Capitaland Investment

[weijian]

I didn't realise the point about the Cap-Ascendas merger being done for scale. Can I trouble you to elaborate on that?

hi EnSabahNur,

Before the merger, Capitaland manager was mainly in commercial/retail/hospitality, while Ascendas was managing business parks/industrial. So their merger is highly complimentary and not purely "done for scale". Of course in the AUM business, efficiencies of scale accelerate beyond the normal operating leverage that a business generally enjoys, as they centralize many of the operations (Treasury, asset managers etc) and business offerings (eg. property management).

In my earlier post, I was just saying that the current CLIM would actually be in a much smaller scale if not for the 2019 acquisition. CLIM current EV is ~27bil (14bil market cap + 13bil debt), so current prices is a good approximation to development/investment mgt BU split in late 2021. Ascenda-Singbridge was valued at ~11bil EV and so a very dirty quick back-of-envelope approximation indicates that CLIM scaled up by ~25-30% with that 2019 acquisition.

[EnSabahNur]

Thanks Weijian

[weijian]

Never felt good about these integrated property counters including CLI and city development. They take on so much debt, they only shine, if ever, when interest rates are low.

hi money,
I do share similar skepticism. But just a quick note on CLI:

(1) As end FY23, CLI's total debt is ~12.6bil. And if one divides this by its equity (exclude minority interest and perps), the gearing is ~90%, which is substantial.

(2) But do note that 2 of its listed trusts - CLAS and CLMT are consolidated on CLI's balance sheet. They are consolidated because CLI is deemed to have control as per AR. My interpretation is because CLI owns >25% for the above 2 listed trusts (CLAS-28% and CLMT-41%) and for the Manager to be voted out for a Trust structure, 75% is required. As such, CLI controls CLAS/CLMT like a subsidiary (>50% ownership), and so their balance sheet is consolidated onto CLI's.

(3) We definitely know listed REIT/Trusts are highly leveraged. So, would one consider CLAS/CLMT's debt, which is consolidated on CLI's balance sheet to be recourse to CLI? If we think it is "NO", then CLMT/CLAS's total debt of ~4billion, or ~30% of CLI's total debt should be removed from CLI when looking at its debt levels. If we account this for the gearing presented at (1) - then 90% is probably closer to 65-70%. It is still substantial I would say, but probably "better" than its peers. Of course, CLI has a mandate to want to divest its assets to its listed/unlisted funds or 3rd parties. But it is also acquiring new assets to own/manage to maturity as well. So its gearing levels are probably reflective of what it is doing.

[weijian]

When FY23 results were announced, beyond the FV losses, the most interesting development for CLI would probably be the 200billion FUM target it set, a 100% increase from the current 100billion. Yours truly also had 1 question wrt to the 200billion FUM target in the Q&A.

In the media presentations, CLI Senior Mgt has indicated that it is currently a buyer's market as they are getting calls from sellers, a 180degree turn from ~3 years back. However, everyone knows platforms are sticky and so everyone is trying to build up their own. So to get someone to sell theirs, it wouldn't be cheap.

Nonetheless, scaling up platforms is hard and before you scale, you can't enjoy economies of scale (hint: Boustead Industrial Fund....FF Wong interested in selling?). There are probably also numerous small hospitality brands that operate their own booking platforms, which will be able to benefit from a bigger Ascott platform in terms of booking, reward points and setting optimal room rates etc.

Annual General Meeting to be held on 25 April 2024 Responses to Substantial and Relevant Questions Received from Shareholders

Inorganic growth avenues such as strategic acquisitions are intended to complement our organic growth efforts. We have been exploring various potential M&A targets and we are guided by three criteria. Firstly, the transaction must help CLI strategically in terms of building new capabilities. Secondly, we are looking for fund management platforms for which we can pay a fair price and are earnings accretive. Lastly, a cultural fit between the current CLI team and the acquired team is essential to maximise the full potential of the transaction and achieve the envisioned growth.

