The Positives
+ FY23 FRB revenue grew 8.7% YoY, boosted by lodging management fees (+28.3%), recurring fund management fees (+9.3%), and commercial management fees (+10.8%). This is partially offset by lower event-driven fees (-52% YoY) in a market that is less conducive to deal-making. Including S$10bn in committed equity pending deployment, CLI currently has S$100bn in FUM and is targeting to reach S$200bn in five years.
The Negative
- FY23 REIB revenue fell 8.5% YoY due to lower corporate leasing income in the USA and lower rental revenue from properties in China. Rental reversions in China remain negative across all operating segments.
- Significant fair value losses of S$600mn, which came mainly from China (-S$511mn) due to weaker rents and market outlook, as well as USA (-S$231mn) due to cap rate expansion. This is partially offset by gains in Singapore (+165mn) and India (+S$44mn).
The Positives
+ Lodging segment star performer. 3Q23 RevPAU up 15% YoY, attributed to higher occupancy (+7ppts) and ADRs (+3%). Overall RevPAU stood at 107% of pre-COVID 3Q19 levels. The improvement in operating performance coupled with 6,200 units (3.8% of signed units) turning operational resulted in a 31% YoY growth in lodging management fees. CLI has a target to reach S$500mn in lodging management fees within five years.
+ Recurring fund management fees grew 9% YoY to S$272mn in 9M23. This alleviates the impact of lower event-driven fees (-64% YoY) in a market that is less conducive for deal-making. CLI has c.S$10bn in embedded FUM that could lift fee income if deployed; it has a current FUM of S$90bn (FY22: S$88bn).
+ Active capital raising. CLI raised S$3.5bn of capital for its private funds YTD (42% above total raised for FY22). During the quarter, it launched a new Wellness and Healthcare-related Fund with an initial close of S$350mn - it has a target fund size of S$500mn with an option to upsize to S$1bn. In 3Q23 to date alone, it has raised S$1.7bn and is looking at strong growth opportunities in SE Asia and India to deploy capital.
The Negative
- China remains a drag. Despite improvements in shopper traffic (+34% YoY) and tenant sales (+22% YoY), retail rental reversions continue to be negative. Office rental reversions were mildly negative, with only new economy assets having mildly positive rental reversions.
- Expect portfolio valuation declines at year end. Due to higher interest rates and cap rate expansion, valuation declines are expected in Australia, Europe, UK and USA. Valuations in China are also expected to decline due to the softer economic outlook in China, while valuations in Singapore and India are expected to be stable.
Outlook
CLI’s lodging management business should continue to remain strong on the back of higher travel demand. We expect event-driven fee-related income to improve in FY24 as interest rate stabilises. Deployment of capital under embedded FUM remains slow, but we expect it to pick up in 2H24. As only 64% of debt is on fixed rate, CLI could continue to be impacted by higher interest rates (+0.1ppts QoQ to 3.9% in 9M23). CLI has a current gearing of 0.55x, up from 0.52x as at end Dec22.
CLI has divested S$1.2bn of assets YTD, and it is unlikely to hit its S$3bn divestment target for FY23. It has c.S$10bn of assets in the divestment pipeline, with almost half of it coming from China.
Maintain BUY with an unchanged TP of S$3.68. No change in our estimates. Our SOTP-derived TP represents an upside of 25.3% and a forward P/E of 18x.
The Positives
+ Lodging segment star performer. 1H23 lodging management fee-related income grew 35% YoY to S$159mn due to higher room rates as well as improved occupancy across the portfolio. Portfolio RevPAU grew 32% YoY to S$87 and was 106% of 1H19 pre-COVID levels. CLI has a target to reach S$500mn in lodging management fees within five years.
+ Recurring fund management fees grew 10% YoY to S$183mn in 1H23. This alleviates the impact of lower event-driven fees (-65% YoY) in a market that is less conducive for deal-making. CLI has S$1.3bn in acquisitions from listed and private funds yet to be reported in Funds Under Management (FUM), as well as S$8.5bn in committed but undeployed capital in private funds that could lift fee income if deployed; it has a current FUM of S$89bn.
