RHB Group Research analyst Vijay Natarajan has kept a “buy” rating on IREIT Global with a lowered target price of 72 cents from 74 cents.
In his report, the analyst sees the REIT’s Western Europe-focused predominantly office portfolio remaining resilient despite the rising macro uncertainties on the back of long leases and good tenants.
Natarajan observes that IREIT Global’s debt is fully hedged until late 2026 thus shielding from rising interest rates. “With a low gearing of 30.8%, there is room for growth from opportunistic acquisitions,” he says, which is one of the lowest levels among Singapore REITs (S-REITs) presenting EUR200 million ($280 million) debt headroom for acquisitions.
The REIT’s valuation is also attractive at 0.7x P/BV, according to the analyst.
During the 1HFY2022 ended June, IREIT Global reported a distribution per unit (DPU) of 1.41 Euro cents (1.99 cents), down 1.4% y-o-y.
The lower actual DPU fell as 100% of the REIT’s management fees were paid in cash, compared to the 50% in the 1HFY2021.
Core DPU for the 1HFY2022 was actually up by 3.7% y-o-y, which stood in line with Natarajan’s expectations.
Revenue and net property income (NPI) grew 27% and 31% y-o-y on the back of acquisition contribution from its French portfolio and Parc Cugat.
Portfolio valuation rose 2.9% YoY to EUR1.0 billion, mainly from a 15% uplift in valuation at its Bonn Campus which secured a new 6-year lease with Deutsche Telekom (DT) and Sant Cugat Green (8%), where a data centre tenant signed 12- year lease at around 5,300 sq m of vacant space. As a result, NAV rose 5.6% in EUR terms to 57 cents.
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As at June 30, the REIT’s portfolio occupancy stood stable at 95%, though the analyst notes that there are some headwinds ahead. DT, the sole tenant at Darmstadt campus, which contributes around 11% of the REIT’s 1HFY2022 income, will vacate in November. “We understand that DT vacated other buildings in the area and consolidated elsewhere, resulting in a higher vacancy in the area,” says the analyst. IREIT has thus been actively marketing the asset which is one of the prime buildings in the area.
“However, with the ongoing macro uncertainty from the Russo-Ukrainian war and higher local vacancy, we believe there could be a potential delay in backfilling, resulting in a near-term occupancy drop,” Natarajan adds. “Regardless, we remain fully confident in management's operational capabilities considering its good past track record in backfilling the entire Bonn campus.”
At present, there is no major lease due until June 2024 when leases on its Berlin campus will be up for renewal.
Meanwhile, the REIT is also seen to step up its sustainability efforts, where it has launched BREEAM Certification Process for its German and French assets in order to increase energy efficiency and improve the attractiveness of assets. This certification process is expected to be completed by 1QFY2023, though its Spanish portfolio is already LEED certified.
Further to his report, Natarajan has lowered his DPU estimates for the FY2022 to FY2023 by 7% and 9% as he factors in the 100% management fees paid in cash as well as a slower backfilling for the REIT’s Darmstadt campus.
DBS Group Research analysts Dale Lai and Derek Tan have also kept a “buy” rating on the REIT with a lowered target price of 68 cents from 70 cents.
IREIT’s acquisition of the Spanish portfolio and the recent acquisition of 27 retail properties in France reduce its key tenant, geographical, and sector concentration risks, say Lai and Tan.
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The REIT also currently has an enlarged portfolio of office and retail properties valued at around EUR 975 spanning across the three European markets of Germany, Spain, and France.
Following its successful integration of the 27 retail properties into its portfolio, IREIT currently has exposure to both the office and retail segments. Its investment mandate also allows for investments into logistics properties, which IREIT could explore, given its enlarged debt headroom of more than EUR 371.
“Its sponsor has also demonstrated its willingness to incubate portfolios while the REIT grows, and this gives IREIT the flexibility to pursue larger acquisitions despite its relatively small size,” say Lai and Tan.
The analysts observe that IREIT’s leases are stable and expected to rise gradually, as they are mostly pegged to CPIs. “Based on our estimates, we believe IREIT is positioned to benefit from rental escalations that are well spread out over the next few years and has the potential to optimise occupancy rates at several properties,” say Lai and Tan.
As at 10.13am, units in IREIT Global are trading at 0.5 cents up and 0.83% higher at 60 cents at a FY2022 P/B ratio of 0.74x and dividend yield of 7.2%.
