IREIT Global - Waiting for new sponsor’s direction
- 3Q16 DPU of 1.57 Scts (+11% y-o-y) in line.
- New sponsor Tikehau Capital announced plans to broaden investment mandate beyond European offices to retail and industrial assets.
- Raise FY17 DPU by 1% after guidance of new hedge rate.
Uncertainty over IREIT’s new sponsor.
- We maintain our HOLD recommendation on IREIT Global (IREIT) with a revised TP of S$0.75.
- While IREIT offers an attractive yield in excess of 8%, uncertainty over the direction of IREIT’s new sponsor Tikehau Capital, an European investment manager, will likely cap IREIT’s near-term share price performance.
- Furthermore, with IREIT’s gearing at c.42%, any growth plans is likely to entail an equity raising exercise to fund the acquisition of new properties in Europe which may be DPU dilutive in the near term, given IREIT’s already high distribution yield.
Strong cashflow visibility.
- With a weighted average lease expiry (WALE) by gross rental income of 6.2 years, IREIT provides strong cashflow visibility. The strength of its cashflows is also underpinned by its blue chip tenants, such as Allianz, Deutsche Telekom, Deutsche Rentenversicherung Bund and ST Microelectronics.
Full-year contribution from Berlin acquisition.
- IREIT's earnings this year should benefit from the full-year contribution from a Berlin property which was acquired in mid-2015 and on a proforma 7.1% NPI yield.
- We estimate that this will translate to a 21% uplift in FY16 DPU (SGD basis).
- To account for the recent depreciation of the EUR versus SGD, we lowered our DCF valuation to S$0.75 from S$0.77 after imputing a new EURSGD rate of 1.51 from 1.55 previously.
Key Risks to Our View
- The key risk to our view is a significant depreciation of EUR versus SGD. For every 0.10 change in the EURSGD FX rate, our DCF valuation changes by 6%. In addition, a weaker-than-expected inflation rate would also delay any increase in rents.