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CapitaLand Investment (CLIM) – a closet growth stock?

SG, Stocks

Written by:

Alvin Chow

The restructured CapitaLand Investment Management (CLIM) was officially listed on Monday 20 Sep 2021 at S$2.95 under the stock code, 9CI. Its share price had risen by 19% since.

CapitaLand has grown tremendously over the years, its no wonder that investors love it. But as the new CLIM continues towards its goal of becoming one of the largest real estate investment managers in the world, there’ll be competition and perhaps more restructuring in the future.

To the potential returns we might get as investors, I dig into CapitaLand’s history and previous strategies to draw some conclusions on their future prospects and growth.

Brief History of CapitaLand

CapitaLand was created over 20 years ago over several mergers and acquisitions. This would prelude many of its subsequent strategies, hence I think it’d be good to start the story from the pre-CapitaLand days.

DBS Land

Few people know that DBS Land existed and was a separate listed entity. DBS Group used to have a property investment arm but in 2000, the Monetary Authority of Singapore (MAS) set a new policy stating that banks could no longer be engaging in non-financial activities including real estate investment. DBS even had a stake in Singapore Petroleum Corp (SPC, yes, the petroleum company which is now part of PetroChina). The assets held under these activities had to be divested within three years.

The reason was to strengthen the financial system by minimising a contagion effect during a crisis – banks should focus on banking and not have too many other activities that increase the chances of problems linking to them. This was likely a follow-up response to the painful 1997 Asian Financial Crisis where Thailand was the epicentre of the problem. There were lax lending and over-leverage in the real estate market leading to a banking and currency crisis that spread across Southeast Asia.

DBS Land + Pidemco = CapitaLand

About 20 years ago, Pidemco was another big name property player in Singapore but I bet only the old-timers may remember it. It was a subsidiary of Singapore Technologies (aka ST, the former version of ST Engineering) – you would be wondering why an engineering company has a property arm.

The diversification for ST started in the 80s when the Ministry of Defence drew up the Singapore Defence Industries Charter which stated that defence companies should diversify to generate revenue from non-defence businesses in order to be economically viable.

By 1995, only 27% of ST’s revenue was defence related. In 1996, Temasek transferred Pidemco to ST with the purpose of listing Pidemco. By then, ST had the experience of listing many of its holdings which included ST Aero, ST Shipbuilding, ST Capital, ST Electronic & Engineering, ST Auto and ST Computer Systems & Services.

The listing of Pidemco didn’t happen as expected because DBS Land became available as an attractive merger due to the new MAS directive (discussed in the previous section). DBS Land was already a listed entity and a merger would automatically make Pidemco part of the bigger listco.

Some would say that the merger between Pidemco and DBS Land isn’t a difficult task because Temasek had controlling stakes in both ST and DBS. Maybe it is true but there were foreign bidders for DBS Land when it was put up for sale, and here’s a recount of the event:

Singapore Technologies made an unsolicited offer and found that DBS Bank was about to close some serious offers from international suitors. DBS went back to these international bidders to give them the opportunity to make counter offers. There was nothing to stop other local players from making a bid too – perhaps they did consider and decided not to pursue. It was not a done deal, and ST had to live for some days with the possibility that it would be outbidded. It was perhaps luck or happenchance that ST caught the last sliver of the window for a bid. But perhaps it was because Pidemco had been continually evaluating various opportunities for investment and divestment, looking for ways to both skill up and scale up.

The successful acquisition of the DBS Bank’s stake in DBS Land, in competition with other international suitors, paved the way for the eventual merger of Pidemco and DBS Land to form CapitaLand.

Ho Ching, Executive Director of Temasek, Speech made on 17 Jul 2002 during the listing of CapitaMall Trust

On 18 Oct 2000, the merger was officially approved and CapitaLand was born. It had a star-studded board of directors who straddled between the public and private sectors:

  • Philip Yeo was the Chairman (currently chairman of EDB)
  • Hsuan Owyang was the deputy Chairman (former HDB chairman)
  • Peter Seah was director (currently chairman of DBS and SIA)
  • Lim Chin Beng was director (former deputy chairman of SIA)
  • Jackson Tai was director (former DBS CEO)
  • Hsieh Fu Hua was director (former CEO of SGX)
  • Lucien Wong was director (currently Attorney-General)
  • Liew Mun Leong was the CEO (stayed on the helm until Jun 2013. He was caught in the legal battle with his domestic helper which drew a lot of public attention in 2019.)

CapitaLand was not a product of entrepreneurship but rather a top-down initiative and a company helmed by quasi-civil servants. Ho Ching, in the same speech made during CapitaMall Trust IPO, acknowledged that. She said the direction is to build a professionally managed real estate company that could compete globally.

