CAPITALAND LIMITED
SGX:C31
CapitaLand - Acquisition Of US Multi-family Portfolio
- CapitaLand makes its first foray into US multi-family properties via the acquisition of 16 freehold properties for US$835m (S$1.14b). The defensive suites of class B properties are highly resilient, seeing only 4-5% rent arrears during recessions. The acquisition is likely to see earnings accretion of 1.4%, based on 2017 pro-forma EPS.
- Management would like to spin off these assets into investment vehicles/ partnerships in the longer term, and build similar businesses in other markets, like China.
- Maintain BUY and target price of S$3.78.
WHAT’S NEW
Venturing further into the US.
~ SGinvestors.io ~ Where SG investors share
- CapitaLand is acquiring a portfolio of 16 multi-family properties in the US West Coast and Denver region for US$835m (S$1.14b). The portfolio consists of 3,787 apartments with about 1,000 units in each cluster at an average price of US$220,000/unit. The average occupancy is over 90% and the average length of stay is two years.
- ~ SGinvestors.io ~ Where SG investors share
- The acquisition is scheduled to complete in 4Q18.
STOCK IMPACT
Quality location.
- The portfolio is well located in the metropolitan areas of Seattle, Portland, Greater LA and Denver in well-connected suburban communities. These areas include many Fortune 500 corporations and major companies that attract net in-migration and job growth. The economies in these regions are also driven by diversified industries.
Potential upside to rental rates.
- There is potential upside for rentals as unfurnished apartments with typical lease of one year offer opportunity for market rent adjustment at renewal. However, the overall portfolio length of stay is two years.
- Management noted that rental reversions in the recent past had been 7-8% (similar to the wider market), but may moderate going forward.
Why US multi-family properties?
- First, this is a strategic fit and a move by the group to diversify assets outside of Singapore and China. The acquisition will increase its total assets from S$62.5b to S$63.6b with international assets (ex China, Vietnam, Malaysia and Indonesia) to rise from 12% to 14% of total portfolio post the acquisition.
- The US multi-family sector is also a deep and scalable sector with a total capital value of over US$3.3t and accounts for 15% of the total housing stock in the US. Within the commercial real estate asset class, this segment offers the highest average returns of close to 10% p.a. in the last three decades.
- With 3,787 units (about 1,000 units in each cluster), the portfolio also enjoys economies of scale (eg only 1.5 staff per 100 units). The longer-term plan for the group is to bulk up scale.
Defensive suite of Class B properties with AEI potential.
- The multi-family portfolio’s occupancy is over 90%, and has steady renewal rates of 50-60% (which provided reliable cash flow and operational stability). In past recessions, rent arrears for this asset class averaged 4-5% (vs 0.6% in normal times). Occupancies also tend to remain fairly resilient (eg mid-high 80s) but rates may come off slightly, accordingly to management.
- The group also sees value-add opportunities, including US$50m in asset enhancements initiatives (AEIs) to renovate two-thirds of the units (on the interiors and common areas). Management noted that since the AEIs can be carried out over 2-3 days when tenants vacate, the overall occupancy is likely to still stay high at over 90%.
- ~ SGinvestors.io ~ Where SG investors share
Immediate income contribution.
- No details were provided. The group highlighted that these acquired assets will immediately contribute income to the group. Value-add opportunities, including asset enhancements, will eventually allow management the option to spin off the platform for multi-family properties into investment vehicles and partnerships.
Acquisition cost of US$845m fully funded by fixed-rate debt (4%+).
- The total acquisition cost comprises the purchase consideration and transaction related expenses of US$10m (S$14m).
Transacted price is fair.
- CapitaLand’s acquisition of the 16 multi-family properties is in line with the appraised value of S$845m (S$1.16b), commissioned by the group and conducted by CBRE using the income capitalisation and sales comparison approaches.
- We believe the acquired assets are poised to see revaluation gains post-AEI works.
Acquisition is expected to be earnings accretive.
- Class B multi-family properties have yields of 5.0-5.5% (vs 4.0-4.5% for Class A properties). Management estimated the acquisition will lead to a 1.4% accretion to FY17 pro-forma EPS.
VALUATION/RECOMMENDATION
Maintain BUY and target price of S$3.78,
- based on a 20% discount to our RNAV of S$4.73/share. The stock remains our preferred large-cap property pick, given its diversified asset base and recurrent earnings,
SHARE PRICE CATALYSTS
- Improving sentiment in core markets of Singapore and China.
- Accretive M&A in building up AUM.
- Recurrent earnings.
Andrew Chow CFA
UOB Kay Hian Research
|
Loke Peihao
UOB Kay Hian
|
https://research.uobkayhian.com/
2018-09-19
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