CA Immo: locking in profits after relative outperformance (downgraded to SELL)

With a portfolio focused on green, modern offices in the capitals of CEE and the core cities in Germany, CA Immo (CAI) is one of the highest-quality names in Europe. Its huge land reserves remain a source of long-term organic growth and trading income. Long lease terms, along with the fast growth of market rents in the key German cities over the past 5-10Y, mean that CAI’s German portfolio is rented well below the market. The coming indexation should start to close the gap. The team has analysed dozens of deals annually and, despite the low leverage and pressure to acquire, management has stayed prudent, and CAI did not buy at the top of the cycle. The asset rotation strategy should drive further improvements in quality – crucial, given the bifurcation we are seeing in many of the office markets in Europe and globally (new and core doing well, despite the higher rents, and older and less well-located buildings often struggling). The strong balance sheet (34% LTV) gives room to manoeuvre. Although these factors mean CAI deserves to trade at a premium, we believe, the stock has already held up much better vs. its peers. At c.1.0x P/B and 0.8x P/EPRA NTA, CAI trades well above its peers (c.0.5x). Also, on earnings: CAI’s c.3-4% FFO yield is much steeper than its peers’ average (c.10%). The consensus seems complacent on the risk to values ahead, and its BPS and DPS estimates may be too ambitious, in our view. While its quality portfolio, strong balance sheet, land reserves, sound management track record and the under-rent in Germany set CAI apart from many of its peers, its recent outperformance offers room to take some profits off the table, in our view. We set our new 12M price target (PT) at EUR 22/share, and downgrade CAI to SELL.