Pidemco was then a collection of URA resettlement projects, which was corporatised and later expanded to cover property investments overseas. [Third class properties in first class sites, as some would say.]

The question then was what Pidemco should do with such a mish-mash of legacy assets. It was not practical for Pidemco to pretend to be another Far East or City Dev, without the entrepreneurial flair of private individual owners like Ng Teng Fong or Kwek Leng Beng. Nor would such a strategy add value to the economy, or build a lasting business.

Instead, the strategy in Pidemco was to build a professionally managed real estate company. Highly competent and committed teams must develop new value add services and products, with the potential for scaling up and travelling to international markets. That is one way for Pidemco to build a distinctive advantage and differentiation from other competitors.

Ho Ching, Executive Director of Temasek, Speech made on 17 Jul 2002 during the listing of CapitaMall Trust

CapitalMall Trust – The inaugural REIT on Singapore Exchange (SGX)

Just one year after the merger, CapitaLand had plans to list SingMall Property Trust but it was deferred because the stock market was in the doldrums after the Dotcom bubble burst.

Finally on 17 Jul 2002, CapitaLand made history when it listed the first-ever Real Estate Investment Trust (REIT) on SGX. It was called CapitaMall Trust (CMT) and the starting property portfolio only had 3 malls:

  • Tampines Mall
  • Junction 8
  • Funan The IT Mall

CapitaLand continued to hold a 40% stake in CMT which is a wonderful thing for the owner and I will explain it in the subsequent section.

CMT’s initial projected yield was 7% and was oversubscribed by five times. It proved to be a popular instrument among property-craving investors who may not have a large capital to sink into an entire property unit. In addition, REIT investors do not have to manage tenants and properties.

The REITs are liquid and investors could buy and sell easily which is unlike transacting physical properties. REIT investors just need to hold the units and collect dividends regularly (and qualifying REITs do not need to pay tax on their rental income). There are many reasons to like REITs as an investment.

Fast forward to 2021, Singapore has the largest REIT market in Asia after Japan. There are 42 REITs and property trusts listed on SGX and the list is growing. The REIT market has really blossomed in Singapore and CapitaLand was a pioneer.

3 strategies CapitaLand employed for continuous growth

Strategy #1: Recycling capital via REITs

Real estate is a capital intensive investment. Companies like CapitaLand has a large amount of capital ‘locked’ in properties that could have been used for other projects.

REITs are a great instrument for property companies to sell part of the assets to other investors, free up some capital and recycle it into other opportunities – e.g. buy new land or fund development projects. Most of the parents (or sponsors) of these REITs still retain a large stake to ensure they control the direction and operations of the REITs’ portfolio.

i) Listing new REITs

CapitaMall Trust Spin-off (2002) = ~S$351M raised

Let’s look at the CapitaMall Trust’s IPO Prospectus (2002) for more details.

CapitaLand owned 91% of CapitaMall Trust prior to the latter’s IPO. The stake was sold down to 37.7% via the listing. It was a combination of redemption as well as the sale of units to cornerstone investors.

213M new units were issued at S$0.96, which was worth S$204M. Out of which, 195m units were redeemed by CapitaLand (convert units to cash), worth S$187M. Another 182M units were sold to other investors. Assuming volume discount at S$0.90 per unit, CapitaLand would receive another S$163.8M.

All in all, CapitaLand raised an estimated S$350.8m in this CapitaMall Trust spin-off.

At the same time, CapitaMall Trust remains managed by a wholly-owned subsidiary of CapitaLand. This is what I meant when I said that the sponsors could cash out on their properties without losing control.

CapitaMall Trust was just the first of the many REITs to come from CapitaLand. More CapitaLand related REITs were listed in the ensuing years.

CapitaCommercial Trust Spin-off (2004)

CapitaCommercial Trust (CCT) became the second REIT to be spun off by CapitaLand. CCT’s IPO concluded in 2004 but it was unlike CMT’s IPO. CapitaLand had about 40% stake in CCT and selling more units meant further dilution.

CapitaLand chose to do a dividend-in-specie whereby CapitaLand shareholders were given CCT units, and there was no cash raised.

Ascott Residence Trust and CapitaRetail China Trust Spin-offs (2006) = ~S$477M raised

In 2006, Ascott Residence Trust (ART) and CapitaRetail China Trust (CRCT) were listed.

ART’s listing raised an estimated amount of S$225.7m. CapitaLand continued to hold a 47% stake in ART.

As for CRCT, the gross proceeds raised for CapitaLand (via its subsidiaries) was estimated to be about S$251m. Most of the fundraising came from institutions – 164.3m units were offered to institutional investors with another 29m for the public. CapitaLand retained a 20% stake in CRCT.

ii) Selling properties to REITs

Listing is not the only avenue that sponsors like CapitaLand can cash out money. They can sell properties to the REITs continually.

