SINGAPORE (Feb 28): CapitaLand and City Developments (CDL) reported their FY2019 and 4QFY2019 earnings ended December on Feb 26 and both focused on return on equity (ROE). CapitaLand’s ROE rose to 10% in FY2019, from 9.3% in FY2018. In 2013, CapitaLand first set an ROE target of 8%.
“We delivered ROE above our cost of equity and 70% of it is cash based,” notes Andrew Lim, CFO of CapitaLand, during its results briefing. Lim refers to the sectors that contributed to CapitaLand’s total Patmi of $2.14 billion in FY2019, up 21.2% y-o-y, as “buckets”.
“Our three profit buckets all delivered strong growth,” Lim says. These three buckets are operating Patmi which refers to profit from business operations excluding any gains or losses from divestments; revaluations and impairments; and portfolio gains or losses arising mainly from divestments; and revaluation gains or losses from revaluation of investment properties.
In FY2019, operating Patmi rose 21.2% y-o-y to $1.06 billion, portfolio gains rose 24.9% y-o-y to $436 million and revaluation gains/ losses rose 18.8% to $643.1 million. Cash Patmi of $1.49 billion comprises operating Patmi, portfolio gains and realised fair value gains.
CapitaLand’s Patmi showed a marked improvement y-o-y, and grew faster that the property group‘s shareholders’ equity as at Dec 31 – which had also grown as a result of retained earnings, up 15% y-o-y to $15.07 billion, and ordinary equity which rose 47.8% y-o-y to $9.33 billion. During FY2018, CapitaLand issued 862.26 million shares at $3.56 each as part payment of 50% of the $11 billion cost of Ascendas-Singbridge (ASB). As a result, NAV rose 2% y-o-y and NTA rose 1% y-o-y to $4.64 and $4.44 respectively.
Most of the Patmi gains were made in 4Q2019, where Patmi rose 94.8% due to better operating performance, and also gains from asset recycling. This includes divesting 28 office campuses to Ascendas REIT in Dec 2019, and the sale of Star Vista to New Creation Church for $296 million. Operating Patmi in 4QFY2018 also surged by more than 90% because of contributions from ASB, and higher recurring income from investment properties in Singapore and China.
CDL sets ROE target
During CDL’s results briefing that took place about half an hour after CapitaLand’s ended on the morning of Feb 26, CDL CEO Sherman Kwek articulated that CDL has set an ROE target of 7% to 8%. In FY2019, CDL reported an ROE of 5.4%.
Kwek’s pronouncement is interesting because it would require CDL to pursue growth. ROE is a function of net profit as a percentage of shareholders equity, which comprises ordinary equity, retained earnings, and other reserves such as foreign currency translation differences. How will CDL get to an ROE of 8%?
CDL adopts historical cost accounting which means that it depreciates its properties rather than revalues them. When asked if CDL is likely to revalue its properties to attain its target ROE, Kwek says, “Revaluation is one way, because our depreciation amount is around $300 million a year.” In FY2019, depreciation and amortisation was $276 million. “But we want to look at asset recycling, and need to rejuvenate assets. Singapore continues to be a key market so the [residential projects] we’ve launched this year will come in useful,” he adds.
After acquiring 50% of the manager of IREIT Global, and a 12.5% stake in the REIT, CDL is likely to use it as the vehicle for European assets. In 2018 CDL acquired two buildings in London, Aldgate House and 125 Broad Street for GBP183 million and GBP385 million respectively and divesting these buildings into a REIT or fund would help drive returns.
Asked whether CDL is looking at a REIT or a private fund to securitise these two assets, Frank Khoo, CDL’s CIO, says: “What is [popular] now is REITs and both retail investors and high net worth individuals are hungry for yield. We would prefer a perpetual vehicle and it would be a new REIT, not IREIT Global.”
In the second quarter of this year, CDL is likely to complete the divestment of W Singapore – Sentosa to its REIT, CDL Hospitality Trusts. CDL is also looking at divesting of the 22-acre site of the former Stag Brewery in Mortlake. Both these divestments should help boost ROE.
Last year, CDL grew assets by 11.5% to $23.2 billion with $2.3 billion in acquisitions. Although the largest cost was the privatisation of Millennium & Copthorne Hotels which cost $1.3 billion, CDL also bought Shanghai Hongqiao Sincere Centre in Shanghai for RMB1.75 billion or $344 million, four freehold apartment projects in Osaka for the equivalent of $69.3 million, Abacus Property Group’s residential development division for $25 million, and a mixed used site in North Melbourne for $17.4 million.
Shanghai Hongqiao Sincere Centre is a 11-block complex comprising office space, a 132-room serviced apartment, and a basement carpark. The serviced apartment’s occupancy is 70% and office space 50% so Kwek says the group is ramping up the occupancy.
