IREIT's capital management is a plus, but portfolio faces some challenges at Darmstadt asset

Goola Warden
Goola Warden11/13/2022 08:33 PM GMT+08  • 3 min read
IREIT's capital management is a plus, but portfolio faces some challenges at Darmstadt asset
Darmstadt Campus
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IREIT Global - which counts Tikehau Capital and City Developments as sponsors and owners of the manager - owns 37 freehold properties comprising five office properties in Germany, five office properties in Spain and 27 retail properties in France, with a total lettable area of around 384,000 sqm and valuation of EUR1 billion.

In a business update for 3QFY2022 for the three months to Sept 30, occupancy improved 96.5% as at Sept 30 compared to 95.8% as at Dec 31, 2021; and weighted average lease expiries (WALE) rose to 4.6 years as at Sept 30, compared to 3.8 years as at Dec 31, 2021.

The improvement in occupancy was due to a federal government body as tenant for four office floors in the Münster Campus that started in September 2022, and a data centre occupier in one of the office buildings in Spain.

However, Deutsche Telekom will be vacating the Darmstadt Campus (which contributes 10.5% to IREIT Globals rental income) by end-Nov 2022. Active marketing is underway. According to the CEO of IREIT Global’s manager, Louis d’Estienne d’Orves, 12 potential tenants have expressed interest in the property, but the current leasing environment remains challenging. It appears that the entire campus had only one tenant, Deutsche Telekom, so there is some competition for tenants. D’Estienne d’Ovre points out that IREIT Global’s properties are newer.

The top five tenants at IREIT's portfolio have not changed. “We have worked on diversifying sources of income and we have reduced exposure to Deutsche Telekom to 27.5% of rental income versus 45% in 2019. It’s important to continue diversifying through new acquisitions of tenants and repositioning assets from single tenant to multi-tenanted, eg Münster Campus,” D’Estienne d’Ovres says.

On the capital management front, aggregate leverage is modest at 30.6% as at Sept 30. “Leverage is safe with strong visibility as bank borrowings are substantially hedged with no refinancing for the next four years,” D’Estienne d’Ovres says. In addition, the 1.8% cost of debt as at Sept 30 is also fixed with a cap till 2026. Most of the debt of some EUR281.3 million matures in 2026.

See also: Resilient DPU, stable valuations, faltering ICR

Anne Chua, CFO of IREIT’s manager says the manager is looking at terming this loan out so that not all the debt expires at the same time. “This is not the right time to refinance. The loan was secured at a very attractive rate. We continue to borrow at 1.8% till the cap hits, and the cap provider pays the difference. We continue to enjoy this low cost of debt for quite a some time. But at the right time we will term it out,” Chua explains.

On the acquisition front, D’Estienne d’Ovres plans to stay cautious. “We don’t want to rush. Prices are decreasing. Prime net property income yields for logistics in France are above 4% versus 3% at the beginning of the year. We are moniroting all this and looking at opportunities.”

He declines to comment on the impact of higher interest rates on IREIT Global’s portfolio. "We don’t have assets where the yields at the start of the year were at 2%-3%. Our positioning was already defensive. A slowdown or decrease in value will not be so substantial. When you look at share price of IREIT there is significant discount versus NAV and this potential reduction in value and slowdown in the environement is more than reflected in the share price.”

As at June 30, IREIT Global’s NAV stood at EUR0.57 with 1HFY2022 DPU at EUR0.0141 versus the unit price of 51 cents.

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