• Maintain BUY, new SGD0.40 TP from SGD0.47, 40% upside and c.11% yield. IREIT Global’s recent announcement of a key tenant vacating does not come as a surprise – this risk was well highlighted earlier. The exit timing does coincide with a challenging macro and funding environment, which has resulted in share price pressure. Nonetheless, we see redevelopment of the Berlin Campus as a medium-term positive move that unlocks the asset’s undervalued potential and, with IREIT providing greater clarity on capex needs, returns potential will likely act as a share price catalyst, in our view.

• Berlin Campus to be repositioned as mixed-use urban precinct post exit of the property’ main tenant – Deutsche Rentenversicherung Bund (DRV) – upon its lease expiry at end Dec 2024. Note: The tenant earlier extended its lease on a short-term basis (six months) at a c.45% higher rent, highlighting the significant under-rented nature of the building (c.50-100% below market). DRV will also pay a lump-sum of EUR15.5m in dilapidation costs, equivalent to 16 months of current rent, part of which IREIT plans to use for income top-up. Considering the asset’s prime location, the current plan is to convert it into a mixed-use facility comprising office (c.65-70% of the total or c.50,000sq m), two hotels (c.25% of the total), and retail spaces (Figure 2). IREIT is in active talks with leading hotel and long-stay hospitality operators to potentially master lease this space and de-risk income volatility.

• Sponsor/co-investor partnership funding likely. We expect potential capex for upgradation could be around EUR150-200m, which would be spread across the likely upgradation timeframe of 12-24 months. Based on its current gearing of 37%, IREIT has a debt headroom of EUR80-100m before factoring in the likelihood of an increase in asset value from capex deployment. We see a highly likelihood of the REIT bringing over its two capable sponsors or outside investors to jointly develop the project, thereby monetising a portion of the asset, and reducing capex outlay and risks.

• New CEO to take the helm. Peter Veins, who is currently a fund manager at European real estate asset manager Sofidy – which is part of IREIT’s sponsor Tikehau Capital (Tikehau) – is set to take over as new CEO. This comes as current CEO Louis d’Estienne d’Orves will be moving internally to assume a senior role at Tikehau. In addition, Tikehau Head of Real Estate (Spain & Portugal) Emilio Velasco will assume the CIO role on a part-time basis.

• FY25F-26F DPU is lowered by 5-6%, factoring in the tenant exit and assuming c.SGD5m in rental top-up. We also raise our COE assumption by 100bps on development risks, resulting in a lower SGD0.40 TP. The unchanged ESG score of 3.2 (out of 4.0), after imputing FY23 sustainability data, results in a 2% ESG premium.

Source: RHB Research - 12 Jul 2024