IREIT Global - DBS Research 2022-11-10: Saved By Low Gearing & Hedging Of Loan Book

• See IREIT Global's announcement dated 09 Nov 2022 for its 3Q22 business updates:

Stronger portfolio occupancy of 96.5%

• IREIT Global (SGX:UD1U)'s portfolio occupancy increased 1.5% q-o-q to 96.5% in 3Q22, mainly due to higher occupancy at Munster Campus. The German federal government commenced a lease of four floors in the property.

Slowdown in leasing momentum expected

• 12.4% of leases expected to expire in 4Q22; likely to be from Darmstadt Campus – Deutsche Telekom has given notice earlier in the year that they will not renew their lease when it expires in November 2022. ~2,700sqm of space at II-lumina will be vacated in December 2022.
• May see some decline in portfolio occupancies at the year end when Darmstadt Campus vacates. There have been some enquiries for the space but no commitments so far. We expect backfilling to be slow given market uncertainties.

Strong rental escalations of 4.2%

• Strong rental escalations of 4.2% y-o-y as a result of built-in rental escalations and CPI indexation on some leases.
• Achieved a slight positive rental reversion of +0.3% in 3Q22.

Borrowing costs remained stable at 1.8%

• IREIT Global's borrowing costs remained stable at 1.8% as substantially all of IREIT’s bank borrowings have been hedged with interest rate swaps and caps. Gearing inched down slightly to a very healthy 30.6% in 3Q22.
• No debt maturity until FY26. However, IREIT Global's debt expiry profile is relatively “lumpy”, with EUR281.3m (or ~85% of the entire loan book) iring in FY26.

Our thoughts on IREIT Global

• Portfolio operations continue to remain strong with a high occupancy of 96.5%. The relatively long WALE of 4.6 years also helps ensure income stability in the medium term.
• Although IREIT Global has almost all of its borrowings hedged to fixed rates, we have taken the conservative approach to assume a slight increase in overall financing costs, especially if new loans are required to fund any CAPEX or working capital needs. We have also adjusted some of our assumptions to account for the current market conditions such as increasing our risk-free rate assumptions to 3.5% and assuming a slower improvement in the occupancy rate.
• We will also be watching out for IREIT Global’s portfolio revaluation in December 2022. The rising interest rates and slowdown in office leasing could potentially put some downward pressure on valuations and cap rate expansions.
• As such, we have revised our target price for IREIT Global to S$0.60 but will be maintaining our BUY recommendation on a valuation basis. Our revised target price implies a potential share price upside of more than 21%.
• From a DPU perspective, the current IREIT Global's share price implies a forward yield of ~7.1% over the next two years.