Capitaland (“CAPL”) announced that it would undertake a restructuring exercise, splitting its development arm from its investment management arm. Its development arm would be taken private, while its investment management arm would remain listed as Capitaland Investment Management (“CLIM”). This post would summarise my thoughts on this restructuring exercise, as well as my take on how we should value CLIM going forward.
My general
take on this deal is that it is the right strategy for CAPL to restructure its
business. Property development is exposed to market cycles, regulatory action
and other factors, whereas the investment management arm can expect to see more
stable recurring revenues in the form of management fees and dividends from its
stake in the various Reits.
In fact, in
early 2020, I invested in Frasers Property for a similar reason, as my thesis
back then was that investing in a developer with a substantial portfolio of
Reits under management would be more lucrative than investing in the Reits
themselves. If we were to simply compare a Reit against the investment
management company that manages the Reit (assuming a pure IM company without
the development arm), it would appear that the IM company should be the better
investment, because its profits would include management fees + dividends from
its proportionate stake in the Reits, whereas an investor in the Reit would
only be receiving dividends. While that investment has not turned out well for
me, CAPL’s proposed restructuring would allow investors to better value the
REIM and Development arms separately, which ideally would fetch higher
valuations as compared to a single entity.
Transaction
Structure
Shareholders
in CAPL would receive a total consideration of $4.102 per share, which includes
1 CLIM share valued at $2.823, 0.155 CICT units and $0.951 in cash. On a
diluted basis, assuming all convertible bonds are exercised, the total
consideration drops to $3.969.
As part of
the consideration, 388 million CICT shares will be distributed – representing around
6% of CICT’s total units issued. Post restructuring, CLIM’s stake in CICT would
be pared down from c.29% to c.23%.
Overview
of CLIM
Post restructuring, CLIM would have a NAV of $14.8B. The
breakdown of the NAV includes CLIM’s stakes in the 6 Reits/Business Trusts (worth
$7.8B), stakes in >20 PE funds that it manages (worth $5.5B), and a
portfolio of investment properties (worth $10.1B). These combined gives CLIM
total assets of $23.4B. Reconciling this with the stated NAV of $14.8B, we can
assume that the difference is due to working capital and debt.
CLIM would have an assets under management (“AUM”) of 132.5B
and funds under management (“FUM”) of 77.6B. This makes CLIM the largest REIM in
Asia and one of the top 10 globally. Management has guided for a target FUM of
$100B by 2024.
Key Merits
of REIMs vs Developers
CAPL has presented the deal as a way of unlocking value in
the investment management arm, which has been undervalued by the market due to
the asset heavy nature of the property development arm. As per CAPL’s investor
presentation, Real Estate Investment Managers (REIMs) generally trade at higher
multiples than Property Developers, due to REIMs having a more asset light
model and more predictable recurring revenue. CAPL’s investor presentation
stated that REIMs trade at an average of 2.6x P/NAV, while SG and HK developers
(ex-CAPL) trade at an average of 0.6x P/NAV. On a forward P/E basis, REIMs also trade at a
premium as compared to developers. However, I believe that using P/E as a
metric would be less relevant due to the inclusion of revaluation gains/losses,
which would result in varying net profit over the years.
Given that CLIM is illustratively valued at $2.823 per
share, or 1.0x P/NAV, one might be inclined to conclude that this presents a
huge upside for CLIM if REIMs are valued at 2.6x P/NAV. However, the crucial
difference here is that CLIM holds a substantial number of investment
properties on its balance sheet, including Ion Orchard, Galaxis and 79
Robinson, for a combined value of $10.1 billion on its balance sheet. Hence, it
would not be appropriate to simply place a 2.6x P/NAV valuation on CLIM, as
this would mean that we are overvaluing its investment properties.
Fund Management is Extremely Lucrative
FUM has been growing at a CAGR of 15%, from 51B in 2017 to
78B in 2020. There was a huge increase in FUM from 2018 to 2019 due to the
acquisition of Ascendas Singbridge. As mentioned earlier, CAPL’s management has
a target of 100B FUM by 2024.
Over the past four years, average fee income/FUM rate was
40bps or 0.4%. In FY2020, CAPL earned fee income from Reits and Fund Management
of $306 million. This fee income excludes fees from serviced residence
management as well as property management, which would be included in CLIM’s
revenue going forward. It is
evident that the fund management business is extremely lucrative. A 56% EBITDA
margin indicates strong profitability, and comparable to many leading companies
including Facebook, Visa and MasterCard.
The caveat here
would be that the Reit manager usually opts to receive Reit management fees in
the form of both cash and units in the Reit, thus the earnings from the Fund Management
arm would not entirely be in cash.
Dividends
from the 6 Reits/Business Trust and Private Funds
CLIM would retain
CAPL’s proportionate stake in the 6 Reits/Business Trust, which would entitle
it to receive dividends distributed to shareholders. Based on CAPL’s shareholding
percentage in the various Reits from its 2020 Annual Report and the current year’s
DPU of the Reits, I estimated that the potential annual dividends that CLIM receives
would be approximately $330 million. CLIM would also receive dividends from its
proportionate stake in its private funds, but I believe that this information isn’t
readily available.
Key
Concerns
1. Dividend
policy: As investors primarily invest in real estate companies for income,
a key concern on that investors may have would be the dividend policy of CLIM,
as there has yet to be clarity on this. However, I believe that CLIM would
still provide investors with a reasonable dividend, because CLA (the
development arm to be taken private) still holds a 51% stake in CLIM. As CLIM
is the cash cow of CLA, the parent company would still require cashflow in the
form of dividends, to fund its development activities. Hence, the most
straightforward way would be for CLIM to distribute dividends to both CLA and
other shareholders.
2. Downsides
of being asset light: I think the more important question to ask would be
regarding CLIM’s strategy in the event when its Reits undertake equity fund
raisings. Currently, the Reit’s sponsor (CAPL in this case) would undertake to
subscribe to its proportionate stake in the EFR exercise. Given the asset heavy
nature of CAPL – with its substantial cash pile – CAPL definitely has the
resources to subscribe for its proportionate stake in the EFR. However, as CLIM
aims to be asset light, it would be beneficial if the management provides
investors with clarity on their strategy going forward.
Do note
that this aforementioned situation only arises if the Reit acquires properties
from third parties or CLA. For example, if CICT does a $1 billion rights issue
to fund acquisitions from a third party, CLIM would usually have to undertake
to subscribe to its proportionate stake in the EFR. In this case, it would be
approximately 23% of $1 billion, or $230 million that CLIM has to produce. In
the event when the Reit acquires properties from CLIM, there would be no issue,
as CLIM can fund its proportionate stake in the EFR from its proceeds from
selling the property.
Conclusion
Investors
would have to value CLIM on its earnings ability based on 1. Fund Management income,
2. Serviced Residence and Property Management fees, 3. Dividends from Reits and
private funds and 4. Rental Income from Investment Properties. I have covered
points 1 and 3, but am unable to find information on points 2 and 4.
Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.
Note: After the publication of this report, I have bought shares of CAPL at an average price of $3.58. My positions my change from time to time without further any further updates.
If you enjoy my articles, please 'Like' my Facebook Page at:
Follow me on Instagram at @AlpacaInvestments
No comments:
Post a Comment