Posts
In early October, I shared my reasons for significantly increasing my investment in IREIT Global.
In that blog, I also said:
"I do not know for sure whether the new management team is going to grow the REIT but it is a reasonable assumption that CDL would not have invested so much in the REIT if they had expected it to stagnate."
Well, IREIT Global is growing.
Yesterday, on 7 December 2019, IREIT Global did a presentation on a proposed acquisition of office buildings in Spain.
It is a portfolio of four freehold multi-tenanted office buildings in Spain, two in Madrid and two in Barcelona.
A joint venture between IREIT Global and Tikehau Capital, the REIT will have a 40% interest.
Total cost of IREIT Global's 40% interest in the joint venture is 57.6 million Euros.
IREIT Global will be funding the purchase of its share initially with the help of a bridging loan from CDL.
The loan has a tenure of 18 months and bears an interest rate of 3.875% above EURIBOR per annum.
Although EURIBOR rates are negative, the effective interest rate of the bridging loan is still pretty high.
I estimate it to be about 3.6%.
12 months EURIBOR rate is now negative 0.269%.
Source: EURIBOR rates
I feel that the bridging loan is pricey but it is the price we pay for speed as it has been stated that the acquisition requires speed and execution certainty.
No dilly dallying, please.
Buy it before someone else does kind of thing.
Maybe.
Anyway, IREIT Global will have to look into refinancing the bridging loan once the acquisition is a done deal.
The REIT should be able to secure a loan with a lower interest rate.
After all, the REIT actually refinanced at a lower interest rate of 1.5%, down from 2% not too long ago.
Moving along.
As an investor for income, I am particularly curious about the REIT's DPU after the acquisition.
Fully funded with debt, IREIT Global's 40% share of the acquisition will be mildly DPU accretive but gearing level will increase rather significantly from 36.5% to 42.9%.
If funded with a mixture of debt and equity, the exercise will become DPU dilutive while the gearing level will increase only slightly from 36.5% to 37.6%.
However, if the REIT should refinance the bridging loan successfully, post acquisition, there should be a positive impact on DPU.
It might be a small positive impact but it should be positive, nonetheless.
With IREIT Global's distribution yield already relatively high, realistically, it would be difficult to acquire without some yield dilution, especially in Germany where property prices are rising relatively quickly.
As rents are not rising nearly as quickly, the NPI yields are being compressed relatively rapidly.
This, I guess, is why the acquisition being presented here is for a portfolio of Spanish properties.
Spain is a weaker economy compared to Germany but the Spanish economy is still growing and unemployment is coming down.
The overall occupancy rate of the four freehold multi-tenanted properties being acquired is 80.9%.
So, there is much room for the management to work on filling unlike the REIT's German properties.
As the passing rents are lower than the market rate, we could also see positive rental reversions over time.
Of course, diversification to reduce concentration risk sounds like a good idea too.
Overall, I like the acquisition.
Excelente!
Chop chop.
Get it done.
Then, refinance the relatively expensive bridging loan.
If there is going to be any equity fund raising to do this, I would like for it to be a rights issue instead of a private placement.
The loan isn't a large one and I believe a 1 for 10 or a 3 for 20 rights issue, depending on the pricing of the rights, should be sufficient.
I am confident of IREIT Global's potential to grow well and I want to share in the benefits.
"Boquerón que se duerme, se lo lleve la corriente."
Translation:
"People who do not act fast will not enjoy benefits or will lose the opportunity."
Source: Spanish proverbs.
Related post:
3Q 2019 passive income: IREIT Global.
Recently published:
Eagle Hospitality Trust: His plight and my philosophy.
IREIT Global's announcement:
Proposed Acquisition Of Four Office Buildings Located In Spain.
Bloggy Award
16 comments:
Hi Ak
CDL collaboration is bearing fruit for Ireit. I hold a small amount in this reit.
Look forward to more action from Ireit.
Hi YKK,
I have no doubt that CDL is going to be an important part of IREIT Global's future growth.
With reputable sponsors who are experienced managers as well, IREIT Global can be so much more than what it is today.
Hi Capricon,
Just talking to myself, as usual.
I have been invested in the REIT for many years and my older positions were mostly bought at under 70c a unit with some at 71c or so a unit, if I remember correctly.
A rather sleepy REIT but not complaining.
Happy just collecting dividends.
A confluence of factors made me increase my investment in the REIT at a higher price.
Time will tell if I made the right decision. ;p
Nibbled a small position for Ireit today after waiting on the sidelines. The below was announced and it dropped 15%. In any given day, the note below would shoot the stock 15% up the other way. Confusing times! remains to be seen if i am an idiot or a genius LOL.
"From a financial standpoint, the Manager wishes to inform that there is limited impact to IREIT’s
performance arising from the COVID-19 outbreak to-date as the majority of its rental income is
derived from long-term leases with blue-chip tenants. As at 31 December 2019, the portfolio
weighted average lease expiry remained healthy at 4.2 years, with 97.7% of the total leases
due for renewal only from FY2022 and beyond. In addition, IREIT’s credit profile remains
healthy, as its total gross borrowings of €232.8 million had a weighted average debt maturity of
5.5 years as at 31 December 2019. Having refinanced its entire bank loans in February 2019
at competitive rates over the long term, IREIT’s existing bank loans of €200.8 million will not be
due for repayment until January 2026. The remaining borrowings relate to the term loan facility
of €32 million taken up in December 2019, which will only be due in May 2021. This should
provide a certain level of support and resilience to IREIT’s portfolio, income stream and financial
position.
