Brokers' take: DBS initiates coverage on IReit Global with 'buy', S$0.76 target price

DBS Group Research has initiated coverage on UD1U : UD1U 0% with a "buy" call, saying that an enlarged and more diversified portfolio would allow the real estate investment trust (Reit) to reap gains.

The research house has a target price of S$0.76 for IReit, according to a report on Thursday. It sees value in IReit with a distribution per unit upside from two areas - rental escalation from its German portfolio, and room for occupancy rates to improve in its Spanish portfolio.

The Reit's acquired Spanish portfolio and recently proposed acquisition of a retail portfolio in France help to reduce its key tenant, geographical and sector concentration risks. DBS Group Research is assuming an equity fundraise of 79 million euros (S$126.7 million) to fund part of IReit's most recent deal.

Additionally, the research house expects to see stable and gradual increase in distributions, propelled by IReit's leases which are expected to rise gradually since they are mostly pegged to consumer price indexes (CPI). With rising CPIs in Germany, France and Spain, the existing lease arrangements would allow the Reit to see rising rental rates, said DBS.

"We also foresee an opportunity to double its rental income in Berlin Campus in (the second half of FY2024)," it added.

DBS is "optimistic" that occupancy rates in the Reit's Spanish portfolio will improve substantially in FY2022, adding that there are already signs of improvement despite the economy remaining weak. This could contribute to higher distributions, the report noted.

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IReit could potentially engage in more acquisitions because it fares better than its peers in its cash and gearing levels as at Dec 31, 2020. As it intends to acquire the France portfolio through a mixture of debt and equity, IReit would have sufficient cash and debt headroom for potential acquisitions, DBS said.

Key risks include the effects of the Covid-19 pandemic, "substantial" lease expiries over the next few years, as well as tenant and geographical risks. Nonetheless, the research house said that lease expiries are partially mitigated by low rental rates and long-term relationships with key tenants.

As at the midday break on Thursday, IReit units were trading flat at S$0.64.