It all turns sour for Capitaland

CapitaLand can point to the fact that its model has worked perfectly well so far, and that if it gets through all of this, it should be well positioned for the next step up. In written responses to questions about the viability of its model, CapitaLand says: “REITs and private equity real estate funds are central to CapitaLand’s capital efficient business model and recycling of capital. The REIT model is still very much valid. REITs will remain viable and an important asset class as these are tax efficient vehicles for holding real estate on a long term basis.”

CapitaLand says REITs have improved the liquidity of large scale properties, and that even if they can’t make yield-accretive acquisitions in this market, they can still create value through organic growth. Chairman Richard Hu put it like this in October: “Our model, developed and honed over the years, has allowed us to be very nimble and quick in unlocking value in stable assets and maintaining high liquidity and financial flexibility to take advantage of the market situation. Today, the group has also built up a portfolio of investment and development properties in its various private equity funds and joint ventures. At the right time, they can be monetised for good returns to our shareholders.”

But this last sentence brings us to another point. CapitaLand has made a series of big recent sales whose timing looks to some observers as a scramble for cash rather than monetising for good returns at the right time. Foremost among them was the sale of Capital Tower Beijing, in September for $498 million: a landmark property and exactly the sort of place one would expect to retain pride of price in CapitaLand’s burgeoning China portfolio. “When they start selling assets like that, you have to wonder how badly they need the money,” says one fund manager. Earnings from this, a property in Singapore, and the injection of four other Chinese properties into one of its own 50% owned private equity funds for US$841 million, bolstered the third quarter results dramatically. They also helped to de-lever the business, which is what every investor wants to see these days. But for someone to sell an iconic property in this environment, surely the situation must be bleak?

Asked how important the Beijing sale was, CapitaLand responds that, having acquired the tower while it was under construction in 2005 and subsequently filled it with major international corporate tenants, “because of this success we received unsolicited offers for the building from several prospective investors. The sale of Capital Tower in early September was a timely one, done two weeks before the global financial situation worsened. The cash flow generated from the divestment… has further strengthened CapitaLand’s balance sheet.” The spokesperson says the deal demonstrates the company’s expertise and “ability to unlock value for shareholders despite the current volatility financial markets”, and stresses: “the transaction was in line with CapitaLand’s business model of prudent capital management by divesting mature assets and recycling capital.”

Certainly, the company doesn’t appear to be in any immediate distress: following its divestments its cash position stood at S$4.2 billion on September 30, with a net debt to equity ratio of 0.51. Interest cover is about 4.3 times. These aren’t numbers that alarm analysts. Macquarie, for example, has an outperform on the stock, with analyst Tuck Yin Soong noting after the third quarter results: “We believe the group has good access to the capital markets, having raised S$5 billion year to date, and does not face any major refinancing. Further, 76% of debt is on fixed rates.”  The CapitaLand spokesperson puts that figure even higher, at 82%, with an average debt maturity of 4.5 years compared to just over two years a few years ago. “CapitaLand has been proactively managing its debt and liquidity long before the present crisis.”

In fact, both CapitaLand and analysts are actually talking about acquisitions. “This strong balance sheet will be particularly useful in the current global financial crisis which has brought down not only Wall Street’s blue chip financial institutions but also created in its wake a global recessionary environment,” said Liew Mun Leong, President and CEO, at the third quarter results. “With the situation deteriorating rapidly, we are strategically watching the distressed markets, very carefully seeking out opportunities to make the right acquisitions at the right price.” Tuck at Macquarie also notes the company is “in a very healthy position to consider tactical acquisitions and investments.”