CapitaLand Investment (CLI) has lost 11.7% over one year as of Dec 16, and is down 15% this year. Keppel, an alternative asset manager, has lost 3.1% this year, and 1% over one year. ESR Group’s share price is up 11% this year, and 19% over a one-year period.
ESR Group is not a strict comparison to CLI and Keppel. All three are focused on different asset classes, although some overlap. All three are sponsors to REITs and funds, although the asset classes differ. ESR has a privatisation offer from a consortium of institutional investors.
CLI and Keppel have stated targets of $200 billion in funds under management (FUM) by 2028 and 2030, respectively.
The focus on growing FUM started in 2021 when CapitaLand announced plans to split its development business from its real estate investment management and property management business. The purpose is for the listed entity, CLI, to be a real estate investment manager (REIM). The development business sits under the privately held CapitaLand Development.
On Dec 16, CLI announced the acquisition of the property and corporate credit investment management business of Wingate Group for A$200 million ($173 million) plus an earn-out based on certain performance hurdles over three years post-completion. The deal with Wingate will see CLI add FUM of some A$2.5 billion ($2.2 billion), translating into price-to-FUM of 7.86% excluding the earn-out. The transaction is among the most expensive, compared with the 4.3% Keppel paid for Aermont and around 6.3% that CLI paid for SC Capital (see table on REIM transactions).
During its investor day on Nov 22, CLI’s top management repeated its FUM target of $200 billion by 2028 and set a new target of operating profit of $1 billion by 2028–2030. Interestingly, CLI’s share price started to decline following the announcement that CLI planned to invest $280 million for a 40% stake in SC Capital Partners announced on Nov 20, for FUM of $11 billion, and continued after the Wingate announcement on Dec 16.
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“Growing the private fund business is a key priority for management and the board, driven by 50% organic, 50% inorganic efforts. CLI will look to pare stakes in listed REITs to 15%–20% from 17%–41% via inter-specie distribution of shares which will be done responsibly or natural dilution from placements for acquisitions. Lodging management remains on track for a $500 million revenue target, and would look to grow via franchising,” JP Morgan summarised in a Nov 24 report.
At CLI’s investor day, JP Morgan analyst Mervin Song pointed out that CLI’s weak share price makes it much harder for the group to deliver its 2028 targets as a REIM. The JP Morgan report said: “We believe the transition will take time to implement, with risk of slower growth over the few quarters, although we anticipate CLI will build the foundation to capture sustainable growth ahead.”
Capital recycling, recurring income
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On Oct 29, Hongkong Land (HKL) announced a new strategy which differs markedly from its traditional development-based build-to-sell residential units and build-and-hold business model for investment property. HKL owns a one-third share of both One Raffles Quay and Marina Bay Financial Centre (MBFC), which are part of the Singapore skyline.
“Our priority is to simplify the business with a focus on Investment Properties in Asia’s gateway cities, generating growth in long-term recurring income. As a result, we will no longer invest in the build-to-sell segment but will instead actively recycle capital out from this business segment into new integrated commercial property opportunities,” the announcement said.
The aim is to deliver enhanced shareholder value through clear long-term growth objectives and targets supported by near-term performance metrics. By 2035, HKL’s new strategic plan and focus are expected to double underlying profit before interest and tax (pbit) in a geographically diversified manner, with no single city accounting for more than 40%; double dividends per share (DPS); grow assets under management to US$100 billion ($135.07 billion) with meaningful participation from third-party capital; and actively recycle capital of up to US$10 billion.
To enhance recurring income, investment properties can be recycled into funds and REITs. Since two thirds of MBFC Towers I and II are in REITs, a third of MBFC Tower III is in a REIT, and two-thirds of One Raffles Quay is in a REIT, it would not be surprising that HKL’s share of these developments are also REITed. The challenge is the tight capitalisation rate, often lower than bank debt, causing a negative carry. The capitalisation rates for HKL’s Singapore portfolio range from 3% to 3.25%.
If recycling capital, taking on capital partners, and focusing on fee income and recurring income sounds familiar, it is. In 2023, Link REIT’s CEO George Hongchoy announced a version of this strategy when he introduced the concept of Link 3.0. Hongchoy articulated the idea of investing with capital partners as Link Asset Management takes a more active role in management.
