IREIT Global - DBS Research 2021-05-06: Gearing Up; Re-initiate Coverage With BUY


IREIT Global - Gearing Up; Re-initiate Coverage With BUY

  • Diversified earnings base with strategic acquisitions.
  • Well spread out rental escalations.
  • Room for larger distributions.

We are re-initiating on IREIT Global with a BUY recommendation and DCF-based target price of S$0.76.

  • We see value in IREIT Global (SGX:UD1U) with DPU upside from
    • rental escalation from its German Portfolio, and
    • room for occupancy rates to improve at its Spanish Portfolio.
  • Our target price of S$0.76 is based on a discounted cash flow (DCF) method.
  • Assuming the acquisition of its Decathlon Portfolio will complete in end-October 2012, IREIT Global is currently trading at an FY22F dividend yield of 7.0% and FY21F P/NAV of 0.91x. Our target price represents an FY22F target yield of 6.0% and FY21F P/NAV of 1.0x

Enlarging and Diversifying its Portfolio.

  • IREIT Global has made several acquisitions and will continue to do so to reduce its concentration risks (key tenant, geographical, and sector) and tap on growth areas. It recently completed its acquisition of the remaining 60% interest in the office portfolio in Spain in 4Q20 and has recently announced the acquisition of a retail portfolio in France. We believe these efforts have substantially reduced its key tenant, geographical, and sector concentration risks.
  • As at 31 December 2020, IREIT Global’s cash and gearing levels are better than peers yet it intends to acquire the France Portfolio through a mixture of debt and equity (rights issuance). This would leave IREIT Global with sufficient cash and debt headroom for potential acquisitions in the future.
  • Based on our estimates, we believe the next potential target could be EUR80-125m.

Stable and Gradual Increase in Distributions.

  • IREIT Global’s leases are either pegged to the respective countries’ consumer price index (CPIs), have built in fixed rental escalations, or are based on rent reviews. The CPIs in Germany, Spain, and France have increased at an average rate of 1.42%, 1.76%, and 1.36% respectively. We believe these lease arrangements provide IREIT Global with stable and gradual rising rental rates.
  • Unlike most of its lease arrangements which are pegged to the CPI, its lease arrangement with its key tenant, Generalmietgesellschaft (GMG), is based on the German CPI with a 10% hurdle rate (binary). GMG currently leases Münster Campus, Darmstadt Campus, and Bonn Campus from IREIT Global and gross revenue from GMG amounted to 46.3% of IREIT Global’s FY20 revenue. Based on our calculations, we estimate that the rental triggers for these three properties will occur in three separate years from 2022 to 2024, providing a smoothed increase in rental income.

Potential for Larger Distributions.

  • The occupancy rates for its Spanish Portfolio averaged 85.2% as at 31 December 2020. While 2021 may be a challenging year for IREIT Global to improve on its occupancy rates, we prefer to view the vacancy as an opportunity to grow its gross revenue rather than a setback. While the Spanish economy continues to remain weak, we are beginning to see signs of improvement and we are optimistic that IREIT Global will be able to substantially improve its occupancy rates in its Spanish Portfolio in FY22.
  • Another area for larger distributions is the end of its lease contract at Berlin Campus. The current rental rate at Berlin Campus is EUR11-12 per sqm per month and this is drastically below the current average rental rate of EUR27- 28 per sqm per month for office properties in Berlin. IREIT Global’s contract with its key tenant Deutsche Rentenversicherung Bund (DRV) is ending in June 2024 and we believe this is an opportunity for rental upside for Berlin Campus. Based on passing rents as at 31 December 2020, Berlin Campus accounted for ~27.8% of its rental income in FY20.

Strong and Credible Joint Sponsors and Strategic Investor.

  • IREIT Global is managed by IREIT Global Group Pte Ltd, which is jointly owned by Tikehau Capital and City Developments (SGX:C09). As at 31 December 2020, Tikehau and City Developments own 29.3% and 21.1% of IREIT Global’s outstanding units. At the same time, AT Investments Limited, entered as a new strategic investor, taking a substantial 5.4% stake. The joint sponsors extended funding to IREIT Global and made the Spanish Portfolio acquisition possible.
  • Tikehau Capital, City Developments, and AT Investments will continue to collaborate actively and tap on each other’s complementary strengths to enhance IREIT Global’s visibility and geographical footprint, while staying aligned with the best interests of minority shareholders.


Key Assumptions

  • One of the key assumptions in forecasting the rental rates for IREIT Global’s properties is the CPIs in Germany, Spain, and France. We have projected an increase in CPIs in these three countries on the back of recoveries in economic activities. The CPIs in Germany, Spain, and France picked up pace in March 2021 recording a 1.7%, 1.3%, and 1.1% y-o-y increase respectively.
  • Our DCF model uses a 10-year cash flow projection followed by 10-year transition growth using the H-Model. We used the H-Model to reflect a transitory growth phase. Our WACC of 5.03% is derived from a 1.00% risk-free rate which is well above the German and Spanish 10-year government bond yields, a market return of 9.00%, beta of 0.75, and after-tax cost of debt of 2.07%. We have assumed a peak transition growth rate of 2.50% transiting to the terminal growth rate of 1.00%.

Key risks.

  • Key risks include tenant concentration risks, multiple single-tenanted or single tenant concentrated properties, substantial lease expiries on the horizon. However, the risk of lease expiries is mitigated by low rental rates and a long-term relationship with the tenants, and the protraction of COVID-19.
  • See 33-page report attached below for complete analysis on IREIT Global.

Wei Le CHUNG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-05-06
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.750 SAME 0.750