For example, here is a list of the subsequent sales of CapitaLand’s associated assets to CMT:

  • 2003: IMM for S$264.5m
  • 2004: Plaza Singapura for S$710m
  • 2005: Bugis Junction for S$580.8m
  • 2006: Raffles City for S$2,085m (joint acquisition between CMT and CCT)
  • 2007: Remaining stake in Lot One, Bukit Panjang Plaza and Rivervale Mall for S$290.3m
  • 2008: The Atrium@Orchard for S$839.8m
  • 2010: Clarke Quay for S$268m
  • 2015: Bedok Mall for S$780m
  • 2018: Remaining stake in Westgate for $17.9m + taking over the loan book

It looks like a win-win situation whereby REITs get a steady pipeline of properties from the sponsor and the sponsor is able to free up cash to reinvest in other projects, thereby growing assets for both sponsor and REIT.

It becomes a virtuous cycle where sponsors develop projects, start property funds, or acquire investment properties then sell to REITs and recycle capital.

Although I have only shown the case for CMT, the same applied to the remaining REITs under CapitaLand.

iii) Earning from REIT Managment Fees

Besides recycling capital, REIT management is a lucrative business too. There are 3 fee components and sponsors like CapitaLand would receive the fees in 1 and 2 via its subsidiaries:

  1. Property management fees: 2.00% per annum of the gross revenue of the properties, 2.00% per annum of the net property income of the properties; and 0.50% per annum of the net property income of the property, in lieu of leasing commissions.
  2. Asset management fees: 0.5% of deposited property
  3. Trustee fees: 0.1% of deposited property

To give you some numbers, the first full year (2003) fees for CMT were a total of S$11.5m:

  • Property management fee = S$4.4m
  • Asset management fee = S$6.8m
  • Trustee fee = S$0.3m

iv) Earnings from Dividends

Another source of cash flow is from the dividends received from the REITs. Remember, CapitaLand still holds stakes in the REITs and the parent company is entitled to dividends just like every other unitholder.

Hence, REITs is a wonderful instrument for CapitaLand to be able to recycle capital from their properties, continue to have control over the assets and at the same time, receive dividends. They also generate fees for their management services.

There were little reasons not to get into REITs. (there’s also little reason why you shouldn’t invest in REITs. Our free guide will help you get started. Download here)

Strategy #2: Race to bigness

CapitaLand has residential, commercial and retail real estate in its portfolio but not industrial. The merger with Ascendas-Singbridge in 2019 expanded the diversity of CapitaLand’s investments.

Prior to the merger, CapitaLand was ranked the #14 real estate investment manager in the world by Assets Under Management (AUM). The merger propelled CapitaLand to the top 10!

It was not a difficult deal to execute considering Temasek have stakes in both CapitaLand and Ascendas-Singbridge. I suspect it might even be a top-down initiative to create a bigger real estate company in Singapore.

The deal was a big one valued at $6b. CapitaLand would pay half in cash and half in CapitaLand shares. Temasek’s ownership of CapitaLand increased to 51% after the transaction.

After the merger with Ascendas-Singbridge, CapitaLand found it convenient to merge ART and Ascendas Hospitality Trust since their businesses were similar. ART was already the largest hospitality REIT in Asia Pacific and the combination made it even larger and harder for other REITs to catch up.

The next CapitaLand’s REIT merger was in 2020, between CMT and CCT. They proposed to merge to form CapitaLand Integrated Commercial Trust (CICT), becoming the third-largest REIT in Asia Pacific!

It seems like CapitaLand is building on its success and now it has enough assets to stand among the world’s biggest real estate companies.

Advantages of being big

There are advantages to being a big and renowned property company besides vanity:

  • It could get better credit ratings and lower interest rates for its loans.
  • It would have more assets to package into REITs and unlock more value.
  • It could move up the hierarchy to acquire even more premium assets which were previously unattainable.

I think CapitaLand (or Temasek) is not resting on its laurel and it could be eyeing more mergers and acquisitions (M&A) in the near future.

Potential mergers in future?

A prime M&A target could be Mapletree Investments.

The key reasons are that Mapletree is part of Temasek too which makes it easy to facilitate the deal, and Mapletree is a sizeable property company on its own with S$66.3 billion AUM. A merger with CapitaLand could possibly propel the combined entity to the top 5 in the world!

To top it off, Mapletree REITs can find synergy with CapitaLand’s REITs. Mapletree Commercial Trust (MCT) can merge with CICT. Mapletree Logistics Trust and Mapletree Industrial Trust can merge with Ascendas REIT. Lastly, Mapletree North Asia Commercial Trust can merge with CapitaLand China Trust.

