DBS Group Research analysts Chung Wei Le and Derek Tan have initiated “buy” on iREIT Global with a target price of 76 cents.
To the analysts, there is value with distribution per unit (DPU) side from rental escalation from its German portfolio and room for improved occupancy rates for its Spanish portfolio.
“Assuming the acquisition of its Decathlon Portfolio will complete in end-October 2021, iREIT is currently trading at an FY2022 dividend yield of 7.0% and FY2021 price-to-net asset value (P/NAV) of 0.91 times. Our TP represents an FY2022 target yield of 6.0% and FY2021 P/NAV of 1.0 times,” they write in a May 6 report.
SEE:IREIT Global to acquire Decathlon properties in France without 'financial doping', backed by CDL
The REIT has made several acquisitions in a bid to enlarge and diversify its portfolio to reduce its concentration risks.
Following the completion of its acquisition of the remaining 60% interest in the office portfolio in Spain during the 4QFY2020 and the recent acquisition of a retail portfolio in France, Chung and Tan believe “these efforts have substantially reduced its key tenant, geographical, and sector concentration risks”.
“As at Dec 31, 2020, iREIT’s cash and gearing levels are better than peers yet it intends to acquire the France portfolio through a mixture of debt and equity (rights issuance). This would leave iREIT with sufficient cash and debt headroom for potential acquisitions in the future. Based on our estimates, we believe the next potential target could be EUR80 million ($128.5 million) to EUR125 million,” they write.
Chung and Tan also see a stable and gradual increase in distributions, due to iREIT’s leases being pegged to the respective countries’ consumer price index (CPIs), built in fixed rental escalations, or are based on rent reviews.
As the CPIs in Germany, Spain and France – where the REIT has portfolios in – have increased at an average rate of 1.42%, 1.76% and 1.36% respectively, Chung and Tan believe that the lease arrangements provide the REIT with stable and gradual rising rental rates.
Separately, the REIT’s lease arrangement with its key tenant, Generalmietgesellschaft (GMG) , is based on the German CPI with a 10% hurdle rate (binary).
Gross revenue from GMG amounted to some 46.3% of iREIT’s FY2020 revenue.
“Based on our calculations, we estimate that the rental triggers for these three properties will occur in three separate years from 2022 to 2024, providing a smooth increase in rental income,” say Chung and Tan.
The analysts also see potential for larger distributions from the REIT due to the signs of improvement noted in the Spanish economy as well as the potential for rental upside for its lease contract at Berlin Campus.
iREIT also has the backing of strong and credible strong sponsors and a strategic investor, which Chung and Tan are positive on.
The REIT is managed by iREIT Global Group, which is jointly owned by Tikehau Capital and City Developments Limited (CDL).
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As at Dec 31, 2020, Tikehau and CDL own 29.3% and 21.1% of the REIT’s outstanding units respectively.
AT Investments Limited, also entered as a new strategic investor with a 5.4% stake at the same time.
The joint sponsors, who extended funding to REIT, made the acquisition of its Spanish portfolio possible.
As at 12.02pm, units in iREIT are trading 0.5 cent lower or 0.8% down at 64.5 cents, or 0.9 times P/NAV according to DBS's estimates.
