RHB cuts IREIT Global’s TP to 42 cents on ‘muted outlook’

Looking ahead, analyst Vijay Natarajan is expecting IREIT’s DPU for the 2HFY2023 to remain weak.

RHB Bank Singapore analyst Vijay Natarajan is remaining “neutral” on IREIT Global UD1U as he is mixed on the REIT’s outlook. That said, he has cut its target price to 42 cents from 53 cents previously due to its “muted outlook”.

In his Sept 12 report, the analyst notes that the REIT has been facing slow leasing progress for Darmstadt Campus in Germany amidst a challenging German office leasing market. So far, the property’s occupancy has stood low at 25%. Since April, the only lease the REIT has signed is the 15-year lease with a German federal body. Darmstadt Campus is contributing about 11% to the REIT’s overall income as at June 30.

“Management noted that market conditions remain challenging as Deutsche Telekom – Darmstadt Campus’ sole previous tenant – had vacated a few other buildings in this market, resulting in higher supply coinciding with weak office demand,” writes Natarajan. “This vacancy, coupled with one-off rent-free periods in Bonn campus, Münster Campus, and Sant Cugat Green, along with higher operational costs resulted in weak 1HFY2023 results, with [the REIT’s] distribution per unit (DPU) declining [by] 24% y-o-y.”

Meanwhile, Natarajan notes that the REIT has seen a better-than-anticipated outcome for the REIT’s leases for Deutsche Rentenversicherung Bund (DRV). The DRV, which is its largest tenant, contributing around 21% to its total income, announced that it will be extending its lease by six months, till the end of 2024.

The rent during the extension period will be 45% higher than the existing rate. DRV will also pay a dilapidation fee of EUR15.5 million ($22.7 million), which is equivalent to 16 months’ worth of rental income if it opts to vacate by the end of 2024.

“We believe DRV is likely to vacate the premises by end-2024, as it has been consolidating its footprint nearby. IREIT had earlier guided that it would have to undertake substantial refurbishment of the asset, with EUR50 million - EUR100 million capex, and this could result in 12-24 months of downtime for the asset,” says Natarajan.

“The upside is that the asset is significantly under-rented at [around] 50% below market rents, and could unlock significant value upon refurbishment,” he adds.

As at June 30, IREIT also has a healthy balance sheet position with its gearing – following the acquisition of B&M – remaining prudent at 33%. IREIT also has one of the highest hedges among the Singapore REITs (S-REITs) with 96% of its debt hedged and with loans expiring in 2026 and beyond.

Looking ahead, the analyst is expecting IREIT’s DPU for the 2HFY2023 to remain weak, even though it is estimated to do better than its 1HFY2023 DPU due to the recent acquisitions and contributions from the government lease at Darmstadt Campus.

That said, he has still lowered his DPU estimates for the FY2023 by 23% to factor in rent-free periods for new leases secured, lower occupancy assumptions for Darmstadt Campus, as well as higher operational costs. Natarajan has also reduced his FY2024 DPU estimates by 11% for the same reasons.

The analyst has raised his cost of equity (COE) by one percentage point to factor in Germany’s economic slowdown. He has also applied a 4% environmental, social and governance (ESG) premium to his target price based on IREIT’s ESG score of 3.2, which is above the country median.

As at 3.29pm, units in IREIT are trading 0.5 cents higher or 1.27% up at 40 cents.

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