CapitaLand Commercial Trust - DBS Research 2018-06-25: Guten Tag Frankfurt

CapitaLand Commercial Trust - DBS Vickers 2018-06-25: Guten Tag Frankfurt CAPITALAND COMMERCIAL TRUST SGX: C61U

CapitaLand Commercial Trust (CCT) - Guten Tag Frankfurt

  • Maiden overseas expansion with EUR356m purchase of a 94.9% interest in Gallileo, Frankfurt on 4% NPI yield.
  • WALE of 10.6 years offers income stability with steady organic growth with rents tied to inflation indices.
  • Medium-term upside with passing rents below market.
  • 1-2% accretion to our FY19-20F DPU estimates.


  • We keep our BUY call on CapitaLand Commercial Trust (CCT) with a revised Target Price of S$2.12. With the correction over the past few months, we believe CCT remains undervalued ahead of a multi-year upturn in office rents in Singapore.
  • In addition, with its property valuations below physical market transactions, CCT is trading at attractive valuations at the current share price. Also, the recent expansion into Germany/Europe provides another growth avenue which we believe the market has not fully appreciated.

Where we differ – Deserves a bigger premium.

  • Consensus’ target prices have moved from a discount to a premium to CCT’s book value since we advocated that CCT should trade at a premium, as it demonstrated the conservative valuation of its properties via the sale of three office buildings at 14-39% premiums to book. But the 1.08x P/Bk accorded by the market is still too low and CCT should trade at a P/Bk of 1.2x which is a typical level during upcycles.
  • Its book also remains understated with buildings such as Capital Tower and 999-year leasehold HSBC Building priced at S$1,847 and S$2,275 psf, respectively, a discount to recent transactions of S$2,400-S$2,700 for comparable buildings.

Multi-year upturn in rents.

  • With Singapore office rents rising faster than expected and increasing for the third consecutive quarter, hitting S$9.70 psf/mth at end-1Q18, close to our year-end target of S$10.00 psf/mth, we believe this should generate increased investor interest in CCT.
  • Focus should turn to the expected multi-year recovery in office rents as new supply over the coming three years is limited. This and the continued rise in office rents should act as re-rating catalyst for CCT’s share price.


  • After incorporating the recent acquisition and equity raising, we raise our DCF-based Target Price to S$2.12 from S$2.10.

Key Risks to Our View:

  • Key risks to our positive view are weaker-than-expected rents.

WHAT’S NEW - Expands into Germany

Maiden overseas acquisition

  • CCT announced its maiden overseas acquisition with the purchase of a 94.9% interest in Gallileo a freehold Grade A office property in Frankfurt, Germany.
  • The agreed property value for Gallileo on a 100% basis is c.EUR356.0m (c.S$569.6m), which is at a 1.4% discount to the valuation conducted by Cushman & Wakefield, and implies a 4% NPI yield.
  • The acquisition was funded through a S$217.9m equity placement (130m units at S$1.676 per unit), with the remainder funded through EUR debt on an interest rate of c.1.4%.
  • Beyond naturally hedging its balance sheet, to manage the FX risk, CCT intends to hedge its EUR income.

Gallileo overview

  • Gallileo is a 38-storey Grade A commercial building with ancillary retail and a 4-storey heritage building for office use. Total net lettable area (NLA) stands at 436,175 sqft (40,522 sqm).
  • The freehold building was completed in 2003 and is predominantly leased to Commerzbank AG (c.98%), a leading Germany financial institution. Overall occupancy is 100%.
  • The weighted average lease expiry (WALE) of the property is 10.6 years which provides strong income visibility. The lease with Commerzbank expires in 2029 with the rent adjusted based on an inflation index every two years. The last increase in rents was made in 2017. However, Commerzbank has an option to terminate the lease in 2024 with 24 months’ notice. The likelihood of Commerzbank terminating its lease early is low, in our view, given the passing rent for the building is currently c.EUR30 per sqm/mth – below prime office rents in Frankfurt of c.EUR40 per sqm/mth.

