• 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 with lower DDM TP (7.85% discount rate) of S$0.68 from S$0.70. FY21e DPU dips 7% to reflect impending equity fund-raising. Our TP implies 7% yields and total prospective returns of 14.1%.

The Positives

+ 1Q21 likely in line. 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’s portfolio was limited. There were no requests for rental rebates or deferrals from tenants. All paid their rents in 1Q21.

+ 27 Decathlon properties in France to increase scale, diversification and WALE. IREIT’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. GRI contribution by IREIT’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 will be also able to benefit from strategic partner Tikehau Capital’s (TKO FP, Not Rated) market presence and expertise in the French real-estate market.

+ Strategic stakeholders demonstrated support. IREIT 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 – 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’s market capitalisation is expected to increase by 20.7% to S$737mn. Should market conditions be unfavourable, IREIT may draw down a bridge loan facility from Tikehau Capital of up to €79.0mn.

The Negative

– Portfolio NAV to fall 6.2% after French acquisition; lower FY21e DPU by 7%. 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’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%. Aggregate leverage would have climbed by 1.2% to 36% while NAV would have fallen by 6.2% to €0.44. We lower FY21e DPU by 7% to factor in the impact.

Source: Phillip Capital Research - 17 May 2021