Brokers’ take: RHB downgrades IReit Global to ‘neutral’ as leasing risks persist
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Michelle Zhu
RHB Research downgraded its call on IReit Global to “neutral” from “buy”, lowering its target price to S$0.55 from S$0.63, on expectations of lower distribution per unit (DPU) in the near term due to declining occupancy.
This came after the real estate investment trust’s (Reit) results for H2 of FY2022 and the full year missed RHB’s estimates due to higher costs, and lower occupancy mainly because of a vacant Darmstadt Campus after its sole tenant moved out in end-November 2022.
In a report on Tuesday (Feb 28), analyst Vijay Natarajan noted that backfilling of the Darmstadt Campus was “rather slow”, attributing the lack of leasing progress to a weak economic outlook and higher supply in the locality.
He also highlighted concerns over the Reit’s Berlin Campus, whose sole tenant’s lease is due to expire in mid-2024.
“It is uncertain at this juncture if the tenant will continue to stay,” said the analyst.
“As the asset is significantly under-rented there is potential upside if it re-lets, yet this may result in a sharp drop in short-term income during backfilling period as well as a need to pump in higher capital expenditure.”
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To factor in expected lower occupancy in the near term, RHB cut its FY2023 DPU forecast by 4 per cent and FY2024 forecast by 6 per cent.
Nonetheless, Natarajan said he continues to like the Reit for its strong balance sheet, as its gearing remains the lowest among its Singapore Reit peers at about 32 per cent. This would provide debt headroom to “pounce on good opportunities”.
In his view, IReit Global’s fully hedged debt profile until end-2026 means it will be minimally impacted by rate increases.
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The analyst added that IReit’s portfolio leases are “pegged to step-up rents and CPI (consumer price index) indexation”. Therefore, there may be an upside for the Reit from current high inflation levels in its key markets.
As at 9.51 am on Tuesday, units of IReit Global were up S$0.01 or 1.9 per cent at S$0.525.
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