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Broker's take: RHB initiates coverage on IREIT Global with 'buy', S$0.92 target price

RHB Research has initiated coverage on IREIT Global, a Europe-focused property trust, with a "buy" call and a target price of S$0.92, saying units were trading at an attractive yield due to a lack of coverage and unfamiliarity over its assets.

In a Tuesday report, RHB Research analyst Vijay Natarajan said: "We like IREIT Global – whose office portfolio comprises nine office assets valued at 630 million euros (S$972.4 million)  – for its exposure to the resilient German economy and good quality stable tenant profile."

IREIT Global's two key tenants – Deutsche Telekom and Deutsche Rentenversicherung –  contribute about 77 per cent of rental income for the Reit. The portfolio has a weighted average lease to expiry of 4.2 years while leases have in-built Consumer Price Index-based rent-escalation mechanisms.

Moreover, the Reit is likely to make acquisitions due to the low borrowing costs in environment in Europe.

In December 2019, IREIT entered a 40:60 joint venture with its sponsor Tikehau Capital for the purchase of four freehold office buildings in Madrid and Barcelona. Mr Natarajan expects the Reit to acquire the remaining 60 per cent stake from its sponsor by the end of this year.

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While the Reit's gearing of 39.3 per cent is "on the high side", Mr Natarajan expects the acquisition to be completed through a combination of debt and equity fundraising of 50-100 million euros.

"With German and Spanish office market rentals on the uptrend, and backed by favourable demand-supply dynamics, we see good medium-term growth potential," he noted.

According to RHB, IREIT's properties are unlikely to be impacted heavily by the Covid-19 outbreak, which has spread to Europe. This is due to most tenants being domestically focused and just 2 per cent of leases are due for renewal in the next two years.

Following recent sell-offs in equity markets due to the coronavirus, Mr Natarajan sees value in IREIT, which is trading "close to strategic investors' entry price of S$0.76 per share", which offers downside support.

Key risks to his call would include the inability of IREIT Global to retain its top tenants, a sharp downturn in the German economy, the continued depreciation of the euro, and sell-off by one of its major shareholders.

At the midday break, IREIT Global units were trading up S$0.01 or 1.3 per cent at S$0.795,  a 13.5 per cent discount from RHB's price target.

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