IREIT Global - UOB Kay Hian 2020-07-01: Resiliency From Blue-Chip Tenants

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IREIT GLOBAL (SGX:UD1U)

IREIT Global - Resiliency From Blue-Chip Tenants

• IREIT Global is a pure play on office properties in Europe. It is resilient despite the COVID- 19 pandemic due to its blue-chip tenants, such as Deutsche Telekom, DRV, Allianz, ST Microelectronics and Ebase, which accounted for 87.8% of gross rental income as of Mar 20.
• Only 3.5% of IREIT Global's leases will expire in 2020-21. 98% of portfolio rents in April and May were already collected.
• Capital values for office properties will be supported by negative interest rates and ECB’s bond purchase programme.
• IREIT Global provides an attractive distribution yield of 8.8% and yield spread of 9.3% for 2020.

IREIT GLOBAL - Business Overview

• IREIT Global (SGX:UD1U) is an SGX-listed real estate investment trust (REIT), which invests primarily in income-producing real estate in Europe used for office, retail, industrial and logistics purposes. IREIT Global’s portfolio comprises five freehold office properties in Germany, located in Berlin, Bonn, Darmstadt, Munster and Munich, and four freehold office properties in Spain, located in Madrid and Barcelona.
• In late-16, Tikehau Capital became a major shareholder of IREIT Global’s trust manager, IGG, and took an 80% stake in IGG. In Apr 19, City Developments (SGX:C09) took a 50% stake from Tikehau Capital in IGG, valued at S$18.4m. City Developments also acquired a 12.4% stake in IREIT Global at the same time. Tikehau Capital and City Developments share the same vision and strategic commitment to strengthen IREIT Global’s position and pursue growth.

‘ABBA’ STRATEGY

• IREIT Global invests in properties with growth potential, namely in core assets in second-tier cities and core plus assets in primary locations or first-tier cities (‘A’ properties in ‘B’ cities and ‘B’ properties in ‘A’ cities, also known as the ‘ABBA’ strategy). This strategy allows for higher-yielding assets with the potential for improvement either through rental uplift or via active asset management.
• ‘A’ properties or core assets have the following attributes:
  • modern building,
  • prime location,
  • long-term leases, and
  • tenants with good lease covenants.
• ‘B’ properties or ‘core plus’ assets fulfill all but one of the above criteria.
• In Germany, Hamburg, Dusseldorf, Cologne, Frankfurt, Stuttgart and Munich are considered ‘A’ cities.

iREIT Global's German portfolio.

• IREIT Global’s German portfolio consists of five freehold properties with a total net lettable area (NLA) of 202,267sqm and total valuation of €574.9m as at 31 Mar 20. Overall occupancy for the German portfolio is high at 99.6%, and notable tenants include DRV, GMG (wholly-owned subsidiary of Deutsche Telekom), ST Microelectronics and Allianz.

iREIT Global's Spainish portfolio.

• IREIT Global’s Spanish portfolio was acquired as a result of its 40:60 JV with Tikehau Capital in Dec 19. It now has a 40% stake in four freehold office buildings located in Madrid and Barcelona, with a total NLA of 72,167sqm and total valuation of €138.3m as at 31 Mar 20 (40% stake valued at €55.3m).
• Notable tenants include Clece (provider of logistics, facility management and cleaning services), Digitex (integrated management solutions provider), Gesif (unit of Cabot Credit Management Group), Catalan Media Corporation (public radio and television company in Catalonia), Coca-Cola European Partners (bottling company for Coca-Cola products), DXC Technology (spin-off from Hewlett Packard) and Roche (Swiss healthcare company).

IREIT GLOBAL'S INCOME STABILITY BACKED BY LONG LEASES WITH BLUE-CHIP TENANTS

Anchored by blue-chip tenants.

• Some 87.8% of IREIT Global’s gross rental income is derived from its blue-chip tenant base, including Deutsche Telekom (45.8%), DRV (31.6%), Allianz (3.8%), ST Microelectronics (3.7%) and Ebase (2.9%). Notably, the top two quality tenants are Deutsche Telekom, a world-leading integrated telco with 178m mobile customers, and DRV, Europe’s largest statutory pension insurance company with 57m customers.

Income stability from long WALE.

• IREIT Global’s portfolio enjoyed high occupancy of 94.7% with a healthy WALE of 3.9 years as of Mar 20. Over the next two years, IREIT Global has minimal lease expiries of 3.5% (lease breaks of 5%) combined in 2020 and 2021.

Stickiness of tenants provides income stability.

• Among its two largest properties, the Berlin campus (34.5% of GRI in FY19) and Bonn campus (21.7% of GRI in FY19) have strategic significance, as they are built-to-suit (BTS) developments for DRV (high-security facilities) and Deutsche Telekom (high office specifications) respectively.
• Both buildings also have strong locational appeal. The Berlin campus is connected by two bridges to an adjacent DRV-occupied building, while the Bonn campus is connected by a pedestrian bridge to Deutsche Telekom’s global headquarters. IREIT Global’s Darmstadt campus (18.4% GRI in FY19) and Munster campus (11.4% GRI FY19) are also solely leased to Deutsche Telekom, which in our view increases the likelihood of renewal.

