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City Developments Limited has Invested in This REIT Yielding 7.7%

At the end of April 2019, City Developments Limited (SGX: C09) announced that it had acquired a 50% stake in IREIT Global Group Pte Ltd, the manager of IREIT Global (SGX: UD1U), and a 12.4% stake in the real estate investment trust (REIT) itself. The total amount was around S$77.8 million.

The acquisition was carried out in order to grow its fund management business, and it would immediately contribute to recurring income through management fees and an attractive distribution yield. At IREIT Global’s current unit price of S$0.75, it has a yield of 7.7% and a price-to-book ratio of 1.04. Let’s take a closer look at three main aspects that investors might like about IREIT Global.

Freehold portfolio

IREIT Global currently owns five freehold office properties in Germany’s cities of Berlin, Bonn, Darmstadt, Munich, and Münster. On top of commercial buildings, its investment mandate allows it to invest in retail and industrial (including logistics) assets in Europe.

The REIT’s portfolio has a high occupancy rate of 98.6%, as of 31 March 2019, with a weighted average lease to expiry (WALE) of 4.2 years. In terms of renewals, 91.3% of portfolio leases (based on gross rental income) is due for renewal only in 2022 and beyond. The main tenants in those properties include blue-chip companies such as Allianz, Deutsche Telekom, and Deutsche Rentenversicherung Bund.

The following is a snapshot of key figures from the REIT’s portfolio:

Source: IREIT Global Q1 2019 earnings presentation (occupancy rate and WALE as of 31 March 2019 while valuation as of 31 December 2018)

It can be seen that IREIT’s portfolio is robust as it has a stable WALE, high occupancy rate, and a strong client base.

Strong capital management

As of 31 March 2019, IREIT had a gearing ratio of 38%, which increased from 36.6% at the end of 2018, but is still well below the regulatory limit of 45%. Its interest coverage ratio, which is derived by taking the respective net property income and dividing it by interest expense, stood at 10 times – an improvement from 8.4 times as of 31 December 2018. The weighted average debt maturity also improved from 1.1 years to a lengthy 6.8 years. The all-in cost of debt per annum was low at 1.5%.

Source: IREIT Global Q1 2019 earnings presentation

Bright prospects

There are headwinds in the global economy with the US-China trade tensions and Brexit. However, IREIT has a long-term view of its investments. In its 2018 annual report, it said:

“Against the backdrop of an uncertain business climate, it is imperative that we stay nimble and vigilant. While our disciplined and prudent asset management and capital management approach has thus far placed IREIT in a position of strength in terms of lease and credit profiles, we will remain steadfast in our strategy as we build on our long-term efforts to maintain a resilient and sustainable portfolio. In this respect, we will continue to stay focused on executing our four pillars of growth, namely seeking diversification, taking a long-term approach, achieving scale, and leveraging on Tikehau Capital’s local presence in Europe.”

Tikehau Capital has a 50% stake in IREIT Global’s manager while City Developments holds the remaining 50% after the acquisition. Tikehau Capital also has a 16.4% stake in IREIT Global.

City Developments sees vast potential in Germany for it to make the REIT investment. In the acquisition press release, it commented:

“[Germany] has continued to develop physical and digital infrastructure to draw in talent and capital. Consequently, Germany has attracted companies looking to establish or expand their European presence, which has benefitted its economy. This has also translated to tightening cap rates, increasing rents, and decreasing vacancies across the country. We have confidence in the long-term fundamentals of the established European economies and will continue to seek opportunities to acquire assets with deep value, capitalising on attractive pricing and yields in key locations.”

Germany currently has the largest gross domestic product (GDP) among European nations and it should continue to attract and retain key businesses in many years to come.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of City Developments Limited. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.