• BUY, new TP of SGD0.63 from SGD0.72, 24% upside with c.9% FY22F yield. IREIT Global’s 3Q22 update shows that it continues to rise above market challenges, with occupancy rate growth and rental rate escalations kicking in. While its occupancy rate should drop by c.11% in 4Q22 due to the exit of a tenant, management is in talks with several tenants and expects to backfill some space. IREIT is the best positioned among S-REITs against rate hikes, with no debt maturity and a near-full hedge until Nov 2026.

• Backfilling underway at Darmstadt Campus. Deutsche Telekom, the sole tenant at Darmstadt Campus (c.11% of overall income) will vacate the premises this month. There has been active interest from 12 potential tenants (both public and private sector). Management expects to convert some of this interest, but acknowledged that economic conditions have made it slightly challenging. The REIT’s preference is to multi-let the asset and reduce tenant concentration risks – a strategy it has been actively been embarking on of late. We have assumed occupancy rates for this asset to be 50% and 75% over 2023 and 2024, in our model. IREIT’s portfolio occupancy rate improved to 96.5% in 3Q22 (2Q22: 95%), mainly due to the German government body commencing its lease for four floors at Munster Campus and lease signings at Delta Nova IV and VI.

• Rental rate escalation of 4.2% YoY kicks in due to step-up rents and CPI indexation at its assets and current high inflation across the Eurozone. Rental collection is at 100%, highlighting its blue-chip tenant profile. Note that IREIT is not exposed to the steep rise in utility charges across Europe, as this is fully passed through and borne by tenants. For new leases signed in 3Q, rental reversion was slightly positive (+0.3%). For Darmstadt Campus, asking rental rates are currently in line with expiring and market rates – and we expect mostly flattish rental reversions for this asset.

• Strong balance sheet. IREIT has no debts maturing until Nov 2026, and has substantially hedged its EUR-denominated debt until then, with interest rate swaps and interest rate caps. As such, the impact of the sharp rise in interest rates should be minimal for the next three years. Its gearing of 30.6% is among the lowest for S-REITs, and provides debt headroom to pounce on good opportunities. Management noted that it is starting to see some cap rate expansion in the market, but will remain cautious and prudent on any acquisitions – it is prepared to wait for the right asset and price.

• We trim FY23-24F DPU by 6% and 2% to reflect lower occupancy rates at Darmstadt Campus and our adjusted financing cost estimate. We lift COE by 60bps to 8.1% on higher market risk premiums, resulting in a lower TP. IREIT’s ESG score of 3.0 is on par with our country median, so we apply a 0% premium/discount to our intrinsic value to derive our TP.

Source: RHB Research - 14 Nov 2022