CapitaLand - Maybank Kim Eng 2018-09-18: Venturing Into New Asset Class

CAPITALAND LIMITED SGX:C31

CapitaLand - Venturing Into New Asset Class

CapitaLand is acquiring 16 multi-family properties in the US. This is a new asset class for the group and is part of its pursuit of new businesses and income streams.
We see the acquisition as a relatively low-risk proposition with stable income that could be enhanced with active management.
We keep forecasts unchanged pending deal completion. Maintain BUY and SGD3.80 Target Price, at a 30% discount to RNAV.

Acquired for USD835m or SGD1.14b, these suburban Class B properties are located in Seattle, Portland, Greater Los Angeles and Denver. The acquisition price is in line with CBRE’s valuation of SGD845m. They have a total of 3,787 units with average occupancy of over 90%. Leases are typically signed for one year with 50-60% retention rates. Average length of stay is two years.

CapitaLand expects to continue investing in the deep multi-family market in the US worth over USD3.3t and sees potential for a separate spinoff in the future.

~ SGinvestors.io ~ Where SG investors share

Management guides that the portfolio has cap rates that are close to market levels of 5.0-5.5%. The purchase will be fully funded by USD debt to hedge FX risks.
~ SGinvestors.io ~SGinvestors.io ~ Where SG investors share
While property yields have a small spread over its 4% funding cost, management sees the potential for rental uplifts with asset enhancement. It expects to spend about USD50m over the next 2-3 years on enhancement.
Overall, it sees 1.4% EPS accretion, based on 2017 pro-forma earnings. Prospective returns are expected to track historical levels of close to 10% pa.

Separately, newly-appointed CEO Mr Lee Chee Koon addressed the sell-side community for the
first time. He flagged three focuses for the group.
- Firstly, he aims to step up capital recycling to enhance returns. Various recently completed projects are potential candidates.
- Secondly, he wants to increase its development pipeline and work towards a 20:80 split between trading and investment properties.
- Lastly, he aims to lift fee income.

Strong rebound in China and Singapore home sales.
Monetisation of assets via a sale to its funds under management or third parties.
Higher market value of its listed REITs.

Overpaying for assets or land.
Poor execution of development projects.
Sharp increase in interest rates could hit demand for properties and drive down asset prices.

Derrick Heng CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-09-18

SGX Stock Analyst Report BUY Maintain BUY 3.800 Same 3.800