Brokers’ take: Analysts cut target prices for IReit Global on leasing slowdowns

Patricia Karunungan
Published Mon, Nov 14, 2022 · 01:44 PM

RHB Research and DBS Group Research have lowered their target prices for IReit Global : UD1U 0% on an expected slowdown in the trust’s leasing momentum, following the exit of a key tenant in November.

RHB maintained “buy” but slashed its target price for the Singapore-headquartered real estate investment trust (Reit) to S$0.63 from S$0.72, after lowering its distribution per unit (DPU) projections for FY2023 and FY2024 by 6 per cent and 2 per cent respectively.

The revised DPU projections reflect lower occupancy rates at IReit’s Darmstadt Campus in Germany as well as adjusted financing cost estimates, said RHB analyst Vijay Natarajan on Monday (Nov 14). 

He noted that the sole tenant of Darmstadt Campus – which will be vacating the premises this month – contributes roughly 11 per cent of IReit’s overall income. In Natarajan’s view, market conditions will make backfilling the property challenging, and he has therefore assumed occupancy rates for this asset to stand at just 50 per cent and 75 per cent over 2023 and 2024.

Moreover, the analyst expects “mostly flattish” rental reversions for the Darmstadt asset, as asking rental rates are in line with expiring and market rates rather than the escalations of 4.2 per cent seen with IReit’s other assets in the eurozone.

In the light of higher market risk premiums, Natarajan lifted the cost of equity by 60 basis points to 8.1 per cent to arrive at the lower target price of S$0.63. 

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He nonetheless continues to like IReit for being “the best positioned” among Singapore-listed Reits (S-Reits) to shield itself against interest rate hikes. The trust has no debts maturing until November 2026, and almost all of its borrowings are hedged to fixed rates.

“Its gearing of 30.6 per cent is among the lowest for S-Reits, and provides debt headroom to pounce on good opportunities,” said Natarajan.

DBS has also reiterated “buy” on the stock, but cut its target price from S$0.68 to S$0.60 on Nov 10, as IReit’s upcoming lease expiries and “lumpy” debt expiry profile compelled the research team to choose a more conservative valuation method.

The revised target price reflects this approach by assuming a higher risk-free rate of 3.5 per cent, as well as a slight increase in financing costs. It implies a potential share price upside of more than 21 per cent.

While the DBS analysts have acknowledged that IReit’s gearing is “very healthy” with no debt maturity until FY2026, they pointed out that 281.3 million euros (S$398.2 million) in borrowings or nearly 85 per cent of the trust’s entire loan book will expire that year.

Said the analysts: “We have taken the conservative approach of assuming a slight increase in overall financing costs, especially if new loans are required to fund any capital expenditure or working capital needs.”

The analysts also anticipate that the interest rate hikes and leasing slowdowns will put “some downward pressure” on IReit’s portfolio revaluation in December.

The trust will see 12.4 per cent of its leases expiring in Q4 FY2022; besides the Darmstadt Campus, the Il-lumina property in Spain will see tenants vacating the space. The DBS analysts nonetheless see potential in IReit’s medium-term income stability, as its portfolio has a “relatively long” weighted average lease expiry of 4.6 years and a high occupancy rate of 96.5 per cent.

In their view, the trust is also poised to benefit from the rental escalations in the European market. 

Units of IReit Global were trading at S$0.51, up 2 per cent or S$0.01, as at 1.41 pm.

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