iREIT Global (SGX: UD1U), a Europe-focused REIT with assets in Germany and Spain, was badly hit by the Covid-19 lockdown measures. Its share price tanked 53% to $0.42 in late March. 

As the coronavirus outbreak came under control in Europe, the worst-hit countries such as Spain, Italy, and the United Kingdom are gradually re-opening their economies.

iREIT’s  share price has also recovered to $0.74 per share on 19 June, although it is still 17% off the pre-Covid high price. 

Can iREIT continue to grow with the improved situations in Europe? In this article, we shall take a closer look at its asset portfolio, financials, and recent substantial shareholder actions to understand better.  

Asset Portfolio

iREIT owns nine freehold office properties in Germany and Spain with a total lettable area of 230,000 square metre and a valuation of 630 million Euro dollars. While its current portfolio consists of only commercial assets, its investment mandate includes retail, industrial, logistic properties, and real estate-related assets.  

91% of the total assets are located in Germany while 9% are found in Spain. The asset portfolio is rather concentrated due to the small number of properties, with the two largest assets making up more than 50% of total valuation. 

Source: 1Q2020 Business Update Presentation

iREIT currently has 53 tenants across its buildings. The main trade sectors are telecommunications and government which collectively contribute 77% of gross rental. The top tenants are Deutsche Telekom, one of the world’s leading telco with 178 million mobile customers; and Deutsche Rentenversicherung Bund, Europe’s largest statutory pension insurance company.

As of end-Mar 2020, its assets enjoy a high occupancy of 94.7% and an average lease expiry of 3.9 years. Less than 5% of its lease is up for renewal in the next two years, providing some stability to its asset portfolio.  

Source: 1Q2020 Business Update Presentation

Revenue and Net Property Income

iREIT posted a stable set of results in FY2019, with revenue, net property income, and the income available for distribution comparable to 2018. 

However, its distribution per unit dropped 2.8% to S$5.64 cents, impacted by a weaker Euro and Singapore dollar exchange rate. This is the inherent exchange rate risk that investors have to bear with, due to the rental collected in Euro currency.  

Source: FY2019 Results Presentation

Balance Sheet and Gearing

iREIT’s gearing as of Mar-2020 stood at 38.0%, with an interest cover ratio of 7.8 times. The gearing seems high in comparison to the 32.6% average of the locally-listed commercial REIT, according to Phillip Capital REITs Monthly Report.  However, iREIT makes up for it with a comfortable interest cover ratio, thanks to its low effective interest rate of 1.8%, and a long debt maturity of 5.2 years. 

Source: 1Q2020 Business Update Presentation

Latest Major Lease Renewal

iREIT recently announced a major deal for one of the assets under its Spanish portfolio. The management has secured a five-year lease for 3,400 square metre of space in its Il-Lumina building in Spain. The new tenant is AREAS, a major travel food and beverage firm with a presence in airports and railway stations across 12 countries. 

The deal would significantly increase the asset’s occupancy rate to 86.4%, thus improving iREIT’s overall occupancy level. 

Historical Performance

iREIT was listed in 2014 and that gives the REIT a relatively short historical performance of 5 years. 

As seen from the table below, revenue has not displayed much growth since 2016. The significant jump in revenue in 2016 was due to the acquisition of the Berlin Campus, its largest asset. 

Net property income and distributable income shows a similar pattern of a substantial increase in 2015, thereafter tapering off with minimal growth from 2016. 

It’s distribution per unit fluctuated within the range of 5.24 cents and 6.33 cents. This could be due to the unfavourable exchange rate between the Euros and Singapore Dollar. 

Source: Self-Compiled from IPO Prospectus

Based on this set of historical figures, I would say iREIT’s performance in the past five years would be fair at best.

Substantial Shareholder

iREIT is majority-owned by its sponsor Tikehau Capital (29.2% stake), a French asset management and investment group with Euro $25 billion of assets spread across Europe, and local property bigwig City Developments Limited (20.9% stake).  

Interestingly, Tikehau and CDL recently increased its unitholding by purchasing shares from an existing substantial shareholder, Mr Tong Jinquan. A new substantial unitholder, AT Investments, has also emerged from the deal with a 5.5% stake. AT Investments is the family office of Singapore billionaire Arvind Tiku. 

The major deals by prominent firms and investors can be seen as a vote of confidence in iREIT’s investment merit. 

Peer Comparison

iREIT’s closest peer would be the Cromwell European REIT which also holds primarily office properties across Europe. 

As seen from the table, both REITs are trading at a similar discount to their net asset value. Based on the current price, Cromwell has a much higher distribution yield than iREIT and a larger market size. This seems to suggest that the stock market deems Cromwell a more risky investment than iREIT, thus demanding a higher yield to compensate for the equity risk. 

However, do note that this comparison is limited by the inherent differences between iREIT and Cromwell, as the latter is much bigger and more geographically diversified than the former. 

Source: Self-Compiled from annual reports and results presentation

Conclusion

iREIT has an interesting portfolio of commercial assets in the mature markets of Germany and Spain. It provides unique access to Europe’s real estate market for investors who are well-versed in that region.  

However, its financial performance has been stagnant in the past four years as I do not observe much growth in its revenue, income, and distribution. Furthermore, the main risk for iREIT lies in geographical and asset concentration due to its small asset portfolio. Unfamiliarity with Germany’s and Spain’s real estate market could hamper investors’ research on iREIT’s quality.

Prospective shareholders would need to weigh iREIT 7.70% yield and share price with an 18% discount to its net asset value is worth the potential returns, particularly in view that CDL is now its substantial shareholder

Personally, I am concerned about its tenant and asset concentration, as well as a lack of growth in the past four years. Hence I would not be eager to buy its shares at this juncture. 

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