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Another quarter has gone by and it is time for another update.
For a change, I will reveal the numbers first.
3Q 2024 passive income: $85.223.17
This is a slight reduction, year on year, as 3Q 2023 passive income was: $85,307.78
Almost negligible difference but it is still a dip.
The reason for this is the much lower contribution from Sabana REIT which I drastically reduced exposure to.
The REIT was one of my largest investments but this is no longer so.
Losing one of my largest investments is bound to have a big impact on my passive income.
However, as the title of the blog suggests, thanks to higher dividends received from my investments in the banks, the impact is mitigated.
The money from the sale of Sabana REIT was used to strengthen my T-bill ladder which is, of course, my war chest.
I am in no hurry to deploy the money since I am already substantially invested in the stock market.
Looking at the investments which contributed the most to my passive income in 3Q 2024:
1. OCBC
2. DBS
3. UOB
No surprises here since OCBC is my largest investment at almost the same size as my investments in DBS and UOB combined.
DBS is going to generate more passive income for me because of the bonus issue which in effect gives a 10% uplift to dividends received.
UOB is, well, UOB.
Conservative and plodding along but still more than decent enough return.
In a recent video, I said I would not be adding to my investments in the banks as their share prices hit all time highs.
I would wait for a pull back in prices before adding.
To be fair, at 1.2x or 1.3x book value or so, the common stock of OCBC and UOB do not look expensive.
So, if I were not invested in the local banks yet, those would be where I put money to work first.
4. IREIT Global
In a recent reply to a comment on the REIT, I said this:
"IREIT's Berlin property will be vacant for 12 to 18 months very soon.
No income to be generated by that asset then.
So, expect income to be impacted.
There is also the point that you (the reader) raised and it is a point I have made many times with regards to REITs.
They will be refinancing in a higher interest rate environment although as many as 6 or 7 rate cuts are coming by end of 2025.
I made a video almost a year ago to talk about all these and said I would not be adding to my investment in IREIT unless unit price went down much lower.
Still, there were readers who added at between 32c to 36c per unit.
To be fair, it isn't just IREIT, I am not interested in putting more money in any REIT now.
My recent video on banks and REITs made this very clear.
My focus is on income and valuation, not so much the prices."
I recently did a podcast with The Fifth Person and there was a segment on whether banks or REITs are more attractive as investments for income.
In case you are interested, here is the video:
In the latest update, IREIT Global said that they are in the final stages of pre-letting the Berlin property to a hotel and another hospitality operator.
They expect to double the asking rent which I believe is realistic as the Berlin property is very much under rented.
I feel that the Berlin property is currently undervalued and if the REIT's management does a good job, we should see value unlocked.
IREIT Global's gearing ratio is still very low but their borrowing cost would most likely increase in 2026 when they refinance.
This is although we are likely to see many rounds of cuts to interest rate before then as the interest rate would still be higher than what we saw in the years following the Global Financial Crisis.
However, the REIT's relatively low level of debt should help to reduce the blow higher interest rate brings.
I revealed not too long ago, my investment in IREIT Global is nursing a big paper loss.
I use the word "nursing" and not "suffering" because the REIT is still paying me a meaningful dividend even as Mr. Market feels pessimistic about it.
At the current unit price, the distribution yield is about 8% and as I feel it is undervalued, there is no reason to sell.
I am quite contented to be paid while waiting for things to improve.
However, if Mr. Market should go into a huge depression and offer me a 10% distribution yield, all else being equal, I would probably buy more.
This would be very similar to the earnings yields offered by our local banks then.
All investments are good investments at the right price.
The right price is not a static number.
It should change if circumstances affecting it should change.
5. AIMS APAC REIT
I cannot end this blog post without giving AIMS APAC REIT a mention.
Still one of my largest passive income generators after so many years.
To me, this is a risk free investment as I have recovered all my capital many years ago.
The unit price can go up or down and it wouldn't affect me at all.
For people who recently invested in the REIT, please be aware that the REIT has perpetual bonds which means that their effective gearing level is higher than the gearing level reported.
Invest in the REIT only if we are comfortable with this.