+ Managed to raise funds in a market battered by high interest rates. CLI raised S$3.2bn of committed equity for its private funds YTD (S$2.5bn for whole of FY22) – it established a new fund, CapitaLand India Growth Fund 2, mandated to invest in Grade A business parks in India.
It also raised S$986mn of new equity in its CapitaLand China Opportunistic Partners Programme and S$150mn in its CapitaLand Open End Real Estate Fund.
The Negative
- REIB revenue declined 3.6% YoY to S$932mn, due to lower contribution from China properties and absence of income contribution from properties divested in 2022. It is unlikely that CLI will be able to hit its S$3bn divestment target for FY23 with only S$839mn of divestments YTD in this challenging environment.
The Positives
+ Strong recovery in the lodging segment. Lodging management fee-related income grew 38.2% to S$76mn due to higher room rates as well as improved occupancy across the portfolio. Portfolio RevPAU grew 42% YoY to S$81 and is 103% of 1Q19 pre-COVID levels. The real estate investment business also benefitted from the recovery in the lodging segment, with revenue growing 10.9% YoY to S$447mn. With the FY23 target of 160k lodging units in the portfolio hit in 1Q23 after signing >4k units in 1Q23, the new target is to double its fee revenue from lodging management to >S$500mn in 5 years.
The Negatives
- 1Q23 revenue growth of 5.6% was below our estimate of 14% for FY23e, due to lower event-driven fees from fund management (-S$33m or -68.8% YoY) with the lull in property transaction activities. However, recurring fees held stable for private funds at S$23mn, while fees from listed funds grew 4.9% to S$64mn. As a result, fee related earnings from fund management fell 22.7% to S$102mn.
- Cash flow from operations fell 24.6% to S$101m, or FFO/share of 2cts. As a result, net debt/equity has risen to 0.53x, and interest coverage is lower at 4.5x. The cost of debt saw an increase of 50bp to 3.6% from end 2022, as only 62% of its debt is on fixed rate.
The Positives
+ Fund management fee-related revenue (+5% YoY) formed 15% of revenue. PE fees (+26%) were boosted by higher transaction-related fees, which formed 43% of PE fees, while recurring PE fees fell 10% YoY. CLI’s listed funds posted +3% and -33% growth in recurring and transaction-related fees, respectively. The decline was the result of a high base in FY21, as transactions picked up after the pandemic year in 2020. Recurring fees made up 77% of FY22 fee-related revenue.
+ Lodging segment recovering steadily. Lodging management fees rose 36% on recovering operating performance as well as 9.3k/2k new units turning operational in FY22/4Q22. RevPAU grew 44% as average daily rates grew 18% and portfolio occupancy increased 10%. Recovery was seen across all CLI’s key markets, except China, with the strongest RevPAU recovery in Europe (+99%) and Singapore (+72%). The group also signed 9.3k keys in 9M22, 13% more than the number of keys signed in FY21, taking the number of keys signed to 159k. CLI is on track (~99%) to meet its 2023 target of signing 160k keys.
+ Real estate investment business (REIB) grew 40% YoY, on the back of reopening in most of CLI's markets, except for China. Leasing activity in India has similarly picked up with Net Property Income growing 5% on the back of physical occupancy at business parks improving to ~60% from <5% in FY21. In Singapore, NPI rose 9% due to positive rental reversion across all asset classes and occupancy increasing across sectors. For the other markets, NPI increased 9% with resilient occupancy of >90% across sectors as improved NPI across Australia, South Korea, USA and UK/Europe offset a slight decrease in NPI for Germany and Japan.
The Negatives
- China retail lagging recovery. Due to China's zero COVID-19 policy, China has only just started to re-open after the pandemic. While tenant sales in Singapore have recovered 29.4% YoY for FY22, tenant sales in China declined 15.7%. Similarly, shopper traffic in China has declined 23.6% compared to an increase of 28.6% in Singapore. Occupancy at Chinese malls has dipped to 90% (FY21: 94%), compared to the 97% retail occupancy for Singapore.
