Capitaland to pay $569.6m for major stake in Frankfurt property

Analysts weigh in on the effects of the company's exposure in the German market.

CapitaLand Commercial Trust (CCT) bought Gallileo, a freehold Grade A commercial property located in Frankfurt, Germany for an agreed property value of $569.6m (€356m), representing the REIT’s first European foray.

CGS-CIMB analyst Lock Mun Yee noted that after the transaction, Germany will account for around 5% of CCT’s assets under management (AUM) and net property income (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."

Still, the trust intends to remain largely Singapore focused in the longer run, limiting its overseas capital allocation to 10-20% of AUM.

RHB Research analyst Vijay Natarajan pointed out that its major tenant, Commerzbank AG, is currently taking up 98% of space. "CCT noted that Commerzbank AG has an option to terminate the lease by 2024, with 24 months’ notice. There is also an inbuilt rental rate adjustment, based on an inflation index every two years. To mitigate forex risks, CCT will also hedge the expected income from the property for four quarters on a rolling basis," he said.

The two analysts agreed that the acquisition is accretive to CCT's distribution per unit (DPU).

Natarajan noted that CCT has launched a private placement exercise of 130 million new units to partially fund the acquisition, whilst the rest will be funded via a planned new loan facility of €342.7m. "Based on an assumed interest cost of 1.4% per annum for the loan, the acquisition will be DPU-accretive, with a pro forma (1Q18) yield accretion of 1.4%. Gearing will, however, inch up to 39% (currently 37.9%) post the acquisition – which limits the REIT’s debt headroom for future acquisition opportunities (maximum allowable limit: 45%)."

Lock said 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," she concluded.

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