RHB remains 'neutral' on IREIT Global; says valuations are 'fair'

Felicia Tan
3-min read

In its 1QFY2023 update, IREIT reported a portfolio occupancy of 87.0%, down 1.3 percentage points q-o-q, as at March 31.

RHB Group Research analyst Vijay Natarajan is retaining his “neutral” call on IREIT Global UD1U after the REIT released its business update for the 1QFY2023 ended March 31 on April 25. The analyst also kept his target price unchanged at 55 cents.

IREIT Global, which has two sponsors, City Developments Limited (CDL) and Tikehau Capital, has 37 properties over 384,282 sqm of net lettable area (NLA) as at March 31.

In its update, the REIT reported a portfolio occupancy of 87.0%, down 1.3 percentage points q-o-q, as at March 31. Its weighted average lease expiry (WALE) came to 4.8 years as at March 31, down from 5.0 years as at Dec 31, 2022. The REIT’s aggregate leverage stood at 32.3%, up slightly from the 32.0% a quarter ago, while its portfolio valuation stood at EUR950.5 million ($1.40 billion) as at the same period.

The REIT also announced that it recently secured a government tenant that will take up a quarter of the vacant Darmstadt campus on a 15-year lease on April 24. The campus accounted for 11% of IREIT’s income in the FY2021, notes the analyst.

The new lease will commence in June and has two options to extend for another five years.

While the new lease will signed at market rates and will generate an annual income of EUR1.2 million, this is said to be slightly lower than the rent paid by the campus’ previous tenant, Deutsche Telekom, according to Natarajan.

“IREIT is currently in active engagement with several prospective tenants, and expects the lease signing to spur interest for this asset,” writes the analyst.

“The REIT’s overall portfolio occupancy rate dipped slightly in 1QFY2023 to 87% (FY2022: 88.3%), due to lower occupancy rates at its Spanish assets. With this new lease, the overall occupancy rate should rise to 89%,” he adds.

The lease renewal of IREIT’s Berlin campus will be the “next major hurdle” for the REIT, says Natarajan. The campus, which accounted for 24% of IREIT’s rental income for the FY2022, is currently fully occupied by Deutsche Rentenversicherung Bund (DRB). DRB’s lease will end in mid-2024.

According to IREIT’s management, it is working closely with the tenant to understand its needs while exploring its options such as extending DRB’s lease or bringing in new tenants if the former decides to vacate the space.

Should the space be vacated, Natarajan sees that there is good potential upside as the asset is currently “highly under-rented” at 30% to 50% below market. That said, this is likely to cause a sharp drop in the REIT’s short-term income during the backfilling period as well as a need to pump in significant upfront capex.

Overall, the analyst remains somewhat positive on the REIT as its portfolio leases saw rental rates rise by 3.4% y-o-y in the 1QFY2023.

“Overall interest costs remain stable at 1.9% per annum (p.a.), with no debt maturity until November 2026 and near the full debt hedge via interest rate swaps/caps,” he writes.

“The REIT’s low gearing of 32.3% also provides debt headroom for it to pounce on good opportunities. Management remains cautious in its outlook, and is ready to wait for the right asset and price amid the current market volatility,” he adds.

Natarajan has given IREIT an environmental, social and governance (ESG) score of 3.1 out of 4.0, one notch above the country average. As such, his target price includes a 2% ESG premium on the REIT’s intrinsic value.

The rest of his estimates remain unchanged.

As at 4.11pm, units in IREIT are trading 0.5 cents higher or 1.01% up at 50 cents.

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