IREIT Global - DBS Research 2017-05-25: Eyeing Tikehau To Pull The Trigger

IREIT Global - DBS Vickers 2017-05-25: Eyeing Tikehau To Pull The Trigger IREIT GLOBAL UD1U.SI

IREIT Global - Eyeing Tikehau To Pull The Trigger

  • 1Q17 NPI up 3.5%, supported by 10% CPI-linked rental escalation booked at Bonn Campus.
  • 1Q17 DPU of 1.44 Scts was down 9% y-o-y on cut in payout ratio to 90%.
  • Expansion of Investment Mandate beyond office to include retail and industrial with new Sponsor on board.



HOLD, TP S$0.75 

  • IREIT Global (IREIT) currently invests in a portfolio of office properties based in Germany. 
  • With a weighted average lease expiry (WALE) by gross rental income of around six 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. 
  • While offering an attractive yield of over 7.5%, uncertainty over the acquisitions to be made by IREIT’s new sponsor Tikehau Capital, a European investment manager, will likely cap IREIT’s near-term share price performance.


Where we differ. 


This stock is not widely covered in the market.

  • We are more cautious about IREIT’s near-term outlook mainly due to its high gearing of over 40%. Any acquisitions are likely to entail an equity-raising exercise, which may be DPU dilutive in the near term.

Potential for medium term re-rating. 

  • With the new mandate for IREIT to invest beyond office sectors to retail and industrial, including logistics, a larger and more diversified portfolio in the medium term may attract more investors resulting in a re-rating of the stock. This re-rating will also gain momentum, once concerns over IREIT’s gearing is addressed.


Valuation

  • We lowered our payout ratio assumption to 90% from 100%, from FY17F onwards, to reflect Manager’s intention to partially pay off debt. 
  • Consequently, we cut our FY17-18F DPU forecast by c.10%. TP remains at S$0.75. 
  • Maintain HOLD.


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.



WHAT’S NEW


1Q17 NPI up due to rental uplift at Bonn Campus but DPU dipped 

  • Net property income (NPI) up due to 10% rental escalation booked at Bonn Campus from Dec 2016. 1Q17 Net Property Income (NPI) increased 3.5% y-o-y to €8.8m, mainly attributed to the CPI-linked increase of 10% in the rental income for Bonn campus. 
  • Gross revenue declined by 0.4% due to a decrease in service charges income that more than offset the increase in rental income. However, the decrease had no impact on NPI due to a corresponding decrease in recoverable property operating expenses.

Payout ratio dropped to c.90%. 

  • While Distributable Income increased by 1.4% y-o-y to €6.5m, distribution paid declined by 8.7% to €5.9m as payout ratio dropped to c.90% from 100%. 
  • A lower payout ratio will be the norm going forward as the Management plans to use earnings to partially pay off its debt. We have lowered our payout assumption from 100% to 90% in our model.

DPU missed our previous forecast: 

  • 1Q17 DPU in EUR terms decreased by 10.6% y-o-y to €0.93 due an enlarged unit base as a consequence of paying all management fees in units. DPU in SGD declined by 8.9% to 1.44Scts, thanks to favourable FX hedge rate. 1Q17 DPU missed our previous forecast because we assumed a 100% payout ratio before.
  • As we lowered our payout ratio assumption to 90% (partially offset by slightly higher revenues on better than expected run rate in 1Q17), 1Q17 DPU now represents 25.0% of our FY17 full year forecast. We understand that 100% of expected distributable income for FY17 has been hedged at an average rate of S$1.55 per Euro.

High occupancy but potential near-term vacancy: 

  • Portfolio occupancy rate stays stable at 99.8% with long WALE of 5.7 years and no material lease expiries till 2022. 
  • Deutsche Telekom (Münster) has vacated one out of six floors it currently occupies from 1 April 2017, the property is being converted into a multi-tenant building with the space released, frictional vacancy will be expected in the next few quarters.

Relatively high gearing: 

  • Gearing stays around 42%, higher than S-REITs’ average of 35%. The REIT also has relatively short debt maturity of 2.6 years as 49% of debt will be due in 2019. 
  • Meanwhile, IREIT’s effective cost of debt stands at 2.0% per annum with the proportion of debt on fixed rates remaining at 88%.

New CEO post Tikehau’s acquisition of manager 

  • Since Tikehau Capital acquired the majority stake in the manager of the REIT, IREIT has been undergoing major senior management movements. New CEO Aymeric Thibord came on board on 15 December 2016 after the previous CEO Itzhak Sella’s resignation. 
  • Mr. Thibord was nominated by Tikehau and was the deputy director at Tikehau from June 2016 and director in fund management at TH Real Estate from Apr 2014 – March 2016. Following its acquisition, Tikehau Capital announced its plans to broaden IREIT’s investment mandate to expand beyond office properties to include retail and industrial properties across Europe. 
  • Detailed plans are yet to be announced but we believe some major movements may be in the offering given the new CEO’s intention to reduce tenant and property concentration risks.

Maintain HOLD 

  • Maintain HOLD due to limited upside from the current portfolio and uncertainty over how Tikehau intends to grow the REIT. 
  • Near-term DPU dilution is possible as new acquisition plans are likely to involve equity fund raising due its gearing being above 40%. 
  • Forward yield is still attractive at > 7.5%




Singapore Research Team DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-25
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.750 Same 0.750



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