Potential uplift for German properties through German CPI-linked rental adjustments.

• For the German properties, with the exception of the Berlin campus which is based on a fixed step-up rate, IREIT Global has embedded rent adjustment clauses in place for each lease agreement, which provides the potential for rental uplifts. In accordance with the lease agreements, rental adjustments are reviewed on a monthly basis and these adjustments are triggered once the German Consumer Price Index (CPI) for the month has crossed the prescribed hurdle of the lease agreement.
• For example, the lease agreements signed by Deutsche Telekom stipulate that if the CPI changes by more than 10% on a cumulative basis, then rent escalation will be triggered and gross rental income will be adjusted by the same percentage of CPI change in the following month.

PORTFOLIO RESILIENT DESPITE COVID-19 PANDEMIC

Blue-chip tenants provide resiliency.

• There has been no early termination by any existing tenants due to the COVID-19 pandemic. Management attributes this resiliency to its secondary market locations, moderate rents charged (on per sqm basis) and good connectivity to various transport modes. Some 98% of portfolio rents in April and May were already collected.
• Requests for rental rebates and deferral accounted for only 2% IREIT Global’s total rents and came mainly from the Spanish portfolio. These assets are multi-tenanted to a number of blue-chip tenants (eg Almaraz and DXC Technology), hence minimising exposure to any single tenant or industry.

Secured new tenants to backfill vacant space.

• Despite the lockdown, IREIT Global managed to secure a major five-year lease for 3,450sqm of office space with AREAS (global F&B leader), boosting its occupancy at Il.Lumina (3.6% of eff. portfolio NLA) from 69.2% as at Mar 20 to 86.4% on a pro-forma basis.
• Management also managed to secure a 9-year future lease for the entire second floor (3,600 sqm/13% of NLA of Munster Campus) from 1 Mar 21, which will be vacated by Deutsche Telekom on 28 Feb 21 due to its break option.

COVID-19 pandemic likely to exert neutral impact on office market.

• Both Germany and Spain have eased safe distancing restrictions in 2Q20. Hence, management expects portfolio performance to remain firm at least in the short to medium term. Management sees a negative impact from telecommuting and work-from-home arrangements, mitigated by a delay in and reduction of office supply (developers rethink future development strategies) and increase in demand for office space to accomodate safe distancing requirements.

SUPPORT FROM CITYDEV & TIKEHAU CAPITAL DRIVES FUTURE GROWTH

• IREIT Global is managed by IGG, which is jointly-owned by City Developments and Tikehau Capital. City Developments and Tikehau Capital own a 50% stake each in IGG.

Both Tikehau Capital and CityDev have increased their investments in IREIT.

• City Developments increased its stake from 12.52% to 20.87% in Apr 20. Similarly, Tikehau Capital has substantially increased its stake in IREIT Global from 16.64% to 29.2%. On a combined basis, they own over 50% of IREIT Global. The increased investment reflects their commitment to supporting the long-term growth of IREIT Global and aligns their interest with that of minority unitholders.

Growth to accelerate with support from CityDev and Tikehau Capital.

• By leveraging on City Developments’s funding capabilities and Tikehau Capital’s local expertise and deep presence in Europe, IREIT Global is able to pursue its growth strategy based on its four pillars of seeking diversification, adopting a long-term approach, achieiving scale and capitalising on a strong local presence.
• IREIT Global can tap on City Developments’s and Tikehau Capital’s extensive networks to grow and expand its real estate porfolio in Europe. Furthermore, City Developments and Tikehau Capital could provide IREIT Global with sponsors’ pipeline for future acquisitions.

IREIT GLOBAL - Valuation

Offers lucrative yield spread.

• Consensus estimate for IREIT Global’s DPU is 4.0 € cents for 2020 and 4.0 € cents for 2021. Based on current share price of S$0.715, IREIT Global provides attractive distribution yields of 8.8% for 2020 and 8.8% for 2021. Yield spreads are 9.3% for 2020 and 9.3% for 2021, above the yield for 10-year German bunds of -0.5%.
• IREIT Global is also trading at an 18% discount to NAV per share of €0.56.
• See IREIT Global Share Price; IREIT Global Target Price; IREIT Global Analyst Reports; IREIT Global Dividend History; IREIT Global Announcements; IREIT Global Latest News.

More attractive compared with peers.

• Comparable S-REITs that invest primarily in office properties in Singapore are projected to provide average distribution yields of 4.5% for 2020 and 4.5% for 2021. S-REITs that invest primarily in office properties in overseas markets, such as North America and Europe, provide average distribution yields of 8.4% for FY20 and 8.5% for FY21. IREIT Global deserves to trade at a lower yield given that Germany and Spain have successfully contained the spread of COVID-19.

See attached 23-page PDF report for complete analysis.

Nicola Ho UOB Kay Hian Research | Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-01

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998