A notable example is the acquisition of Ascendas Singbridge by CL in 2019. This move significantly enhanced CL’s capabilities in fund management and the new economy asset class, while strengthening its presence in markets like Singapore and India. These laid the groundwork for CL’s restructuring into CLI. As we pursue this objective, we remain committed to delivering sustainable long-term earnings for our investors and capital partners.

https://links.sgx.com/FileOpen/20240420%...eID=797457

[CY09]

In recent times, Singapore's office space has seen no interested buyers willing to match office space valuation

https://www.businesstimes.com.sg/propert...01oU9mGnKx

There are floor spaces being vacated in the CBD but unsurprisingly many valuers have painted office spaces as good with CAP rates abscribed being even lower than SORA rate.

No doubt Capland says its aiming for 200B FUM with current progress at 100B FUM. However, if most of its assets are in Singapore (which it is), I do feel it is unrealistic. Singapore property market has been using close to fraudlent valuation inputs and ground reality is that funds are not willing to match to the prices unless special circumstance are made. For example, in the failed Far East Shopping Centre (part retail/part office), the buyer wanted URA to grant 20% more floor area beyond the GPR which is unrealistic and definitely beyond what the master plan had provisioned. If it had been granted, many would question whats the use of URA 5 yearly master plan

I am not a capland investor, however, it would have been nice if someone had asked the soundness of the local Capland REIT valuers who had used Cap rates which at times are lower than SORA.

[weijian]

In recent times, Singapore's office space has seen no interested buyers willing to match office space valuation

https://www.businesstimes.com.sg/propert...01oU9mGnKx

There are floor spaces being vacated in the CBD but unsurprisingly many valuers have painted office spaces as good with CAP rates abscribed being even lower than SORA rate.

No doubt Capland says its aiming for 200B FUM with current progress at 100B FUM. However, if most of its assets are in Singapore (which it is), I do feel it is unrealistic. Singapore property market has been using close to fraudlent valuation inputs and ground reality is that funds are not willing to match to the prices unless special circumstance are made. For example, in the failed Far East Shopping Centre (part retail/part office), the buyer wanted URA to grant 20% more floor area beyond the GPR which is unrealistic and definitely beyond what the master plan had provisioned. If it had been granted, many would question whats the use of URA 5 yearly master plan

I am not a capland investor, however, it would have been nice if someone had asked the soundness of the local Capland REIT valuers who had used Cap rates which at times are lower than SORA.

Hi CY09,

Based on my observation and also understanding from listening to the operators of companies, below are my thoughts on cap rates:

- Valuation is actually more Art than Science. There are estimates (meaning range of values) and assumptions and more importantly, how one makes/defend those assumptions.

- Companies can get a valuation based on "X assumptions". No surprise what is the company's preference. Crunch time comes when they defend/justify those numbers when they present it to their statutory auditor. There is "leeway" in the discussion and really, a lot of times, it may depend on those talking to the auditors.

- But one thing that will get the auditors alarmed, will be the company using "X assumptions" in previous years and then suddenly want to use "Y assumptions" this year, ie. changing their valuation methodology.

- So we know everyone wants high valuations - so it will be as high as it can be, ie. fair valuations are probably most overvalued - But mostly, doesn't mean all the time. There are a couple of observations that may reflect the amount of aggressiveness/conservativeness:
(1) One can look at how many times a REIT can sell something "above NAV". Similarly, when a REIT is most selling "below NAV", then good chance many other assets on the balance sheet are probably overvalued.
(2) The amount of revaluation losses probably correlate to the amount of revaluation gains. If a REIT had been using aggressive assumptions to revalue itself upwards, there is a good chance the same assumptions will hurt it on the way down, especially when the statutory auditor does not agree with changing the assumptions as previously mentioned.

[weijian]

Back in 2013, the % of units under Ascott from 3rd party (mgt contracts and franchise) was 43%. 11 years later at end FY23, this % has almost doubled to 82%.

Currently, the biggest boys in this business do anything from 97% (Accor) to >99% (Marriott/Hilton/IHG). So Ascott still has some way to go in terms of reducing their ownership/master leases. But it is pretty evident that the way to hit 500mil fee revenue target, would have to come from growth via mgt contracts/franchising.