Another possible target would be Keppel Land. It is currently a wholly-owned subsidiary of Keppel Corp in which Temasek has a 20.97% stake. Again, it wouldn’t be too difficult if they want to get the deal done.

With S$14.8b in assets, Keppel Land is a more digestible size compared to Mapletree Investments. It has 5 REITs namely, Keppel REIT, Keppel DC REIT, Keppel Pacific Oak US REIT and Keppel Infrastructure REIT. Only the last REIT may not be relevant to CapitaLand and can be retained in Keppel.

Keppel Corp has stated its intention to acquire the post media-spinoff SPH and that would make Keppel’s property portfolio stronger and an even more attractive target for CapitaLand once completed.

It has been an amazing journey for CapitaLand in a 20-year period – growing from a new property company to being among the top 10 real estate managers in the world. I believe CapitaLand is on the next phase of growth via M&As.

Strategy #3: Delineate investment and development

The business buzzword today is ‘asset-light’. You hear about how Airbnb is the world’s largest hotel but it does not own any hotels, or Uber is the world’s largest transportation company but it does not own a fleet.

One of the key advantages of an ‘asset-light’ business is that it can scale fast as it isn’t bogged down by the need to raise loads of capital for expansion. This is why many of today’s tech companies can capture a big market in a much shorter time than what businesses could have done in the past.

CapitaLand is definitely an asset-heavy business considering it is in real estate. But, a REIT is a good example of a delineation between property ownership and management.

There are two parts to the real estate business. The REIT unitholders are the owners who get the capital intensive part of the business while the REIT managers own the asset-light part. Think about it, the REIT managers do not need to own the properties in order to be paid fees.

Similarly, the original CapitaLand has both asset-heavy (development) and asset-light businesses (management). In early 2021, CapitaLand proposed to restructure and split the two businesses. The asset-heavy development business would be privatised while the asset-light business will remain listed.

The CapitaLand management believes that this would unlock value for the stock as the investors’ perception of the development business have been poor.

Developer stocks have been trading around a Price-to-Book ratio of 0.6x to 0.8x, while real estate investment manager stocks are at 2.6x. This shows that investors are more willing to pay a premium for the asset-light business.

But this doesn’t mean that an asset-heavy business is bad. Instead, it has to do with the nature of real estate development – you cannot complete a building in a day, it takes years. Hence, the revenue and earnings are much more unpredictable and cyclical. The risk is also higher given that a large capital outlay is required, the ROI is unknown and it’s susceptible to the risk of government policies.

Investment management on the other hand is consistent, earning a stream of income from the assets under management on a quarterly basis. It is a much more attractive business model compared to development and hence worthy of a premium for its valuation.

The restructured CapitaLand Investment Management (CLIM) wants to be one of the largest real estate investment managers in the world. The restructuring has been completed and sets the foundation for the vision to be realised.

Investors like the new CLIM and the share price has risen by 19% since it started trading on 20 Sep 2021 – this is how you magically unlock value.

CapitaLand’s Immediate Challenger

It is not a time to celebrate for CapitaLand yet because another real estate investment manager, ESR Cayman, has made a move to acquire the largest manager in Asia Pacific, ARA Asset Management.

ARA Asset Management used to be listed on SGX but was delisted in 2017. It is now privately owned by:

  • Private Equity Fund, Warburg Pincus,
  • SGX-listed Straits Trading,
  • co-founder John Lim,
  • Li Kashing’s CK Asset,
  • and others.

The additional assets from ESR would widen the size gap between the ESR and ARA combined entity versus CLIM.

That said, I am confident that CLIM would continue to find more ways to grow via M&As and the other property companies under Temasek would provide the pipeline to do so.

CapitaLand’s growth prospect

Singapore might be small but we have a global vision.

Singaporeans may not be the best innovators but we are good managers who can execute.

With vision and execution comes results.

CapitaLand is a testament to these characteristics. It started off as a merger between DBS Land and Pidemco in 2002 with a vision to be a professionally managed real estate company. It succeeded and now CapitaLand is one another phase of the challenge – to be one of the world’s largest real estate investment managers.

The track record is fantastic. Although we complain about how top-down or Temasek-led all the growth had been, I really hope we can break the curse of the real Singapore Inc. CLIM is our best hope for now.

I think the best has yet to come and CLIM can become a much bigger version of itself in the future. I also believe that the plans have already been laid out but only the insiders knew about them.

That said, CLIM isn’t going to be the most exciting growth stock you can buy. We are unlikely to have ground-breaking inventions but becoming a global real estate manager is something Singapore can achieve.

I believe the track record of execution would eventually realise the vision. Slowly but surely.

P.S. I share how I evaluate stocks to find potential multibaggers that can grow my money, join me

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