CapitaLand Commercial Trust - CGS-CIMB 2018-05-17: Diversifying Into Germany

CapitaLand Commercial Trust - CGS-CIMB 2018-05-17: Diversifying Into Germany CAPITALAND COMMERCIAL TRUST SGX: C61U

CapitaLand Commercial Trust - Diversifying Into Germany

  • Strategic maiden foray into Germany.
  • Provides access to the robust Frankfurt office market, accounting for c.5% of AUM and NPI.
  • Post-acquisition, leverage ratio up slightly to 39%.
  • Purchase is accretive to DPU.
  • Upgrade to ADD with a slightly higher Target Price of S$1.94.

Strategic entry into German market

  • CapitaLand Commercial Trust (CCT) announced it is buying a 94.9% stake in an office property located in Frankfurt, Germany. CapitaLand will hold the remaining 5.1%.
  • Gallileo is a 436,175 sq ft NLA Grade A commercial and ancillary retail property with a 4-storey heritage building located in the ‘Banking District’ of Frankfurt CBD. The property is fully leased largely to Commerzbank, whose lease expires in 2029.

Germany to make up 5% of AUM and NPI

  • The deal is expected to be completed by Jun 18. Germany will account for c.5% of CCT’s AUM and NPI post transaction. This will give CCT exposure to the robust German market with strong supply/demand fundamentals and low funding costs.
  • Post purchase, CCT’s occupancy and income visibility will be strengthened with a longer weighted average lease expiry (WALE) of 6.1 years. In the longer run, the trust intends to remain largely Singapore focused, limiting its overseas capital allocation to 10-20% of AUM.

To be funded by debt and equity; leverage ratio rises to 39%

  • The purchase consideration of €337.9m (S$540.7m, 94.9% stake) is at a 1.4% discount to independent valuation.
  • The total acquisition cost of S$548.3m, after taking into account other related expenses, is expected to be funded by a private placement of S$130m new units to raise S$208.8m and new debt of €212.2m (S$339.5m). This would likely increase the trust’s leverage to 39%.

Deal is DPU accretive

  • The deal is expected to be DPU accretive. The property NPI yield of 4% is higher than the assumed funding cost of 1.4%. Not only is the property currently under-rented, there is also room for further yield improvements given the Commerzbank lease is adjusted based on inflation index every 2 years. This will provide more forward earnings growth.

Upgrade to ADD

  • We raise our FY18-20F DPU estimates by 0.4-1.4% to factor in the new contributions. CCT intends to hedge its overseas income on a 4-quarter rolling basis with no near-term refinancing risks.
  • Our DDM-based Target Price is lifted to S$1.94 with the additional income and change in our blended cost of equity to 7.27% (from 7.3% previously). CCT’s share price had weakened over the past week and now offers c.18% total return. Hence, we upgrade our call to ADD.
  • Downside risks include delays in completing the transaction.

LOCK Mun Yee CGS-CIMB | YEO Zhi Bin CGS-CIMB | 2018-05-17
SGX Stock Analyst Report HOLD Maintain HOLD 1.94 Up 1.930