DBS Group Research analysts Dale Lai and Derek Tan have maintained “hold” on IREIT Global UD1U to 33 cents from 44 cents previously.
With positive leasing activity at the Darmstadt Campus, IREIT is expected to post an earnings improvement in FY24, Lai and Tan highlight. Several earnings drivers this year include continued rental indexation, stable financing cost, full-year contribution from the B&M portfolio, as well as higher rents received for the six-month lease extension at the Berlin Campus.
They note that IREIT has confirmed that it will be looking at repositioning the Berlin Campus once Deutsche Rentenversicherung Bund’s (DRV) lease at the property expires on December 31.
“We understand that the property will be repositioned into a mixed-used development comprising of hotels, retail and office components. At this stage, details on the repositioning are still not firmed up, but we estimate that the project will take at least 18 months to complete and cost about EUR150 to EUR200 million,” the analysts point out.
As there are still many questions on the repositioning projects including the timeline, costs involved and method of financing, the analysts have taken the prudent approach to remove all income contribution from the asset until more details are provided.
They have also assumed that financing costs could begin inching up as the EUR200.8 million loan that is due for refinancing in January 2026 is secured against IREIT’s German portfolio. “We believe that lenders will expect higher margins in anticipation of the redevelopment of the Berlin Campus and have thus revised up financing costs,” they add.
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Although the analysts view the repositioning of the Berlin Campus as a positive for IREIT, it will have a near-term impact on distribution per unit (DPU). As the property accounts for about 22% of IREIT’s revenues, the imminent redevelopment will lead to a significant dip in earnings in FY2025 and FY2026 amid the repositioning.
Furthermore, if additional debt is taken to fund the repositioning, it will lead to a significant increase in IREIT’s overall financing costs as benchmark rates today are significantly higher than their current cost of borrowings, they note.
With the absence of income from the Berlin Campus and higher financing costs, FY2026 may spell the bottom in earnings for IREIT, Lai and Tan add.
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Units in IREIT closed at an unchanged 30 cents on Aug 12.
