SINGAPORE (Mar 3): RHB Group Research is initiating coverage on IREIT Global, a Europe-focused REIT, with a “buy” and a target price of 92 cents, as the research house likes it for its exposure to the resilient German economy and good quality stable tenant profile.
IREIT’s office portfolio comprises nine office assets – five in Germany and four in Spain – worth about €650 million ($1.0 billion).
Despite economic uncertainties, IREIT enjoys income stability as it derives its strength from two key tenants – Deutsche Telekom and Europe’s largest pension fund, Deutsche Rentenversicherung (DRV) – which RHB sees as “sticky” in nature and accounts for some 77% of IREIT’s rental income.
Weighted average lease to expiry (WALE) remains healthy at 4.2 years, while leases have inbuilt Consumer Price Index (CPI) based rent escalation mechanisms.
In its latest 4Q19 results, IREIT recorded a 4.9% fall in DPU to 1.36 cents from 1.43 cents a year ago, while net property income (NPI) was a slight 0.1% higher at €7.5 million.
In a Tuesday report analyst Vijay Natarajan says, “With German and Spanish office market rentals on the uptrend, and backed by favourable demand supply dynamics, we see good medium-term growth potential.”
Additionally, IREIT is expected to see minimal impact on Covid-19, as its tenants are mainly domestic centric and only 2% of leases are due for renewals in the next two years.
“We see value at current share price levels which is close to strategic investors’ entry price of 76 cents per share, offering downside support,” adds Natarajan.
Overseas S-REITs are also offered tax advantages for institutional investors, as dividends are not taxable.
Before the end of 2020, Natarajan expects the REIT to acquire the remaining 60% stake in its Spanish assets from its sponsor. It already acquired a 40% stake at an initial NPI yield of about 5%.
The analyst believes that this asset offers occupancy and rent growth potential.
Currently, the REIT’s gearing is on the high side of 39.3%, and is expected to fund it with a combination of debt and equity fund raising. With EUR borrowing costs remaining low at less than 2%, the potential acquisition is expected to be accretive to unitholders.
Furthermore, Natarajan likes this REIT as it is driven by a capable sponsor – Tikehau Capital – and strong strategic investor – City Developments.
As at 11.40am, units in IREIT are trading at 80 cents or 0.9 times FY20 book value with a dividend yield of 7.4%.
