Analysts have lowered their estimates slightly on IREIT Global UD1U after the REIT’s distribution per unit (DPU) for the FY2023 ended Dec 31, 2023, came in slightly below their estimates.
On Feb 22, IREIT announced a full-year DPU of 1.87 Euro cents (2.7 cents), 30.5% lower y-o-y, and 1.6% below the projections of DBS Group Research analysts Dale Lai and Derek Tan.
The analysts have kept their “hold” call on the REIT with a slightly lower target price of 44 cents from 45 cents previously.
Overall, Lai and Tan like the REIT’s “well-diversified” portfolio across Western Europe, although they see near-term uncertainties with the non-renewal at Darmstadt impacting the REIT’s earnings in the near- to medium-term.
The slowdown in the office leasing market in Western Europe may also lead to prolonged vacancies at some of these assets, they note.
“Another potential risk with the slowdown in the European market is further cap rate expansion. So far, we estimate that IREIT’s portfolio has experienced a 100 basis point (bps) expansion in cap rates, and further expansion could be expected in the coming quarters,” they add.
RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call and target price of 47 cents even though IREIT’s DPU for the 2HFY2023 and FY2023 slightly came behind his estimates.
On Jan 2, Natarajan upgraded the REIT to "buy" from "neutral" after the divestment of the REIT's Spanish office asset Il-Lumina. At the time he had estimated the REIT's FY2023 DPU to come in at 2 Euro cents.
This time, he has lowered his DPU estimates for the FY2024 to FY2026 by 5% to 6% after factoring in assumptions for backfilling and downtime, as well as factoring 50% contributions from the REIT’s Berlin campus in FY2025 and FY2026 and removing rental top-ups. His cost of equity (COE) assumption is also lowered by 40 bps amid rate cut expectations.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
“While FY2023 was a transitional year, with occupancy movements and slow backfilling progress, a better FY2024 is expected on the back of full income contribution from newly signed leases and acquisition contributions,” says the analyst, who expects IREIT’s FY2024 DPU to rebound by 10% y-o-y from a rental uplift from its Berlin campus and lack of a rent-free period at its Bonn and Darmstadt campuses among other factors.
The Berlin campus, which is IREIT’s largest asset with key tenant Deutsche Rentenversicherung Bund (DRV) accounting for 21% of its FY2023 income, will see more clarity in the first half of 2024. DRV signed a six-month lease extension from its initial expiry in June 2024 till the end of the year with a 45% increase in rent for the term. DRV also paid a EUR15.5 million dilapidation fee, equivalent to 16 months’ rental income.
“Management noted that while it remains in discussion with DRV on its future plans for the asset, IREIT is also doing a detailed study on repositioning the asset if DRV chooses to vacate. Due to the asset’s excellent location and severely under-rented nature (30% - 40% lower post adjusted rent), management sees strong medium-term potential. However, repositioning the asset involves significant capex (EUR50 million - EUR150 million) and a short-term drop in distributable income,” says Natarajan.
Another tailwind for the REIT could happen in 2H2024 when the European Central Bank (ECB) starts cutting interest rates, he adds. “While uncertainties remain on the Berlin campus lease extension beyond FY2024, the severe under-rented nature of the asset offers good repositioning potential,” he writes.
In a briefing for media and analysts, IREIT’s CEO Louis d'Estienne d'Orves says that the REIT is still focused on diversifying its portfolio as that’s where they will see recurring income over the years.
On the REIT’s lowered valuation which mostly impacted its German portfolio, Thomas Friedberger deputy CEO of Tikehau notes that the German economy is a cyclical one. Referring to IREIT’s focus on Western European properties, Friedberger also points out that the country makes up about a third of Europe’s GDP and that it has at least eight big cities compared to France, Italy and Spain, which has one to two big cities in comparison.
On potential additions to the portfolio, d’Estienne d’Orves stressed that having an asset with a good location is important while the tenant has “to make sense” from an economical point of view.
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To RHB’s Natarajan, the declines in the REIT’s asset value have bottomed after the “significant markdowns” and peaking interest rates.
“Overall gearing remains modest (37.9%) due to IREIT’s conservative balance sheet approach. For FY2024, management guided that its focus will be on improving operational performance,” he says.
Meanwhile, DBS’s Lai and Tan see that any further significant expansion on cap rates could put pressure on the REIT’s gearing, which is a risk to their neutral view at the moment. Another key risk, in their view, is a prolonged slowdown in the European office leasing market, which could lead to slower backfilling and downside to earnings.
As at 1.33pm, units in IREIT are trading 0.5 cents lower or 1.35% down at 36.5 cents.
