Accordia Golf Trust: Reasonable or realistic price?

This is in response to a reader's question.

As it is going to be about managing expectations, I think it is important enough to be a blog.

In a recent blog on Accordia Golf Trust in response to a friend's question as to whether it was realistic to expect an offer price for Accordia Golf Trust's golf courses which would translate to $1.20 a unit at the Trust level, I explained that although I didn't know if it would happen, it certainly wasn't an unreasonable expectation.

If you are a new reader or cannot remember why I said that, I have provided the link to that blog at the end of this one.






Now, being reasonable and being realistic are quite different.

I said in the same blog,

"... to be realistic, when selling an entire portfolio, it is usually more difficult to command a big premium compared to selling the properties individually."

and I also said,

"Nonetheless, a compelling offer has to be one that is substantially above the NAV."

What is considered "substantially above the NAV"?

Well, there isn't a right or wrong answer and it is going to be really a matter of opinion.






For me, I feel that a 10% to 20% premium to NAV would be considered substantial enough to be pretty attractive if we were to use our past experience with Croesus Retail Trust and Saizen REIT as yardsticks.

In an earlier blog on Accordia Golf Trust, I daydreamed about the possibility of selling the golf courses at a 60% premium to their valuations.

Remember, I said I was merely speculating and that it was a daydream.

It might have been a reasonable expectation but it might not have been a realistic one.

Even as we manage our expectations, we can only hope that what Accordia Golf Trust received was not a lowball offer.






The next thing I am going to talk to myself about can be related or unrelated to the blog topic at hand, depending on our perspective.

You might or might not know about the "Reasonable Person Test".

I learned about the "Reasonable Person Test" when I did Business Law as a module donkey years ago.

If this is something new to you, it is probably good to learn about it.

The question to ask is, realistic or not,

"Would a potential jury agree that $1.20 a unit is a reasonable asking price?"

Here is a video on the "Reasonable Person Test":







Related post:
Accordia Golf Trust: Offer must be way above valuation.

IREIT Global is going to Spain! Excelente!

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.