Resilient Frankfurt office market

  • We understand based on data from CBRE, a key attribute of the Frankfurt office market is the resiliency across cycle. Even during the 2008-2009, while prime office rents fell, it remained within a relatively tight range in the high EUR30’s per sqm/mth. Since then, rents have climbed towards the EUR40 per sqm/mth level.
  • The increase in rents over the past few years has been attributed to strong demand (400-700k sqm per annum), with vacancy rates hitting record lows of around 9.5% at end-2017 from c.17% in 2010. Vacancy within the banking district now stands at 6.3%, down from c.13-15% in 2010. Supply has also been below the 10-year average of 181k sqm. Going forward, while there is a pick-up in supply over 2018 and 2019, we understand more than 45% of the supply within the banking district has already been committed and the new supply ranging from 150k- 200k sqm is only close to the 10-year average and should be well absorbed. Furthermore, with Gallileo’s long WALE of over 10 years, the property is not subject to near-term volatility in market rents.

Another leg of growth but also protects CCT’s long-term interest

  • Beyond the expected DPU accretion and income diversification, we are generally positive on CCT moving overseas from a purely Singapore-focused S-REIT.
  • While some investors would be concerned about the added country and FX risks, as detailed in our recent report “The time is now”, we believe these risks are mitigated if the country that a S-REIT is expanding into has a risk profile that is similar to Singapore’s.
  • Moreover, while CCT’s sponsor, CapitaLand does not have a large presence in the German/European office market, we believe the commitment for CapitaLand to expand into the market and its existing European business via Ascott (serviced apartments/hotel segment) should give comfort to investors over the group’s ability to gain scale and expertise.
  • We are also positive on the transaction as it provides CCT with another growth avenue given the difficulty in acquiring Grade A office buildings at favourable prices in Singapore. In addition, while rents in Singapore should be on an uptrend over the next 3-4 years, we believe that the long stable income provided by Gallileo should temper any downside to DPU when the Singapore office market undergoes a downturn.
  • Despite the remaining years left on CCT’s leasehold properties (excluding freehold and 999-year leasehold buildings) being still long at c.59 years as at end-May 2018, the acquisition of a freehold property in Germany, should also protect against any erosion to CCT’s NAV per unit over time as its leasehold properties approach the end of their lease period.
  • In terms of valuation, we believe the purchase price is fair despite the purchase price being significantly higher than the EUR150m price reportedly paid by a consortium of South Korean investors in 2013. This is because of the strong market conditions in Frankfurt, as evidenced by the large falls in market vacancy over the past few years as well as prime yields of around 3.3% for Frankfurt office buildings (as reported by JLL and Colliers).

Positive financial impact with 1-2% accretion to DPU

  • Following the acquisition of Gallileo in June/July and an equity placement, we estimate a 1-2% accretion to our FY19-20F DPU. We estimate neutral impact on FY18F DPU due to partial contribution to earnings this year. We also raised our DCF-based Target Price to S$2.12 from S$2.10.
  • NAV per unit is expected to remain stable around S$1.76-1.77 (before distributions). However, gearing is expected to rise incrementally to c.39% from c.38% at end-March 2018.
  • Post acquisition, NPI contribution will drop from 100% to 95% and CCT’s WALE will be extended to 6.1 years from 5.7 years.

Maintain BUY with revised Target Price of S$2.12

  • We believe CCT’s maiden overseas acquisition marks a significant milestone for the trust, as it kicks start another growth avenue for CCT. This combined with the expected multi-year recovery in the Singapore office market, should result in CCT delivering a sustainable increase in DPU over the next few years. 
  • With CCT currently trading at only c.1x P/Bk, we believe the market has under appreciated not only the upside from the move into Europe but more importantly the undervalued status of its core Singapore portfolio as well. 
  • In an upturn, based on historical experience, CCT typically trades up to 1.2x P/Bk as implied by our revised Target Price of S$2.12. Thus, we re-iterate our BUY call.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | 2018-06-25
SGX Stock Analyst Report BUY Maintain BUY 2.12 Up 2.100