The Positives
+ Stable results expected; 1Q20 was minimally impacted by Covid’19. 100% of rental income has been collected from tenants in 1Q20 with no dips in occupancy, hence topline and NPI for 1Q20 is expected to remain stable. The impact of the outbreak and lockdown measures were only evident at the end of the first quarter. Therefore, April is expected to bear the brunt of the blow as lockdowns eased post-April. Despite so, 98% of April’s rents have been collected, with only 2% of arrears coming a handful of tenants from the Spanish portfolio.
+ Proactive asset management mitigated lease break fears of key tenants. GMG, one of IREIT’s key tenant, has exercised its break option to return 2 out of 6 floors of Munster South building in 28 Feb 2021. However, the manager has identified and secured a 9-yr future lease with another strong tenant for the entire 2 floors that will commence on 1 March 2021. As this new lease will commence right after, we are not expecting any dip in occupancy from this transfer of leases. Thereafter, the WALE of Munster Campus is to increase from 2.9 to 4.1 years, which will help to provide the portfolio with greater income visibility.
+ Sponsors and new strategic investor, AT investments, increased stake to show support; IREIT’s non-executive director bought shares from market. Tikehau Capital and CDL increased their unitholding to 29.2% and 20.87%, from 16.64% and 12.52% respectively. Along with AT Investments’ acquisition of a 5.5% stake in IREIT, sponsors and new strategic investor collectively own approximately 55% of IREIT’s shareholdings. The additional stakes were purchased from Mr Tong Jinquan at S$0.49/share who reduced his stake from 34.5% to 6.1%. Meanwhile, Mr Bruno de Pampelonne who is IREIT’s non-executive director, chairman of Tikehau Investment Management and senior partner at Tikehau Capital, purchased 200,000 units of IREIT at S$0.6075. These transactions are testaments of the sponsors’, investor’s and management’s confidence in IREIT’s portfolio.
The Negatives
– Limited growth expected from CPI-linked escalations. Low confidence in an economy usually reduces inflation expectation. As Germany’s and Spain’s GDP are expected to decline by 6.3% and 9.2% respectively in 2020 amidst the Covid’19 outbreak, we are less optimistic about IREIT’s portfolio growth that has most of the leases linked with their nations’ CPI.
– Depreciation of EUR to impact 2020 DPU. IREIT hedges approximately 80% of its income to be repatriated from overseas to Singapore on a quarterly basis, one year in advance. We are expecting translation loss to impact DPU by 3-5% as EUR generally depreciated against SGD throughout 2019.
Outlook through Covid’19
Since the implementation of lockdown measures at around mid-March, most tenants at the German and Spanish properties commenced BCPs and work-from-home arrangements, with physical occupancies at around 10-30%. Cleaning, maintenance and repairs at the properties are still carried out regularly. To date, the German portfolio has been resilient as the manager has not received any requests for rent rebates or deferrals from the German portfolio, but there have been a few requests from tenants in the Spanish portfolio. These tenants contribute less than 2% of IREIT’s total income.
Office take-up and leasing activity are expected to slow across both European states, as tenants
and investors take on a more cautious approach towards relocation and expansion in this economic climate. Letting demand and rental rates will face near term headwinds. Since occupancy rates for the German and Spanish portfolio are at 99.6% and 80.8%, the lack of letting demand is more concerning for the Spanish portfolio (which to date IREIT owns a 40% stake). Nevertheless, with only 0.9% and 2.6% of the leases due to expire and 2.6% and 2.4% eligible for lease break in FY20 and FY21 respectively, IREIT’s portfolio presents defensiveness given that 95% of the current income stream is locked in till 2022.
Upgraded to BUY with a lower TP of S$0.770.
Our target price translates to a FY20e distribution yield of 8.2% and a total upside of 25.1%. We revised our COE assumptions upwards by 80bps on the back of increased market risk and reduced our FY20-23 DPUs by 1-3% due to greater currency depreciation and lower rental growth assumptions.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
