The Positives
+ Stable results. Gross revenue and NPI was up by 2.6% and 1.4% YoY attributable to the new lease at Münster South Building which commenced in Jul 2019. However, DPU in S$ terms dipped by 2.7% as it was impacted by weaker EUR/SGD exchange rates. Nevertheless, distributable income and DPU slightly surpassed our expectations as it formed 50.9% and 52.1% of our FY20e estimates, respectively. Overall occupancy lifted slightly QoQ at 95.7% from 94.7%, attributable to new lease with ÁREAS, a global leader in F&B services at the Il∙lumina property in Spain. Portfolio WALE stands at 3.7 years with 95.9% of the leases locked in till 2022.
+ Acquisition of remaining 60% stake in the Spanish portfolio to provide greater diversification benefits and organic growth opportunities. Post-acquisition, IREIT’s aggregate valuation will increase by 13% from €630mn to €711mn. The acquisition will decrease IREIT’s portfolio exposure to Germany from 91% to 81%; no single property will contribute to more than 30% of IREIT’s valuation. The top 5 tenants’ aggregate contribution to the portfolio’s GRI will decrease from 87% to 78%, and no tenant will contribute over 40% of aggregate GRI, down from 46% previously. Additionally, the properties’ passing rents are on average 15% below market rents, presenting future organic growth opportunities as leases are marked to market.
+ Commitment highlighted: Key strategic investors will undertake all Rights units unsubscribed during Rights Issue. Tikehau Capital, CDL and AT Investments demonstrated their support for IREIT and the Rights issue by pledging to take on all unsubscribed units offered. Assuming 0% take up for other unitholders and only Tikehau Capital, CDL and AT Investments subscribed to the rights issue, AT Investments may potentially own 15.4% of IREIT’s shareholdings (up from 5.5%) and become a controlling unitholder to IREIT. Tikehau Capital and CDL will own 29.3% (prev: 29.3% – maximum stake) and 24.5% (up from 21%), respectively. This highlights the stakeholders’ commitment to partake in IREIT’s growth journey.
+ Lower gearing levels to provide more headroom for more inorganic growth opportunities ahead. The enlarged portfolio is expected to see gearing levels at 35%, down from 39% previously. Reduced gearing levels will place IREIT in a better position to embark on further inorganic growth opportunities. IREIT is currently looking at opportunities in Germany, Spain, France and gateway cities in Europe where Tikehau Capital has presence in.
The Negatives
– Rights issue to fund acquisition and repay loan; Acquisition is DPU and NAV dilutive. IREIT will be issuing 281.8mn units to raise c. €90mn (S$140.9mn). It will be used to fund the proposed acquisition (c. €49.1mn) and repay the €32m term loan facility granted by CDL. The acquisition is expected to be completed in 4Q20. Looking at pro forma data based on 1H20 numbers, DPU for the enlarged portfolio was to decline by 18.9% from 2.85c to 2.31c. NAVPS for the enlarged portfolio was also to fall by 14.5% from €0.55 to €0.47.
Outlook
The COVID-19 pandemic and ongoing geopolitical tensions have taken a toll on the business activity in Europe, with major economies in the region expected to fall into recession in 2020. This has led to several measures taken by the EU, including the approval of the historic €750bn pandemic recovery fund and new budget of nearly €1.1trn over seven years to support the European economy. Amid the looming recession, the take-up in office space and investment activity in Europe is expected to slow down in 2020.
However, office rents where IREIT’s properties are located are not expected to be significantly affected due to strong local fundamentals e.g. low vacancy rates and lack of supply. IREIT’s portfolio has remained resilient with majority of the leases supported by blue-chip tenants. The impending acquisition will increase and diversify IREIT’s asset and tenant base, and mark what we believe to be the beginning to IREIT’s growth plans now that it is backed by supportive stakeholders. It has been a rough start to growth, but growth nonetheless.
Downgrade to NEUTRAL with a lower TP of S$0.68.
Our target price translates to a FY20e distribution yield of 6.9% and a total upside of 0.8%. We factored in for the €90mn rights issue to fully fund the acquisition and repay the CDL loan. DPU for FY20e, FY21e and FY21e has been lowered by 10%, 17% and 17% respectively. In light of more organic growth opportunities presented by the Spanish portfolio, we increased our terminal growth rate to 1.5% from 1% previously.
The report is produced by Phillip Securities Research under the ‘Research Talent Development Grant Scheme’ (administered by SGX).
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