“We earlier forecasted revaluation losses of $0.4 billion to $0.8 billion due to China (down 1% to 3% with unchanged cap rates) and 30 basis point (bps) to 50 bps cap rate expansion in four other markets,” says Lee, who kept his “buy” call on CLI. He also expects CLI’s net gearing to increase by 1 percentage point (ppt) to 4 ppts to 58% to 60% from 57% in the 1HFY2023. CLI’s net asset value (NAV) per share is also estimated to fall by 3% to 5% to $2.68 to $2.75 versus its last NAV of $2.83.
However, the revaluation exercises of CLI’s six listed REITs stood as a “pleasant” surprise with total attributable revaluation losses/gains of only $0.2 billion and $1.1 million, notes Lee.
CapitaLand China Trust (CLCT)’s assets under management (AUM) fell by only 1% with its Singapore REITs’ AUM were up by 2% to 6%, the analyst points out.
Meanwhile, the weak markets were REITs with exposure to US properties. For instance, CapitaLand Ascendas REIT (CLAR) and CapitaLand Ascott Trust (CLAS) saw their US AUMs drop by 18.5% and 2.1% respectively. “[This] implies [a] potential major write-down of CLI’s multi-family portfolio (of US$1.1 billion or $1.48 billion)”, says Lee. Another weak market in CLI’s portfolio is its Australian assets where CapitaLand Integrated Commercial Trust (CICT) and CLAR saw declines of 9.5% and 4.5% respectively in their Australian AUMs.
In the 1HFY2024, the analyst estimates CLI’s pace of divestments to remain slow, similar to the pace seen in the 1QFY2024 so far.
“We estimate [that] CLI (including its listed and private funds) divested [some] $1.8 billion of assets at a 20% premium in FY2023, representing [a] 41% y-o-y decline and below [its] five-year average of $5.9 billion,” says Lee.
“While 1QFY2024 has tripled y-o-y to $0.9 billion, we expect the slow divestment pace to persist through 1HFY2024 on potential rate cuts in most countries occurring in 2Q2024 at [the] earliest,” he adds. The “uninspiring” yield spreads in most target markets and majority – or 47% - of pipeline on-balance-sheet assets in China, where there is tepid buy interest are also contributors to Lee’s view.
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“The difficulty in divesting also weakens REITs’ ability to expand funds under management (FUM) given high gearing of 39%, while high cost of equity (6.1%) and 1.0 times P/B toughens equity raise,” he says.
In FY2023, Lee has changed his core patmi estimates to $787 million, 9% lower than his previous forecast. He has also lowered his core patmi estimates for FY2024 and FY2025 by 3.6% and 3.1% to $917 million and $1.02 billion respectively.
His target price is lowered to $3.99 from $4.57 previously on a higher revalued net asset value (RNAV) discount of 20% on slower divestment and FUM expansion pace.
Following CLI’s results, Lee sees any negative kneejerk share price impact to be a buying opportunity.
However, he’d like to see the group conducting platform acquisitions, sustained share buybacks with share cancellation and China recovery/lower exposure to offset slow divestment pace (especially China; ~half of pipeline assets) and REITs’ weak FUM expansion prospects in the near-term.
Shares in CLI closed 3 cents lower or 1.08% down at $2.74 on Feb 27.