- Macro-economic and geopolitical headwinds slowing fund generation and acquisition momentum. Inflation, rising interest rates and the Russia-Ukraine conflict have resulted in higher required returns for capital investors, limiting the assets eligible to seed funds. While USD-denominated capital has taken a wait-and-see approach towards RMB investments, CLI’s RMB fund management license allows it to tap local capital. However, the lockdowns and tightened restrictions in China in FY22 have impeded business discussions and delayed planned transactions.
Note: In the 3Q22 update, only revenue and funds under management details were provided
The Positives
+ Fund management fee-related revenue (+16% YoY) formed 15% of revenue. PE fees (+44%) were boosted by higher transaction-related fees, which formed 47% of PE fees, while recurring PE fees dipped slight and fell 5% YoY. CLI’s listed funds posted +7% and -6% growth in recurring and transaction-related fees respectively. The latter was the result of a high base in 9M21, as transactions picked up after the pandemic year in 2020. Recurring fees made up 74% of 9M22 fee-related revenue.
+ Lodging segment recovering steadily. Lodging management fees rose 48% on recovering operating performance as well as 8.2k/7.3k new units turning operational in FY21/9M22. RevPAU grew 41% as average daily rates grew 20% and portfolio occupancy increased 10%. Recovery was seen across all CLI’s key markets, except China, with the strongest RevPAU recovery in Europe (+139%) and Singapore (+66%). The group also signed 7.3k keys in 9M22, ~89% of the number of keys signed in FY21, taking the number of keys signed to 155k. CLI is on track (~97%) to meet its 2023 target of signing 160k keys.
+ Real estate investment business (REIB) grew 48% YoY, on the back of reopening in most of CLI's markets, except for China. Significant easing of community safe management measures since Mar 22 has improved business and consumer sentiment and increased activities. Leasing activity in India has similarly picked up with physical occupancy at business parks improving to ~39% from <5% in FY21.
The Negatives
- China retail lagging recovery. Due to China's zero COVID-19 policy, China has not fully reopened since the start of the pandemic. While tenant sales in Singapore have recovered 29.4% YoY for 9M22, tenant sales in China declined 13.3%. Similarly, shopper traffic in China has declined 20.8% in China compared to an increase of 21.5% in Singapore. Occupancy at Chinese malls has dipped to 92% (2Q22: 92%), compared to the 97% retail occupancy for
Singapore.
- Macro-economic and geopolitical headwinds slowing fund generation and acquisition momentum. Inflation, rising interest rates and the Russia-Ukraine conflict have resulted in more circumspect behaviour and higher required returns for capital investors, limiting the assets eligible to seed funds. While USD-denominated capital has taken a wait-and-see approach towards RMB investments, CLI’s RMB fund management license allows it to tap local capital. However, continued lockdowns and tightened restrictions in China have impeded business discussions and may delay planned transactions.
Outlook
CLI’s real estate investment and lodging management business should continue to recover on the back of further easing of travel and mobility restrictions. After having divested S$2.4bn YTD, CLI is on track to hit its annual divestment target of S$3bn. However, its 10% FUM growth target may be at risk given the current macro-economic and geopolitical headwinds which have resulted in more circumspect behaviour among capital investors. Prolonged lockdowns in Shanghai and Beijing may also delay planned transactions.
Maintain ACCUMULATE with unchanged SOTP TP of S$4.12
We maintain our ACCUMULATE recommendation with an unchanged SOTP target price of S$4.12. We raise FY22e earnings by 8% as we increase RE investment revenue estimates for FY22e. Our SOTP derived TP of S$4.12 represents an upside of 9.5% and a P/E of 16.1x. The pick-up in travel and lifting of lockdowns in China will be immediate catalysts for CLI.
