IREIT Global - Phillip Securities 2021-08-11: Occupancy-Improvement And M&A Prospects

IREIT GLOBAL (SGX:UD1U)

IREIT Global - Occupancy-Improvement And M&A Prospects

IREIT Global (SGX:UD1U)'s 1H21 NPI and DPU in line, at 49.6%/51.7% of our FY21e estimates. No rent rebates or deferrals in 1H21. Portfolio valuation up by 3.9% h-o-h, led by a 7% increase for Berlin campus.
Positive leasing in Germany and Spain to improve occupancy in 3Q21.
We tweak FY21e DPU by 0.5% after a modest lift to revenue. Upgrade IREIT Global to BUY from ACCUMULATE with higher DDM target price of S$0.75, from S$0.68. Cost of equity lowered from 7.85% to 7.3% to reflect resilience of European office asset class. Catalysts expected from potential occupancy improvements and M&As.

IREIT Global's 1H21 NPI and DPU were in line, at 49.6%/51.7% of our FY21e estimates. Gross revenue and NPI increased 31.6% and 23.4% y-o-y following its acquisition of a remaining 60% interest in the Spanish portfolio on 22 October 2020. Property expenses jumped as its Spanish properties are multi-let and have lower NPI yields.
IREIT Global's DPU fell 21.4% y-o-y from an enlarged unit base following IREIT Global’s rights issue on 18 September 2020 There were no requests for rental rebates or deferrals from tenants in 1H21 – a good sign.

Portfolio valuation was raised by 3.9% h-o-h, led by a 7% h-o-h increase for IREIT Global’s largest property, Berlin campus. Apart from lower discount and capitalisation rates applied across its portfolio, Deutsche Rentenversicherung Bund, its major tenant at the Berlin campus, did not exercise its break option in June 2021 to return part of its leased space to IREIT Global in 2022. As a result, its entire lease will now only expire in June 2024, raising Berlin campus’ income visibility. This bumped up the property’s valuation.

Office leasing in Germany and Spain has improved in recent months. In July 2021, IREIT Global successfully secured three lease extensions and two new leases in Spain. It is also in advanced discussions with a few tenants who have break options and lease expiries in 2022. Portfolio occupancy remains high at 95.9%. FY21 expiries will remain minimal at 2.4% of portfolio GRI. We expect the leasing momentum to benefit occupancy in 3Q21.

On 6 August 2021, IREIT Global proposed divesting its multi-storey car park adjacent to its Darmstadt campus. Sale consideration was €9.5mn, about 10.5% higher than an independent valuation of €8.6mn as at 30 June 2021. The reasons for sale stem from GMG’s non-renewal of the multi-storey carpark in 2022. Darmstadt Campus has its own carpark space. Completion of the divestment is expected in 4Q21. We expect rental impact to be less than 3%. IREIT Global intends to use the proceeds to pursue further acquisitions.
Following its mandate of investing in office, industrial and retail properties, targets are likely to be in its existing markets as well as new ones such as Belgium, Luxembourg and the Netherlands.

With effect from 17 August 2021, units in IREIT Global can be traded in both its functional currency, € (IREIT Global EUR (SGX:8U7U)), and S$ (IREIT Global (SGX:UD1U)). Distribution currency will also be changed from S$ to € from 2H21 onwards. This provides investors with greater optionality, while nullifying the need to hedge IREIT Global’s future distributions. We believe this can provide time and cost savings, as IREIT Global can focus purely on operational metrics.
From investors’ standpoint, unitholders can rely on CDP’s direct crediting service (DCS) to automatically convert € distributions at a competitively priced exchange rate provided by CDP’s partner bank, HSBC.
In the event that a unitholder who is a CDP direct account holder has not yet subscribed for DCS with CDP, or opted out of currency conversion service, his relevant € distribution will be retained by CDP and reflected under the Cash Transaction section of his CDP monthly account statement.

We raise IREIT Global's FY21e DPU forecast by 0.5% on the back of higher FY21e revenue, offset by Darmstadt campus’ carpark disposal. Following a narrowing of discount rates by its valuers from 4.9-9.9% to 3.8-8.0% and terminal cap rates from 4.3-7.0% to 3.8-6.8% to reflect the resilience of the European office asset class, we lower our COE assumption from 7.9% to 7.3%. Accordingly, our target price for IREIT Global climbs to S$0.75 from S$0.68.
Catalysts are expected from potential occupancy improvements and M&As.
See

Tan Jie Hui Phillip Securities Research | https://www.stocksbnb.com/ 2021-08-11

SGX Stock Analyst Report BUY UPGRADE ACCUMULATE 0.75 UP 0.680