Decathlon needs no introduction and its regular shoppers should be familiar with brands like Quecha for value-for-money backpacks for hiking and Kalenji for running. Cyclists too make a beeline to Decathlon for its bikes, tights and shoes.
Now IREIT Global, a modest-sized REIT with assets of around EUR720 million ($1.15 billion) will get a boost to EUR833 million in assets by acquiring 27 of Decathlon’s “out of town” stores in France. These stores are like big boxes, sitting in large pieces of land.
For instance a big box in Vichy, with gross leasable area (GLA) of 3,293 sq m is on an almost 80,000 sq m land area. On average, the stores range from 2,000 sq m to 6,000 sq m of GLA, on freehold sites ranging from 10,000 sq m to 80,000 sq m, with many of them in the 20,000 sq m to 30,000 sq m range.
That, says Louis d’Estienne d’Orves, CEO of IREIT Global’s manager, would allow the REIT to increase the plot ratio sometime in the future. “What is interesting is there might be some potential of extending some of the shops and we could see that eventually in the future, because the assets are located in large plots of land, and it’s easier to do an extension, and to get permission for an extension from the municipality than for greenfield sites,” says d’Estienne d’Orves during an analyst and media briefing recently.
The cost of the acquisition is around EUR110.5 million. Including fees and expenses, the total cost is likely to be EUR122.3 million. IREIT Global’s manager plans to fund the acquisition through a combination of EUR51 million in debt, and equity fund raising (EFR) with a preferential offering. For the EFR, Tikehau Capital, City Developments (CDL), AT Investments (ATI), and IREIT Global Group (IGGPL) which own 29.3%, 21.1%, 5.4% and 0.2% of IREIT Global respectively, have given irrevocable undertakings to subscribe for their pro rata share. In addition, CDL will subscribe for any excess units that are unsubscribed, up to $59 million of the preferential units.
To do this, an EGM will take place at end June for unitholders to vote on a whitewash waiver and on the acquisition as the transaction size is more than 29% of IREIT’s market capitalisation. Since this is not a related party transaction, Tikehau Capital, CDL, ATI and IGGPL have given irrevocable undertakings to vote in favour of the acquisition.
According to IREIT Global’s announcement, based on the financing proposals, the DPU based on FY2020 numbers will be enhanced by 1%. However, net asset value would be diluted by 6.2%.
Another problem for investors with long memories is that the acquisition is structured as a sale and leaseback, with Decathlon leasing the properties for 10 years. Unitholders of local REITs that have used a sale and leaseback to kickstart IPOs have had less than positive experiences when financial engineering was used to artificially boost valuations with inflated master lease rents.
This is unlikely to happen with IREIT and Decathlon. For one thing, the net property income (NPI) yield is 7.1%, and the master lease rents are at market rents. Moreover, valuations in the European Union appear to be more robust. While valuers globally look favourably on properties with long weighted average lease expiries (WALE), they take into account other factors.
“WALE is important for the valuers. More importantly, we look at comparables, the location, transactions in the past, and replacement costs. These kinds of retail units are becoming more complex to build in France. Getting planning permission is more challenging because municipalities don’t want to increase supply of this kind of retail property. In addition, it’s a market where investment volume has increased versus 2020,” d’Estienne d’Orves explains.
Another factor that shows there is no financial engineering in IREIT Global’s transaction is the occupancy cost of just 4% for the Decathlon portfolio. Occupancy cost is usually defined as a ratio of rent to sales of the portfolio.
Also, the tenant is the end user who is divesting these properties to invest in technology and improve its “Click & Collect” e-commerce offering. Indeed, Quecha’s 40 and 50 litre backpacks may cost a fraction of those from The North Face, Patagonia or Osprey but they are just as effective for hiking and trail running.
