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With strong balance sheet, IREIT’s gearing 'among the lowest' for S-REITs, but RHB trims TP

Jovi Ho
Jovi Ho11/16/2022 12:03 PM GMT+08  • 3 min read
With strong balance sheet, IREIT’s gearing 'among the lowest' for S-REITs, but RHB trims TP
With 37 assets across Europe, IREIT has no debts maturing until November 2026.
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IREIT Global is “relatively well-shielded” with a strong balance sheet and no debts maturing until November 2026, notes RHB Group Research analyst Vijay Natarajan.

IREIT’s 3QFY2022 ended September update shows that it continues to rise above market challenges, with occupancy rate growth and rental rate escalations kicking in, says Natarajan in a Nov 14 note.

While its occupancy rate should drop by some 11% in 4QFY2022 due to the exit of a tenant, management is in talks with several tenants and expects to backfill some space, he adds. “IREIT is the best positioned among S-REITs against rate hikes, with no debt maturity and a near-full hedge until November 2026.”

Natarajan is maintaining his “buy” call on IREIT with a lower target price of 63 cents from 72 cents previously due to higher market risk premiums. The new target price represents an upside of 24%.

IREIT’s mandate is investing in Europe real estate, including office, retail and industrial purposes. It has in its portfolio 37 assets valued at over EUR1 billion ($1.42 billion).

Backfilling is underway at IREIT’s Darmstadt Campus, writes Natarajan. Deutsche Telekom, the sole tenant at Darmstadt Campus (contributing some 11% of overall income) will vacate the premises this month.

Management says there has been active interest from 12 potential tenants from both the public and private sector. Management expects to convert some of this interest, but acknowledged that economic conditions have made it slightly challenging, writes Natarajan.

According to Natarajan, the REIT’s preference is to multi-let the asset and reduce tenant concentration risks, a strategy it has been actively been embarking on of late. “We have assumed occupancy rates for this asset to be 50% and 75% over 2023 and 2024, in our model.”

IREIT’s portfolio occupancy rate improved to 96.5% in 3QFY2022 from 95% in the previous quarter. This was mainly due to the German government body commencing its lease for four floors at Munster Campus and lease signings at Delta Nova IV and VI.

IREIT’s rental rate escalation of 4.2% y-o-y kicks in due to step-up rents and CPI indexation at its assets and current high inflation across the Eurozone. Rental collection is at 100%, highlighting its blue-chip tenant profile, notes Natarajan.

IREIT is not exposed to the steep rise in utility charges across Europe, as this is fully passed through and borne by tenants.

For new leases signed in 3QFY2022, rental reversion was slightly positive at 0.3%. For Darmstadt Campus, asking rental rates are currently in line with expiring and market rates, says Natarajan, and he expects mostly flattish rental reversions for this asset.

Finally, IREIT has a strong balance sheet, says Natarajan. “IREIT has no debts maturing until November 2026, and has substantially hedged its Euro-denominated debt until then, with interest rate swaps and interest rate caps. As such, the impact of the sharp rise in interest rates should be minimal for the next three years.”

Its gearing of 30.6% is among the lowest for S-REITs, and provides debt headroom to pounce on good opportunities, writes Natarajan. “Management noted that it is starting to see some cap rate expansion in the market, but will remain cautious and prudent on any acquisitions; it is prepared to wait for the right asset and price.”

Natarajan trims IREIT’s FY2023/2024 distribution per unit (DPU) by 6% and 2% respectively to reflect lower occupancy rates at Darmstadt Campus and his adjusted financing cost estimates. “We lift IREIT’s cost of equity by 60 basis points to 8.1% on higher market risk premiums, resulting in a lower target price.”

As at 11.46am, units in IREIT are trading 1 cent lower, or 1.87% down, at 52.5 cents.

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