Results First Take: Rental indexation to drive organic income growth

  • Portfolio occupancy remained stable and rental indexation to lead to some organic growth to earnings
  • Key positives: i) extension of Deutsche Telekom’s lease at Bonn Campus to April 2024, ii) no impact to rising interest rates as loans are fully hedged to FY26 and FY27, iii) bulk of leases that would be expiring in FY22 have been addresses
  • What we are watching out for: i) Darmstadt Campus will be vacated in November 2022 and backfilling is expected to take some time, ii) how rising interest rates will impact property valuations and cap rates
  • Maintain BUY with TP of S$0.70
Key operational data1Q20224Q2021% Change1Q2021% change
Portfolio occupancy (%)95.7%95.7%95.9%-0.2 ppt.
WALE (years)3.73.8-
Aggregate leverage32.1%32.1%35.0%-2.9 ppt.
Interest Coverage Ratio7.77.77.7
All-in cost of debt1.8%1.8%1.8%

(+) Portfolio occupancy remains stable at 95.7%

  • Berlin Campus: DRV did not exercise break option, so lease will run until June 2024
  • Bonn campus: Deutsche Telekom lease extended by 12 months to April 2024
  • Darmstadt Campus: Deutsche Telekom  will vacate property in November 2022, still actively marketing the space
    • Vacancy rate in the area has increased and will need more time to backfill space
  • Munster Campus: German federal government body has backfilled all 5 floors of office space that was just vacated by GMG
  • II.lumina: 1,600 sqm of office space to be vacated in August 2022
  • Parc Cugat: Slowdown in demand, but has rental guarantee until 31 December 2022
  • Sant Cugat Green: Ongoing discussions to lease out 5,300 sqm of vacant data centre space

(+) Leverage maintained at 32.1%, and borrowings have been hedged to fixed rates

  • Aggregate leverage maintained at 32.1%
  • All borrowings have been hedged to fixed rates
  • First debt maturity only in FY26

(+) Rental indexation to lead to some organic growth in earnings

  • Most of IREIT’s leases and linked to CPI
    • Leases in France and Spain undergo indexation at the start of each year
    • Leases in Germany are also indexed annually

(+) Bulk of leases expiring in FY22 have been addressed

  • Bulk of the 17.2% leases expiring in FY22 relates to the five floors that will be expiring at the Munster Campus in Germany
    • All five floors have already been committed by the German federal government
    • Some of the remaining expiries are coming from the Darmstadt Campus where Deutsche Telecom will vacate in November 2022

Our thoughts

IREIT’s overall portfolio remains healthy and the rental indexation mechanism will help drive some organic growth to earnings. Concerns of Deutsche Telekom’s rationalisation of space throughout Germany has partially been addressed when their lease at Bonn Campus was extended by 12 months, and will now run until April 2024. However, its other lease at the Darmstadt Campus will expire in November 2022, and IREIT may face some headwinds at that property as vacancy rates in the area has increased.

We also understand that IREIT will mostly be insulated from the ongoing spike in interest rates and utility costs as its debt are fully hedged until FY26 and utility costs are mostly passed on to tenants. With the rising interest rates, there could potentially be some downside risks on valuations, but again, we understand that IREIT is not too concerned with this as their valuers have been conservative in their valuation of IREIT’s portfolio.

As such, we will be maintaining our BUY recommendation with a TP of S$0.70