The Positives
+ Fund management fee-related revenue (+21% YoY) formed 16% of revenue. PE fees (+81%) were boosted by higher transaction-related fees, which formed 51% of PE fees, while recurring PE fees remained stable and grew 2% YoY. 1H22 PE fees include performance fees of S$31mn from notable transactions such as the unwinding of CLI-managed CapitaLand Vietnam Commercial Value-Added Fund (CVCVF) on Jan 22 and the reduction in an equity stake in Athena LP on Feb 22. CLI’s listed funds posted +7% and -15% growth in recurring and transaction-related fees respectively. The latter was the result of a high base in 1H21, as transactions picked up after the pandemic year.
+ Lodging segment recovering steadily. Lodging management fees rose 37% on recovering operating performance as well as 8.2k/4.5k new units turning operational in FY21/1H22. RevPAU grew 44% as average daily rates grew 21% and portfolio occupancy increased 9%. Recovery was seen across all CLI’s key markets, except China, with the strongest RevPAU recovery in Europe (+228%) and Singapore (+54%). The group also signed 4.5k keys in 1H22, ~54.9% of the number of keys signed in FY21, bringing the number of keys signed to 139k.
+ Real estate investment business (REIB) grew 44% YoY, on the back of reopening in most of CLI's markets, except for China and Japan. Significant easing of community safe management measures since Mar 22 has improved business and consumer sentiment and increased activities. Leasing activity in India has similarly picked up with physical occupancy at business parks improving to ~35% from <5% in FY21. Due to China's zero COVID-19 policy, Shanghai was placed under lockdown since Mar 22 due to the spike in COVID cases. This has stalled leasing activity and has resulted in rental rebates (~1.2 months) given to affected tenants in 2Q22. For context, 15 of CLI's assets are in China, representing 34% of its China exposure.
The Negative
- Macro-economic and geopolitical headwinds slowing fund generation and acquisition momentum. Inflation, rising interest rates and the Russia-Ukraine conflict have resulted in more circumspect behaviour and higher required returns for capital investors, limiting the assets eligible to seed funds. While USD-denominated capital has taken a wait-and-see approach towards RMB investments, CLI’s RMB fund management license allows it to tap local capital. However, lockdowns and tightened restrictions in Shanghai and Beijing have impeded business discussions and may delay planned transactions if lockdowns persist.
Outlook
CLI’s real estate investment and lodging management business should continue to recover on the back of further easing of travel and mobility restrictions. Having divested S$1.6bn YTD, CLI is on track to hit its annual divestment target of S$3bn. However, its 10% FUM growth target may be at risk given the current macro-economic and geopolitical headwinds which have resulted in more circumspect behaviour among capital investors. Prolonged lockdowns in Shanghai and Beijing may also delay planned transactions.
The Positives
+ Fund management fee-related revenue (+28% YoY) formed 20% of revenue. PE fees (+127%) were boosted by higher transaction-related fees, which formed 61% of PE fees, while recurring PE fees grew 21% YoY. Notable transactions include the unwinding of CLI-managed CapitaLand Vietnam Commercial Value-Added Fund (CVCVF) in Jan 22 and reduction in equity stake in Athena LP in Feb 22, which realised IRRs 200% and 60% above their respective project IRRs and generated transaction fees. Post-quarter, the PE fund holding 79 Robinson Road divested the asset to CapitaLand Integrated Commercial Trust (CICT SP, BUY, TP: S$2.46) and another CLI-managed PE fund, COREF, realising c.S$72mn in divestment gains. CLI’s listed funds posted +13% and -48% growth in recurring and transaction-related fees. The latter was the result of a high base in 1Q21, as transactions picked up after the pandemic year.
+ Lodging segment recovering steadily. Lodging management fees rose 31% on recovering operating performance as well as 8.2k/2.2k new units turning operational in FY21/1Q22. RevPAU grew +34% as average daily rates grew 14% and portfolio occupancy increased from 48% to 57%. Recovery was seen across all CLI’s key markets, except China, with strongest RevPAU recovery in Europe (+168%) and Singapore (+40%). The group also signed 3.2k keys during the quarter, c.24.7% the number of keys signed in FY21, bringing the number of keys signed to 135k.
