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IREIT: What is a more realistic distribution yield now?

Wednesday, February 4, 2015

A reader who attended last Saturday's event sent me an email asking me about IREIT Global because he got in during its IPO and he is now worried after hearing what I had to say. 

I was puzzled because I asked if anyone was invested in the REIT on Saturday but there was no indication that anyone was.

Anyway, for those who are interested, I did not say anything new last Saturday. 

Please see related post at the end of this blog. 

Basically, I again explained why I avoided investing in IREIT Global when they had their IPO middle of last year.

I also said that people who invested in the REIT because of the expected 8% distribution yield would probably be disappointed. 

So, what is the expected yield now?

The Euro has been in a downtrend against the S$. 

Today, the exchange rate is one Euro to S$1.54 which is much lower than it was middle of last year at S$1.70.

Based on the estimated income available for distribution to unit holders of Euro 8.3 million (6 months) and approximately 419 million units in issue, annualising the DPU in S$ terms now gives us a distribution yield of about 6.8%.

IREIT Global's unit price has retreated since hitting a high of 90.5c a unit.

Will IREIT Global's unit price go much lower? 

It looks like it could, especially if Mr. Market still demands an 8% distribution yield.

What? Take a stab in the dark? 

Er, well, if the annualised DPU is 6.1c, to get an 8% yield, the REIT would have to trade at 75c a unit which is some 15% lower than its IPO price of 88c a unit.

Related post:
IREIT Global: Distribution yield of 8% safe?


seefei said...

i am more careful of reit that pay out 8% or more. not that they are bad but just have to be more careful.

an example was sabana. it was paying about 9% dividend when i got in. when it had problem filling its warehouse space, i divested some and finally got out of it when it was obvious it couldnt find tenant. of course AK also sounded the alarm with his good posts.

AK, too bad i could not make it for the seminar. otherwise would pass u the $188 ang pao that i had reserved for you for all the good posts. LOL

AK71 said...

Hi seefei,

$188 ang bao for me? You should have told me!

Er, I give you my POSB account number now and you transfer, ok? Electronic ang bao. ;p

Singapore Man of Leisure said...

Bad AK!


Let others 起烦恼。

How now?

Must buy flowers and take flower bath. No wonder your skin better than mine.....

AK71 said...


I thought you are the flower monk? Flower monk doesn't take flower baths? I blur liao. -.-"

The secret to my good skin is 500mg of Vitamin C a day, use NIVEA sunblock moisturiser and drink plenty of water! There, now, you can have good skin too! ;p

victorlsl1 said...

what are your thoughts on the latests CPF developments?

AK71 said...

Hi Victor,

I like this:

"Those who want to put more into their Retirement Account for higher annuity payouts should be allowed to do so, felt the panel, which is proposing that they be allowed to have up to three times the Basic Retirement Sum to pay for CPF LIFE premiums (or S$241,500 in 2016)."

I will probably be taking full advantage of this if it should be allowed.

I do not like the much lower basic retirement sum which is half of the current MS of $161,000. The CPF is supposed to help members progress towards retirement adequacy, not regress towards inadequacy.

Nick said...

Thanks AK for sharing your thoughts.

Will the MS of $161,000 increase every year to keep up with inflation? If so I presume the ERS amount cap of $241,500 will also increase in tandem?

AK71 said...

Hi Nick,

Yes, there has to be some accounting for inflation and the recommendation is to factor a 3% increase annually. So, I would think that the BRS, FRS and ERS will all be affected in the same way. :)

AK71 said...

The QE Battleship Sets the Path Towards Significant Euro Weakness

Tom Elliott, International Investment Strategist at deVere Group observes:

“The ECB has added its newest €60 billion a month battleship to the currency wars, which only the U.S. and Swiss stay aloof from. It is a larger-than-expected quantitative easing (QE) program, designed to inflict shock and awe on markets.

“Its goal is to severely weaken the euro and so spur exports and boost imported inflation. Let’s not pretend it will boost eurozone lending, while the bank sector remains so weak.

“But while this will boost eurozone stocks, by weakening the euro, investors should regard QE with mixed feelings. Capital markets are in a curious and unstable mode thanks to QE from other central banks that has pushed up all asset prices in recent years with little discrimination over quality.”


AK71 said...

Greece is running out of options to fund itself despite a four-month bailout extension, raising pressure on Athens to quickly implement reforms it has vocally opposed or default on debt repayments in a matter of weeks.

For a period, Greece could save money by delaying payments to suppliers or try to raise up to €3 billion by borrowing from state entities such as pension funds though the government may already have used up part of this, one source familiar with the matter said.

In any case those options would only give Athens a breather of a few weeks, since it has monthly needs of about €4.5 billion, including a wage and pension bill of €1.5 billion and €1 billion in health and social security costs.

Latest budget data for January, meanwhile showed a €1 billion shortfall on tax revenues, adding to the country's woes.


AK71 said...

IREIT Global announced on 27 February that it has missed revenue forecast for the period spanning 13 August – 31 December 2014.

