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DBS cuts iREIT target price but notes low gearing, hedged loans

Lim Hui Jie
Lim Hui Jie11/11/2022 02:40 PM GMT+08  • 2 min read
DBS cuts iREIT target price but notes low gearing, hedged loans
Bonn Campus is one of the properties in the REIT’s German portfolio. Photo: IREIT Global
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DBS Group Research analysts Dale Lai and Derek Tan have maintained their “buy” call on iREIT Global, but have trimmed their target price from 68 cents to 60 cents.

The analysts note that the REIT has reported higher portfolio occupancy in 3QFY2022 ended Sept 30, up 1.5% q-o-q to 96.5%.

This was mainly due to higher occupancy at Munster Campus in Germany, where the German federal government commenced a lease of four floors in the property.

However, moving forward, the analysts expect a slowdown in leasing momentum. Lai and Tan point out that there are 12.4% of leases expected to expire in 4QFY2022.

While there are some enquiries for the space, they note that there are no commitments so far, and expect backfilling to be slow given market uncertainties.

On a whole, iREIT’s acquisition of its Spanish portfolio and the recent acquisition of 27 retail properties in France reduce its key tenant, geographical and sector concentration risks, the analysts think, adding that the REIT’s leases are stable and expected to rise gradually, as they are mostly pegged to consumer price indices (CPIs).

See also: UOB Kay Hian upgrades Frencken to 'buy' due to 'positive outlook' for its key customer and improving cost pressures

“Based on our estimates, 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.

In addition, Lai and Tan highlight that iREIT has an investment mandate for logistics properties, which it could explore, given its enlarged debt headroom of more than EUR371 million ($595.8 million)

iREIT’s sponsor has also demonstrated its willingness to incubate portfolios while the REIT grows, and this gives it the flexibility to pursue larger acquisitions despite its relatively small size.

See also: Citi maintains 'buy' rating on Genting Singapore off the back of MBS results beat

Another bright spot for iREIT is that its borrowing costs remained stable at 1.8% as substantially all of its bank borrowings have been hedged with interest rate swaps and caps, and it does not face any debt maturity until FY2026. Gearing for iREIT stands at 30.6% as of 3QFY2022.

As of 2.08 pm, units of iREIT were trading at 50.5 cents, with a P/NAV ratio of 0.7 and dividend yield of 8%.

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