I attended the Ireit AGM this morning which was held at Suntec convention hall which I will summarized below based on the meeting and my conversation with the CIO, Mrs. Jeremy thereafter (2nd pic from the left)
After the meeting was concluded, I also took the chance to accumulate Ireit shares by adding them for 30,000 shares at a price of $0.70 this evening. As a result of this purchase, this has now become my core holdings to make it into the top 4.
There was not too much crowd and it’s understandable given the small size of the shareholders, so the whole session was rather cosy. As usual, the management started out with the usual presentation and thereafter open the questions to the floor for further clarifications.
Questions & Answers
1.) The first question was pertaining to the concentration risk which DT Telecom made up the majority of the tenant profile.
This isn't new as I have heard from many fellow investors myself that this is one of the risks highlighted. The management asserted that DT Telecom is a crème of the lot bluechip tenant which comes with little risk of defaulting but conceded that they are doing something to allay the investors’ concern about it. For instance, the recent Berlin acquisition reduces the tenant profile for DT Telecom from 80% to 50% at the moment. They will continue to monitor this concentration risk which is on top of investor’s concern.
2.) Another investor asked about the potential acquisition in 2016 which the management is upbeat about concluding the deal. I also asked the CIO thereafter about the interesting project she is working on at the moment.
The management conceded that with the portfolio yield at around 9%, it is not easy to find an accretive acquisition where most of the property yield for grade A assets in Europe are at around 5.5%. The recent Berlin acquisition was concluded at 7.1% yield, which is amazing but it’s unlikely they can repeat such a deal for a grade A asset at current environment. The Europe negative interest rate environment has made the property assets an attractive purchase and as such there are yield compression everywhere.
Also, the management conceded that given their gearing status and 100% distributable income policy, it is likely that they would need to turn to placement or rights issue should they decide to fund any potential acquisitions.
From the way I read their words, it appears that a placement is soon on the card since they have the acquisition on the pipeline. It is quite unlikely that they will do another rights issue this year since the acquisition this year should be much smaller than the Berlin acquisition and hence a placement plus debt would suffice at this juncture. In any case, as Reit investor, we just have to be prepared when it comes.
3.) There was also another investor who asked if the management is looking to venture into other parts of Europe such as Bulgaria or Portugal market.
The management is looking for opportunities outside of Germany but Bulgaria and Portugal are not in the pipeline because the market is small. Based on my discussion after with the CIO, it appears further that they may go into UK or Netherlands market because the cost of debt structure is what the management does like. For instance, in Germany, there is a type of bond called “Pfandbriefe” which is generally issued by German mortgage banks that is collateralized for property use. The cost of debt is currently less than 2% for the Pfandbriefe while the same in UK would cost 2.5% and in Netherlands it would cost 3%. So you can see where they are focusing at. The cap rate in those countries are also higher than the rest.
4.) Another investor asked about the tax structure in Germany and understand that it is high at 15.3%.
The management explained the way the structure is built and all investors need to know at the end of the day is the effective interest rate is at less than 5%. Also, should the company divest the property in Germany, they would be subjected to capital gain tax.
5.) There was also a question on currency hedging and why the management is only locking in 1 year of currency hedging (FY2016 = EUR1: SGD 1.52).
The reason for this is because hedging is a tricky practice and there are usually costs associated with it. It is also very difficult to time the market in terms of currency and hence they are looking to only hedge for a year for now. But the management assured investors that this is one agenda that is high in their important list because it affects the DPU directly.
6.) Last but not least, there was also question regarding the AUM targets on how much the company is going to grow in the next 3 years.
The management explained that while they want AUM to grow at a sustainable rate, they would not make any acquisitions that would destroy shareholders’ value for the sake of increasing AUM. They then mentioned about how their performance fees are tied to the DPU increase, which is aligned with the shareholders’ interests.
This reminds me of my previous Ascott case where their performance are directly linked to AUM and distributable income (not DPU/share) and hence you can see why they keep growing so aggressively.
It was a very good session and I came out rather impressed from the way I spoke with them.
Even though they are small in size, the management appears assuring that they would not destroy shareholders’ value with dilutive equity placement and if there are any, they would be accompanied with an accretive acquisitions to the DPU.
Furthermore, I like the fact that the macro factors are in favor to the company with EU still on an aggressive quantitative easing program which will last for quite a while. This would keep the costs of debt low, which means that the spread return for the portfolio is rather significant.
I also like their long WALE and stable blue chip tenant such as DT Telecom and Germany largest pension fund. I also learnt from the CIO that their Bonn campus are currently on fixed uplift while Berlin and the rest are on fixed + cumulative CPI linked variable. The hurdle rate is at 10% and once they hit that, they would be able to get an organic growth from their rental reversion, which should surprise on the upside.
Vested with 62,000 shares of Ireit as of writing.