• 4Q19 results dipped modestly below our expectations. Net property income remained stable YoY. 4Q19 DPU was 4.9% lower YoY due to weaker EUR/SGD exchange rates, bringing FY19 DPU down by 2.8%.
• NAV per unit jumped 13% from S$0.75 to S$0.85 due to revaluation gains.
• We like the high-income stability observed in IREIT’s portfolio. It remains largely anchored by the attributes of its German assets (occupancy: 99.7%, WALE: 4.2%), with an overall portfolio occupancy rate of 94.6% and a WALE of 4.2 years.
• Maintain ACCUMULATE with an unchanged target price of S$0.885.

The Positives

+ Stable results. IREIT recorded a 0.1% increase in NPI YoY, with a marginal decrease in both gross revenue and property operating expenses in 4Q19. On a full-year basis, NPI is also up by 0.1%. Increase in property operating expenses was largely due to repair and maintenance on the properties, offset by higher gross revenue arising from the finalisation of prior year’s service charge reconciliation. FY19 DPU was down by 2.8% YoY, partially attributable to weaker EUR/SGD rates recognized.

+ Revaluation gains increased NAV per unit by 13% and reduced gearing levels. Post-acquisition of the 40% stake in the Spanish portfolio, aggregate leverage increased to 39.3% vis-à-vis initial guidance of 42.9%, mainly attributable to a 9.2% increase in fair value of investment properties. The increase was due to higher appraised value of the German portfolio. Consequently, NAV per unit increased 13% from S$0.75 to $0.85 per unit, marking a P/NAV ratio of 1.0x as at 31 Dec 2019.

The Negatives

– Effective interest rate increased to 1.8% p.a, fewer loans are hedged. Accounting for the CDL bridging loan that bears an interest of 3.875% above EURIBOR, cost of debt increased from 1.5% to 1.8% p.a while the proportion of loans hedged declined from 100% in 3Q19 to 86.3% in 4Q19.

Outlook

Interest rates in the Eurozone are still expected to remain lower for longer, which provide attractive financing/refinancing opportunities for IREIT. In 2020, the take-up in office space and rental growth expectations in Europe may slow down due to slower business activity and higher new development completions. This might drive down occupancy rates. Given that most of IREIT’s leases are locked in till FY22 with only 1.0% and 1.2% of the leases due to expire and 2.6% and 2.4% eligible for lease break in FY20 and FY21 respectively, IREIT’s portfolio presents yield visibility and defensiveness.

The Manager will be looking to increase the occupancy rate of the Spanish Portfolio (which is currently at 80.7%) and bring the under-rented properties nearer to market levels through active asset management. In addition, it will be exploring possible debt and equity financing options to repay its term loan facility and to exercise the call option granted by Tikehau Capital to acquire its 60% stake, while maintaining an appropriate capital structure for IREIT.

Maintain ACCUMULATE with an unchanged TP of S$0.885.

Our target price translates to a FY20e/FY21e distribution yield of 6.4% and a total upside of 8.7%. As IREIT is currently trading closer to the industry average book value, most of the upside will be contributed by the dividend yield. Nevertheless, we believe that IREIT’s portfolio will still provide a stable income stream and attractive dividend yield for investors.