• No financial results released for 3Q20 as IREIT reports semi-annually. Next reporting will be for half year ending 31 December 2020.
• IREIT continues to provide income visibility and stability. Occupancy held firm QoQ at 96.3% with 95% of leases locked in till 2022. Portfolio WALE at 3.7 years.
• Upgrade to ACCUMULATE due to depressed share price. Finetune revenue forecasts by +0.7%/-2.3% to account for new leases signed as well as a weaker rental outlook. DDM TP unchanged at S$0.68, implying a dividend yield of 8.0% and a total return of 17.8%.

The Positives

+ 3Q20 expected to be in line. IREIT’s rental collection rate has been 98% since March 2020. Rental collection rate was similar in 3Q20. All tenants in Germany have paid their rents and IREIT has not received any requests for rental rebates or deferral. In Spain, it has agreed to rent rebates and deferral for a few tenants. Rebates were dished out to one canteen operator and one café operator, equivalent to 0.8% of portfolio gross rental income (GRI). IREIT is not expecting more to come.

+ Portfolio occupancy up by 0.6% to 96.3%; income stability anchored by minimal expiries. Portfolio occupancy was lifted by a new 5-year lease with Axians, a leading information and communications technology integration service provider, at Il∙lumina. The lease was secured in September and increased the property’s occupancy by 7.3% to 90.2%. Only 5.1% and 4% of leases by GRI are due for lease break and expiry respectively in the next two years. This mitigates risks from a weaker leasing environment caused by COVID-19.

+ New stronghold tenant as top 3 contributor. DXC Technology (DXC US, Not Rated) is a Fortune 500 investment-grade IT service company listed on the NYSE. After IREIT acquired the remaining 60% stake in its Spanish portfolio in October 2020, DXC has become its third-largest tenant, at 5.1% of its portfolio GRI. GMG – Deutsche Telekom (39.2%) and DRB (27.1%) remain its biggest tenants.

The Negative

– Lockdown woes. Due to a recent surge in COVID-19 infections, Germany imposed a new month-long lockdown on 2 Nov 2020. On 26 October, Spain went into another nationwide lockdown for 15 days. This has since been extended by six months until 9 May 2021. While the restrictions are less stringent than earlier lockdowns, the return of workers to their offices has been delayed. As such, we are expecting a flat to slightly weaker outlook for rents and occupancy in the next two years.

Outlook

Occupancy and office take-up have declined in Germany and Spain. However, rents are still holding up due to a low supply of quality products and potential delays in new office supply. We believe IREIT’s strong tenant base coupled with minimal expiries (FY20: 0.5%; FY21: 3.5%) will continue to anchor its income stability.

Upgrade to ACCUMULATE with unchanged TP of S$0.680. We adjust our revenue forecasts for FY20/FY21e by +0.7%/-2.3% to account for new leases signed and a weaker rental outlook. The impact on FY21e DPU is offset by higher EUR/SGD exchange rates assumed (+1.3%) for IREIT’s interest-rate hedges.

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