Maintain BUY; Target Price SGD3.80

• CapitaLand is acquiring 16 multi-family properties in the US. This is a new asset class for the group and is part of its pursuit of new businesses and income streams.
• We see the acquisition as a relatively low-risk proposition with stable income that could be enhanced with active management.
• We keep forecasts unchanged pending deal completion. Maintain BUY and SGD3.80 Target Price, at a 30% discount to RNAV.

Putting a Billion Dollars to Work

Acquired for USD835m or SGD1.14b, these suburban Class B properties are located in Seattle, Portland, Greater Los Angeles and Denver. The acquisition price is in line with CBRE’s valuation of SGD845m. They have a total of 3,787 units with average occupancy of over 90%. Leases are typically signed for one year with 50-60% retention rates. Average length of stay is two years.

CapitaLand expects to continue investing in the deep multi-family market in the US worth over USD3.3t and sees potential for a separate spinoff in the future.

Accretion From Positive Carry & Enhancements

• Management guides that the portfolio has cap rates that are close to market levels of 5.0-5.5%
• While property yields have a small spread over its 4% funding cost, management sees the potential for rental uplifts with asset enhancement. It expects to spend about USD50m over the next 2-3 years on enhancement.
• Overall, it sees 1.4% EPS accretion, based on 2017 pro-forma earnings. Prospective returns are expected to track historical levels of close to 10% pa.

Initial Remarks From New CEO

Separately, newly-appointed CEO Mr Lee Chee Koon addressed the sell-side community for the first time. He flagged three focuses for the group.

• Firstly, he aims to step up capital recycling to enhance returns. Various recently completed projects are potential candidates.
• Secondly, he wants to increase its development pipeline and work towards a 20:80 split between trading and investment properties.
• Lastly, he aims to lift fee income.

Swing Factors 

Upside 

• Strong rebound in China and Singapore home sales. 
• Monetisation of assets via a sale to its funds under management or third parties. 
• Higher market value of its listed REITs. 

Downside 

• Overpaying for assets or land. 
• Poor execution of development projects. 
• Sharp increase in interest rates could hit demand for properties and drive down asset prices. 

Source: Maybank Kim Eng Research - 18 Sep 2018