IREIT Global: French portfolio to ease the pressure
- 1H23 DPU of 0.93 Ects was c.24% lower y-o-y, below our estimates
- Decline in DPU mainly caused by vacancy at Darmstadt Campus and 4-month rent-free period at Bonn Campus
- Looking forward to completion of acquisition of 17 retail properties in France to support earnings in 2H23
- Downgrade to HOLD, with revised TP of S$0.45
- 1H23 revenues were 5.5% lower y-o-y, 10.0% lower h-o-h
- This was mainly due to the vacancy of Darmstadt Campus (vacant since November 2022)
- Also, the rent-free period for lease renewal at Bonn Campus (four-month rent-free for lease extension from May 2023)
- And some other rent-free periods for lease renewals at Munster Campus and Sant Cugat Green
- The 10.1% decline in NPI was further amplified by higher operating expenses
- This was mainly due to non-recoverable expenses at Darmstadt Campus, and higher repair and maintenance expenses overall
1H23 DPU of 0.92 Ects is c.24% lower y-o-y
- The lower DPU was mainly due to the lower revenues, higher financing costs, as well as enlarged unit base from the preferential offering
- It was also due to a one-off payment of EUR400,000 in leasing incentives for GMG as part of the six-year lease extensions at the Bonn Campus
- And the preferential offering on 19 July 2023, which raised S$75.9m
- As there will be a timing difference between the preferential offering and the deployment of proceeds, we expect some drag on DPU in FY23
- Private placement was done on 19 July 2023
- Purchase of the 17 retail properties (B&M portfolio in France) is expected to be completed only in 3Q23
Acquisition in France at an attractive yield of 7.9%
- Proposed acquisition of a portfolio of 17 retail assets located throughout France:
- All 17 assets are fully leased to B&M, a leading discount retailer in Europe that is listed on the London Stock Exchange
- The purchase consideration of EUR76.8m is at a c.1.7% discount to valuations
- Attractive NPI yield of c.7.9%; estimated DPU accretion of slightly more than 1%
- This will lead to c.8.1% growth in IREIT’s AUM
- Comes with a WALE of 6.8 years, with built-in annual CPI indexation to rents
- Initial GRI of EUR6.7m, and NPI of EUR6.1m
- The acquisition will be funded mostly by the preferential offering
- The preferential offering raised S$75.9m (or c.EUR52m)
- The remaining c.EUR25m is to be funded with new borrowings
Improvement in portfolio occupancy rate to 88.7%
- The portfolio occupancy rate improved 1.7ppt q-o-q to 88.7%
- This was mainly due to the 15-year lease signed at the Darmstadt Campus
- The tenant is a German federal government body and its lease commenced on 1 June 2023
- IREIT is in discussions with a few other potential tenants for the remaining space at the Darmstadt Campus (still has a vacancy of 75%)
- At the Berlin Campus, the DRV has signed a six-month lease extension until 31 December 2024
- The revised rent from 1 Jul 2024 is 45% higher than the current rents
- The Berlin Campus will undergo a repositioning once the DRV vacates the asset in December 2024
- At the Bonn Campus, GMG (part of Deutsche Telekom) has signed a six-year extension at the property starting from May 2023
- This came with a four-month rent-free period, and a EUR400,000 leasing incentive
- 1H23 positive rental escalations of +4.1% from CPI indexation
Gearing inched up q-o-q to 33.1%
- Gearing inched up 80bps q-o-q to 33.1% in 2Q23
- This was mainly due to new loans drawn down for capex, as well as a decrease in portfolio valuations
- Including the acquisition of the B&M portfolio in France, gearing will potentially inch up to c.34.2%
- All-in borrowing costs are likely to inch up by another 20-30bps with the additional loan
- All-in financing costs remained relatively stable at 1.9%, only a 10bps increase q-o-q
- No loans due for refinancing until FY26
- 96.2% of loans have been hedged to interest rate swaps and interest rate caps
- Portfolio valuations reported a c.2.9% decline from the last valuation carried out on 31 December 2022
- The majority of the valuation declines came from the German and French portfolios
- German portfolio: -3.2%
- French portfolio: - 2.8%
- Spanish portfolio: - 1.9%
- IREIT’s portfolio experienced an expansion in cap rates (c.25-50bps) as a result of high interest rates and uncertain economic conditions
- Cap rates may expand another 25-50bps in 2H23
Our thoughts
IREIT’s 1H23 earnings were impacted by the vacancies at the Darmstadt Campus, as well as the rent-free periods paid for GMG’s lease extension at the Bonn Campus. IREIT’s adjusted 1H23 DPU of 0.93 Etcs came in below our estimates, as the timing difference between the preferential offering and deployment of the proceeds led to a further drag on 1H23 DPU. As the acquisition of the 17 retail assets in France is expected to be completed in 3Q23, it will lead to a drag on earnings until the acquisition is completed and will generate slightly more than 1% accretion in DPU in FY24 on a full-year basis.
We have thus revised down our forecasts to take into account the enlarged unit base as well as the prolonged vacancies at the Darmstadt and Berlin Campuses. Even as we assume a gradual backfilling of the vacancies, we have also factored in some rent-free periods to our revised estimates. Furthermore, we understand that the Berlin Campus may experience some downtime, as an asset repositioning will be carried out in FY25, after the DRV vacates the property.
Due to the increasing uncertainties surrounding the European office market, we are projecting prolonged vacancies in IREIT’s portfolio. Moreover, the expansion in cap rates throughout Europe could lead to further valuation declines. As such, we are downgrading our recommendation to HOLD with a revised target price of S$0.45.
FY Dec | 1H2022 | 2H2022 | 1H2023 | % chg yoy | % chg hoh |
Gross revenue | 30.1 | 31.6 | 28.4 | (5.5) | (10.0) |
Property expenses | (5.6) | (7.2) | (6.5) | 14.7 | (10.5) |
Net Property Income | 24.4 | 24.4 | 22.0 | (10.1) | (9.8) |
Other Operating expenses | (3.7) | (3.9) | (3.8) | 1.1 | (4.5) |
Other Non Opg (Exp)/Inc | 19.5 | 13.6 | (0.6) | nm | (104.7) |
Associates & JV Inc | 0.0 | 0.0 | 0.0 | - | - |
Net Interest (Exp)/Inc | (2.9) | (3.0) | (3.1) | (7.5) | (3.1) |
Exceptional Gain/(Loss) | 27.5 | (55.2) | (34.1) | nm | nm |
Net Income | 64.8 | (24.2) | (19.7) | nm | 18.6 |
Tax | (8.8) | 4.58 | 2.16 | (124.7) | (52.8) |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 56.0 | (19.6) | (17.5) | nm | (10.6) |
Total Return | 0.0 | 0.0 | 0.0 | - | - |
Non-tax deductible Items | 0.0 | 0.0 | 0.0 | - | - |
Net Inc available for Dist. | 56.0 | (19.6) | (17.5) | (131.3) | (10.6) |
Ratio (%) |
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Net Prop Inc Margin | 81.3 | 77.1 | 77.3 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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