Capitaland – Matching up to the high bar set by Mapletree

I read an interesting article on the Business Times yesterday pointing out that even as many Temasek controlled companies are struggling, one of Temasek’s non-listed company has been shining like a star – Mapletree Investments. Mapletree had posted higher profits in 2020 and have been posting double digit ROE consistently. To put in context, these are the 5 year average ROE of Mapletree and other listed property companies:

It is clear that we have a champion here. Mapletree, Temasek’s 100% owned property arm, is outperforming the big SGX listed property companies in a big way.

As an investor, I have picked the best listed property player I know to invest in. Capitaland is indeed growing shareholder value better than its listed peers. But I just can’t help but to wonder:

  1. Since they are both controlled by Temasek, why is there such a big difference in performance between Capitaland and Mapletree?
  2. Does Temasek have different strategies for the two? If not, then why have two separate entities instead of merging them?
  3. How long has Capitaland been lagging behind and how can it catch up?

I may never have the answers to all these questions. But we can wander about and find out more. I was pleasantly surprised to find that both Capitaland and Mapletree report their 5 year financial performance summary in nearly the exact format in their annual reports. This makes for convenient comparisons. It also indicates that Temasek is measuring their performances with similar metrics, which must be very awkward for Capitaland executives.

Take a look at this. I was quite surprised to see this, but Mapletree’s ROE has been higher than Capitaland’s every year. In fact, the 10-year average ROE of Capitaland is 6% compared to Mapletree’s 12%. If Mapletree Investments were to be listed, I’m sure investors will be flocking to it. But since it is not, we have to settle for the next best.

Hope for Capitaland – AUM is set to grow more aggressively

But on a brighter note, I am confident that Capitaland’s performance will improve. Largely because of the restructuring. I have written rather extensively on why I like the restructuring of Capitaland to CLIM. Indeed, Capitaland’s CEO and CFO have also spoken plainly about their intent to grow AUM and fee income in CLIM. I think that this management is on the right track here.

What should CLIM investors look out for

Mapletree’s KPI (published in their annual report) revolves around AUM. Having a high AUM ratio, total AUM, and fee income are the KPIs that will drive earnings, cash flow, and overall returns to shareholders. While Capitaland does not publish its KPIs (I hope they do for CLIM), as investors, we can still lookout for these measures to gauge the company’s performance trajectory.

1. The AUM ratio

AUM ratio refers to the ratio of third party assets managed under Funds/ Trusts compared to owned assets. In the illustration below, AUM ratio is the portion of assets in white divided by the portion in blue.

It is preferable for the company to spin off as much properties as they can into Funds and Trusts (including REITs). Suppose a property company has $1b of resources to invest in property. If it buys $1b of properties and keeps it for itself, then, it benefits only from that property. But if instead, it gathers $4b more from other investors to pool together a $5b fund and buys $5b of properties, the company will get the same amount of rent and capital appreciation. On top of that, it will also earn management fees.

Management fees themselves are no small matter. They can add up to 10% of operating income. If we assume management fees is 10% of operating income for the illustration below, portfolio B will see a 50% boost in income. That is quite significant. I will discuss more on management fees later.

The restructuring of Capitaland into CLIM will surely give a big initial boost to the AUM ratio. Subsequently, to continue growing the AUM ratio, CLIM will have to find ways to attract more third-party funds at a faster rate than the growth of its own assets. Seeing this in Capitaland’s annual report gives us reason to be optimistic that management can achieve this.

2. Overall growth in AUM

Of course, having a high AUM ratio is not enough. A good ratio must come with quantity to produce results. On this front, Capitaland has some catching up to do. The nearly parallel lines in the chart below may look like Capitaland and Mapletree are growing their AUM at the same rates. That is not the case. They are growing at about the same rate in terms of quantity. But Mapletree started from a much lower base. So it has in fact grown its AUM more than 3x faster than Capitaland!

I have to highlight that while there is much to be improved in this area, Capitaland has done well in its other fee generating business – lodging. This is a lucrative business because they get to earn fees with little to no capital outlay. Owners of lodging (serviced residences) properties engage Capitaland to manage their properties for a fee. The owner still owns the property, so it doesn’t come under Capitaland’s Funds or Business Trust AUM. However, Capitaland still earns fees from managing it. An example is Lum Chang, who owns 100% of Rochor Citadines. But they have hired Capitaland to run the property as a serviced residence under the Citadines brand.

The number of lodging units being managed by Capitaland has been growing quickly at around 20% per year. While the customers include themselves (eg. Ascott REIT), the majority of customers are third party property owners.

3. Management fees

I have not studied the management fee structure of all the REITs. It will be quite a big project to undertake. But there are many types of fees involved and not all are recurring. So do take note that high fees may be due to one-off events.

In 2015, the Straits Times published a list of all SGX listed REITs and their management fees as a % of revenue. It caused quite a stir. But looking back, I noticed that the Capitaland/ Ascendas REITs generally had lower fees.

A more recent set of REIT management fees can be found here. Do check them out. They have compiled the full list of all the SGX REITs. I have extracted the REITs managed by Capitaland and Mapletree and it looks like Capitaland’s fees as a % of operating income has recovered.

I also noticed that for both of Capitaland’s recent mega REIT mergers, the ones with lower management fees were acquired by the one with higher fees. I could not find information if the CMT/ ART fee structure will replace the CCT/ AHT one. But it would be quite a clever way to tweak the fee structure of these REITs in their favour.

Conclusion

The proposed restructuring is a masterful move by the Capitaland board. I am happy to be an investor in CLIM and remain bullish on their prospects. While there is room for improvement, I like the direction that the management and board are taking. Moving forward, I also hope that CLIM can provide investors with the information that can help us monitor and value the company better, namely:
a. What are their KPIs
b. How much of the AUM is third party vs owned
c. Profit margins of Lodging management and other fee generating businesses

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