Ascott announces key appointments in global expansion move

The company is charting a new growth trajectory towards achieving its target of over S$500 million in fee revenue in 2028

“The appointment of these industry veterans to our business development team signals our commitment to invest in top talent to build Ascott’s growth ecosystem and establish Ascott as the operator of choice for lodging property owners around the world. With each of them focusing on a key region, Ascott is now better positioned to penetrate deeper into existing markets and make headway in new markets through targeted growth strategies,” said chief growth officer Serena Lim.

https://www.businesstimes.com.sg/compani...nsion-move

[weijian]

CLIM did a 3Q23 update a couple of days back and 1 thing stood out:

~S$390M of share buybacks done since listing in 2021
➢ Including ~S$49M YTD 2023
• Reducing equity base to improve EPS and ROE

CLIM 3Q23: https://links.sgx.com/FileOpen/CLI%203Q%...eID=777537

So after excluding 49mil of SBB done YTD 2023, lets look back at the 340mil it spent earlier:
2022: Spent ~140mil on 34.7mil shares at ~3.80sgd per share.
2021: Spent ~200mil on 62mil shares, ~3.35sgd per share.

In 2023, gearing and interest costs are higher now compared to the good old years of 2021/2022. So it takes brave men to keep buying (and at much higher quantities) at current prices which are 10-20% cheaper than the past, in order to continue to "reduce equity base". If that were so, it would be truly buying from a position of strength!

An update on CLI's SBB. Contrast to some folks who beat the drums (Keppel Ltd, HRNetGroup, Valuetronics etc), CLI has been doing their SBB "no frills attached":

2024 to date (after renewal of SBB mandate):  Spent ~198mil on 74.8mil shares at ~2.65sgd per share.
2023 (Oct turmoil onwards to Jan2024):  Spent ~156mil on 52.6mil shares at ~3sgd per share.
2022: Spent ~140mil on 34.7mil shares at ~3.80sgd per share.
2021: Spent ~200mil on 62mil shares, ~3.35sgd per share.

So CLI Mgt seems to have accelerated their SBB in recent times, but share price continues to stay stagnant - Cause for concern? Or buying from a position of strength?

Does a durian eater prefers high or lower prices at durian stalls?

Is this SBB value accretive since it hasn't been bought at deep discounts to net asset value? And a misallocation of capital as CLI has plenty of debt at holding level? I think the OPMI will probably find out in a few years down the road.

[weijian]

CLI recently published its carrying value of its stake in its listed funds and private funds. It wouldn't have been easy to extract that (especially on the private funds).

Taking just CLI's stake in its funds --> 13.1bil/5.16bil shares ~2.50sgd. So just based on the carrying value of its funds, it is already 90% of its market cap!

Maybe this is why it has been spending loads of money doing SBB.

SGX-DBSV Conference

Carrying Value of Sponsor’s Stake in Listed Funds S$8.1B (pg 31)
Carrying Value of General Partner’s Stake in Private Funds S$5B (pg33)

SGX-DBSV Conference ppt:
https://links.sgx.com/FileOpen/20240827%...eID=816868

[weijian]

A win for the CLI's ecosystem - Transferring the stake from private fund to listed fund. Keeping the AUM, brand and hotel management.

As CLI's REIT prices start to rebound, yield accretive M&A becomes possible again and the pace of "asset recycling" should slowly accelerate after been in the thaw for the last 2-3years.

CapitaLand Ascott Trust to acquire lyf Funan Singapore at S$263 million

– CapitaLand Ascott Trust (CLAS) has entered into an agreement with Ascott Serviced Residence Global Fund1 (ASRGF) to acquire lyf Funan Singapore at an agreed property value of S$263 million2.

CLAS’ sponsor, The Ascott Limited (Ascott), holds a 50% stake in ASRGF. In line with CLAS’ portfolio reconstitution strategy, the yield-accretive acquisition will enhance the quality of CLAS’ portfolio and sustainability of returns to its Stapled Securityholders.

https://links.sgx.com/FileOpen/20241001_...e%20at%20S$263%20million.ashx?App=Announcement&FileID=820542