Last year, the share price of CapitaLand Investment (CLI) eked out a gain of 8.5%, with a total return including dividends reinvested of more than 12%, according to Bloomberg. By contrast, the FTSE ST All Share Real Estate Index fell by 11% in 2022, and by a lower 7% if dividends were reinvested based on Bloomberg’s calculations. Whether CLI continues to outperform the broader real estate sector this year remains to be seen.
However, with the rapid rate hikes by the US Federal Reserve from May 2022 onwards, the real estate and REITs sector had to contend with higher interest expenses and lower valuations, as valuers in some developed markets marked commercial property valuations down.
As a real estate investment manager or REIM, CLI’s earnings profile is different. As part of the old CapitaLand’s restructure as a REIM, CLI now reports funds under management (FUMs), lodging management (LM), fee-related earnings (FRE), fee income-related business (FRB), ratios such as FRE/FUM and metrics such as LM FRE. (CLI has gone to town on abbreviations but these are the key ones.) Traditionally, FRE and FRB are viewed as annuity-like, and less volatile than developer earnings which tend to be “lumpy”. The key to growth and higher earnings is to manage more funds efficiently and keep a fairly liquid balance sheet, as REIMs tend to be asset-light.
As at Sept 30, 2022, CLI’s FUM stood at $86 billion, and embedded FUM was $6.1 billion. (Embedded FUM of $3.4 billion is the estimated FUM from committed and undeployed capital for private funds and announced REIT transactions which are not completed and yet to be included in FUM as of 3Q2022, and $2.7 billion from announced transactions post 3Q2022.)
For the nine months to Sept 30, 2022, FM FRE/ FUM was 53 bps versus 50 bps as at Sept 30, 2021, while LM FRE stood at $190 million, up 48% y-o-y. In 1HFY2022 ended June 30, 2022, CLI reported revenues of $1.354 billion (up 29% y-o-y), operating patmi of $346 million (up 31% y-o-y) and patmi of $433 million (down 38% y-o-y). The decline was due to lower portfolio gains from asset recycling.
Globally, money is a lot more expensive. The Fed raised its federal funds rate seven times, with hikes of 75 bps four times within a year, a first. This caused asset transactions globally to slow down.
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Despite this, CLI launched five new funds, including two in Korea and two in China. In October 2022, CLI partnered APG, a Dutch pension fund, to build a pan-Asian storage platform.
In the first nine months of 2022, CLI raised $752 million in capital from third parties. In a Jan 3 report, JP Morgan reckons that CLI’s FUM would be able to grow to $106 billion this year, ahead of CLI’s own $100 billion target for 2024.
“Combined with an upturn in the lodging business on global travel recovery and a 20% jump in lodging units under management, we estimate this will drive a strong 17% two-year cagr in core Patmi. CLI also offers an attractive 4.3% yield for FY2022,” JP Morgan says.
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The risks to this outlook include risks associated with CLI’s REITs and private funds in terms of funding costs and access to funding, JP Morgan indicates.
On Dec 30, 2022, CLI’s group CEO Lee Chee Koon sent out a new year message in the form of a poem. These four verses are key to executing well this year: “The key growth drivers which we will pursue are to manage funds well, and expand lodging too. With inflation rates high, and liquidity tight, we must get capital management right.”
As at Sept 30, 2022, CLI’s net debt/equity was a manageable 0.49x, and interest coverage ratio a comfortable 4.2x with $7.2 billion of undrawn facilities in case any distressed sale emerges.