Kwek revealed that the agreement with Sincere Property Group (China) is being renegotiated. “It’s unlikely we walk away. You have to have diversification from your core business and I am still a China bull. This will ensure the future of our group. The company needs to be diversified and global to remain healthy. You can’t have all your eggs in one basket,” Kwek reasons.
According to him, CDL’s legacy landbank which provided the company with hefty margins as recent as 2018 is smaller this year and it has to compete for sites in government land sales which gives slimmer margins. Hence Kwek sees the need to diversify and grow a fund management business which is seen to provide higher, more stable returns compared to the more lumpy residential development income.
“The group’s historical landbank includes a 14,013 sq m site at Tampines Road/Upper Changi Road North which we have a 33% interest in,” a CDL spokeswoman says.
Generous relief measures for Covid-19 to impact NPI
Sectors that are directly impacted by Covid-19 outbreak — such as tourism, hotels, hospitality, F&B and retail — are tenants and customers of CapitaLand’s malls, serviced residences and hotels. Already, 12 of its malls in China, including four in Wuhan are closed. “In the last 2-3 weeks, we’ve been talking to retail tenants to look at relief measures and some were announced in the last few days,” says Lee Chee Koon, CapitaLand’s CEO.
In Singapore, CapitaLand announced a $10 million marketing assistance package which will be from its “marcom” expenditure and would not affect net property income for the malls.
As part of the Singapore government’s property tax rebate for qualifying commercial properties to help retailers, CapitaLand will pass on all the savings to its tenants.
CapitaLand will roll out additional support measures, including rental relief, as part of its commitment to build sustainable partnerships with its retailers. The rental relief will be disbursed to tenants in a targeted manner. CapitaLand will offer various forms of support which may include flexible rental payments and a one-time rental rebate of up to half-a-month for eligible tenants. These additional targeted rental relief measures for CapitaLand’s retail tenants will affect the malls’ NPI.
“When Dorscon turned orange on Feb 7, mall traffic dropped by 50%,” says Jason Leow, President, CapitaLand Singapore and International. However, it has rebounded and footfall in the subsequent weeks after Feb 7 is down by just 5%.
In terms of gross turnover sales, Leow reckons the January numbers continued to be healthy, but February was impacted and he says they are monitoring the numbers.
CapitaLand has waived rent and property management fees for its four malls in Wuhan for about three weeks. Malls outside Wuhan have both charges halved for about two weeks. In China, where the retail portfolio is owned through funds, the cost of assistance to tenants will be “north of” RMB100 million ($19.9 million) for CapitaLand. “We are still in discussions with retailers to see how we can help them,” says Lucas Loh, President, China, at CapitaLand.
The Ascott, the serviced residence and lodging arm of CapitaLand, experienced lower occupancy rates. However, according to Kevin Goh, CEO of Ascott, this was mitigated by Ascott’s longer length of stay given its serviced residence profile, and 80% of customers are corporate customers, which is more inelastic than the leisure market.
In China, Ascott’s occupancy in second tier cities is 40% compared to hotels which are down to 10%. In Shanghai Beijing, Guangzhou and Shenzhen, Ascott’s occupancy is down to 70%. “We implemented robotic delivery two years ago and that’s come in handy for our customers,” Goh adds.
In Singapore, Ascott’s occupancy rates are down to 70% from an average of more than 80% before the Covid-19 outbreak.
CapitaLand’s gearing falls
Divestments of $5.9 billion last year, of which 64% or $3.8 billion were recycled into its REITs and business trusts helped to lift CapitaLand’s ROE last year. That also helped to bring down gearing levels to 0.63 times as at Dec 31, 2019 from 0.73 times as at June 30 2019 following the acquisition of ASB.
The lower gearing was also helped by the issuance of $500 million of perpetual securities in Oct 2019. Had CapitaLand not issued the perpetual securities, its net debt to equity ratio as at Dec 31, 2019 would have been 0.65 times. CapitaLand consolidates its REITs, and its net D/E ratio would have been 0.56x if REITs and business trusts were not consolidated.
CapitaLand returned 22.2% from the gain in its share price alone in 2019, excluding its 12 cents dividend which it has maintained. CDL returned 34.9% through share price gains only, excluding its 20 cents dividend.
On the face of it, CDL appears to have a longer runway given that it wants to raise ROE from 5.4% in FY2019 to the 8% level – no time horizon for this target was mentioned. However, CapitaLand’s heft — it now has a market cap of around $19 billion and is among the largest property groups in Asia — puts it on the radar of institutional funds. Moreover, its diversified portfolio — both by asset class and geography — may suggest it has less concentration risk and hence a greater ability to withstand market cycles.
Instead of hunkering down, CapitaLand’s management plans to pursue a growth path. CFO Lim says Capitaland’s lowered gearing ratio “gives us the ability and agility to remain resilient and to take counter cyclical positions if we find the right opportunity.”
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