing to pressure. They are not selling for the sake of selling, and the average premium from their divestiture for 1H 2022 is 11%, which is better than the 10.5 % average premium for 2021.
Capital position
From its balance sheet point of view, CLI is in a solid financial position. It has adequate cash and bank lines, low gearing, a favourable interest coverage ratio, and a strong credit profile.
All of this would allow CLI to deploy its dry powder at any moment. Something that is essential in this climate.
Moving forward
Looking ahead, CLI fee income business would continue to grow, offering additional stability to the firm’s bottom line. This is the direction the company is taking after recognising that each dollar produced in Fee-Income Related Business is more valuable than in Real Estate Investment Business. As it does so, we can expect shareholders to benefit along with it.
Other than that, CLI has provided an update of the core markets it operates in, and the outlook doesn’t look bad for the company
Is CapitaLand Investment cheap?
At its current price of $3.87, CLI’s Book value is 1.29x while its Price to Earnings is 18.5x
As a comparison here are 2 REIM market leaders:
| Book Value | Price to Earnings | |
| CapitaLand Investment | 1.29x | 18.5x |
| Brookfield Asset Management | 1.94x | 23.9x |
| Blackstone | 15.24x | 19.85x |
Of course, this isn’t an apples-to-apples comparison since Brookfield Asset Management and Blackstone have far larger fund management divisions than CapitaLand Investment. In other words, they are less asset-heavy, resulting in a substantially higher book value.
CLI is still lower in terms of price to earnings, but if CLI can successfully transition from REIB to FRB in the next few quarters, we could possibly see an increase in its multiple to somewhere around the other 2 REIMs.
Dividend
No dividends were issued for the first half.
However, if we consider the previous dividend of $0.12 (excluding the special dividend of $0.03) at the current share price of $3.87, the yield is around 3.1% now. Not too bad but note that Singapore Savings Bond is already offering close to 3%.
Concluding thoughts
CLI is a really enticing investment with strong fundamentals and a strong leadership team. Recent results suggest that CLI is on the right track, and the asset recycling slump isn’t as bad as it appears.
With the global economic and travel recovery, CLI has benefited from increased retail, workspace revival, and a rise in its lodging business.
However, three major issues remain. The persistent geopolitical risks, inflation and rising interest rates, and, finally, China’s continuous covid-19 disruptions. While I believe CLI will survive these events, whether or not they will prosper is dependent on these circumstances, with the Covid-19 disruption in China having the most direct influence.