KGI Research Singapore

Singapore's leading broker offering Futures, FX, Equities and Wealth Management.

IREIT Global (IREIT SP)

Initiation: Updated 18 June 2021


The French Evolution
  • We initiate on IREIT with an OUTPERFORM and a target price of S$0.69.
  • Fairly stable European office market – While office property investment has slowed down substantially in Europe and vacancy rates are trending up, rents have held firm, and iREIT has managed to collect on due rents. iREIT should see positive news into the future as inflation rates climb in 2021.
  • Staying active with French entrée – The proposed acquisition of 27 Decathlon properties will provide iREIT with further reduction of its tenant and geographical concentration risk, while potentially achieving both DPU and yield accretion.
  • Room for yield premiums to compress. Foreign office REITs on SGX tend to trade at a dividend yield premium to local office REITs. This yield premium has widened since the pandemic begun, and we expect it to narrow as office markets stabilise in the future.

Inflation trends beneficial for iREIT

Similar to the US, Europe is now experiencing above average inflation, and the European Central Bank (ECB) has adopted an identical “waitand- see” approach, maintaining a loose stance on monetary policies. A temporal spike in inflation could be beneficial for iREIT, as they can lock in earlier-than-expected rent increases with their tenants.

The French Evolution

The proposal to acquire 27 Decathlon properties represents iREIT’s first foray into France, and first foray into retail properties. We see the acquisition to be beneficial as it reduces key tenant, geographical and sector concentration risk, while being potentially DPU and yield accretive.

Dividend yield premiums at a high

iREIT, together with other foreign office REITs listed in SGX, often trade at a dividend yield premium to local office REITs. The yield premium has steadily risen over the years from around 1% to over 2%, as local investors demand a larger risk premium to hold onto foreign office property. We expect stabilisation in global office markets to reduce this risk premium, and for iREIT to benefit when foreign REITs become attractive again.

Valuation & Action

We initiate with an OUTPERFORM and TP of S$0.69 based on the Dividend Discount Model, using 7.82% as our cost of equity and a 1.5% terminal growth rate. This implies a 6% capital appreciation gain and 6.9% forward dividend yield.

We expect the renewal or extension of the rest of GMG’s expiring leases as the key catalyst for price action, given the risk overhang on overall rents. The completion of the Decathlon acquisition at an appropriate level of unit dilution should also be beneficial for iREIT. Other catalysts include finding new tenants and improving occupancy rates.

Risks

Tenant concentration risk; work-from-home thematic leading to lower occupancy; tightening tax regulations in Europe; Forex.


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