CapitaLand Commercial Trust (CCT) made its maiden acquisition outside of Singapore with the purchase of a majority stake in a Frankfurt property known as Gallileo.
Situated in the central business district (CBD) of Frankfurt, Gallileo will be 94.9% owned by CCT, with CapitaLand holding the remaining 5.1%.
The area where the building is located is known as Banking District.
Gallileo is a freehold commercial Grade A property that is presently 100% occupied.
At an agreed property value of Euro 356.0m, the price is 1.4% lower than the independent valuation of Euro 360.9m, calculated by Cushman & Wakefield as at 31 Mar 2018.
According to CCT, the acquisition is to be funded by bank borrowings and net proceeds from the Private Placement. The acquisition is expected to be DPU accretive and targeted to complete in June 2018.
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By foot, the Willy-Brandt-Platz underground, main railway station and Taunusanlage suburban railway stop is 3-10 mins away.
By car, the main railway station and airport is 3-20 mins away.
Buildings around the Gallileo include Deutsche Bank Twin Towers, Commerzbank Tower, Garden Tower, japan Center, Euro Tower, Opernturm and Trianon among others.
Gallileo is a 38 storey Grade A commercial building with ancillary retail and a 4-storey heritage building for office use.
Completed in 2003, the building is of a freehold tenure and has a net lettable area of 436,175 sqft.
Its typical floor plate size is 10,549 sqft. The building has a WAL of 10.6 years which is higher than the portfolio’s WALE (by NLA) of 5.7 years.
The estimated net property income yield is c. 4.0%.
Acquisition cost and funding
Funding will come from new loan facilities amounting to 212.2m euro or S$339.5m and private placement proceeds of S$208.8m.
The proceeds will be used to pay
- Purchase consideration of 337.9m euro or S$540.7m
- Acquisition fee of S$5.4m
- Transaction related expenses such as professional fees, insurance and other costs of 1.4m euro or S$2.2m
Given the size of CCT’s portfolio, the rationale of expanding overseas was that it would be a natural step.
In Singapore, good quality assets are tightly held, with 72% of Singapore’s Grade A office CBD stock being owned by S-REITs and developers, and 28% owned by other owners.
Even though CCT is expanding overseas, they will continue to be pre-dominantly Singapore focused and pursue strategic overseas investments.
The REIT proposed a capital allocation of 10% to 20% of deposited property for overseas investments.
The focus will be on select gateway cities in development markets and the focus will be on core commercial properties in line with CCT’s value proposition.
The REIT intends to leverage on CapitaLand’s overseas investment and asset management platform and network.
Rationale of acquisition
CCT provided the following 5 reasons for the Galileo acquisition
- Strategic expansion into Germany
- The building is a Grade A, freehold property that fits with CCT’s existing portfolio
- DPU accretive acquisition
- Enhances resilience, diversity and quality of CCT’s portfolio
- Leveraging on Sponsor’s established platform
As the largest market in Europe, Germany contributes to 21% of Europe’s GDP and is the 4th largest economy in the world based on 2017 real GDP.
The labour market is strong with a low unemployment rate of 3.8% as of 2017. The political situation is also stable, with the country being the bastion of stability in Europe.
According to CCT, interest rates are expected to remain low with the yield for a 10-year federal bond at approx 0.61%.
DPU after the acquisition is expected to rise from 2.12 cents as of 1Q2018 to 2.15 cents on a proforma basis in the same period.
The key drivers of the accretion is an attractive NPI yield of 4.0%.
NPI yield is calculated based on the property’s pro forma FY17 NPI assuming CCT held and operated it from 1 Jan 2017 to 31 Dec 2017, divided by the agreed property value.
The yield spread is therefore 339 bps based on the current 10-year government bond yield of 0.61%.
For the acquisition, euro bank borrowings are hedged 100% and the interest rate will be fixed for 5 years.
Income from Gallileo is tax-exempt to CCT’s unitholders too.
After the acquisition, CCT’s aggregate leverage will rise to 39% from 37.9% and pro forma NAV per unit will remain at 1.74 cents.
Dividends from Gallileo will be hedge for 4 quarters on a rolling basis and there are no near-term financing risks.
At the portfolio level, the existing portfolio valuation will grow 5.4% to $10.9b from S$10.4b, while the 1Q2018 NPI by geography will rise 5.3% from S$108.7m to S$114.5m.
Occupancy rate will rise to 97.6% from 97.3% and WALE by monthly gross rental income will rise from 5.7 to 6.1 years.
After the acquisition, Galilleo will contribute 5% of pro forma 1Q2018 NPI (total S$114.5m).
The largest remains Raffles City Singapore at 23% followed by Asia Square and CapitaGreen at 17% each.
CCT will have a market cap of S$6.4b, 11 properties in Singapore’s central area and Frankfurt’s prime CBD, S$10.9b worth of deposited properties, approx 4.9m sqft of NLA, 97.6% occupancy and 6.1 years WALE after the acquisition.