If everything goes according to plan, and shareholders vote in favour of the various inter-dependent resolutions at CapitaLand’s EGM and scheme meeting on Aug 10, CapitaLand Investment (CLI) is likely to make its debut on Sept 17. Based on the valuation of $4.102 each CapitaLand shareholder receives one CLI share, 0.155 CapitaLand Integrated Commercial Trust unit, and 95.1 cents in cash. As a result, CLI’s theoretical net asset value (NAV) on a pro forma basis is $2.823. For CLI to be a success, its share price should trade at or above its NAV.
What does CapitaLand’s restructure mean for its REITs?
According to Lee Chee Koon, group CEO of CapitaLand, CLI will be sponsor to the CapitaLand’s six REITs, CapitaLand Integrated Commercial Trust (CICT), Ascendas REIT, CapitaLand China Trust, Ascott Residence Trust (ART), Ascendas India Trust and CapitaLand Mall Malaysia Trust.
“[With] CLI being sponsor of the REITs, we will definitely want to make sure the REITs do well. We will continue to provide the same level of support and our wish is to continue to hold long-term stakes in the REITs of 20% to 25%. Whether we will review this target depends on how the various REITs are growing. If they are growing significantly bigger we can review this,” Lee says.
He also clarifies that if the privately held CapitaLand Development (CLD) can inject an asset into the REIT it would do so. “This depends on specific details of joint-venture agreements between [CLD] and the REITs,” Lee says. For instance CapitaLand is in a joint venture with CICT to develop CapitaSpring which has topped out. CICT has a call option to acquire the portion of CapitaSpring it doesn not own.
Another entity, ART and CapitaLand are jointly developing a 678-bed purpose build student accomodation (PBSA) to serve over 35,000 undergraduate and graduate students from the nearby University of South Carolina (USC). Construction of the student accommodation asset is scheduled to start in 3Q2021 and complete in 2Q2023.
“There is no need for double handling if CLD can inject the asset directly into the REIT,” Lee confirms.
“We have set out recent recent transactions which are a good representation of transactions where we partnered with our REITs, which demonstrates the role of a responsible sponsor to help the REIT digest a major redevelopment,” Andrew Lim, group CFO of CapitaLand, points out. “That speaks to our support and continued commitment when the REIT identifies something interesting to deliver to their own unitholders, and where CLI can step in with our balance sheet to support the organic growth of our REITs.”
Looking ahead, Lim indicates that much of the support could be tied to redeveloping and renewing the REITs’ portfolio. “This renewal theme is starting to play out and could become a major capital requirement in Singapore and China for our older assets where our REITs are starting to redevelop and rejuvenate. This is where both sponsor and REIT can come in to renew our current portfolio to repurpose and future proof these assets in a post-Covid environment,” Lim elaborates.
Among a major redevelopment involving CapitaLand, ART, City Developments and CDL Hospitality Trusts is the redevelopment of Liang Court into an integrated development with hotel, serviced residence, shopping mall and two residential towers with a fresh 99-year lease.
CLI on the other hand, could grow by acquiring new assets or platforms to create new REITs, funds and products. Or, CLI could acquire certain platforms in certain markets that the CapitaLand group may be interested in. CLI could also form joint-ventures and in the seeding new funds. “There could be other major M&As we could be looking at. One important point is having the ecosystem with CLD which gives us lot of flexibility to look at M&A, and having a partner we can work with allows us the flexibility to see which parts of capital we can call on to maximise fire power and maximise returns to various stakeholders,” CEO Lee says.
Whatever the case, every transaction must complement CLI and the CapitaLand group’s existing operations. “"I must stress we do not want to grow AUM for AUM’s sake. We are not, out of the blue, going to go into new asset classes where we have no inherent abilities," Lee asserts.
The rationale for splitting CapitaLand - where 65% of its NAV goes into CLI, and 35% is in a privately held CapitaLand Development (CLD) entity - is so that CLI can trade nearer its NAV. Developers traditionally trade at a discount.
The development cycle for commercial property such as malls, integrated developments and office towers take three years, and stabilising them could take a further three years. CFO Lim refers to capital tied up in developing property as patient capital.
“If it sits on the balance sheet for anything more than three years it is patient capital, it is not capital that can be converted into funds-under-management (FUM) and generate fee related earnings (FRE),” he says.
So far, the reception for the restructure is positive. Since the initial announcement in March, CapitaLand’s share price is up 15%. On July 19, when details of the restructure was announced in a circular, CapitaLand’s share price was up amidst a sea of red, with the broad market falling.
Credit Suisse has an outperform rating on the stock. “With $12.6 billion (100% basis) of property investments, expect portfolio reconstitution and capital recycling to remain a key driver of future returns. Expect CLI’s recently attained [fund management] status in China to accelerate future AUM growth,” Credit Suisse says. It adds that the valuation of CLI, at a price to book of 0.89 times is attractive versus peers. CLI’s shares, being given to CapitaLand shareholders at a value of $2.82, are at a discount to the valuation of between $3.14 and $3.62 based on valuation reports.
