• Maintain BUY with a new TP of SGD0.72 from SGD0.74, 18% upside and c.7% yield. 1H earnings were inline. IREIT Global’s Western Europe- focussed predominantly office portfolio is expected to remain resilient despite rising macro uncertainties on the back of long leases and good tenants. Its debt is fully hedged until late 2026 thus shielding from rising interest rates. With a low gearing of 30.8%, there is room for growth from opportunistic acquisitions. Valuation is attractive at 0.7x P/BV.

• 1H core DPU up 3.7% YoY, while actual DPU fell 1.4% YoY as 100% of management fees were paid in cash (vs 50% in 1H21). Revenue and net property income (NPI) grew 27% and 31% YoY on the back of acquisition contribution from its French portfolio and Parc Cugat. Portfolio valuation rose 2.9% YoY to EUR1.0bn, mainly from a 15% uplift in valuation at its Bonn Campus which secured a new 6-year lease with Deutsche Telekom (DT) and Sant Cugat Green (8%), where a data centre tenant signed 12- year lease at c.5,300sqm of vacant space. As a result, NAV rose 5.6% in EUR terms to 57 cents.

• Portfolio occupancy stable at 95%, but some headwinds ahead. DT, the sole tenant at Darmstadt campus (c.11% of 1H income), will vacate in Nov 2022. We understand that DT vacated other buildings in the area and consolidated elsewhere, resulting in a higher vacancy in the area. IREIT has been actively marketing the asset which is one of the prime buildings in the area. However, with the ongoing macro uncertainty from the Russo- Ukraine war and higher local vacancy, we believe there could be a potential delay (factored in six months) in backfilling, resulting in a near-term occupancy drop. Regardless, we remain fully confident on management’s operational capabilities considering its good past track record in backfilling the entire Bonn campus. There is no major lease due until Jun 2024 when leases on its Berlin campus will be up for renewal.

• Stepping up its sustainability efforts. IREIT has launched BREEAM Certification Process for its German and French assets in order to increase energy efficiency and improve the attractiveness of assets. The certification process is expected to be completed by 1Q23. Its Spanish portfolio is already LEED certified.

• Gearing down to 30.8% is one of the lowest among SREITs presenting EUR200m debt headroom (assuming 40% levels) for acquisitions. Potential targets are in the commercial and logistics space in Western Europe.

• We lower FY22-23F DPU by 7% and 9% assuming 100% of management fees paid in cash (previously 50%) and a slower backfilling for Darmstadt campus. ESG Score of 3.0 out of 4.0; as this score is in line with our median score, we apply a 0% premium to its intrinsic TP.

Source: RHB Research - 15 Aug 2022