Having said this, the REIT is well run and enjoys a tail win as logistics real estate which the REIT is mostly about remains in high demand.
IREIT Global reported lower net property income for 1H2023.
I remind myself that if the current weakness is temporary in nature, then, staying invested is what I want to do.
Portfolio occupancy has improved from 87% to 88.7% as 25% of the vacated Darmstadt asset was taken up by the German government.
However, together with the rent free periods for newly signed leases in Bonn Campus, Munster Campus and Sant Cugat Green, contribution to property income will only be visible in 2H2023.
There is also the fact that the REIT has more units in issue after the recent rights issue while the funds raised have yet to be utilized.
The acquisition of out of town retail parks leased to B&M will make a meaningful contribution to property income when it is completed.
All these point to a higher level of distributable income in 2H2023.
Staying invested in IREIT Global for income also gives me peace of mind unlike being invested in some other REITs like Elite Commercial Trust, Manulife US REIT and Prime REIT because of its very strong balance sheet.
Gearing level will be at around 34% post acquisition of the B&M portfolio.
Even if the value of properties in their portfolio should see a decline of 10%, gearing level would not exceed 40% unlike some of the other REITs mentioned above.
IREIT Global also has almost 100% of its debt on fixed interest rate which is at around 1.9% p.a. and they do not need refinancing until 2026.
I particularly like their Berlin asset which recently saw an extension of its master lease till end of 2024 at a significantly higher asking rent.
This confirms reports that that the said asset is under rented.
Although there could be a vacancy period if the master lease is not extended beyond 2024, I expect that it would be more quickly backfilled than the Darmstadt asset.
IREIT Global seems to be suffering collateral damage as well due to Mr. Market's pessimism about some overseas REITs.
However, when I look at the details, IREIT Global is in a stronger position.
I keep saying to myself that during tough times, having a strong balance sheet will ensure survival.
This could be lost on Mr. Market.
So, opportunities to buy IREIT Global even cheaper could present themselves.
This brings me to the next point of this blog post, T-bills.
Regular readers know that I have a T-bill ladder which was completed in April this year.
I have not only been maintaining the ladder but I have also been strengthening it whenever I could.
I would add a thousand dollars or two to my application in every T-bill auction.
Only an extra thousand dollars or two?
Yes, AK is a retiree without a lot of spare cash. Sadness.
I also talked about when I might dismantle my T-bill ladder.
Well, if Mr. Market should become even more irrational than usual, I might just have to dismantle my T-bill ladder to buy more of IREIT Global.
The next T-bill auction is happening on 17 August which is just next week.
I will be putting in a non-competitive bid using money from a T-bill which matured plus some spare cash on hand, as usual.
No need to think hard about how much to bid competitively unless I am using CPF-OA money.
Anyway, now that the serious stuff is out of the way, let's look at other stuff.
In my last blog, I talked to myself about the bumper interim dividend from UOB.
Up by 40%, it made me giddy with joy!
I expect OCBC and DBS to pay higher dividends too.
This means they should at least match their dividends in the last quarter.
If nothing goes wrong, my passive income for Q3 2023 should be somewhat higher than for Q3 2022.
If this pans out, it would be quite a feat since 2Q 2022 passive income generated by my investment portfolio increased by an impressive 42% compared to 2Q 2021 (mostly because the banks were still paying lower dividends in 2Q 2021.)
Whether passive income in Q3 2023 would be higher than Q2 2023 is less certain and, for that, I would wait and see.
On to another happy discovery.
When I checked my bank account, I found a few thousand dollars deposited by my old friend, AIMS APAC REIT (AA REIT.)
With my war chest largely depleted by IREIT Global's rights issue, getting some free money from AA REIT makes me love the REIT more.
As there will be quite a bit more dividend to be received from UOB and probably OCBC and DBS too next month, I decided to increase the quantum in my application for the upcoming 6 months T-bill with some of the money.
It is now open for application and the auction is happening on 3 August.
I will be going for non-competitive bid, as usual.
There is no need to agonize over a competitive bid since whatever the cut-off yield might be, it would most likely be higher than whatever interest rate the banks are offering for a 6 months fixed deposit.
