- Keep NEUTRAL, new TP of SGD0.53 from SGD0.55, 9% upside with c.8% FY23F yield. We like IREIT Global’s proposed acquisition of French out-of-town retail parks due to their defensive nature, tenant quality and income stability. The move also helps to diversify its geographical spread and asset class mix, while mitigating tenant concentration risks – which it is now facing. Meanwhile, the key near-term risk, however, remains the uncertainty surrounding its Berlin campus, on which its largest tenant lease (c.24% of income) is set to expire in the middle of 2024.
- IREIT has proposed the acquisition of B&M, a French retail portfolio comprising 17 fully occupied single-tenant sites with a GLA of 61,756sqm (larger land area: 252k sqm), which accounts for 15% of B&M stores in France. These have a long WALE of 6.8 years (weighted average lease break: 4.6years). IREIT sees potential for leases to be extended as B&M Group’s sales across French store have been growing by double digits (ie low occupancy cost). Some assets have been tenanting buildings since mid-2000, while the French Government has put restrictions on the establishment of retail parks. There is also a potential upside from plans to install solar panels and an EV charging network that will generate additional income, while there is an untapped commercial GFA of c.5,000 sqm.
- B&M Group is a leading LSE-listed fast-growing European discount retailer (market cap: GBP5.4bn) with estimated sales of EUR12bn across France in 2023. Amid rising inflation, the discount retail industry has grown quickly in recent years, driven by inflationary pressures and lower purchasing power. Between Sep 2021 and 2022, there was a ~24% rise in traffic at French discount stores, with 1.2m new customer visits tracked.
- Purchase price of EUR76.8m (SGD112.2m), at a c.1.7% discount to its valuation, implies an attractive NPI yield of ~7.9% (c.490bps spread over 10-year government bond yields). There are also in-built annual rental rate escalations pegged to France’s CPI. Post-acquisition, France will be IREIT’s second largest market by rental income (c.27%, from 17% prior to the deal) with retail accounting for c.20% (13% previously). The assets are acquired from a fund managed by its sponsor Tikehau Investment Management, and the deal will be subject to unitholders’ approval.
- Minimal earnings accretion but equity funding mix (~60% equity) boosts stability. IREIT intends to raise SGD75.4m in equity via a preferential unit offering (estimated at SGD0.45/unit), with sponsors Tikehau and City Developments (CDL) subscribing for their pro-rate stakes. CDL will also be the underwriter for the remaining units. Pro forma (FY22) DPU is expected to be flat, with a 7% NAV dilution and a comfortable post- acquisition gearing of 33.3% (from 32%). We trim FY23-25F DPU by 4-5% to factor in the new units, and changes to its debt and occupancy levels.
Source: RHB Research - 5 Jun 2023
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