August 2015

IREIT Global (SGX: UD1U)

Yield Compression and Takeover Catalysts
Potential Upside of >40%

Please email questions and comments to:

hch@quarzcapital.com
Jan F. Moermann
Havard Chi
www.quarzcapital.com
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Quarz Capital Management

The IREIT Opportunity

Introduction

Germany

SG-listed REIT owning commercial real estate in Germany

Utilizes ABBA Strategy Invest in Grade A properties in B Cities and Grade B properties in A Cities
Strategy offers higher yield and capital appreciation potential
Listed in Aug 14 with 2 cornerstone investors

Real Estate
Bloomberg

IREIT SP

Price & Data on 25th Aug 2015

Stock Price

SGD 0.66

12M Hi/Low

SGD 0.79/0.64

Recommendation: Buy
Price Target

SGD 0.92

Shares in Issue

611.0 mn

Free float (est)

29.3%

Market Cap

SGD 403m

3M average daily value

SGD 0.29m
Major Shareholders
Tong Jinquan
Lim Chap Huat

57.4%
13.1%

1M

3M

12M

-4.4

-5.3

-14.8

0.80
0.78
0.76
0.74

Undervalued and trade at attractive Dvd Yield of 7.6% / 9.4% in 15E / 16E (P/E of 11.7x 16E) versus Germany
listed peers which are trading at Dvd Yield of 3-4.5%. Main reasons are:
- Singapore imports US monetary policy which currently has a tightening bias
- REITs with domestic assets are yielding 5-8%, investors demand premium to invest in REITs with foreign
property portfolio
- Fear of further EUR depreciation and general perception of weak European economies (e.g. PIIGs)
- Weak investor communication and low public float
- Portfolio conservatively valued at 438m (SGD 700m) vs NPI of 30m (SGD 49m), Cap Rate of 6.8%

Potential Catalysts

Stock Performance (%)

Current Situation

Ramp up of QE programme by the ECB to further drive yield compression (particularly in Germany)
Sustained economic growth in Germany (driven by strong export sector)
~90% of rental income contributed by blue chip tenants (Deutsche Telekom, DRB)
Locked in long term lease of +7 years with inflation adjustment, no break option (income visibility)
Mispricing versus German listed peers to be eventually arbitraged away:
Share price appreciation (+40% upside potential factoring conservative Dvd Yield target of 6.5%)
Privatization / Takeover candidate relisting assets at a substantially higher valuation in Germany

0.72
0.70
0.68
0.66
0.64
0.62
0.60
Aug-14

Dec-14

Apr-15

Initiate BUY on IREIT with target price of SGD 0.92

Catalysts to drive potential upside of IREITs share price by +40%

Source: Bloomberg, IREIT Global, Quarz Capital Management

Quarz Capital Management

Listed at the Wrong Place & Time

Share Price and Indices Indexed to IREITs Rights Adjusted IPO Price in Aug 2014

1.3

Yield Compression and share price appreciation of DE real estate stocks

1.2
1.1
1.0
0.9

IPO at SGD 0.88

(SGD 0.76 following
rights adjustment)

Draghi hints that ECB

might start purchasing
govt bonds to inject
money into the banking
system, raise inflation
expectations

Official
announcement of
QE by ECB

Annouced rights issue

priced at SGD 0.468
(increase in units by
45%) to purchase
Berlin property

Discount
to close?

0.8
0.7

Book closure for payment of 3.7%

Dividend for Aug- Dec 14

0.6
Aug-14

Sep-14

Oct-14
IREIT

Nov-14

Dec-14

Jan-15

Feb-15

Deutsche Annington

Mar-15

Apr-15

Alstria Office REIT

May-15

Jun-15

Jul-15

Aug-15

FTSE Singapore REIT

IREITs share price has exhibited higher correlation with SG listed REITs with majority of assets in SG
Share price did not rally in line with the peers in the German real estate sector (following the announcement of QE by the ECB)
Large divergence in IREITs stock performance and valuation vs peers listed in Germany
Potential discount which can be closed

IREIT trades at a substantial valuation gap vs its German peers as the stock did not benefit from the rerating of
German real estate stocks driven by ECBs QE Programme
Source: Bloomberg, IREIT Global

Quarz Capital Management

Substantial Yield Gap

Comparative Dividend Yield

2017E Dvd Yield

10%

9.10%
Compression of IREITs
Dvd Yield to a conservative
and still attractive level of
6.5% will drive a +40%
upside in IREITs stock
price

8%

6%

4.27%

4.53%

4%
2.61%
2%
0.07%

0.34%

0.71%

0%
-0.25%
-2%
DE Govt 1 Yr

DE Govt 5 Yr EU Corp AAA 5 DE Govt 10 Yr

Yr

D Annington

Alstria REIT

Hamborner
REIT

IREIT Global

Substantial upside potential for IREIT from the compression of yield to level in line with peers
Source: IREIT Global, Quarz Capital Management