So, the exercise to strengthen the fixed income component of my investment portfolio continues.
It gives my portfolio greater stability.
It gives me greater peace of mind to know that if I need more money, I have a T-bill ladder I can rely on.
This means I would not have to sell my stocks at prices not of my own choosing if some things should go terribly wrong in life.
Being forced to do something, not having control over our lives is not a good feeling.
With the yield curve still inverted, 6 months T-bills are going to remain rewarding.
So, they help to keep me sane and happy at the same time.
As for the latest 6 months T-bill auction results, not too bad.
The cut-off yield is 3.85% per annum.
Still don't understand why some people are bidding below 2% per annum which we can gather from an average yield of 2.88% per annum in the auction results.
I stop face palming liao.
Give up.
My non-competitive bid was 100% filled, fortunately.
Waiting for the next 6 months T-bill as I keep my T-bill ladder intact.
I don't think my application for excess rights would be fully filled.
So, I am waiting for some money to be refunded.
I have also received some money from a 6 months T-bill which has matured.
The next 6 months T-bill will see its auction happening on 20 July or next Thursday.
Instead of simply recycling money from the matured T-bill, I plan to increase the quantum by using some of the money I expect to be refunded from my application for excess rights.
Judging by the increased interest in non-competitive bidding in the last 6 months T-bill auction, it is possible that my non-competitive bids would only be partially filled in future auctions.
So, given this consideration, increasing the application quantum in future makes sense too.
With interest rates offered by the banks for 6 months fixed deposits having declined pretty significantly, it is only natural that interest in 6 months T-bills should pick up.
Adding exposure to 6 months T-bills while the front end of the yield curve remains elevated will generate relatively attractive passive income for me safely.
It would also help to strengthen the fixed income component of my portfolio which is something I have been doing for quite a while now.
The money in my T-bill ladder can also be deployed in the next significant stock market correction which might happen if the much talked about economic recession takes place.
At 40.8c per rights unit, it was just too cheap to ignore.
With DPU expected to be at 2.31 Euro cents, we are looking at 3.42 Singapore cents using the prevailing exchange rate.
At the moment, 1 Euro = S$1.48.
This gives a distribution yield of almost 8.4%.
This is very attractive to me, especially when I remind myself that IREIT Global retains 10% of its distributable income.
There is also the fact that IREIT Global's gearing ratio is only 33% and that almost 100% of its debt is fixed until 2026.
This gives me peace of mind.
Although its Berlin asset will see its Master Lease expiring middle of next year, I am not too worried.
This is because the office market in Berlin is relatively resilient with vacancy rate at only around 5%.
There is also the fact that IREIT Global's Berlin asset is significantly under rented and I believe it should not have great difficulty getting the lease renewed or, failing that, getting new tenants.
IREIT Global's unit price closed at 42.5c today.
At this price, the distribution yield is 8.05% which is still very attractive.
Looking at the chart, I see the declining 200 days moving average at 50 cents.
This should be the resistance to watch.
Having said that, as an investor for income, I am more interested in receiving passive income.
Although with the rights issue oversubscribed, I do not expect my application for excess rights to be fully filled, I still expect IREIT Global to continue generating meaningful income for me.
As IREIT Global was already one of my largest investments, this rights issue has served to further enlarge my investment.
This should have an outsized impact on my passive income in future, all else being equal.
I have been busy gaming in the last few days as Neverwinter celebrates its 10th birthday.
Time really flies and I have been adventuring in virtual worlds for 8 years.
Of course, I have been retired from gainful employment for just as long.
I remember saying that CPF is a pie we would all get to eat one day if we did the right things.
Well, in another 3 years, I would get to eat the pie.
It is both a happy and depressing thought.
Anyway, like I shared in my last blog, I ignored AA REIT's rights issue.
It meant accepting an 11% reduction in income from the REIT in future.
I am staying invested in AA REIT but as a retiree without plenty of excess funds, I am less willing to deploy money into any venture that does not add to my income in the very near future.
Even if I were to take up my rights entitlement, unless I am willing to apply for a lot more in excess rights, I would still suffer some income reduction from the REIT.
