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.