Quarz Capital Management

Overview of IREITs Assets

Acquired in July 15
Asset Value: 49 mn
NPI: 3.6 mn
% of NAV: 11%
Key Tenant: GMG (Deutsche Telekom)

Asset Value: 147 mn

NPI: 10.2 mn
% of NAV: 33%
Key Tenant: DRB

Asset Value: 100 mn

NPI: 6.5 mn
% of NAV: 23%
Key Tenant: GMG (Deutsche Telekom)

Asset Value: 81 mn
NPI: 5.7 mn
% of NAV: 18%
Key Tenant: GMG (Deutsche Telekom)

Asset Value: 61 mn
NPI: 4.2 mn
% of NAV: 14%
Key Tenant: ST Microeletronics, Allianz

Total Asset Value of 439m versus Mkt Cap and Debt of 262m / 202m respectively (45% LTV ratio)
Source: IREIT Global, Quarz Capital Management

Quarz Capital Management

Blue Chip Tenant Mix with Long-Term Lease

Tenant Mix

NPI Contribution
Mnster
11%

Others
3%

Ebase
3%
Allianz
4%
ST MicroElectronics
5%

Concur
14%

Deutsche
Telekom*
48%

Darmstadt
18%

Bonn 19%
Darmstadt 18%
Munster -11.6%

DRB
37%

Berlin
34%

Bonn
23%

*Deutsche Telekom is Germanys biggest telco operator (mobile and fixed line).
The company is 32% owned by the German government. DT also owns 12% of
British Telecom and 65% of T-Mobile US (3 rd biggest mobile telco in US)

85.3%

Lease Expiry Profile By Gross Rental Income

75.8%

Weighted Average Lease Expiry 7.5 Years

(Post Acquisition of Berlin Properties)
11.5%
0.0%

0.0%

2016E

6.9%

2017E

6.8%

4.1%

2018E
Pre-Acquisition
Post-Acquisition

5.9%

3.6%

2019E

2020E and beyond

Blue Chip tenant base which are locked in long-term leases (with inflation adjustments) to provide income
stability for IREITs unitholders
Source: IREIT Global, Quarz Capital Management

Quarz Capital Management

IREIT Properties - Berlin Campus

Acquired in 6 Aug 15 for 144.2m (largest asset)

2 fully connected buildings of 8- and 13- storeys
Located in the district of Lichtenberg, 6km east of Berlin City
Walking distance to Ostkreuz railway station
14km to main Berlin Tegal and Schenfeld airports
DRB has break option for 17% of floor space in 2019, 2022
Fixed rental uplift of 5.5%, 2,2% in 2019, 2022
Healthy office rental environment in Berlin
Vacancy rate from 9.5% in 1Q06 to 6.3% in 1Q15
Rental rate increase at 2.9% CAGR since 2010
Average rent (/psm/mth) of 14.1

Largest Asset (34% of NAV) which is wholly leased to DRB (German Statutory Pension Insurance Scheme) with
lease period of 8.8 years (partial tenant break option in 2019/22)
Source: IREIT Global, Quarz Capital Management

Quarz Capital Management

IREIT Properties - Bonn Campus

4 2-, 4- and 6- storeys U-shape buildings

Located in Bundesviertel, southern part of Gronau district
Next to Deutsche Telekom Global HQ
Asset fully leased to Deutsche Telekoms subsidiary, GMG
100 m away from Deutsche Telekom U Bahn
Noted tenants nearby include Deutsche Post DHL HQ, Solar World HQ,
HARIBO HQ, Cisco, Ericsson, UN Campus
26km from Cologne Bonn Airport
Rent is indexed to CPI (upward rent adjustment of 10% once cumulative CPI
>10%)
No tenant break option (Remaining lease terms of 7.3 years)

Asset accounts for 23% of NAV. Sole tenant is GMG with L-T lease term of 7.3 years (CPI adjustment) and no
tenant break option
Source: IREIT Global, Quarz Capital Management

Quarz Capital Management

IREIT Properties - Darmstadt Campus

6 connected 5- and 7-storeys office buildings (double H-shape)

8- storey carpark with 836 carpark space
Walking distance to Darmstadt main train station
25/30 km from Frankfurt Rhein Main Airport and Frankfurt city
Asset houses Deutsche Telekoms largest operation outside Bonn
Close proximity to EU Space Operations Centre, Darmstadt University of
Applied Science, P&G Wella HQ
No tenant break option, Rent is indexed to CPI (upward adjustment of rent by
10% once cumulative CPI >10%)

Asset accounts for 18% of NAV. Sole tenant is GMG with L-T lease term of 7.1 years (CPI adjustment) and
no tenant break option
Source: IREIT Global, Quarz Capital Management

10

Quarz Capital Management

IREIT Properties - Concor Park (Aschheim)

3 connected 5 -storey office buildings with multi-storey carpark

Situated next to Mnchen Rheim S-Bahn station
10.5 km from Munich city centre
Top 3 tenants (ST Microelectronics, Allianz, Ebase) contribute 86% of rental
income
Proximate to Messe Mnchen International Conference and Exhibition Centre