Much better to put the money in T-bills in my case.
This provides a nice segue into the next topic.
My non-competitive bid for the recent 6 months T-bill was 100% filled.
3.89% p.a. huat ah!
Could have been higher but it is obvious that many kiasu people were placing very low bids of possibly under 2% p.a. in order to secure their T-bills.
Proof is in the pudding with average yield at a paltry 3.07% p.a.
I saw that and it was a face palm "Alamak AK!" moment.
I have no words.
Speechless.
OK, I stop.
Another "Alamak AK!" moment was DBS and OCBC being fined $2.6 million and $600,000 respectively by the Monetary Authority of Singapore.
It is a ton of money to AK but it is probably like being stung by a mosquito for the banks.
I am staying invested in DBS and OCBC, of course.
Still looking to add to my investment in OCBC and UOB at supports.
Hint: OCBC tested immediate support which has risen to $12.30 a share just now.
Longer term support for OCBC is still around $12 a share.
I would add to my investment in DBS too but its stock price would have to decline much more for it to be attractive to me.
Nothing to see here, move on.
I am gathering my funds to take part in IREIT Global's rights issue now.
Must pay by 11 July.
If I am successful in getting all the excess rights I aim to get as well, IREIT Global could become an investment as big as my investment in OCBC.
Yes, I am emptying my war chest for this.
This is an exciting thought but also a scary one.
I might have to do some rebalancing of my portfolio later on.
For now, I just like the idea of increasing my income from IREIT Global by at least 16%.
Recently, I talked to myself about helping my parents to pay for their rights entitlement for both AIMS APAC REIT and IREIT Global.
This will take a chunk of money.
As these two REITs are also two of my largest investments, I have to set aside a relatively large amount of money to pay for my own rights entitlement too.
After much thought, I made the decision to forgo my own rights entitlement for AIMS APAC REIT for the following reasons.
1. The money raised is not for any activity that would immediately generate more income.
Of course, I might see DPU increasing again in future if they use the money prudently for AEIs and redevelopment.
However, I won't see any return on the proposed additional investment right away.
2. My investment in the REIT is already free of cost.
All income generated by the REIT is really free money for me.
I don't have to add to my investment to have a good outcome even if I should take an 11% reduction in income from the REIT in the meantime.
Readers who have been following my recent blogs and the comments sections might remember that I talked to myself about these.
Now, hot from the press, we have firm details on IREIT Global's rights issue.
161 for 1000 units at 40.8c a unit.
IREIT Global initially used an illustrative rights unit price of 45c when they announced the proposed acquisition of retail parks in France.
That sent their unit price tumbling down to 44.5c at one point.
When readers asked if that was a good price to buy, I said that it appeared attractive to me with a potential 8% distribution yield.
However, I was waiting to buy at 42c because that was where the chart showed stronger support.
I also said in another reply that we must remember that 45c was only an illustrative price.
With IREIT Global already trading at 45c a unit, the rights issue would have to be at a lower price to be attractive.
So, I would wait.
Now, priced at 40.8c a unit, it is very attractive to me.
I wish I had more money in the war chest to apply for more excess rights.
At a unit price of 40.8c, I am looking at a potential 8.8% distribution yield from mostly freehold assets.
This is also on the back of a relatively strong balance sheet with gearing ratio at 33%, post rights issue.
With interest rates likely to stay higher for longer, I keep saying it would be business entities with stronger balance sheets that would see the light at the end of the tunnel.
The Fed chair has already hinted that a lowering of interest rates would not happen until 2 years later which means sometime in 2025.
Fortunately, IREIT Global has almost 100% of its debt on low interest rates fixed till late in 2026.
In recent weeks, I settled into a routine of producing videos and then publishing the transcripts here.
Both the video and the blog would be released within minutes of each other.
I kept doing that because I had an inkling that most people who "eavesdrop" on AK don't really enjoy eavesdropping.
They really enjoy reading AK's diaries.
Tsk, tsk.
Terrible.
Anyway, looking at the viewership and readership numbers, it is quite apparent.
As I am a hobbyist YouTuber just like I am a hobbyist blogger, this isn't a tragedy.
