CapitaLand - DBS Research 2018-09-19: An Emerging Landlord In The US Multi-family Asset Class

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CAPITALAND LIMITED SGX:C31

CapitaLand - An Emerging Landlord In The US Multi-family Asset Class

• Acquires a portfolio of 16 freehold multi-family properties in the US for US$835m.
• Estimated yield of 5.0-5.5%; potential to drive total returns to 10% through asset enhancements.
• Scalable asset class in a market with depth and liquidity.
• Potential securitisation of portfolio in the medium term to drive returns and recurring income.

What’s New

Stepping into a new multi-family asset class in the US

• CapitaLand Limited announced the acquisition of a portfolio of 16 freehold multi-family properties in the US for US$835m (c.S$1.14bn).
• The target portfolio consists of 3,787 apartment units which will provide CapitaLand with a sizeable presence in the US.
• The price/unit is US$220,000, which is in line with market comparables. The initial yield is estimated to be in the range of 5.0-5.5%, in line with markets.

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• The properties are located in the suburban communities of the metropolitan areas of Seattle, Portland, Greater Los Angeles and Denver. These properties are located near amenities and key employment hubs.
• Positive market dynamics driven by stronger business activities and employment growth opportunities in the submarkets underpin demand for offices and multi-family homes and thus is expected to see continued strong demand from middle-income families and skilled professionals who are looking for jobs in the submarkets.
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Driving value through strategic enhancements

• CapitaLand enjoys immediate accretion from stable cashflows from the existing portfolio which is 90% occupied and supported by an average length of stay of c.2 years. We believe there is opportunity to yield up from the estimated initial yield of 5.0-5.5% by increasing occupancies and average daily rates.
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• As these apartments are generally unfurnished with a typical lease term of one year, this allows the group to yield up the portfolio when leases come due yearly. We understand that the portfolio's organic growth might be in the mid-single-digit level.
• In the medium term, CapitaLand plans to spend US$50m in capex to refurbish the rooms and hopes to achieve a total return of up to 10% in the coming years.

Market outlook

• The multi-family sector in the US is broad, scalable and a growth sector widely seen as one of the most resilient and liquid institutional asset classes.
• According to CBRE, the multi-family sector is second in terms of liquidity compared to the office sector in the US and has shown to be less impacted by downturns compared to other property types. According to data from the National Council of Real Estate Investment Fiduciaries (NCFREIF), the annual investment return of this asset class averaged 9.75% over the past 10 years, one of the highest among various asset classes.
• The short-term leases allow immediate adjustment to market, which implies strong organic growth potential for the investment. https://SGinvestors.io ~SGinvestors.io ~ Where SG investors share
• According to CBRE, 68% of multi-family properties are privately owned, which offer CapitaLand the opportunity to grow its footprint in the longer term.

Our thoughts

Infusing the group with improved earnings stability, complementary to its Ascott serviced residence business. 

• The multi-family asset class is widely seen to offer resilient cashflows and we see this asset class as an expansion of the group’s established corporate housing business under Ascott, which targets the longer-stay corporate segments. Metrics like the portfolio location within cities that enjoy strong employment growth, and in hubs with expanding multinational presence, are drivers of demand for these homes.

A value-add opportunity to drive earnings; properties could be spun off into a REIT in the longer term.

•  CapitaLand intends to add value to the portfolio through strategic asset enhancement initiatives (AEI) to drive rentals and capital values higher. The target is to achieve a 10% total return in a few years. The group intends to scale up its exposure to this sector in the longer term through partnerships (JVs, funds or even a REIT) with an aim to build a sizeable and scalable business.
• Given the group’s expertise in fund management and the management of REITs, we believe that the opportunity will come in the form of a REIT platform which will allow CapitaLand to grow its fee management business and to present investors with a tax-efficient platform to invest in the US multi-family business.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2018-09-19

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