RHB Bank Singapore analyst Vijay Natarajan has upgraded IREIT Global UD1U to “buy” from “neutral” after the REIT announced that it had agreed to divest Il-Lumina for EUR24.5 million ($35.7 million) on Dec 22, 2023. He has also lifted his target price estimate to 47 cents from 42 cents previously.
Il-Lumina is a freehold office building located in the mixed-use office and industrial area, Esplugues de Llobregat, some 5km away from Barcelona, Spain. The building has a total lettable area of 20,922 sqm (225,202.53 sq ft) with 310 parking spaces. The property had a gross rental income (GRI) of EUR2.4 million for FY2022 ended Dec 31, 2022. The asset accounted for 3% of the REIT’s portfolio value in FY2022 and 4% of its NPI in the same FY.
The valuation of the property stood at EUR23.3 million as at June 30 based on independent property valuer, BNP Paribas Real Estate Consult GmbH’s calculations.
“IREIT Global’s latest move to divest its Spanish office asset at a premium to valuation is a positive step. The divestment will improve portfolio weighted average lease to expiry (WALE) and further strengthen its balance sheet position with a low gearing, providing debt headroom for opportunistic acquisitions ahead,” says Natarajan in his Jan 2 report. IREIT’s gearing after the divestment is expected to fall to 33% from 34.4% in 3QFY2023 with 96% of its debt remaining full hedged till 2026.
“With a low gearing profile and recent fall in rates, we believe the REIT could opportunistically tap into yield-accretive acquisition opportunities. Management had earlier guided its interest to broaden IREIT’s asset class profile by acquiring industrial (logistics) and differentiated retail assets to achieve a better diversification profile for the REIT,” he adds.
Based on the analyst’s estimates, IREIT’s exit net property income or NPI yield based on its divestment price, comes up to around 8%.
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Following the divestment, the REIT will book a gross divestment gain of EUR1.2 million, some of which Natarajan believes may be used to top-up its distributable income in the interim.
“Key reasons for divesting the asset include its short WALE profile of 2.8 years vs the portfolio’s 4.9 years and secondary office location that could likely pose leasing risks upon expiry. Completion of divestment is expected by January,” he says.
In addition, the recent slide in the Eurozone bond yields provide tailwinds for the REIT. Based on the latest official data, the Euro area’s annual inflation fell more than expected to 2.4% in November 2023, down from October 2023’s 2.9%.
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“This has resulted in economists forecasting that rates have peaked, with rate cuts anticipated starting early 2Q2024. This in our view provides tailwinds to the REIT by making its current yield spreads attractive. In addition with risk-free rates receding, we believe capitalisation rate expansion cycle for European assets are likely over, and further asset devaluations are unlikely,” says the analyst.
Despite the upgrade and higher target price, Natarajan has lowered his distribution per unit (DPU) estimates for the FY2024 to FY2025 by 2% to 3% to factor in the loss of income from Il-Lumina’s divestment.
He has also lowered his cost of equity (COE) assumption by 70 bps, factoring in reduced risks from IREIT’s low gearing profile and fall in risk-free rates.
In FY2024, Natarajan sees any DPU rebound to come from the REIT’s Darmstadt leases and acquisition contributions.
RHB has given IREIT an environmental, social and governance (ESG) score of 3.2 out of 4.0, which results in a 4% ESG premium to Natarajan’s dividend discount model (DDM)-derived target price.
As at 11.46am, units in IREIT are trading 0.5 cents lower or 1.24% down at 40 cents.
