• Despite macroeconomic uncertainties over the Eurozone area from spiking inflation and ongoing Russo-Ukrainian war, we note the portfolio of IREIT Global (SGX:UD1U) is well suited to deliver stable dividends based on its long stable leases, fixed debt (until 2026), and low gearing level.
• Valuations remain attractive with IREIT Global trading at a 25% discount to its book value and offering ~8% yield which is ~600 bps premium to the 10-year Eurozone central government bond yield. Maintain BUY with an unchanged target price of S$ 0.74, 21% upside and ~8% yield.

Bonn Campus Leases Extended for Another Six Years

• Deutsche Telekom (DT), the sole existing tenant occupying the entire building, has extended its lease tenure in the building for another six years until Apr 2029 (initially DT signed a 12-month lease extension until Apr 2023). The extension is another testament to IREIT Global’s good asset quality and is likely to result in an uptick in value of the asset which accounts for 13% of total. We understand that the rents are similar to those of current rents with rent escalations clauses tied to annual inflation.
• Overall portfolio weighted average lease expiry (WALE) will increase to 4.6 years from 3.7 years. IREIT Global is currently in active discussions with various tenants for Darmstadt campus (7% of portfolio value) which will be vacated by DT in Nov 2022.

Inflation-linked Rent Escalation and 100% Debt Fixed Until 2026

• IREIT Global’s portfolio is minimally impacted by rising inflationary pressures and will - in fact - have a slight positive effect from rent escalations that are pegged to inflation rates. For assets in France and Spain rents are adjusted for inflation annually while for its German portfolio, the rental increase is on a cumulative basis once a certain threshold is reached.
• Similarly, the sharp spike in utility charges will also have a minimal impact as these are generally passed through and borne by tenants.
• On the interest cost side 100% of IREIT Global’s debt is fixed at 1.8% pa up until end of 2026 thus shielding it from sharp anticipated increases in overall interest rates.

Among the Lower Geared S-REITs

• IREIT Global is among the lower geared S-REITs with a gearing of 32% presenting healthy debt headroom of > EUR100m for potential acquisitions (assuming 40% levels). Management has noted that its target market remains for share price.

• No earnings changes, ESG score of 3.0 out of 4.0 for IREIT Global based on our proprietary in-house methodology. As this score is in-line with our median score we have applied a 0% premium to its intrinsic target price.

Source: RHB Invest Research - 31 May 2022