Further tenant diversity expected
- FY21 DPU of 2.93 Ects is a 11% increase y-o-y, mainly due to a recently enlarged portfolio
- Organic growth backed by stable portfolio occupancy and higher rental rates that are pegged to CPI
- Upcoming lease expiries have been renewed and replaced; bulk of remaining expiries only at the end of FY22
- Maintain BUY with a revised TP of S$0.70
Investment Thesis
Enlarged and more diversified portfolio. IREIT’s acquisition of the Spanish portfolio and the recent acquisition of 27 retail properties in France reduces its key tenant, geographical, and sector concentration risks. It currently has an enlarged portfolio of office and retail properties valued at c.EUR975 spanning across the three European markets of Germany, Spain, and France.
Stable and gradual increase in distributions. IREIT’s leases are stable and expected to rise gradually, as they are mostly pegged to CPIs. Based on our estimates, we believe IREIT is positioned to benefit from rental escalations that are well spread out over the next few years and has the potential to optimise occupancy rates at several properties.
Room for larger acquisitions. Following its successful integration of the 27 retail properties into its portfolio, IREIT currently has exposure in both the office and retail segments. Its investment mandate also allows for investments into logistics properties, which IREIT could explore, given its enlarged debt headroom of more than EUR371. Its Sponsor has also demonstrated its willingness to incubate portfolios while the REIT grows, and this gives IREIT the flexibility to pursue larger acquisitions despite its relatively small size.
Valuation:
Our DCF-based TP is revised to S$0.70 based on a WACC of c.6.0%. Our TP is based on a risk-free rate of 2.5% and beta of 0.9x.
Where we differ:
Adopting a more conservative approach in our DCF-based valuation by assuming a higher risk-free rate and higher beta.
Key Risks to Our View:
Tenant and geographical concentration risks, protraction of COVID-19, and substantial lease expiries in the next four years – which is partially mitigated by low rental rates and long-term relationships with key tenants.