• The recent increase in stake by IREIT Global (SGX:UD1U)’s sponsor and strategic investor demonstrates confidence in its assets and long-term growth plans.
• Despite a sharp increase in COVID-19 cases in Germany, near-term operational risks are minimal: Only 2% of leases are due to expire by 2021 and it has a strong tenant profile. There are also no major refinancing concerns, with the bulk of debt expiring in 2026 only.

Sponsor and Strategic Investor Now Own > 50%

• IREIT Global announced last week that sponsor Tikehau Capital (Tikehau) and strategic investor City Developments (SGX:C09) have increased their stakes to 29.20% and 20.87% from 16.64% and 12.52%. AT Investments also emerged as a substantial shareholder after buying a 5.5% stake.
• Separately, Tikehau Investment Management Chairman Bruno de Pampelonne also purchased 200,000 shares in the open market at SGD0.605/share on 8 Apr.
• We view these transactions as a strong show of confidence on IREIT Global’s portfolio quality and long-term growth.

Strong Tenant Profile

• One of the key strengths of IREIT Global, in our view, is its sticky and quality tenant base.
• The Top 2 tenants, which account for 77% of rental income are Deutsche Telekom (46%) – a leading German integrated telecom operator with a good credit rating – and DRV. Another 10% of its tenants are leading multinationals like Allianz Handwerker Services, ST Electronics, and Ebase.

Minimal Lease Expiries Until 2021

• Over the next two years, only 2% of leases are due to expire (5% if lease breaks are included) – mainly IREIT Global’s Spanish assets. The next major lease expiry will only be at the end of 2022 – the lease for the Darmstadt campus. As such, we believe there is a good probability of a lease extension, given that this is the second-largest Deutsche Telekom campus in Germany.
• Beyond 2022, the leases are well spread, mitigating its concentration risks.

Majority of Debt Expires in 2026

• About 86% of IREIT Global’s debt (EUR200m) will expire in 2026 and is fully hedged at an all-in cost of 1.5% pa. The remaining EUR32m expiring in May 2021 is a bridging loan from its strategic investor and carries minimal refinancing risks, in our view.
• While gearing is slightly on the high side at 39.3%, we believe the risk of a threshold breach is low, as asset values have to decline by 13% for this to happen.

Earnings and Target Price Changes

• We have raised our COE assumption by 80bps and lowered our FY20F-22F DPUs by 3-4% by rolling back on our expectations of occupancy improvements across IREIT Global’s Spanish assets and lowering rent growth expectations.

Source: RHB Invest Research - 13 Apr 2020