IREIT Global - RHB Invest 2016-02-22: Stabil Wie Ein Stein

IREIT Global - RHB Invest 2016-02-22: Stabil Wie Ein Stein IREIT GLOBAL UD1U.SI 

IREIT Global - Stabil Wie Ein Stein

  • IREIT offers investors a solid and defensive c.9% dividend yield, which is among the highest in the S-REIT universe. 
  • We initiate coverage on this REIT with a BUY and DDM-based SGD0.81 TP (17% upside). 
  • The REIT is backed by a portfolio of five freehold properties in Germany, generating stable cash flows stemming from long leases with blue-chip tenants. 
  • We forecast for a 20% growth in FY16 DPU. 
  • We also see scope for further DPU growth as the REIT manager executes on acquisition opportunities. 

Freehold assets backed by long leases. 

  • Unlike its sector peers, IREIT Global (IREIT) is the only S-REIT with a 100% freehold portfolio. 
  • Its five properties are located across five key German cities, anchored by blue-chip tenants such as Deutsche Telekom and STMicroelectronics. 
  • The average lease term to expiry of seven years of its portfolio ensures solid, long-term visibility on cash flows. 

Near-term DPU growth driven by acquisitions. 

  • While IREIT’s rental agreements with tenants pegged rental adjustments to increases in the Consumer Price Index (CPI), the current low inflation environment implies that DPU growth is likely to be driven by yield-accretive acquisitions. 
  • The REIT made its maiden acquisition last year and we expect full-year contribution from its Berlin purchase to fuel a 20% YoY DPU growth in FY16. 
  • We expect IREIT to embark on further acquisition opportunities in FY16. 

Healthy real estate fundamentals in Germany. 

  • IREIT offers investors exposure to the buoyant German economy, with its GDP projected to grow by 1.9% in 2016-2017. 
  • Due to increased business activities across a broad swath of the economy, especially in the IT space and small and medium enterprise (SME) sector, demand for prime office space in seven key German cities grew by 15% to 2.4m sq m in 9M15. 
  • With little new-build space and sustained demand, vacancy rates are expected to drop further from an already low 5.7%. 

Mispriced REIT = opportunity. 

  • IREIT is one of the highest-yielding REITs within the S-REIT universe, trading at an FY16F yield of 9.2%, despite a very low-risk business model. 
  • We think the REIT is misunderstood due to its smaller market capitalisation and overseas asset base, and we see scope for its yield to compress as it delivers on earnings and acquisitions. 
  • Risks include a sustained fall in the EUR against the SGD. 

P.S. The title of the report Stabil Wie Ein Stein means steady as a rock in German, which is how we see the stock, providing a steady yield and return to investors.

Goh Han Peng RHB Research | Ong Kian Lin RHB Research | Ivan Looi RHB Research | 2016-02-22
RHB Research SGX Stock Analyst Report BUY Initiate BUY 0.81 Same 0.81