SINGAPORE (Sept 21): CapitaLand is acquiring a portfolio of 16 multi-family properties in the US West Coast and Denver region for US$835 million ($1.14 billion).
The portfolio consists of 3,787 apartments with about 1,000 units in each cluster at an average price of US$220,000/unit. The average occupancy is over 90% and the average length of stay is two years. The acquisition is scheduled to be completed in 4Q18.
See: CapitaLand acquires US portfolio of multifamily properties for $1.14 bil
Acquisition cost of US$845 million fully funded by fixed-rate debt of 4%-plus.
According to UOB KayHian in a Wednesday report, lead analyst Andrew Chow says this is a strategic fit and a move by the group to diversify assets outside of Singapore and China.
But why is CapitaLand venturing into the US multi-family territory? Firstly, Chow says the portfolio is well located in the metropolitan areas of Seattle, Portland, Greater LA and Denver in well-connected suburban communities.
“The areas also include many Fortune 500 corporations and major companies that attract net immigration and job growth. The economies in these regions are also driven by diversified industries,” says Chow.
In addition, the multi-family portfolio’s occupancy is over 90%, and has steady renewal rates of 50-60% that provides reliable cash flow and operational stability.
The acquisition will increase its total assets from $62.5 billion to $63.6 billion with international assets to rise from 12% to 14% of total portfolio after the acquisition.
To be sure, the US multi-family sector is a deep and scalable sector with a total capital value of over US$3.3 trillion and accounts for 15% of the total housing stock in the US.
Within the commercial real estate asset class, this segment offers the highest average returns of close to 10% p.a. in the last three decades. With 3,787 units or about 1,000 units in each cluster, the portfolio also enjoys economies of scale, needing only 1.5 staff per 100 units.
CapitaLand’s multi-family portfolio’s occupancy is over 90%, and has steady renewal rates of 50-60% which provides reliable cash flow and operational stability. In past recessions, rent arrears for this asset class averaged 4-5% vs 0.6% in normal times. Occupancies also tend to remain fairly resilient but rates may come off slightly, accordingly to management.
There are also value-add opportunities, including US$50 million in asset enhancements initiatives (AEIs) to renovate two-thirds of the units. Management notes that since the AEIs can be carried out over 2-3 days when tenants vacate, the overall occupancy is likely to still stay high at over 90%.
CapitaLand says the acquired assets will immediately contribute income to the group. Value-add opportunities, including asset enhancements, will eventually lead to revaluation gains and allow management the option to spin off the properties into investment vehicles and partnerships.
Class B multi-family properties have yields of 5.0-5.5%. Management estimated the acquisition will lead to a 1.4% accretion to FY17 pro-forma EPS.
UOB is maintaining a “buy” with target price of $3.78, based on a 20% discount to our RNAV of $4.73 per share.
Year to date, shares in CapitaLand are down 4.8% to $3.38 or 13.7 times FY20F earnings.
