RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call on IREIT Global UD1U with a lowered target price of 40 cents from 47 cents previously, following the REIT’s recent announcement concerning the vacating of its key tenant.
“The exit timing does coincide with a challenging macro and funding environment, which has resulted in share price pressure,” says the analyst.
That said, Natarajan sees the REIT’s current redevelopment of the Berlin Campus as a medium-term positive move which could potentially unlock the asset’s undervalued potential.
Alongside IREIT Global’s clarity on its capital expenditure needs, returns potential will likely act as a share price catalyst, in the analyst’s view.
Following the exit of the property’s main tenant — Deutsche Rentenversicherung Bund (DRV) — as at end December, the Berlin Campus is set to be repositioned as a mixed-use urban precinct by the REIT.
The analyst notes that the tenant had earlier extended its lease on a short-term basis of six months at higher rent of around 45%, highlighting the significant under-rented nature of the building, which is around 50%-100% below market value.
DRV will also pay a lump-sum of EUR15.5 million ($22.64 million) in dilapidation costs, which is equivalent to 16 months of current rent, part of which the REIT plans to use for income top-up.
Taking the asset’s prime location into consideration, the REIT’s current plan is to convert it into a mixed-use facility comprising an office, two hotels and retail spaces.
IREIT Global is currently in ongoing discussions with leading hotel and long-stay hospitality operators to potentially master lease this space and de-risk income volatility.
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Additionally, Natarajan notes that sponsor and co-investor partnership funding for the REIT is likely.
“We expect potential capital expenditures for upgradation could be around EUR150 million to EUR200 million, which would be spread across the likely upgradation timeframe of 12 months-24 months,” he adds.
Based on its current gearing of 37%, IREIT Global has a debt headroom of EUR80 million-EUR100 million before factoring in the likelihood of an increase in asset value from capital expenditure deployment.
As such, the analyst sees the REIT bringing over its two capable sponsors or outside investors to jointly develop the project as a high possibility, which would monetise a portion of the asset, and reduce capital expenditure outlay and risks.
Natarajan also notes that Peter Viens is set to take over as the REIT manager’s new CEO, following the departure of current CEO Louis d’Estienne d’Orves who is moving internally to assume a senior role at Tikehau Capital, the REIT’s sponsor.
Viens is currently a fund manager at European real estate asset manager Sofidy, part of Tikehau Capital.
Following these developments, the analyst has lowered his FY2025-FY2026 distribution per unit estimates by 5%-6% which factors in the REIT’s tenant exit with the assumption of a rental top-up of around $5 million.
Natrajan has also raised his cost of equity assumption by 100 base points (bps) on development risks, accounting for his lowered target price.
As at 12.15pm, shares in IREIT Global are trading at 0.5 cents higher or 1.72% up at 29.5 cents.
