Analysts at RHB Group Research and DBS Group Research are mixed on IREIT Global UD1U , following the release of its FY2022 results which missed expectations.
RHB analyst Vijay Natarajan has downgraded IREIT to “neutral” from “buy”, trimming his target price to 55 cents from 63 cents previously.
Natarajan notes that IREIT’s 2HFY2022 DPU fell 15% y-o-y on higher operating expenses, increase in administrative expenses as well as payment of management fees, which were fully in cash. As a result, the trust’s FY2022 DPU fell short, accounting for 94% of its forecast.
DBS analysts Dale Lai and Derek Tan kept their “buy” call and target price of 60 cents despite IREIT’s FY2022 DPU being 3.2% below their projections. They add that although the DPU came in slightly below their estimates, they believe that there is earnings growth going forward.
“IREIT’s leases are stable and expected to rise gradually, as they are mostly pegged to CPI. We believe IREIT is positioned to benefit from rental escalations that are well spread out over the next few years and has the potential to optimise occupancy rates at several properties,” the analysts say.
Natarajan highlights that IREIT’s leasing progress is slow at its Darmstadt Campus, with no leases signed so far after being vacated by Deutsche Telekom (DT) at the end of November 2022 although the trust is in discussion with several tenants from both the public and private sector with the intention to multi-let the asset. The lack of leasing progress is due to a combination of weak economic outlook and higher supply in the locality, with DT vacating few other premises, he notes.
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“The lease on the Berlin campus — which is fully occupied by Deutsche Rentenversicherung Bund (DRB) — will expire mid next year. Management is working closely with the tenant to understand its needs, while exploring all options such as to extend or bring in new tenants if DRB decides to vacate.
“As the asset is significantly under-rented, there is potential upside if it re-lets, yet this may result in a sharp drop in short-term income during backfilling period as well as a need to pump in higher capex,” says Natarajan.
DBS has revised its projections to account for some organic growth in rent, while also assuming about 70% of the space at Darmstadt Campus would be backfilled during the course of the year.
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On the capital management front, Lai and Tan believe that IREIT would continue to enjoy stable financing costs — this is as substantially all loans have been hedged to fixed rates through interest rate swaps and interest rate caps, they add. Additionally, there are no loans due to mature until FY2026, they highlight.
On a valuation basis, DBS continues to like IREIT given its relatively attractive forward yield of about 7%.
Meanwhile, RHB has lowered its FY2023-FY2024 DPU estimates by 4% and 6% to factor in a lower occupancy.
As at 10.21am, units in IREIT are trading flat at 50 cents.