+ Real estate investment business (REIB) grew 28% YoY, on the back of reopening in most of CLI's markets, with the exception of China and Japan. Significant easing of community safe management measures since Mar 22 has improved business and consumer sentiment and increased activities. Leasing activity in India has similarly picked up with physical occupancy at business parks improving to 15-30% from <5% in FY21. Due to China's zero COVID-19 policy, Shanghai was placed under lockdown since Mar 22 due to the spike in COVID cases. This has stalled leasing activity and will likely result in some rental rebates given to affected tenants in 2Q22, in line with the PRC government’s messaging to its state-owned enterprises. For context, 15 of CLI's assets are in China, representing 34% of its China exposure.
The Negatives
- Macro-economic and geopolitical headwinds slowing fund generation and acquisition momentum. Inflation, rising interest rates and the ongoing Russia-Ukraine conflict has resulted in a more circumspect behaviour and higher required returns for capital investors, limiting the assets eligible to seed funds. While USD-denominated capital has taken a wait-and-see approach towards RMB investments, CLI’s RMB fund management license allows it to tap local capital. However, lockdowns and tightened restrictions in Shanghai and Beijing have impeded business discussions and may delay planned transaction if lockdowns persist.
Outlook
CLI’s real estate investment and lodging management business should continue to recover on the back of further easing of travel and mobility restrictions. Having divested S$1.6bn YTD, CLI is on track to hitting its annual divestment target of S$3bn. However its 10% FUM growth target may be at risk given the current macro-economic and geopolitical headwinds which have resulted in more circumspect behaviour amongst capital investors. Prolonged lockdowns in Shanghai and Beijing may also delay planned transactions.
Maintain ACCUMULATE; SOTP TP raised from S$4.05 to S$4.12
We raise our FY22e PATMI estimate from S$1,218 to SS$1,234 on higher fund management margins. The SOTP TP is up due to higher investment management PATMI. The pick-up in travel and lifting of lockdowns in China are immediate catalysts for CLI.
The Positives
+ Stellar year of capital recycling; driving 9M21 fee-related earnings (+34%) and funds under management (+10%). CLI divested S$13.6bn in FY21 at an average 13.1% premium to book value, crystalising S$616mn in portfolio gains. This was 4.5x higher than the S$3.0bn divested in FY20 and higher than the 8-10% premium CLI has achieved in the last 3-5 years. c.82% of divestments were converted into FUM, helping CLI to achieve its 10% p.a. FUM growth target. CLI incepted seven new private funds in FY21, raising more than S$1.4bn from external parties. Fee-related earnings (FRE) grew 34% YoY to S$409mn, bolstered by transaction-driven fees which accounted for 18% of FRE. Recurring earning accounted for the remaining 82% of FRE, which grew 17% YoY. Capital recycling also allowed CLI to rebalance its portfolio into new economy assets. c.70% of assets divested were integrated development assets, while 56% of S$6.8bn in investment were in new economic assets, which include data centres, business parks and logistics assets.
+ Lodging segment recovering steadily. RevPAU rose 19% YoY, as occupancy improved to c.60%, up from c.50% in FY20. Revenue from the lodging segment grew 27%, on the back of recovery in operations and 8.2k keys turning operational. CLI signed 15k new keys, up from 14k keys signed in FY20, growing the number of keys under management by 8% to 133k keys. CLI is on track to meet its FY23 target of 160k keys under management.
+ China showing recovery; Singapore stabilising. Occupancy across retail, office and new economy assets in China improved 3-4ppts YoY on the back of sustained reopeneing. Occupancy at Singapore retail and office assets fluctuated 1-2ppts YoY, still impacted by the periodic tightening of restriction. Occupancy at new economy asset was up 2ppts with positive reversions recrossed across multiple asset types.
The Negatives
- Occupancy in India business and logistic parks dipped 8ppts YoY from 93% to 85%. While presented as one of CLI’s core markets, India represents <3% of CLI’s FY21 EBITDA. CLI secured positive reversions on leases signed during the year, however, occupancy in India business and logistic parks dipped 8ppts YoY. This contrasts with the improving occupancy seen across the new economy assets in China and Singaopore, which saw occupancy improve 3ppts to 94% and 90% respectively.
