Friday, July 18, 2014

IREIT Global - IPO Review

Markets seem to be bullish as there are more IPOs coming in the 2nd half of the year than the first.

Today, we look at the latest REIT IPO  - IREIT GLOBAL.

To give a little bit of some of the macro background on this IPO in case you have not read the prospectus. They are the first SGX listed office REIT with an investment mandate solely focused on Europe, with an initial 4 properties located in Germany (Bonn, Darmstadt, Munster, Munich).








Also, based on the Q1 data, it appears that the office market is in the upward trend of the accelerating phase, which makes it favorable if you are in the landlord position. Again, all this would depend back on the macro factor of the economy. The consensus believes that the recent ECB interventions - particularly its pledge to support the sovereign bond markets through the OMT facility - have effectively quashed the near term risk of the eurozone disintegrating and will pave the way for stabilisation of the eurozone over the next 5 years.




Forecasted and Projection Financial Statements

Based on the forecasted and projection income statement from FY 2014 - 2016, it appears that they are forecasting DPU CAGR growth of around 5% from 2014 to 2015 and beyond. Interest Coverage ratio stands at around 7x while DPU is at 7.6% for FY2014 and 8% for FY2015 and beyond based on 100% distribution of earnings.



What I like about the Reit?

1.) The projected yield of 8% (if projections are met)
2.) The 4 properties are freehold in nature and purchased only recently (still new)
3.) Latest market valuation of the assets are largely in line (EUR 284.1 M) with the historical purchase cost (EUR 283.1 M)
4.) Average WALE of about 7.6 years and 100% committed occupancy for all the 4 properties
4.) Committed strategic partner (owned by Mr. Tong) and include the first and second lock up period for the next 18 months
5.) Management fee structure directly linked to DPU growth (aligned with unitholder's interest) rather than asset value or NPI.

What I dislike about the Reit?

1.) EURO risk - EU breakdown still possibility with uncertainty in Portugal and Italy
2.) Forex risk - The projection yield of 8% is based on a projected forex of EUR1: SGD1.70. Note that during the 2011 Euro crisis, the rate goes as high as EUR1: SGD 1.85. If this happens, this will severely affects the DPU projection.
3.) 100% committed occupancy means there is unlikely to be further upside surprise. Projected growth is expected to come from revised rental lease.
4.) Listing price is above NAV which is at 78 cents.

Conclusion

For a quick comparison amongst foreign asset listed reits, we can take a look at both Ascendas Hospitality Trust (AHT) and Lippo Mall Indonesia Retail Trust (LMRIT) even though they may be in different industries. AHT was listed at 88 cents and have since gone down the hill due to unfavorable forex rate. Similarly, unitholders of LMRIT have also suffered due to unfavorable rate of the rupiah. It is never easy to have your earnings denominated in foreign currency.

I also question the need to have the reit listed in singapore. Due to favorable reits environment we have over here, we are always attracting funds raising over here. The cost of capital might also be low here which makes sense for them to pursue.

At 8% yield the projected yield may seem to interest investors while the listing at 88 cents is priced above the nav level. It remains to be seen how this would work out but i would certainly want to see how it played out before venturing in into another unchartered foreign asset territory.





2 comments:

  1. Hi,

    Thank your for the great analysis.

    I did a QUICK valuation of IReit at my blog and hope that you can add my URL.

    http://rosesyrupresearch.blogspot.sg/

    I will link back to you thanks.

    ReplyDelete
  2. Hi,
    Isn't it better yield when €1= SGD 1.85? Every € gets more SGD.
    Sqdot

    ReplyDelete

UA-57154194-1