CapitaLand adopted the asset-light model to focus on recurring income with fees from managing assets boosted by earnings from its development arm as far back as 2002 when it listed its first REIT.
Mapletree Investments, GLP Capital Partners (GLP) and ESR Group have strategies involving developing property, recycling stabilised assets into REIT and funds, and acquiring greenfield or brownfield projects via funds with capital partners. More recently, Frasers Property has also articulated a focus on recurring income from real estate management, supplemented by development profits.
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HKL’s new model
HKL is changing its business model to adapt to the mid-21st century. “We believe the new strategy is a positive credit event for bondholders as the recurring incomes from rental and management fees are substantially more stable compared to the development properties segment. In addition, the large exposure of development properties in China has been dragging down the financial performance and capital of HKL,” says OCBC Credit Research in a recent update.
As of June 30 June, HKL’s investment properties and development properties assets were US$31.7 billion and US$9.6 billion respectively. According to HKL’s 2023 annual report, its development property assets are located in mainland China (82%) and Southeast Asia (16%), primarily in Singapore and Hong Kong.
The Singapore assets would stand at around US$1.53 billion. In 1HFY2024 for the six months to end-June, HKL reported that US$626 million of properties were sold but not recognised in Singapore.
In its Oct 29 briefing, HKL had indicated that the US$10 billion of capital recycling would likely comprise US$6 billion of development properties and US$4 billion of investment properties. The Oct 29 presentation also indicated that HKL is likely to cease developing property.
JP Morgan says: “We would not be surprised if HKL ends up disposing of MCL Land (its subsidiary in Singapore) at slightly below book value, or they may simply take their time in selling the development property projects, eventually depleting the development property land bank.”
Did Keppel row back on asset-light?
Did Keppel row back a little on its asset-light strategy and more importantly, did investors like the move?
This episode starts in 2022, when Keppel announced an asset-light strategy. In April 2022, Keppel divested its offshore & marine business (O&M) via two paths. Keppel O&M was merged with Sembcorp Marine to form Seatrium.
Separately, Keppel established Asset Co, owned by Baluran, Kyanite and Keppel in the proportion of 74.9%, 15.1% and 10% respectively. Kyanite is a unit of Temasek Holdings, and Baluran was indirectly owned by a fund managed by Argyle Street Management and TIH Investment Management.
Keppel divested more than $4 billion of legacy rigs to Asset Co and received a combination of ordinary shares representing 10% equity interest, vendor notes and perpetual securities.
On Nov 19, Keppel announced it will secure control over 13 rigs following a selective capital reduction (SCR) exercise to be completed by Asset Co which will result in Asset Co becoming a wholly owned subsidiary of Keppel. UOB Kay Hian reports that Keppel holds a 10% equity stake in Asset Co, $139 million in perpetual securities and approximately $4.3 billion in vendor notes issued by Asset Co.
The original intention was to repay the vendor notes and redeem the perpetuals as and when the legacy rigs are sold or securitised.
“This [move] gives Keppel full control over the pace of the monetisation of the 13 legacy rigs and the $843 million in cash currently held in Asset Co,” UOB Kay Hian says.
The purpose of the exercise is for Asset Co to be housed within a newly created private fund to be managed by Keppel’s asset management arm, with FUM of around $4 billion to $5 billion.
“Given the company’s historical relationships with its clients, it is confident in attracting investment from third-party funds. We understand that there has been a decent level of interest from investors with the upcycle the O&M industry is currently in,” UOB Kay Hian says.
The $843 million of cash held within Asset Co (as at end-3Q2024) will be utilised to complete the unfinished rigs with an aim to sell the vessels.
Once a monetisation event occurs, Keppel will likely either pay down debt and/or pay out a special dividend to its shareholders, UOB Kay Hian points out.
In a business update, Keppel says that it has monetised $6.1 billion since October 2021, excluding the divestment of Keppel O&M. Keppel’s total assets have reduced by 15% between end-2021 to end-September 2024 while FUM more than doubled from end-2021 to $85 billion as at 1HFY2024.
Does Keppel’s outperformance versus CLI reflect the idea that investors prefer asset managers to have real assets, or is it because Keppel has asset classes such as the data centres and rigs? Analysts and investors may do well to ponder on the asset-light model over the holiday season.
