IREIT Global - Phillip Securities 2020-08-13: Rough Start To Growth, But Growth Nonetheless. Downgrade To NEUTRAL

IREIT GLOBAL (SGX:UD1U)

IREIT Global - Rough Start To Growth, But Growth Nonetheless. Downgrade To NEUTRAL

Stable results offset by weaker EUR/SGD exchange rates, IREIT Global (SGX:UD1U)'s 1H20 DPU was down by 2.7%.
Resilient portfolio; Overall occupancy lifted slightly q-o-q at 95.7% from 94.7%, portfolio WALE stands at 3.7 years with 95.9% of the leases locked in till 2022.
Rights issue to fund acquisition results in DPU and NAVPS dilution; Downgrade to NEUTRAL at a lower target price of S$0.68.

IREIT Global's 1H20 gross revenue and NPI was up by 2.6% and 1.4% y-o-y attributable to the new lease at Münster South Building which commenced in Jul 2019. However, DPU in S$ terms dipped by 2.7% as it was impacted by weaker EUR/SGD exchange rates. Nevertheless, distributable income and DPU slightly surpassed our expectations as it formed 50.9% and 52.1% of our FY20e estimates, respectively.
Overall occupancy lifted slightly q-o-q at 95.7% from 94.7%, attributable to new lease with ÁREAS, a global leader in F&B services at the Il∙lumina property in Spain.
Portfolio WALE stands at 3.7 years with 95.9% of the leases locked in till 2022.

Post-acquisition, IREIT Global’s aggregate valuation will increase by 13% from €630mn to €711mn. The acquisition will decrease IREIT Global’s portfolio exposure to Germany from 91% to 81%; no single property will contribute to more than 30% of IREIT Global’s valuation.
The top 5 tenants’ aggregate contribution to the portfolio’s GRI will decrease from 87% to 78%, and no tenant will contribute over 40% of aggregate GRI, down from 46% previously. Additionally, the properties’ passing rents are on average 15% below market rents, presenting future organic growth opportunities as leases are marked to market.

Tikehau Capital, City Developments (SGX:C09) and AT Investments demonstrated their support for IREIT Global and the Rights issue by pledging to take on all unsubscribed units offered. Assuming 0% take up for other unitholders and only Tikehau Capital, City Developments and AT Investments subscribed to the rights issue, AT Investments may potentially own 15.4% of IREIT Global’s shareholdings (up from 5.5%) and become a controlling unitholder to IREIT Global. Tikehau Capital and City Developments will own 29.3% (prev: 29.3% - maximum stake) and 24.5% (up from 21%), respectively. This highlights the stakeholders’ commitment to partake in IREIT Global’s growth journey.

The enlarged portfolio is expected to see gearing levels at 35%, down from 39% previously. Reduced gearing levels will place IREIT Global in a better position to embark on further inorganic growth opportunities. IREIT Global is currently looking at opportunities in Germany, Spain, France and gateway cities in Europe where Tikehau Capital has presence in.

IREIT Global will be issuing 281.8mn units to raise c. €90mn (S$140.9mn). It will be used to fund the proposed acquisition (c. €49.1mn) and repay the €32m term loan facility granted by City Developments. The acquisition is expected to be completed in 4Q20.
Looking at pro forma data based on 1H20 numbers, DPU for the enlarged portfolio was to decline by 18.9% from 2.85c to 2.31c. NAVPS for the enlarged portfolio was also to fall by 14.5% from €0.55 to €0.47.

The COVID-19 pandemic and ongoing geopolitical tensions have taken a toll on the business activity in Europe, with major economies in the region expected to fall into recession in 2020. This has led to several measures taken by the EU, including the approval of the historic €750bn pandemic recovery fund and new budget of nearly €1.1trn over seven years to support the European economy. Amid the looming recession, the take-up in office space and investment activity in Europe is expected to slow down in 2020.
However, office rents where IREIT Global’s properties are located are not expected to be significantly affected due to strong local fundamentals e.g. low vacancy rates and lack of supply. IREIT Global’s portfolio has remained resilient with majority of the leases supported by blue-chip tenants. The impending acquisition will increase and diversify IREIT Global’s asset and tenant base, and mark what we believe to be the beginning to IREIT Global’s growth plans now that it is backed by supportive stakeholders. It has been a rough start to growth, but growth nonetheless.

Our target price for IREIT Global translates to a FY20e distribution yield of 6.9% and a total upside of 0.8%. We factored in for the €90mn rights issue to fully fund the acquisition and repay the City Developments loan. DPU for FY20e, FY21e and FY21e has been lowered by 10%, 17% and 17% respectively.
In light of more organic growth opportunities presented by the Spanish portfolio, we increased our terminal growth rate to 1.5% from 1% previously.
See IREIT Global Share Price; IREIT Global Target Price; IREIT Global Analyst Reports; IREIT Global Dividend History; IREIT Global Announcements; IREIT Global Latest News.

Tan Jie Hui Phillip Securities Research | https://www.stocksbnb.com/ 2020-08-13

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