Update: 30th Aug 2016
Continued resilience in dividend distribution. Reiterate buy call with target price of SGD 0.92
IREIT has provided us with a total return of 25% (Capital Gains / Dividends: 12% /12.8%) since we initiated a position in the company in 25th Aug 2015 (see initiation presentation published on 25th Aug 2016).
IREIT announced strong 1H16 results with gross revenue and distributable income increasing by 58% and 47% YoY. 2Q16 dividend per unit (DPU) increased by 45% YoY. IREIT’s relatively new property portfolio (completed or refurbished <5 years) continue to result in minimal capex and maintenance cost. Interest coverage also continues to remain high at 8.3x. Based on our initial investment price, our annualized dividend yield is approximately 9.6%.
IREIT’s portfolio continues to report a low vacancy rate of 0.3% due to its contracted long-term leases with key tenants such as GMG (Deutsche Telekom’s subsidiary) and DRB (German Statutory Pension Insurance Scheme). Revaluation of the property assets has resulted in Loan-to-Valuation ratio to drop to 42%. We expect the current low yield environment in Germany to result in the further revaluation of the property portfolio at the end of the year, creating the possibility for IREIT to use leverage to undertake further income accretive acquisitions which will increase IREIT’s DPU.
The manager has fully locked in 2016’s distributable income at the EURSGD rate of 1.53.
While Brexit might potentially create a period of economic uncertainty in the Eurozone, we are comforted that IREIT will be largely unaffected by this macro issue in the short and medium term due to its locked in rental contracts with tenants which are government owned.
The German office leasing market continues to remain robust with leasing volume increases by 9.3% YoY in 1H16. Lack of new office supply will continue to support positive reversion in rental rates.
The sale of the REIT manager to Tikehau Capital has increased investors’ concern about the possibility of the manager making dilutive acquisitions to boost its management income. We are of the view that the presence of major shareholders (Tong and Chap who together owns 76 % of the REIT) will limit such possibility. We are optimistic that Tikehau can provide IREIT with the necessary avenue to reach European institutional investors who can help arbitrage away the sharp undervaluation which IREIT is currently trading at versus its peers in Germany.