KGI Securities analyst Kenny Tan has started coverage on iREIT Global with an “outperform” rating and a target price of 69 cents, representing around 13% upside from current levels.
In his initiation report dated June 18, Tan's rating is underpinned by the "fairly stable" European office market.
He highlights that iREIT has “fared relatively well” throughout Covid-19, thanks to rents staying firm despite weaker leasing activity. “[iREIT] was able to promptly collect on rents, while settling new lease agreements with its key tenant, GMG, a wholly-owned unit of Deutsche Telekom,” Tan notes.
He expects IREIT to benefit further as the European economy recovers.
Tan highlights that the surge in Europe's inflation rate as its economy picks up may boost iREIT’s rental reversion, given that almost all of its leases are inflation-linked and incorporate rental step-ups tied to the consumer price index.
“Should inflation data continue to come in strong for the rest of 2021, iREIT may benefit from early-than-expected triggers of its rental escalation clauses,” he explains.
Interest rates are also expected to remain lower for longer, as the European Central Bank deposit rate stays negative. "This is favorable for iREIT’s fairly aggressive expansion strategy, as borrowing costs are expected to stay low for the next couple of years," Tan notes.
Tan is also positive on iREIT’s proposal to acquire 27 Decathlon properties, its first foray in France as well as retail properties. “We see the acquisition to be beneficial as it reduces key tenant, geographical and sector concentration risk, while being potentially DPU and yield accretive,” he says.
See more: IREIT Global ventures into France with purchase of 27 properties from Decathlon for EUR111 mil
Looking ahead, Tan expects foreign office REITs listed on the SGX including iREIT to “become attractive again” as global office markets stabilise.
While foreign office REITs usually trade at a dividend yield premium compared to local office REITs, Tan expects this to narrow, which will be beneficial to iREIT.
Tan’s target price of 69 cents is based on the dividend discount model. It implies a 6% capital appreciation gain and 6.9% forward dividend yield.
“We expect the renewal or extension of the rest of GMG’s expiring leases as the key catalyst for price action, given the risk overhang on overall rents. The completion of the Decathlon acquisition at an appropriate level of unit dilution should also be beneficial for iREIT,” he concludes.
He highlights new tenants and improvements in occupancy rates as other catalysts for the counter.
In terms of risks, Tan sees tenant concentration risk, lower occupancy driven by a shift to work-from-home arrangements, tightening tax regulations and forex risk as potential headwinds for iREIT.
As at 4.43pm, units in iREIT are up 0.5 cents or 0.77% higher at 65.5 cents.
Photo: iREIT Global
