CapitaLand's big restructuring: Is this the deal investors have been waiting for?

IF I have learned anything from watching CapitaLand over the last two decades, it is that the group never admits to being at a disadvantage; and never tires of imagining what it could become in the future.

This aggressive let's-make-lemonade-with-our-lemons attitude is admirable. But, for investors, it can mean having to cope with shifting strategies, and swallowing seemingly strange justifications from the group for its corporate actions.

In February 2009, when the markets were still reeling from the Global Financial Crisis, CapitaLand announced plans to raise S$1.84 billion through a deeply discounted rights issue.

The news release put out by the group was headlined, "CapitaLand raises capital from a position of financial and business strength"; and it characterised the rights issue as "a strategic initiative ... consistent with CapitaLand's track record of proactive capital management".

I could not help but marvel at the audacity of CapitaLand's top executives and communications team. Markets across the world had tumbled, but they seemed utterly convinced that investors would see why their company deserved more money.

It was also in 2009 that CapitaLand spun off its retail property business as a separately listed company called CapitaMalls Asia (CMA). The idea was for CMA to be able to tap the market independently to support its fast growth.

This proved to be a strategic mistake though. The separately listed CMA did not perform well after its IPO, and sapped some of CapitaLand's own investor following.

In 2014, CapitaLand took CMA private again. But, the group described the about-turn as part of an effort to streamline itself and focus on integrated development projects.

Since then, with the rise of e-commerce, CapitaLand has quietly downplayed the importance of its retail property business and tried to expand into more promising fields.

In January 2019, CapitaLand said it would acquire Ascendas-Singbridge from Temasek Holdings for S$6 billion, in a deal that would give it significant exposure to assets such as logistics properties and business parks, which are benefiting from the growth of e-commerce and the knowledge economy.

For investors, however, this expansion has not really paid off. For one thing, CapitaLand financed the purchase of Ascendas-Singbridge with an equal proportion of cash and new CapitaLand shares priced at S$3.50 each - a steep discount to its net asset value (NAV) per share.

This had a dilutive impact on CapitaLand's NAV per share. The deal also left the group with higher gearing.

More to the point, the transaction did nothing to reduce CapitaLand's absolute exposure to its retail property assets, which were badly affected by Covid-19 last year. Revaluation losses related to properties such as ION Orchard, Jewel Changi Airport and Raffles City Chongqing pushed CapitaLand deep into the red for FY2020.

Looking back, CapitaLand received little credit from investors for all its initiatives. Over the past decade, even as the company's financial and operational scale increased, its share price has essentially traded sideways.

Up until a week ago, shares in CapitaLand had delivered a total return of just 22.2 per cent since obtaining the eligibility to list CMA back in 2009. The Straits Times Index returned 75.2 per cent during the same period.

Reorganising for growth

This past week, however, shares in CapitaLand climbed more than 16 per cent, after the group unveiled a major reorganisation plan.

Under the deal, CapitaLand's property development business will be taken private by its controlling shareholder while its real estate investment management activities and lodging business will remain in the public market under an entity called CapitaLand Investment Management (CLIM).

CLIM is being styled as a fully integrated real estate investment manager (REIM) "with funds and property management capabilities across multiple asset classes and a spectrum of private and listed funds".

CLIM will house CapitaLand's real estate investment trusts (Reits) and private funds platforms. The value of its stakes in its Reits and private funds are likely to be about S$7.8 billion and S$5.5 billion, respectively.

At inception, CLIM will also have within its investment portfolio some S$10.1 billion worth of income-generating properties that have the potential of being monetised within three years.

Retail properties, offices and integrated developments will account for 29 per cent, 19 per cent and 7 per cent of this portfolio, respectively. "New economy" assets such as logistics properties and business parks will account for a further 23 per cent. Lodging assets will account for the remaining 22 per cent.

The privatised development arm of CapitaLand will continue to support CLIM, by providing its funds and Reits with a pipeline of assets; and by participating in development activities involving assets held by CLIM or its funds.

Meanwhile, the lodging business that will be held under CLIM could provide it with a growing source of fee-related earnings - especially as Covid-19 travel restrictions are gradually lifted over the next couple of years.

Under the reorganisation plan, minority shareholders of CapitaLand will effectively swap their shares for a combination of shares in CLIM, units in CapitaLand Integrated Commercial Trust (CICT) and some cash. This consideration is estimated to be worth S$4.102 per CapitaLand share, according to the company's announcement last week.

This is based on CLIM being valued at its NAV of S$2.823 per share.

The big question is whether shares in CLIM will end up garnering the market valuation expected of it. Prior to the announcement of the reorganisation, CapitaLand was trading at a 23 per cent discount to its NAV as at Dec 31 of S$4.30 per share.

Officials at CapitaLand are betting that CLIM will obtain a much higher valuation. In a presentation on the proposed restructuring, they pointed out that REIMs such as Charter Hall Group, Goodman Group, Lendlease Group and ESR Cayman are trading at a market cap weighted average of 2.6 times their NAV.

Shares in CapitaLand closed Friday at S$3.85.

Becoming a REIM

So, what does all this mean for investors? In my view, CapitaLand has taken an important step towards unlocking the substantial value that resides within the group. Consequently, its shares probably will trade at a much narrower discount to book value than in the past.

Whether CLIM garners valuations comparable to established REIMs like Charter Hall, Goodman and ESR Cayman, however, is another matter. Much is likely to depend on CLIM's success in making good quality acquisitions from third-party sources, and delivering the asset-light and capital-efficient growth it is promising.

The faster CLIM establishes a strong track record in building up its investment management business, the quicker investor focus will shift from the dynamics of its investment property portfolio, and - logically - the more likely it is that its shares will trade at a premium to its NAV.

If CapitaLand succeeds in fashioning itself into a thriving REIM, the decade ahead could be more rewarding for its shareholders than the one that has just passed. And, the enormous self-confidence the group displays might not seem quite so jarring to investors.

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