SINGAPORE (Apr 17): Among the top REIT performers since the FTSE ST REIT Index made a low on March 23 is IREIT Global, which owns five office campuses in Ger-many, and a 40% stake in a port-folio of office buildings in Spain. It has risen by 61% in three weeks.
Prior to April 6, Tikehau Capital and City Developments (CDL) held 16.64% and 12.52% of the units in IREIT Global, respectively. Following the purchase of additional stakes in IREIT from Tong Jinquan announced on April 6, Tikehau Capital now owns 29.20% while CDL owns 20.87% of the units in IREIT. A new unitholder, AT Investments, has acquired a 5.50% stake in IREIT. Tikehau and CDL own 50% each of IREIT’s manager.
“Moving from 12% to 20% for CDL and from 16.64% to 29% for us shows a strong commit-ment from both of us,” says Bruno de Pampe-lonne, chairman, Tikehau Investment Management and head of Asia, Tikehau Capital, in a recent interview.
Tong, one of China’s richest men according to Forbes, is also a seller of ESR-REIT where his stake has reduced from 30% to around 25%. Based on SGX filings on Apr 3, a Deutsche Bank unit appeared to have seized Tong’s 28.33% stake in IREIT. In addition, Deutsche Bank has been selling Tong’s stakes in both IREIT and ESR-REIT.
In a recent update, RHB Securities points out that the stakes were purchased from Tong at 49 cents per unit. Separately, de Pampelonne purchased 200,000 units in the open market at 60.5 cents per unit, RHB says. IREIT’s net asset val-ue as at Dec 31, 2019, was 85 cents per unit, up 13.3% yo-o-y.
When asked how the transaction came about, de Pampelonne demurs, suggesting that Tong wanted to focus on his business interests in China instead of focusing on his investments overseas. On April 9, Tong stepped down as non-executive director of IREIT’s manager. At any rate, having two strong parties as major unitholders is likely to be beneficial to the REIT.
“We had this complex shareholder structure where the largest shareholder Mr Tong was more focused on domestic projects than growing the REIT or investment outside of China,” de Pampe-lonne says. “Now that shareholder structure is clarified it’s much easier to grow the REIT,” he adds.
Blue-chip tenants
S-REITs have been buffeted by the coronavirus pandemic, in particular in the retail and hospi-tality sectors, and investors are braced for DPU cuts. IREIT is a different kettle of fish. It has blue-chip tenants such as Deutsche Telekom, Deutsche Rentenversicherung Bund (a German pension fund), Allianz, and ST Microelectronics.
The portfolio’s weighted average lease expiry is 4.2 years. IREIT’s shortest lease to expiry is the lease at its Darmstadt Campus for Deutsche Telekom which has a further 2.5 years to run. In an update on April 13, RHB Securities reckons that the lease is likely to be renewed. “The next major lease expiry will only be at the end of 2022 — the lease for the Darmstadt campus. As such, we believe there is a good probability of a lease extension, given that this is the second-largest Deutsche Telekom campus in Germany. Beyond 2022, the leases are well spread, mitigating its concentration risks,” notes Vijay Natarajan, an analyst at RHB Securities.
When asked whether IREIT’s manager is in discussions to extend Deutsche Telekom’s lease, de Pampelonne points out that it’s still early to discuss renewals. Deutsche Telekom’s leases contributed around 45.8% to gross rental income in 2019, followed by Deutsche Rentenversicherung Bund with 31.6%, ST Microelectronics and Allianz. Some 97% of the leases will only be due for renewal from 2022 onwards, although 7.7% of the leases is subject-ed to lease break option from FY2020 to FY2022.
“The assets are fully let in Germany with strong tenants such as Deutsche Telekom, Deutsche Rentenversicherung Bund, and Allianz, the insurance company, representing more than 80% of the total portfolio rental income,” notes Louis d’Estienne d’Orves, executive director at Tike-hau Capital. “We don’t have any concern about the quality and strength of these tenants in terms of covenants. Where they are located is key for them,” he adds. “One example is in Munster where we had a vacancy, from two floors vacat-ed by Deutsche Telekom. We immediately found a new tenant for a new nine-year lease.”
In addition, IREIT does not have any major refinancing till 2026 with a weighted average debt expiry of 6.1 years, and its interest cover ratio was at 10.4 times in 2019. While the cost of debt remained low at 1.8% last year, d’Estienne d’Orves points out that although interest rates have gone down, interest cost depends on the income profile. The banks can increase the margin — and generally, margins will increase for assets which are more risky.
But the kind of blue-chip tenants in IREIT’s portfolio with their relatively long leases are likely to keep the REIT’s interest cost low. The properties with blue chip tenants are also likely to hold their valuations as better valuations are ascribed to properties with highly rated tenants.
CEREIT allays investors’ concerns
For the time being the spread of Covid-19 in Eu-rope has not impacted IREIT’s portfolio and the REIT’s tenants have not requested for rebates. “The portfolio we have comprises mainly office tenants. At this stage, there hasn’t been any kind of discussion or agreement with tenants on rent rebates. We‘ve reviewed the portfolio tenant by tenant and less than 0.5% of total income is from retail tenants,” d’Estienne d’Orves says in a re-cent interview.
