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Morningstar | CapitaLand Further Diversifies by Acquiring Multifamily Properties in the U.S.

Narrow-moat CapitaLand has further diversified away from its core geographies in Singapore and China by acquiring 16 multifamily properties in the United States, consisting of 3,787 units, for USD 835 million, or SGD 1.14 billion. The residential units, equating to USD 220,000 per unit, are spread across Seattle, Portland, Denver, and Greater Los Angeles. The average occupancy level is 90%, generally with a short vacancy period between tenants relative to other property types. The average length of stay is around two years. While the capitalisation rate was not disclosed, management noted it was at a similar level to the market rate of 5.5%. The transaction will be debt-funded with interest cost of close to 4%.

Separately, serviced-residence division Ascott acquired a 70% stake in Tauzia, a hotel operation in Indonesia, for USD 26 million. Tauzia’s customer base is s imilar to Ascott,  mainly comprising business travelers. The acquisition will add 20,000 rooms, with half under development, to the Ascott portfolio. The hotels are located in major cities such as Jakarta and Bali, and CapitaLand is seeking to leverage the Tauzia brand into new geographies in Southeast Asia.

Our fiscal 2019 EPS forecast rises slightly by 1.3%, but we retain our fair value estimate of SGD 4.20. We still see value in the developer. The acquisitions are in line with the developer’s earlier strategy of diversifying away from Singapore and China and provide additional rental income to the group. The acquisitions add to the SGD 1.8 billion of investments made as of the first-half result, offset by divestments totalling SGD 3.1 billion over the same period. CapitaLand also divested its stake in Westgate to its listed CapitaLand Mall Trust. The geography and asset class are not entirely new to the group, given existing investment in the U.S. The group also has experience of operating residential properties in Japan, prior to its divestment as the capitalisation rate compressed.