In fact, it could be a blessing in disguise.
Although I still enjoy making YouTube videos as a hobby and I have produced videos almost daily for more than a year, I might do it less often as it is more time consuming.
So, in future, there might be more blogs like this where there would not be a corresponding video.
I need more than 24 hours a day to do all the things I want to do in retirement!
I really have quite a bit of catching up to do in the online games I am still playing, for example.
Second update is on the subject of "money".
Some readers might know that my retiree parents are invested in AIMS APAC REIT and IREIT Global too.
Apart from their CPF and SRS savings, the two old folks have rental income from a shoe box apartment and dividends from some stocks.
As I am paying the property tax and maintenance of their rental property, they are able to enjoy the rental income in full.
Being retirees, they are living off passive income as they should.
However, total passive income they get in a year is only about half of what their total yearly income was before they retired a few years ago.
I remind myself of the following.
If not for us children, for sure, they would have been able to save a lot more money for their retirement.
There is also the fact that their CPF and SRS savings would be depleted in their mid 80s which is only another few years from now.
For readers who have been following my blogs on the topic of providing financial support for my parents, this probably throws more light on why I have significantly increased the quantum in recent years.
Since I do not expect my own expenses to grow significantly in future, I am ready to provide even more financial support to my parents if required.
This is so that they would not have to make too many changes to their lifestyle in retirement or compromise on their standard of living in their old age.
Alamak!
This is supposed to be a quick update and I just went rambling off.
A thousand apologies!
Back to AIMS APAC REIT and IREIT Global.
I have decided to help my parents pay for their rights units.
Of course, consistent with what I have said before, I will keep an eye on the current unit prices as well.
Mr. Market seems to be feeling rather pessimistic and if I should be offered prices which are much lower, I would buy from the open market.
In such an instance, I would be leaving the sponsors of the REITs to pick up my rights entitlement in the form of excess rights for them instead.
In fact, I have overnight BUY orders to buy more units in AIMS APAC REIT at $1.16 a unit and IREIT Global at $0.42 a unit as, technically, these look like strong supports to me.
To be honest, it would be a pleasant surprise if my orders are filled but I know never to say never.
Of course, helping my parents to increase their investments in the REITs this way would mean that I would have less money to add to investments in my own portfolio.
However, trying to make more money for myself really hasn't been a priority for me for quite a while now.
Why do I say this?
Is having more money no longer important to me?
Am I OK with growing poorer over time?
Hmm.
I really don't want this to be a long blog.
So, I might blog about this topic a bit more later in the week.
This is the transcript of a YouTube video I produced recently.
-----------------------
Q2 and Q3 are usually good quarters for me in terms of passive income.
After setting aside money for personal expenses, parental support and gifts, the plan was to use some of the money to increase exposure to T-bills.
I still find 6 months T-bills to be quite attractive.
Of course, regular readers would understand why.
I have always had a soft spot for risk free and volatility free CPF which pays between 2.5% to 4% per annum.
Oops.
My apologies, it should be 2.5% to 4.01% per annum.
So, with similar characteristics, it is no surprise that I am attracted to T-bills these days like a bee is to honey.
The latest 6 months T-bill auction saw a cut-off yield of 3.84% per annum.
I said in an earlier blog that I would be happy if cut-off yield remained the same at 3.85% per annum.
3.84% per annum is enough to make me quite happy.
Anyway, like I said, I had planned to use some incoming passive income to increase exposure to T-bills.
That plan has to be put on hold now.
I would have to be contented with simply recycling money from maturing T-bills into new ones.
This is because of two rights issues which are coming up.
AIMS APAC REIT and IREIT Global are two of my largest investments.
So, together, I would have to put aside a relatively large amount of money for the rights issues.
For AIMS APAC REIT, we are likely to see a slight near-term reduction in DPU.
This is because part of the plan is to use the funds for asset enhancements and possible redevelopment of existing assets.
Nothing immediately income generative.
With more units in issue, including those issued for the private placement, existing shareholders could see roughly a 6% decrease in DPU if we subscribed only to our rights entitlement.
We can apply for excess rights which would increase the income we receive from the REIT if we are successful, of course.
