CapitaLand Commercial Trust (CCT) - UOB Kay Hian 2018-05-18: Expanding Overseas The Natural Next Step

CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2018-05-18: Expanding Overseas The Natural Next Step CAPITALAND COMMERCIAL TRUST SGX: C61U

CapitaLand Commercial Trust (CCT SP) - Expanding Overseas The Natural Next Step

  • The S$548.3m proposed acquisition of Gallileo Property will extend CCT’s footprint into Frankfurt’s prime CBD (5% exposure to Germany), increase portfolio occupancy to 97.6% (+30bps), lengthen WALE to 6.1 years (vs 5.7 years), and add CommerzBank into its top 10 tenants list.
  • The acquisition is expected to be yield accretive (1.4%). Management plans to allocate to build its overseas footprint to 10- 20% of asset value.
  • Maintain BUY with unchanged target price of S$2.09.



WHAT’S NEW

  • CapitaLand Commercial Trust (CCT) announced the proposed acquisition of 94.9% interest in Gallileo Property, comprising of a freehold, 35 storeys of office space and three storeys of ancillary retail and F&B space, totaling 436,175 sf in NLA.
  • The proposed acquisition is expected to be funded by fully-underwritten private placement of approximately S$208.8m (38.1%) of net proceeds and bank borrowings of €212.2m (61.9%).
  • With the proposed placement, CCT intends to declare an advanced distribution of income from 1 Jan 18 to the day prior to the date which the new placement units are issued, which will be approximately 3.49 S cents.


STOCK IMPACT

  • Acquisition extends CCT’s footprint overseas. The transaction extends CCT’s footprint into Frankfurt’s prime CBD (known as the Banking district), which saw significant increase in take-ups (ie highest since 2000), and declining vacancies (ie 6.3%; at record lows of the past decade) in 2017. 
  • Post-acquisition, CCT’s portfolio value will grow to S$10.9b (vs S$10.4b) with 4.6% exposure to Germany, along with increased portfolio occupancy of 97.6% (+30bps), lengthened WALE of 6.1 years (vs 5.7 years), and addition of one new tenant among its top 10, CommerzBank AG. Finally, the addition of Gallileo property will also improve asset diversification, such that the maximum NPI contribution by any single property decreases from 24% to 23%.
  • Immediate yield-accretion of 1.4% on pro-forma 1Q18 DPU. The transaction is expected to boost pro-forma 1Q18 DPU by 1.4% to 2.15 S cents (vs 2.12 S cents), based on an NPI yield of 4.0% and debt cost of 1.4%.
  • Transacted price is fair (ie 1.4% discount to open market value). The total purchase consideration of €356.1m (S$569.8m), and CCT’s 94.9% proportion which corresponds to €337.9m (S$540.7m), represent a 1.4% discount to independent valuation conducted by Cushman & Wakefield LLP, using the DCF and capitalisation approach.
  • Acquisition cost of €342.7m (S$548.3m), funded by bank borrowings and net proceeds from Private Placement. The acquisition cost of S$548.3m will be funded by a mix of new loan facilities of approximately S$339.5m (61.9%) and net proceeds from private placement of new units of S$208.8m (38.1%). The funding requirements include purchase consideration of €337.9m (S$540.7m), acquisition fees payable to the Manager €3.4m (S$5.4m), and transaction-related expenses of €1.4m (S$2.2m)
  • Room for further leverage. With the acquisition of Gallileo Property, the pro forma aggregate leverage will be 39.0%, increasing marginally from the current level of 37.9% (and still far below the regulatory limit of 45%). With a 1.4% cost of debt (below 4.0% NPI yield), management could have increased leverage further to boost yield accretion.
  • Gaining exposure to Frankfurt prime CBD and a reputable tenant. Frankfurt is an attractive office market with strong take-up, limited future office supply, and resilient rents. Frankfurt and its Banking district (ie where the Property is located) have registered significant increases in take-ups in 2017 (the highest level since 2000), resulting in record low vacancies, i.e. 9.5% and 6.3% for Frankfurt and its Banking district. 
  • The future supply pipeline until 2019 is also relatively low with good pre-letting (ie more than 45% of the Banking district’s new supply are committed), further decreasing available space expected. Frankfurt rents are also among the highest in Germany (compared with other major German cities in the last 10 years), and are usually stable and resilient.
  • The property is also fully leased, predominantly to its anchor tenant, Commerzbank AG (Germany’s second-largest listed lender by total assets), until its expiry in 2029. The rents are adjustable based on an inflation index every two years (along with option to terminate in 2024 with 24 months’ notice).
  • More overseas expansion to come, but still predominantly Singapore-focused. Management guided that CCT is looking to allocate between 10-20% of its deposited property overseas, which will only reach 4.6% post-acquisition of Gallileo. Management alluded that good quality office assets in Singapore are tightly held (ie out of the 13.7m sf of Grade-A office stock in core CBD, 72% are held by S-REITs and developers, leaving only 28% in the hands of other owners). CCT has also been actively exploring opportunities to acquire core commercial assets in key gateway cities in developed markets.


VALUATION/RECOMMENDATION

  • Maintain BUY with unchanged target price of S$2.09. Contributions from the Gallileo acquisition will be factored in, post-completion in Jun 18. 
  • Our valuation is based on DDM (required rate of return: 6.7%, terminal growth: 2%).


SHARE PRICE CATALYST

  • Higher-than-expected contribution from Gallileo Property and Golden Shoe carpark redevelopment.
  • Higher office rentals, positive newsflow on leasing activity as well as employment growth.





Vikrant Pandey UOB Kay Hian | Peihao Loke UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-18
SGX Stock Analyst Report BUY Maintain BUY 2.090 Same 2.090



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