IREIT Global - Phillip Securities 2021-05-17: Growth Spurt

IREIT GLOBAL (SGX:UD1U)

IREIT Global - Growth Spurt

IREIT Global (SGX:UD1U)'s 1Q21 likely in line as portfolio occupancy was stable at 95.9%. No rent rebates or deferrals were provided.
New sale and leaseback of Decathlon portfolio in France to increase scale and diversification. Greater income stability from longer portfolio WALE of 4.5 years.
Maintain ACCUMULATE on IREIT Global with lower DDM target price (7.85% discount rate) of S$0.68 from S$0.70. Our FY21e DPU forecast for IREIT Global dips 7% to reflect impending equity fund-raising. Our target price implies 7% yields and total prospective returns of 14.1%.

IREIT Global's portfolio occupancy inched up from 95.8% to 95.9% following expansion of an existing lease at Concor Park.
Despite lockdowns in Germany and Spain, COVID-19’s impact on IREIT Global’s portfolio was limited. There were no requests for rental rebates or deferrals from tenants. All paid their rents in 1Q21.

IREIT Global’s AUM is expected to grow by 15.8% to €833.5m after its acquisition of 27 properties from Decathlon. The acquisition is expected to reduce its reliance on Germany, with the French portfolio expected to contribute 16% to portfolio GRI. The acquisition will also add a new trade sector – sports & leisure – and one of the world’s largest sporting goods retailer to IREIT Global. GRI contribution by IREIT Global’s largest tenant, GMG, will drop from 39% to 33%.
The 27 properties are 100% leased to Decathlon on triple-net leases with a WALE of 10 years and WALB of 6 years, extending its current WALE from 3.5 years to 4.5 years. We believe IREIT Global will be also able to benefit from strategic partner Tikehau Capital’s (TKO FP) market presence and expertise in the French real-estate market.

IREIT Global intends to raise funds for the acquisition cost of €122.3mn via a private placement and/or a preferential offering. If the fund-raising includes a preferential offering, Tikehau Capital, CDL (CDL SP, BUY, S$10.68), AT Investments and IREIT - which collectively hold 56% of IREIT Global - have undertaken to subscribe for their full allotments. CDL will also subscribe to excess units to bring its total subscription to S$59mn. The balance will be funded by a bank loan of €51.4mn.
IREIT Global’s market capitalisation is expected to increase by 20.7% to S$737mn. Should market conditions be unfavourable, IREIT Global may draw down a bridge loan facility from Tikehau Capital of up to €79.0mn.

Assuming the rights issue and its Spanish and French properties were acquired on 1 January 2020 and operated through 31 December 2020, the French acquisition would have increased IREIT Global’s adjusted NPI yield from 5.5% to 5.7%. Adjusted DPU would have risen 1% to 2.84 € cents. This assumes €79.0m equity funding in the form of 212mn new units at S$0.596 a share and €51.4m of new debt. However, assuming the Spanish acquisition was completed on 22 October 2020, pro-forma FY20 DPU would have fallen by 2.2%.
IREIT Global's aggregate leverage would have climbed by 1.2% to 36% while NAV would have fallen by 6.2% to €0.44.
We lower IREIT Global's FY21e DPU forecast by 7% to factor in the impact.

Due to the pandemic and global macroeconomic uncertainties, commercial letting and investments have dropped. The full onslaught of work-from-home arrangements has yet to be felt as most businesses are still taking a wait-and-see approach amid Germany’s and Spain’s lockdowns. That said, there are early indications of market consolidation. GMG, an anchor tenant of IREIT Global, has decided to consolidate operations at its Münster North lease from Apr 2022 onwards. It will break its lease at Münster South building, which represents 5% of IREIT Global’s GRI.
IREIT Global is discussing with a few prospective tenants to lease out the space. Near-term lease expiries include one more GMG lease at Darmstadt Campus in November 2022. There are no break options for this lease but IREIT Global has started to engage GMG for possible early lease renewal.
Elsewhere, leasing demand has increased from some tenants looking for space to expand. Allianz (ALV GR) has taken up more conference rooms at Concor Park, which raised the asset’s occupancy during the quarter. Over at Berlin Campus, DRB is also looking to add space.

All 27 properties were originally developed by Decathlon as built-to-suit assets. They were designed to complement Decathlon’s omnichannel retail concept which requires a smaller retail footprint but more storage and collection space. Its high level of customisation is expected to increase its stickiness, as are the high costs of moving and difficulty of obtaining building permits for new retail space in France.

Apart from its international footprint, Decathlon is the biggest player in France’s sporting goods industry with a market share of 33%. It develops and sells its products under various in-house brands, which made up 80% of its turnover in 2020. Decathlon’s stand-alone brands makes Decathlon less susceptible to competition as well as threats from brands that are developing their own direct-to-consumer channels.

IREIT Global's gearing is expected to be 36% after acquisition, which presents debt headroom of close to €250mn before breaching the 50% MAS limit. We believe this headroom is sufficient for further M&A opportunities.

Our IREIT Global's FY21e DPU forecast dips 7% to reflect fund-raising. We have assumed €79.0m of funding from 212mn new units issued at S$0.596 a share and €51.4m of new debt. Current IREIT Global's Share Price implies dividend yields of 7% and total prospective returns of 14.1%.
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Tan Jie Hui Phillip Securities Research | https://www.stocksbnb.com/ 2021-05-17

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