Outlook
CLI’s property portfolio continues to recover on the back of a reopening and return-to-normalcy. CLI maintains its S$3bn p.a. divestment target while growing FUM by 10% p.a.. At current growth rates, CLI is on track to hitting its 2023 lodging target of 160k keys under management and S$100bn 2024 FUM target. This will increase the proportion of fee-related earnings for CLI, which currently account for 40% of operating PATMI.
As CLI pushes to grow PE FUM, new funds will adopt a traditional PE fee structure which includes an ongoing management fee based on committed capital as well as carry fees which are tied to the performance of the fund manager. As CLI’s private fund business is less established compared to its track record as a manager of listed funds, CLI is prepared to take up to a 20% stake in newly incepted private funds as a show of confidence and alignment of interest with its third-party equity providers.
The Positives
+ Active capital recycling, driving 9M21 fund management fee-related earnings (+34%) and funds under management (+9%). CLI divested S$12.3bn as at 10M21, 4x higher than the S$3.0bn in FY20. Assets were divested at an average of 13.5% above fair value, higher than the 10-11% premium CLI has achieved in the last 3-5 years. Capital recycling also allowed CLI to rebalance its portfolio into new economy assets. c.78% of assets divested were integrated development assets such as the Raffles City projects in China, while 69% of S$5.3bn in total investment were in new economic assets, which include data centres, business parks and logistics assets. CLI incepted seven new private funds in 9M21, five of which were incepted in 3Q21, raising more than S$1.4bn from external parties. New investments and inception of funds grew funds under management (FUM) by 9% since Dec21, from S$77.6bn to S$84.3bn. 9M21 fund management fee-related earnings grew by S$74.2mn or 34% YoY; 70% of the growth attributed to higher transaction-driven fees due to asset recycling.
+ Lodging segment recovering steadily, office and new economy resilient. 3Q21 RevPAU up 12%/33% QoQ/YoY; occupancy improved YoY from 50% to 60%. The recovery in operations, together with 5,300 units (4.1% of signed units) turning operational, resulted in a 23.1% YoY growth in lodging fee income for 9M21. Occupancy for the office and new economy sectors has been resilient, remaining above 90% on average.
The Negatives
- Malaysia retail lagging recovery, having been under strict movement control for most of 2021. While tenant sales in Singapore and China have recovered 13.8% and 14.3% YoY for 9M21, tenant sales in Malaysia declined 15.0%. Occupancy at Malaysian malls has fallen c.10ppts to 84.3% (FY19: 94.3%). This compares to the 96.4% and 93.9% retail occupancy for Singapore and China.
Outlook
Balance sheet heavy, but critical for growing FUM. CLI is relatively balance sheet heavy compared to other REIMs. Its net debt-to-equity ratio of 0.49x is higher than that of its peers, which range 0.25-0.3x. However, having a larger balance sheet is critical for CLI as it is trying to grow its private fund business. It allows CLI to pick up assets opportunistically, incubating and using them to seed new funds, thereby growing FUM. As CLI’s private fund business is less established compared to its track record as a manager of listed funds, CLI is prepared to take up to 20% stake in newly incepted private funds as a show of confidence and alignment of interest with its third-party equity providers. CLI is on track to reaching its 2024 FUM target of S$100bn.
CLI’s property portfolio continues to recover on the back of a reopening and return-to-normalcy. The investment management and lodging platform enjoys growing demand from private capital and lodging owners. The divestment of partial stakes in six Raffles City China assets to China Ping An has triggered reverse enquiries from several Chinese investors looking to create permanent investment vehicles. The stars are aligning for CLI, which secured its private equity fund manager status in China for RMB capital raising, a previously untapped capital market for CLI.
Maintain ACCUMULATE and SOTP TP of S$4.00
No change in our estimates. Our SOTP derived TP of S$4.00 represents an upside of 18.9%. CLI is trading at 16.7x P/E; we are forecasting FY21e dividend yield of 2.4%.