However, as my resources are pretty limited, I am alright with receiving a bit less income from AIMS APAC REIT post rights issue for a while.
For me, this is not a terrible outcome as I have said many times before that my investment in AIMS APAC REIT has been free of cost for some time.
All income distributions from the REIT are really free money for me.
So, I will subscribe to my rights entitlement and just enough excess rights so that I do not end up with odd lots.
As for IREIT Global, they do not have any private placement in their fund-raising exercise.
So, there is no risk of DPU dilution if we do not apply for excess rights.
They are raising funds using a combination of debt and rights issue.
I also like that the funds they are raising will be used to purchase income generating assets right away.
This is why I said that IREIT Global is really inviting existing shareholders to invest in more properties.
The sponsors will be doing this alongside shareholders as they hold about 50% of the units in issue.
Therefore, I find their rights issue to be more interesting than the one by AIMS APAC REIT.
I also like that at 45 cents a unit, we would be getting a distribution yield of around 8% which is pretty attractive.
Of course, this is not without risk and volatility, unlike T-bills.
However, for me to forgo increasing exposure to T-bills for this rights issue is not a tragedy.
Remember, I am just talking to myself here.
It should be quite obvious to anyone that this is a plan that seems fine for me but it might not be suitable for others.
For readers who who are not subscribed to my YouTube channel or who simply prefer reading blogs to watching videos, I produced 2 videos recently and these are the transcripts. ------------
This was a comment from a reader yesterday.
1. For Capitaland China Trust, do you think sentiments towards China are overly pessimistic?
Hence, could the Trust be trading at a fair price
now?
2. I am sure you saw the right issue on AIMS APAC Real Estate Investment Trust.
Any comment on that?
AK had this to say about China.
For CapitaLand China Trust, I am just holding on to what I have now.
After seeing how China handled the COVID-19 pandemic and also what they did to their biggest tech companies, I don't really know how to read investments in China now.
Another reader said this about Capitaland China Trust.
Hard to wait for the banks when REITs like Capitaland China Trust kept enticing me with lower and lower prices. How like that?
AK said to the reader.
I have been holding on to my position in Capitaland China Trust and not done any buying or selling.
I am not sure as I am more wary of policy risks in China than anything else right now.
Jamie Dimon, CEO of JP Morgan, said this in a recent interview.
China is a far more complex situation now.
He was mostly referring to policy risks, but he was also concerned about geopolitical risks.
Too much uncertainty caused by the Chinese government.
We can also see that Chinese economic recovery has been weak and, to be honest, I agree that much of it has been self-inflicted.
It is not hard to understand that I would rather put more money into investments I have less to worry about.
AK is becoming timid with age.
I had this to say about AIMS APAC real estate investment trust.
The proposed rights issue is relatively small, but it is necessary so that the REIT does not take on more debt to grow organically.
The sponsor has also thrown its weight behind the exercise.
The sponsor, which holds about 75 million units, or about 10% of the total units in the real estate investment trust, has provided an irrevocable undertaking to the manager and the joint bookrunners and underwriters, which include DBS Bank.
The sponsor will accept, subscribe and pay in full for its total provisional allotment of the new units under the preferential offering.
They will also make applications for the number of excess new units under the preferential offering which are not taken up by other unitholders.
Hence, demonstrating their confidence in the real estate investment trust.
The exercise will raise around $100 million through the private placement and preferential offering.
Private placement is to place about 56 million to 58 million units at an issue price of about $1.21 to $1.25 per unit to raise proceeds of $70 million.
The non-renounceable preferential offering or rights issue will raise another $30 million.
This is through the issuance of about 25 million new units to existing eligible unitholders at about $1.19 to $1.23 per new unit.
Existing unitholders will be eligible to an advanced distribution of between 1.7 cents to 1.9 cents per unit.
This would be for the months of April and May.
The record date to be entitled to the advanced distribution and the eligibility to participate in the preferential offering is at 5pm on June 9.
The funds raised will help unlock greater value organically through active enhancement and re-development strategy.
It will also help to secure growth opportunities through targeted acquisitions.