DPU for the period: 2.57c.

The REIT also warned of an oversupply of office spaces in Germany. “With the QE stimulus introducing massive liquidity into the market and coupled with the weakened Euro and the low interest rates in Europe, competition for commercial properties in Germany will be intense.”


AK71 said...

DPU: 1.53 € cents = 2.57 S$ cents.

The actual distribution per unit is computed after taking into consideration the forward foreign currency exchange contracts that IREIT has entered into to hedge the currency risk for distribution to Unitholders. 100% of the distributable income for the period from Listing Date to 31 December 2014 has been hedged at an average exchange rate of approximately S$1.68 per Euro.


AK71 said...

Distribution yield was saved by a currency hedge.

Current exchange rate is about S$1.53 per Euro for about a 9% difference.

With QE by the ECB, the Euro is likely to weaken further and this gives us a glimpse into what future DPUs might look like, all else remaining equal.

AK71 said...

An email from a reader:

Dear Mr. AK71,

Yesterday, my friend told me to read your blog. He said you talked about I-REIT during your talk.

I like I-REIT because of high yield but I did not buy at IPO and it went up. When the price down to below IPO price, I happily bought. Average price 87 cents.

I got 2.57 cents dividend but price is now 81 cents. Can you please tell me what to do?



AK71 said...

At IPO, they used an exchange rate of S$1.68 per Euro.

The next distribution is going to be based on S$1.55 per Euro.

The Euro is expected to weaken to S$1.40 in the next 12 months.

I would use this understanding in my valuation of I-REIT.

AK71 said...

For the first time in years, the European Central Bank is embarking on a policy course with a following wind. But already some officials are fretting that the gale they are unleashing may turn into a hurricane.

The concern is that the bond-buying plan launched on Monday to pump more than a trillion euros into the 19-country economy will send stronger members such as Germany that could arguably do without the support into overdrive, while fostering complacency among laggards.

The plan is aimed at lifting euro zone inflation from below zero back up toward the ECB's target of just under 2 percent. But the risk is that it inflates real estate and share price bubbles and might cause Europe's biggest economy, which already has record low unemployment of 6.5 percent, to overheat.


AK71 said...

Greece will run out of money by April 20 unless it receives fresh aid from creditors, a source familiar with the familiar with the matter told Reuters on Tuesday.

Athens is scrambling to send a list of planned reforms to its European lenders in the coming days in the hope of unlocking fresh aid and averting bankruptcy.

It has lately relied on repo transactions - where it borrows money from state entities - to cover its cash crunch, but can continue to rely on that only for a few more weeks, the source said.


AK71 said...

IREIT Global Group, manager of IREIT Global, has entered into a sale and purchase agreement with HFS Immobilienfonds Deutschland 6 GmbH & Co KG to acquire a property in Berlin for 144.2 million euros (S$217.7 million).

Located in the district of Lichtenberg, the property comprises two fully connected building sections of eight storeys and 13 storeys respectively.

Choo Boon Poh, chief financial officer of IREIT, said: "We intend to fund the acquisition through a mix of equity and debt. IREIT has announced a rights issue to raise gross proceeds of approximately S$88.7 million. The balance of the funding for the acquisition will be through a bank loan facility, from which it intends to draw down a gross amount of approximately 102 million euros."

The net property income yield is 7.1 per cent. Principal tenant Deutsche Rentenversicherung Bund (DRB) occupies 98.8 per cent of the property's total lettable area on a lease expiring in 2024.

With this acquisition, IREIT's total portfolio value will grow to 438 million euros. The property will be its largest asset, adding a net lettable area of 79,097 sq m to IREIT's existing portfolio for a total of 200,603 sq m with 3,441 parking spaces.


AK71 said...

Canadian insurer Manulife Financial Corp is seeking to raise S$569.4 million through a Singapore listing of a real estate investment trust (REIT) backed by three United States office properties, it said in a prospectus filed yesterday with the Monetary Authority of Singapore.

Manulife aims to sell 694.4 million units, including cornerstone units, at S$0.82 each, making the initial public offering (IPO) Singapore’s biggest in a year. The cornerstone investors include Malaysia’s Fortress Capital Asset Management, Japan’s Nikko Asset Management Asia and the Oman Investment Fund.

Manulife forecast a distribution yield of 6.3 per cent for next year in the Singapore trust offering of its US office properties located in Washington DC, Los Angeles and Orange County in California, it said in the prospectus. DBS and JP Morgan will act as joint book runners and underwriters.


CL said...

Quote AK: "if the annualised DPU is 6.1c, to get an 8% yield, the REIT would have to trade at 75c a unit which is some 15% lower than its IPO price of 88c a unit"

Did I get it correctly that you took 6.1c divide 8% to get 75c (or 76c)?

AK71 said...

Hi Chris,

That sounds logical. :)

AK71 said...

All investments are good at the right price.

IREIT was not a good investment at 90.5c a unit.

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