Pursuant to the announcement dated 24 February 2020 on the resignation of the Chief
Executive Officer (the “CEO”), the Manager also wishes to update that the Board of Directors
has identified and approved a well-qualified candidate to assume the new CEO position. Details
of the candidate will be announced once the process for the regulatory approval of his
appointment has been completed."
Hi Unknown,
When the bear comes out of its cave, none is spared.
At the current price, IREIT Global is a fantastic bargain, I feel.
Of course, cheap could always get cheaper.
After all, Mr. Market could stay irrational longer than we can stay solvent.
Hi Mr AK,
In recent 2 weeks, there seems to be a gentle bearish trend for IREIT. Would you comment on the recent slide in Ireit global prices?
Hi F@ng,
My investment thesis has not changed and if the unit price falls significantly from here, I would probably be buying more.
See:
IREIT's rights issue: Why did AK subscribe?
Okay thank you! Hard as a nice investor but will take note to hold on good fundamental stocks at good entry points, and ignore short term fluctuations!
Hi F@ng,
Of course, all of us should do our own research to be sure.
When in doubt, it might be better to stay out. ;)
Peace of mind is priceless. :)
Some might find this interesting:
Is Eagle Hospitality Trust worth it?
Hello AK
I have been a long time reader of your blog, having been visiting since 2014s I think. Thank you for all the enlightening articles.
I have some IREIT, but I am kind of worried about their Darmstadt property. It forms about 13% of the gross income, but the only tenant is leaving Nov this year. Despite IREIT's efforts, they have not been able to find a replacement so far.
Can you share your thoughts on the impact on IREIT's valuation? If you don't mind talking to yourself.
Hi Goh,
Unfortunately, I do not have inside information on the progress that is being made on the property concerned.
I can only say that based on the manager's track record, they have shown themselves to be very capable of filling up space rather quickly.
However, given the very challenging situation in Europe at the moment, I think it is reasonable to expect some delay which could of course negatively impact IREIT's DPU and also its valuation.
Having said this, unless we expect the building to remain vacant for a very long time or forever, the setback should be temporary if it takes place at all.
Thankfully, IREIT has grown their portfolio of properties and increased the number of tenants to mitigate any concentration risk.
If you are still worried, do take a hard look at your portfolio and see if you have over invested in IREIT and also ask if the REIT gels with your investment objectives.
Reference:
Two questions for investors losing sleep...
Hi AK
Thank you for the reply, I appreciate it. Of course, I do not expect you to have any insider information. Just wanted to know your thoughts, which you have generously shared.
IREIT is not a big part of my portfolio, so I am not losing any sleep over it. But I am interested in all my stocks, even if allocation is small. After all, money is money, so I don't sleep on an investment even if its small.
I do not have a good feel of German property, but I do know that the original CEO bought the initial batch of German properties based on similar selection criteria (Something like grade A office in grade B location, or was it the other way around)
So whether tenants find Darmstadt an attractive place to rent may also be an indirect indication of how attractive the other German properties are. And the tenant who is vacating Darmstadt is also a significant tenant in other properties, which of course you are aware of.
There is some indication that Germany, like many other countries, are gradually moving to a more flex working arrangement which naturally reduces demand for offices.
In such an environment, grade B offices (either B in location, or B in build quality) tend to suffer more due to a flight to quality.
There are also other factors at play, such as the rise in risk free interest rates which would make REITs less attractive and reducing valuation. This is of course affecting all REITs, not just IREIT. Indeed, the good thing is IREIT's debt expiry is further away than most REITs.
Hi Goh,
Thanks for sharing your thoughts with us here in such great detail.
Much appreciated.
Certainly, the rising interest rates and the move towards working from home are challenges faced by all office REITs.
From what I have read. IREIT Global's assets are well located and somewhat undervalued even in today's environment.
Also, it is hard for me to visualize more than 50% of people working from home.
Maybe, I am just old fashioned.
However, with the many problems that Europe is currently facing, it is possible that we could see valuation of all commercial properties in the region softening.
Then, I ask how much does that impact investors like me?
I remind myself that I am investing for income and not speculating to flip a property.
So, even if the DPU should decline to 3.5c which is a possibility more because it might take a longer time to fill vacant spaces than because of the weakening Euro, at 56c a unit, it still means a distribution yield of 6.25%.
I would stay invested because that is still pretty attractive to me.
I do not think the weakening Euro is as much of a concern because the ECB is likely to hike interest rates to fight inflation just like the USA which would strengthen the Euro.
It could take a long time before things get better and, in fact, things could get worse if geopolitical issues fester or escalate but as long as I am being paid while I wait for things to improve, it isn't such a bad situation to be in.
"The European Central Bank is clearly awake to the threat of inflation. Thursday’s unanimous 75-basis point hike to its benchmark deposit rate is the largest in the ECB’s 24-year history. The era of negative rates is now firmly in the rear-view mirror. The bank’s forward guidance is dramatic: If necessary, more hikes will follow over the next few meetings into early next year."
The ECB Hikes Big to Fight Inflation and Bets on Optimism.
hi AK, any recent thoughts on ireit? the outlook for the Continent is not good...
Hi Jane,
You might want to watch the videos I shared in the blog I just published a few minutes ago.
Of course, we must do what gives us peace of mind. ;)
Post a Comment