I rather like rights issues which raise money in order to generate more income for the investors.
This is a relatively small rights issue and, therefore, not too demanding.
If AK can talk to himself, so can you!
(Continue scrolling down to read about IREIT Global and its rights issue.)
I have said before that I rather like rights issues if the money raised is used to generate more income for investors.
In the latest fund raising exercise by IREIT Global, this seems to be the case.
They are proposing to acquire 17 retail parks in France.
A strong reason to invest in these assets is that this retail format will continue to outperform in the context of global inflation partly caused by the COVID-19 pandemic.
"The popularity of hard discounters, discounters and outlet stores in France has risen exponentially in recent years.
"Retail Parks, an Out-of-Town asset class, have been resilient through the COVID-19 pandemic due to their accessibility, open-air format, wide range of available spaces, parking facilities, manageable operational cost, value-for-money brands and for some retailers, omni-channel experiences."
These 17 retail parks are leased to B and M Group, a European discount retailer listed on the London Stock Exchange with a market cap of about 4.7 billion Sterling Pounds.
They have been occupying these assets since 2005 on average.
There is a Weighted Average Lease Expiry of 6.8 years but there is an option for lease break 4.6 years from now.
A combination of competitive rents due to out-of-town locations and a resilient retail model which is discount retailing suggests to me that this is a good investment.
Of course, all investments are good investments at the right price.
The asking price is approximately $112 million.
This gives approximately 1.7% discount to the average of the two independent valuations of approximately $114.1 million.
The price is very close to valuation.
Although this might suggest that we are not getting a fantastic deal, it also suggests that this kind of properties is probably in high demand.
The seller isn't desperate to sell.
However, similar to the purchase of Woolworth's HQ in Australia by AIMS APAC real estate investment trust, I like that these 17 properties in France have excess plot ratios which could be developed for more rental income in future.
I would take this potential into consideration since we should always have a long term perspective when investing in good income producing properties.
So, apart from rental escalation being pegged to inflation, this could be another way to extract more income from the assets.
When we take into consideration that new developments of such assets are being restricted in future due to new French regulations, these assets will become even more valuable in future.
This reminds me of Saizen REIT when its properties were valued at under replacement cost.
No one in his right mind would construct a new building when buying an old one would be much cheaper, and would give similar or higher rental yields.
So, the assets Saizen REIT was holding were undervalued.
In the case of out-of-town assets in France, new ones are apparently not allowed by law.
With the future in mind, we could make the case that these assets could be undervalued.
Of course, having these properties in the portfolio would reduce concentration risk which has been a major pain point for many investors forever.
I don't really care for the other advantages put forth by the management.
The next thing I want to know is how the acquisition is going to be funded and whether it is going to be yield accretive.
Apparently, it is going to be yield accretive.
Pro forma adjusted FY2022 accretion of 2.0% was computed based on audited FY2022.
This is with the assumption that Darmstadt Campus is 100% vacant for FY2022 from 1 January 2022 with nil revenue but with operating expenses.
OK, how much do investors have to pay?
Cost of properties = $112 million.
Expenses related to purchase = $20 million.
Now, I know how people paying ABSD in Singapore feel.
The deal will be funded by the following.
1. A non-renounceable underwritten preferential offering of new Units to existing Unitholders on a pro rata basis or a rights issue.
2. External bank borrowings.
3. Borrowings from Tikehau Capital.
Both Tikehau Capital and City Developments Limited, the joint sponsors, and the manager, will subscribe in full their allotment in the rights issue.
They will also subscribe to excess units which other investors do not take up, such that their aggregate subscriptions would amount to a maximum of $40 million.
IREIT Global has a market capitalization of around $550 million.
As the sponsors jointly hold about 50% of the total units issued, without further information, I can only hazard a guess that we would see around 10% increase in the number of units issued.
We could assume that approximately 168 million new Preferential Offering Units might be issued at an illustrative issue price of 45 cents per Preferential Offering Unit.
This could raise gross proceeds of approximately $75 million.
So, if we like this proposed investment in French retail parks, we have to be ready to increase our investment in the real estate investment trust by about 10% through the rights issue.
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