In a teleconference on April 7, Cromwell European REIT’s (CEREIT) manager acknowledged that its tenants have asked for rebates. In order to break the transmission of Covid, European governments have enforced lockdowns, social distancing measures, office and shop closures, restrictions from public gatherings, flight bans and school closures.
“Apart from CEREIT’s sole cinema operator in Lissone near Milan which was shut down by government decree, we have not yet agreed to any rent rebates for any other tenant-customers,” says Simon Garing, CEO of CEREIT’s man-ager. “However, to date, 139 mainly smaller tenant-customers, accounting for 9.7% of the yearly rent roll, have approached us to request largely deferral of rental payments,” he acknowledges.
Garing adds that these requests are for a limited time — a month or two and not for the whole year. This includes CEREIT’s hotel in Saronno near Milan which remains temporarily closed. The smaller tenant-customers are typically SMEs such as cafes, event organisers, childcare centres, gyms and public car park operators. The hotel and cinema comprise 2.5% of net property income (NPI).
“Generally, we propose to offer to move tenants to monthly payments rather than the more onerous quarterly in advance payments or in some special cases to offer rent deferrals of 1–3 months, until conditions normalise,” Garing says.
CEREIT’s portfolio is a lot more diversified than IREIT’s. CEREIT’s portfolio comprises 103 proper-ties with 957 tenants. The top 10 tenants contribute a third to gross rental income. By value, the sectors are office with 63%, light industrial and logistics 3%, and others 6%. The Netherlands accounts for 31% of portfolio value, followed by Italy with 23%, France with 20%, Poland (12%) and Germany, Finland and Denmark making up the remainder.
According to Wouter Zwetsloot, head of Benelux and real estate, Europe, Cromwell Property Group, CEREIT’s sponsor, European tenants pay rent three months in advance. In Italy, rent is paid six months in advance for assets where the government is the tenant-customer. “Despite most of Europe having been in lockdown from at least the second half of March, from where we stand today, we have yet to see any immediate impact on revenues,” Zwetsloot says.
Zwetsloot points out that April is a rent collecting month. However, CEREIT’s Italian portfolio comprises largely offices which are 60% tenanted by the Italian government which pays its 2H2020 rent in July. Of the Italian leases, less than EUR70,000 ($108,204) of NPI will be expiring this year.
Opportunity amid crisis
In December 2019, before the Covid-19 outbreak in Wuhan, China, turned into a pandemic, IREIT acquired a 40% stake in a portfolio comprising four freehold office buildings in Barcelona and Madrid. The agreed property value of the Spanish portfolio on a 100% basis was at EUR133.8 million, representing a 3.3% discount to the valuation of EUR138.3 million by Cushman & Wakefield Spain. Tikehau Capital holds the remaining 60% and IREIT has a call option to acquire this stake.
“In Spain, when we acquired the portfolio we’ve been extremely cautious on rental assumptions in our underwriting. In the Spanish market we have analysed for each building, the rent psm at the peak and at the bottom of the market, the vacancy rate for each location and capital value for each location at the peak and bottom. Our assumption of rental levels are in line with the long term average rather than the one at the peak” d’Estienne d’Orves explains.
In addition, the properties were acquired with a 20% vacancy rate, because there’s potential for rent increase, he adds. “We knew we would be able to secure tenants at good rental levels and we are discussing with potential tenants at levels higher than current rents and in line with business plans,” d’Estienne d’Orves says.
In fact, he indicates that IREIT’s German properties are also somewhat under-rented. “In Berlin, which is 30% of portfolio valuation, the property’s rent is lower than the rent in the sur-roundings because Berlin has evolved a lot in the last 10 years. This location which was second-ary is now an established prime office location,” d’Estienne d’Orves reveals. “Vacancy rates in the places our properties are located in are 1-3% and the properties are not over-rented so we are on the safe side.”
Increasing IREIT’s liquidity
Pampelonne says the main strategy is to grow the REIT, and to diversify the assets. “We want a larger more liquid REIT while keeping the quality of the assets and we would grow only with assets that make sense. In terms of geography we will look at France, Spain, Italy, Netherlands, Belgium and Germany of course, where the markets are more efficient [and transparent]. We don’t have plans to go to Eastern Europe. In terms of asset classes our focus will be offices and logistics,” he describes. Retail in Europe is in a difficult situation despite some interesting opportunities.
One of the drawbacks of IREIT was its lack of liquidity, and Tong’s presence which curtailed growth because of a reluctance to raise equity from unitholders for growth. “We will address the issue of liquidity by growing the REIT and diversifying the investor base. If IREIT exercises the call on the Spanish assets we will have to bring new investors in and improve the liquidity. We’ve given a very strong message to the market we are going to continue and speed up discussions with potential investors,” de Pampelonne says. “We want to build this REIT into the reference European REIT in Asia.”
