Navigating rough waters, CapitaLand Investment can surprise shareholders by distributing units in Reits

LIKE most of its property peers, CapitaLand Investment (CLI) is facing down a tough environment amid global economic uncertainties.

But perhaps the group can surprise its investors by doing a distribution in specie of units in real estate investment trusts (Reits) that it holds. 

The real estate investment manager trades at a superior book-value multiple compared with Singapore-listed property groups City Developments Limited (CDL) and UOL Group .

Over 2022, CLI’s share price rose 8.5 per cent while CDL’s jumped 20.9 per cent and UOL’s fell 5.2 per cent. 

Rising to the challenge

CLI’s business model makes it vulnerable to rising interest rates, as investors use higher discount rates to value CLI’s Reits and worry over rising borrowing costs of the trusts.

As volatile stock markets make it harder for Reits to buy assets, CLI may face difficulty earning acquisition fees or growing management fees from Reits scaling up via acquisitions.

Capital recycling – the selling of assets and deploying of monies in attractive opportunities – can get tricky for CLI under the current climate.

As geopolitical uncertainties cause decision-makers to adopt a risk-off approach, asset divestment may be harder.

Cost of capital also rises with higher interest rates, which potentially leads to deeper scrutiny of opportunities and less aggressive pricing by buyers. For 2022, CLI’s capital recycled was S$2.9 billion – shy of its annual target of S$3 billion. 

CLI‘s relatively large China exposure also raises uncertainty. As the country makes a messy exit from its zero-Covid strategy, it may take some time for consumer confidence and the economy in China to recover.

China, including Hong Kong, accounted for 32 per cent of the group’s total assets of S$36.4 billion as at end-September 2022.

On the other hand, CLI did well to launch private funds in tough market conditions last year. Expanding the private fund management business will help strengthen CLI’s asset-light and capital-efficient business model.

At the same time, CLI’s growing lodging business should benefit from post-Covid recovery.

Still, investors may fret over how CLI’s top management sees the investment landscape, and whether the group can maintain the dividend per share of S$0.15 that was paid for 2021, when CLI announces its full-year results.

Distribution in specie

Perhaps, CLI can surprise and reward its shareholders – while lightening its balance sheet – by distributing in specie to its shareholders some of the units it holds in its Singapore-listed trusts. 

As at end-September 2022, CLI held effective stakes of 23 per cent in CapitaLand Integrated Commercial Trust (CICT), 18 per cent in CapitaLand Ascendas Reit , 37 per cent in CapitaLand Ascott Trust , 24 per cent in CapitaLand China Trust and 22 per cent in CapitaLand India Trust . 

Hong Kong-listed ESR Group – the largest real asset manager in Asia-Pacific – holds under 10 per cent of units in Suntec Reit . ESR’s ARA Asset Management owns the manager of Suntec Reit.

By holding smaller stakes in the listed trusts that it manages, CLI can become more asset-light while keeping the size of funds under management (FUM). CLI had FUM of around S$86 billion as at end-September 2022, and it intends to grow FUM to S$100 billion by 2024.

In November 2022, CLI announced the setting up of two onshore renminbi funds to invest in business park opportunities in China. CLI said that, aligned with its asset-light strategy to grow its FUM, it will hold stakes of 10 per cent and 20 per cent in these funds. 

Meanwhile, CLI holds a 10 per cent share of the initial equity commitment in its partnership with APG Asset Management to build an Asia-focused self-storage platform. APG is the investment manager for the largest pension provider in the Netherlands.

Holding a large stake in a Reit entrenches CLI’s position as the manager. However, holding a stake closer to 10 per cent in a Reit could be enough to show that the sponsor has skin in the game.

For one, if CLI holds smaller stakes in its various trusts, the free floats of the said trusts would improve.

Moreover, with CLI’s track record in managing Reits, investors will likely support CLI to manage the said trusts, even if it holds smaller stakes in them.

For example, if a CLI shareholder receives about 71 CICT units for 1,000 CLI shares held, the value of the CICT units received works out to around the S$0.15 dividend per share that CLI shareholders received for the last financial year, based on CICT’s unit price as at Jan 25, 2023. In this scenario, CLI distributes a stake amounting to under 6 per cent of CICT. 

CLI has a healthy cash balance, available undrawn facilities and a robust credit profile that positions it to weather future economic headwinds and capitalise on opportunities. It need not resort to distributing Reit units in order to minimise the cash dividend payable.

Nonetheless, CLI has room to lower the size of stakes held in its listed trusts. And CLI shareholders may be happy to get a mix of cash dividend and units of listed trusts.

CLI’s group chief executive officer Lee Chee Koon was named the Outstanding Chief Executive Of The Year for the Singapore Business Awards 2022. The group’s then group chief financial officer Andrew Lim was named the best CFO in the category for companies with over S$1 billion in market capitalisation at the Singapore Corporate Awards 2022.

Shareholders can be hopeful that CLI’s board and management will astutely steer the group through choppy waters of slower economic growth, high inflation and high interest rates, while looking after their interests well.

The writer holds shares in CLI.