Asset accounts for 14% of NAV. Multi-tenant property with average mid length lease terms of 4 years
Source: IREIT Global, Quarz Capital Management

11

Quarz Capital Management

Mnster Campus Gartenstrasse 215,217

2 adjacent 6- storey office buildings with multi-storey carpark

500m to Mnster Zentral Nord train station
2.5 km from Mnster city centre.
Known as the creative desk of Westphalia, Mnster is one of the fastest
growing city in North Rhine Westphalia and home to the European / German
HQ of various major corporations such as IBM, Sparda Bank, German State
Pension and Insurance.
Rent is indexed to CPI (upward adjustment of rent by 10% once cumulative
CPI >10%)
No tenant break option

Accounts for 11% of NAV. Sole tenant is GMG with mid length lease term of 4 years (CPI adjustment) and
no tenant break option
Source: IREIT Global, Quarz Capital Management

12

Quarz Capital Management

Financials

Stable dividend yield of > 9.1% (@current share price) till 2020 attributed to long-term leasing contracts
Source: IREIT Global, Quarz Capital Management

13

Quarz Capital Management

Conclusion

Investment Thesis
- Assets have long-term leases (no tenant break clause) with blue-chip tenant base
- Guarantee the stability of rental income and annual dividend (>9.1%)
- Well located and relatively new property portfolio (buildings <5 years old) : Proximate to HQ of main tenants, buildings
with high specifications
- Potential positive revaluation of property portfolio (decrease in cap rate) increases the ability of IREIT to undertake
more leverage to acquire income accretive properties
- Dvd Yield compression to result in potential share price upside
- Potential take out target able to relist property portfolio in Germany at a higher valuation or as a pure yield
investment for German institutional investors
Risks
- Limited ability to adjust current rent, occupancy rates have been fully optimized (already at 100%)
- Low float (2 key shareholders with ~70% shareholding)
- Risk of high vacancy rate if major tenants choose to vacate assets (>2020)

IREIT is an attractive dividend story with strong upside potential

Source: IREIT Global, Quarz Capital Management

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Quarz Capital Management

Appendix German Commercial Real Estate

Source: Catella, Quarz Capital Management

15

Quarz Capital Management

Appendix IREIT Management Fee Structure

Managers Fee Structure

IREITs Manager is currently owned by Summit Group, LCH SPV and IREIT Global Management in the shareholding
proportion of 65%, 19% and 16% respectively.
Base Fee
REIT Manager is entitled to a Base Fee of 10% of IREITs Annual Distributable Income.
The Base Fee is payable to the Manager either in the form of cash or units.
Performance Fee
Manager is entitled to a Performance Fee of 25% of the difference in Distribution Per Unit (DPU) in a financial period (as
compared to the DPU in the preceding financial period) multiplied by the weighted average number of units in issue
Acquisition Fee
The Manager is entitled to receive an Acquisition Fee not exceeding a maximum of 1% of the acquisition price for any real
estate purchased directly or indirectly by IREIT
Divestment fee
The Manager is entitled to receive a Divestment Fee not exceeding a maximum of 0.5% of the sale price of any real
estate directly or indirectly sold or divested by IREIT

Source: IREIT Global, Quarz Capital Management

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Quarz Capital Management

Appendix Key Shareholders

Tong Jinquan (57.4% shareholding)
Founder and Chairman of the Summit Group, a real estate owner and developer in China.
Summit Group was established in 1994 and currently has assets of ~RMB65 billion (USD 10
bn). The group owns and operates a total of 943,800sqm of commercial properties in
Shanghai, including 2 five-stars and 4 four-star hotels, with a total of 4,500 hotel rooms. Other
assets include serviced apartments, office buildings as well as retail malls.
Mr. Tong also has substantial stakes in a number of Singapore REITs such as Viva Industrial
Trust, Cambridge Industrial Trust, Soilbuild REIT and Sabana Industrial Trust.

Lim Chap Huat (13.1% shareholding)

Co-founder and current Executive Chairman of Soilbuild Group which is mainly an industrial
real estate developer in Singapore. Lim is a veteran in the Singapore property development
scene with more than 35 years of experience.
Besides his 23% stake in Soilbuild Group, Mr. Lim also has major stakes in Soilbuild REIT and
Keppel DC REIT.

Source: IREIT Global, Quarz Capital Management

17

Jan F. Moermann
Managing Partner
E-mail
jfm@quarzcapital.com

Tel

+41 (0)79 257 89 32

Havard Chi
Quarz Capital ASIA (Singapore)
Director / Head of Research

E-mail

hch@quarzcapital.com

Tel

+65 (0)94 33 3898

Quarz Capital Management, Ltd.

Clifton House, 75 Fort Street
P.O. Box 1350, George Town
Grand Cayman, KY1-1108
Tel
+41 (0)79 257 89 32
Web
www.quarzcapital.com