Vijay Natarajan of RHB Bank Singapore has kept his "buy" call on IREIT Global as he believes that the REIT, trading at a 50% discount to book value partly because of the impending loss of its largest tenant, has likely bottomed out.
However, the REIT's near-term distribution will be hurt by the upcoming redevelopment of its largest asset, the Berlin Campus, which will take place in the coming two years or so. As such, Natarajan has cut his target price from 40 cents to 34 cents, which is still an upside of 19% and a FY2025 yield of 7%.
On June 21m 2024, Deutsche Rentenversicherung Bund (DRB), Europe’s largest pension fund and the sole tenant of the Berlin Campus, formally notified IREIT that it is vacating the space upon lease expiry on December 2024. As IREIT's largest tenant, DRB accounted for around 22% of the REIT's rental income for its 1HFY2024.
IREIT will suffer from lower DPU in the coming FY2025 and FY2026, as it undertakes a redevelopment costing some 130 to 160 million euros. Nonetheless, Natarajan believes this is the "best path" for IREIT to unlock long-term value and diversify its income base.
He points out that the Berlin Campus sits on a prominent location in the city centre, and is significantly "under-rented".
Amid the changing office market landscape, IREIT plans to reposition the Berlin Campus into a mixed-use facility comprising offices, taking some 70% of GFA; two hospitality operators each taking up 12% of the GFA and the remaining 5% for retail.
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IREIT has already signed two hospitality leases of 20 years each, with no break option.
The first lease is with Premier Inn, UK’s largest hotel chain, which will operate a 270-room hotel taking up 10,438 sq m, starting from 1HFY2027, paying an annual rental of 2.2 million euros that will be stepped up to 2.6 million euros after four years with annual indexation.
The other lease is with Stayery, described as a "modern-concept" serviced apartment project. It will operate 255 guest rooms by 1HFY2027 with an annual fixed rent of 2.7 million euros, which will increase to 3 million euros at the end of the 3-year step-up period.
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Natarajan estimates that the combined rents would be equivalent to around 45% of rental income now paid by DRB while occupying only around 24% of GFA, underscoring a significant income uplift.
In addition, IREIT expects healthy demand from office tenants for its repositioned integrated campus.
The redevelopment is estimated to incur a capex of between 130 and 160 million euros, with 82 million euros committed for the two hospitality assets and the remainder for office and retail podium upgrades.
According to Natarajan, the capex will be deployed in phases, with a corresponding rise in asset value expected. This will be funded via debt and potential asset disposals over the years.
Gearing, as a result, could creep up to around 40% but may come down if asset values start to recover from the anticipated lower interest rates for the EU, he says.
Natarajan had earlier expected IREIT's manager to top up DPU for the two transitory years of FY2025 and FY2026 but the REIT has now guided that it will not. As such, he has cut his FY2025 DPU by 34% y-o-y from the loss of rental income from DRB, plus higher financing costs for additional debt.
Natarajan observes that IREIT’s share price has plummeted due to uncertainties, but it is likely bottoming out and is now trading at a 50% discount to book value. As at June 30, its NAV was 58 cents per unit. "Further share price declines could attract privatisation bids from its sponsor," he says.
IREIT Global units last traded at 28 cents, unchanged for the day but down 30.49% in the past 12 months.
