CapitaLand Commercial Trust (CCT) - UOB Kay Hian 2018-06-22: Gallileo Acquisition A Done Deal

CapitaLand Commercial Trust (CCT) - UOB Kay Hian 2018-06-22: Gallileo Acquisition A Done Deal CAPITALAND COMMERCIAL TRUST SGX: C61U

CapitaLand Commercial Trust (CCT) - Gallileo Acquisition A Done Deal

  • The acquisition of 94.9% of Gallileo Property has been completed, extending CapitaLand Commercial Trust’s (CCT) footprint to the Frankfurt prime CBD area (5% exposure to Germany). Management has guided for acquisitions of core commercial assets in key gateway cities, targeting an allocation of 10-20% of its deposited property overseas.
  • At home, CCT’s CapitaSpring has secured JP Morgan as anchor office tenant, and is well-positioned to ride on the cyclical recovery in the Singapore office segment.
  • Maintain BUY with a higher target price of S$2.11, factoring in the Gallileo Property acquisition.



WHAT’S NEW

  • CapitaLand Commercial Trust’s (CCT) S$548.3m acquisition for 94.9% interest in Gallileo Property was completed on 19 Jun 18, partially funded by S$214.3m net proceeds from a private placement.
  • At home, CCT’s CapitaSpring has secured JP Morgan as anchor tenant, committing to about 155,000sf, or close to a quarter of the 635,000sf office NLA).


STOCK IMPACT


Acquisition of 94.9% of Gallileo Property extends CCT’s footprint to Frankfurt prime CBD

  • Post-acquisition, CapitaLand Commercial Trust’s (CCT) portfolio has grown to S$10.9b (with 4.6% exposure to Germany), along with an enhanced portfolio occupancy of 97.6% (+30bp), a longer WALE of 6.1 years (vs 5.7 years), as well as asset diversification (ie maximum NPI contribution by any single property decreases from 24% to 23%).
  • Frankfurt is an attractive office market with strong take-up, limited future office supply, and resilient rents. Frankfurt and its banking district (where the property is located) registered significant increases in take-up in 2017 (the highest level since 2000), resulting in record low vacancies - 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 (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.

Fair transacted price, at 1.4% discount to open market value

  • The purchase consideration of €356.1m (S$569.8m), and CapitaLand Commercial Trust’s (CCT) 94.9% share at €337.9m (S$540.7m), represents a 1.4% discount to an independent valuation by Cushman & Wakefield LLP, using the DCF and capitalisation approach.

More overseas expansion to come

  • Management alluded that good quality office assets in Singapore are tightly held (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 been looking to allocate 10-20% of its deposited property overseas, which will only reach 4.6% post-acquisition of Gallileo.

CapitaSpring has secured JP Morgan as anchor office tenant

  • CapitaSpring has secured JP Morgan as anchor office tenant, which has committed to about 155,000f (close to a quarter of the 635,000sf office NLA). 
  • The S$1.82b re-development (on the previous Golden Shoe Car Park site) began construction in Feb 18 and is expected to complete in 1H21. Other than office space, CapitaSpring will also comprise a 299-unit Citadines serviced residence managed by Ascott, ancillary retail space, as well as a food centre on the second and third levels of the development. 
  • CapitaSpring is expected to generate a 5% yield-on-cost, based on previous guidance from management and independent valuators on office rental rates of S$12-14 psf pm and RevPar of S$255-270 for the serviced apartments.

CapitaSpring in the future acquisition pipeline

  • CapitaSpring is jointly owned by CapitaLand Commercial Trust (CCT) (45%), CapitaLand (45%) and Mitsubishi Estate Company (10%). 
  • As part of the JV, CCT has a 5-year call option over the office component of the property, including units held in a trust by CapitaLand and Mitsubishi Estate Company (MEC). Following expiry of the option, CCT and CapitaLand have the right to drag along MEC’s office units for any sale, transfer or disposal with the units held by CCT or CapitaLand. CCT and CapitaLand hold similar drag-along rights for MEC’s serviced residence units. These above options and rights would allow CCT to acquire and dispose of properties as needed.

CCT well-positioned to ride cyclical recovery in Singapore office

  • With 29% of its leases expiring in 2018-19, CCT has the capacity to take advantage of rising market rents. Asia Square Tower 2, Six Battery Road and One George Street achieved monthly rents of S$11.00- S$13.90 psf, S$12.00-S$13.00 psf, and S$9.50-S$11.40 psf respectively in 1Q18, which were committed largely above market and expiring rents.

Singapore office rents to see sustained recovery, amid tight occupancy and supply

  • Management expects office rents to continue growing steadily over the next few years. Management cited CBRE data, which showed Grade A Office rents growing 3.2% q-o-q in 1Q18 to S$9.70 psf pm, representing three consecutive quarters of increase after a 22% correction in office rents over the last two years (from the last peak in 1Q15). 
  • CCT expects office rents to continue growing steadily on the back of higher committed occupancies in newly completed office buildings (ie media sources have reported about 70% pre-commitment at Marina One and UIC Building) and limited new supply in the CBD in 2018-20.

Future supply expected to taper

  • Future supply expected to taper going forward to 1.07m sf p.a. on average in 2018-21 (vs 1.81m sf p.a. between 2008 to 2017), according to CBRE data. CBD core segment makes up only 48.8% of the future supply over the next three years, which includes notable projects like Frasers Tower (0.66m sf) and 18 Robinson (0.15m sf).

Leasing demand from co-working operators here to stay

  • Management believes co-working operators are likely to stay in the long haul, given their more competitive offerings (leases are structured more flexibly, and not subjected to the typical three-month minimum leasing period). 
  • In 1Q18, WeWork committed to leases in new locations, such as Central Square Central (28,700sf), Mapletree Anson (20,000sf) and City House (34,000sf). The quarter also saw the entrance of two new operators, CoQoon and Core Collective, setting up their first locations in Singapore. 
  • Although the demand from co-working operators is robust, we believe the segment at some point may undergo a consolidation phase. Such negative consequences from the technology boom were already felt from the M&A between Grab and Uber. The concern is what happens to Uber’s existing two locations at Mapletree Anson and Guoco Tower since Grab already has 100,000 sf of leased office space in Marina One.


EARNINGS REVISION/RISK

  • We revise our 2018-20 DPU forecasts by 0-2.7% and raise target price by 1% as we factor in contributions from the Gallileo Property acquisition.


VALUATION/RECOMMENDATION

  • Maintain BUY with a higher target price of S$2.11, based on DDM (required rate of return: 6.7%, terminal growth: 2%).


SHARE PRICE CATALYST

  • Higher-than-expected contributions from Gallileo Property and CapitaSpring.
  • Higher office rentals, positive newsflow on leasing activity as well as employment growth.





Andrew CHOW CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-06-22
SGX Stock Analyst Report BUY Maintain BUY 2.11 Up 2.090



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