Short-term pain for long-term gain
(+) 1H22 revenues and NPI increased more than 25% y-o-y
- 1H22 revenue of EUR30.1m was 27.2% higher y-o-y, mainly due to contribution from acquisitions
- July 2021: 27 retail properties in France
- September 2021: Parc Cugat in Spain
- Consequently, 1H22 NPI of EUR24.4m was also 26.4% higher y-o-y
(+) Distributable income was 20.4% higher y-o-y
- 1H22 income available for distribution – EUR18.2m – was 20.4% higher y-o-y
- As IREIT only distributes 90% of its income, distributable income in 1H22 was EUR16.4m
- Also 20.4% higher y-o-y
- 1H22 DPU of 1.41 Ects was however 1.4% lower y-o-y due to:
- 100% of Manager’s Fees being paid in cash in 1H22
- Only 50% of Manager’s Fees was paid in cash in FY21
- Assuming 100% of Manager’s Fees in 1H21 was also paid in cash, 1H22 would have been 3.7% higher y-o-y
(+) Portfolio occupancy of 95.0% and WALE of 4.7 years
- Six-year lease extension signed by Deutsche Telekom for the entire Bonn Campus
- Extension commences in May 2023
- Signed 12-year lease for 5,300 sqm of data centre space (20.4% of property) at Sant Cugat Green
- Both properties reported a 14.9% (Bonn Campus) and 7.7% (Sant Cugat Green) increase in valuations due to leases signed
- Overall portfolio valuation uplift of 2.9%
- IREIT’s portfolio currently valued at more than EUR1.0bn
- 14.9% of leases based on GRI will be expiring in 2H22
- Bulk of remaining expiries are from Darmstadt Campus lease which will expire in November 2022
- Darmstadt Campus contributes c.10% of IREIT’s GRI
- IREIT in discussions with potential tenants to backfill property; would ideally like to lease out property to a single master-tenant
(+) Gearing improved to 30.8% on the back of higher valuations
- Gearing improved to 30.8% due to an increase in portfolio valuations
- All borrowings have been hedged to fixed rates and interest rate caps
- Weighted average debt maturity of 4.0 years
- No loans will be expiring until FY26
(+) CPI-linked rent reviews to support organic earnings growth
- Majority of leases in France and Spain are CPI-linked
- Higher rents expected due to strong CPI increase
- Leases in Germany are typically only reviewed when cumulative inflation exceeds a pre-agreed threshold
- i.e., rents will be reviewed once cumulative inflation exceeds 10% since its last review
(+/-) 100% of Manager’s fees to be paid in cash
- 100% of Manager’s fees in 1H22 was paid in cash; compared to only 50% previously
- DPU will be lowered in the near-term, but this is a positive for unitholders in the longer-term
- Prevents dilution to unitholders, especially as IREIT shares are currently trading at a more than 26.5% discount to NAV
- We have revised our estimates to account for Manager’s fees to be paid entirely in cash going forward
Our thoughts
Acquisitions over the past year were the main driver of IREIT’s growth in earnings, and higher distributable income consequently. However, as IREIT has switched to receiving 100% of its Manager’s fees in cash, DPU was slightly lower than our previous estimates. As such, we have revised our projections to assume that all Manager’s fees will be paid in cash going forward. Although this will lead to a decline in DPU in the near-term, we see this as a positive move for unitholders in the longer-term, especially as IREIT shares are trading at a more than 26.5% discount to its NAV, and further issuance of units will lead to a larger dilution to exiting unitholders.
The main positives in the past quarter were the six-year lease extension at Bonn Campus, and the 12-year lease signed at Sant Cugat Green. However, there are still no updates on backfilling at Darmstadt Campus which will be vacated by Deutsche Telekom in November 2022. Nevertheless, IREIT remains confident that they will be able to re-let the space in due course. Its low gearing of only 30.8% also provides IREIT with ample debt headroom of more than EUR165m (before gearing hits 40%) for further acquisitions and asset improvements.
As we revise our estimates to account for 100% of Manager’s fees in cash, our FY22 DPU estimates have been lowered by c.6.5%. As such, our TP is lowered to S$0.68 even as we maintain our BUY recommendation.
