Wednesday, August 21, 2019

Why I Would Not Consider Ireit Global At Their Current Valuation

Ireit Global is a Reit I used to own in the past due to the strong profiling of their freehold assets in Germany, high dividend yield, low borrowing costs and long WALE with concentrated blue chip tenant profile.

You would think that Germany is a strong powerhouse in Europe and they are too big to fail, so everything else equal, it's something which is probably too good to be true, especially since they debuted and listed back in 2014.

I bought them in the past in the range of 63 to 66 cents when most people were skeptical about the relatively new manager at that time and managed to sell them when they were at around 73 cents. The main reason I sold was because Tikehau Capital came in and they kept harping about a possible inorganic growth through acquisitions in their investors presentation slides, which is pretty imminent at that time that they were going to do a rights issue since their gearing was in the 40% range back then.

Since then, 5 years after the listing, there's not much acquisition stories that are developing and revolving around.

Most of the assets remained as what they were during the IPO, there were a few assets that appreciate in value which resulted in the lower gearing today (~36%) while dividend yield remained in range.

Costs of borrowings did went down further from 2% to 1.5% due to the drastic state of the European economy and we just wonder if we will start seeing more defaults or downsizing of their blue chip tenants. It's probably one of the danger of concentration activities and you can see why retail investors keep harping into that as one of the potential risks.

Earlier this year, City Reit Management, a fund subsidiary of blue chip property giant City Development (CDL), came in to purchase a 50% stake in the Manager. CDL did that as part of their growth plans to secure a more recurring income platform through fund management activities.

You wonder why Tikehau wants to allow that since they are big enough players in Europe themselves who are able to grow their AUM if they want to do that.

And we're all waiting for Tikehau to make it happen since they took over back in 2016 and kept harping about growing, but albeit no news so far. Surely, if they want to do that, they can easily find a good property with sufficient passing rent yield and appropriate capital structure to make the acquisitions DPU accretive, so am not sure what's the further wait.

The arrivals of more than one stake in the manager with majority vote for decision making brings about more uncertainties because the plans could be skewed to one side.

CDL, in particular, was familiar with Europe but specializes more in hotel management and not commercial or logistics and Tikehau might be the big brother familiar with it. If so, one might wonder what sort of value does CDL brings to the table. At the worst scenario possible, they might be pressuring Tikehau to make the deal to grow the AUM, this especially if they are only interested in extracting management fees out of the AUM.

I'm still unsure if Ireit Global at this valuation brings anything to the table for investors, especially with so much uncertainties questioning both the European economy and the management's direction of where the Reit is going to go. This has definitely been a lost 5 years opportunities for Ireit Global themselves to grow their assets and they might be in for a rougher ride when the global economy goes back into recession or slower growth over the next couple of years.

At this valuation, I certainly don't find it attractive enough to put my money on it.

At the best, this probably gives you the current 7.7% yield returns per annum which you might get, but you shouldn't expect too much from it, especially if you are gunning for double digit returns. At the worst, you might get into the perfect storm of a declining European economy which will increase the probability of a default or downsizing activity in tenants, a rights issue, and a wasted warchest opportunities.

Surely if you find the current profile attractive, you would similarly found their past profile attractive as well.

Thanks for reading.

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  1. Hi,

    Thanks for your post. And thought I'd share a different perspective.

    IREIT used to be run by a team based out of Singapore. Tikehau ("TKO"), a Paris-based asset manager took over the REIT manager in 2016. The point of the acquisition seemed to be to allow IREIT to be a point of entry by Asian investors into securitised European commercial real estate.

    From my understanding, the new manager's focus in 2017 was integrating IREIT's internal systems with that of TKO's. That took longer than one would expect.

    The manager's focus in 2018 was working on fixing the leverage issue, which they finally announced in January 2019 by extending the WADM and fixed at low interest rates.

    And right after the AGM in April 2019, they announced a fix to the substantial shareholder issue. With Tong now reduced from 55% to 35%, and Lim now below 5%, any equity raising from existing and new unitholders like CDL is far more likely to go through. (You'll also notice that Tong, despite being a board director, didn't attend any of the 5 board meetings in 2018. Then again, when you own 55% of the REIT, you probably get certain privileges ... )

    So, in my mind, IREIT has fixed a few overhangs. But in the process, IREIT has lost the lead from being the only European-focused S-REIT to being one of several with a stake in Europe (eg. Cromwell, Frasers Logistics, even CapitaLand Commercial Trust).

    And in their latest slides, IREIT has highlighted how they intend to make DPU dilutive acquisitions, because it is basically not feasible to acquire DPU accretive properties without taking on too much risk. I think this is a reasonable trade-off for portfolio, tenant and geographic diversification.

    The main issues for me at the moment are:

    1. Improving DPU in EUR terms. This had been on a downtrend from 1Q17 until 1Q19, but came up again in 2Q19. IREIT needs to make a sustainable improvement in operational cash flow.

    2. Small size of the portfolio. IREIT needs to bulk up their portfolio, and diversify it. Cromwell European REIT is several times their size. So is Belgium-listed Befimmo which owns office buildings and offers a gross DPU yield of over 7% (which after withholding tax is approx. 5%). At least the gearing has come down from 42% to 36%.

    In other words, equity raising from existing unitholders is almost certain. But with CDL as a unitholder, they should have support from a well-recognised Asian player to expand in Europe. (I personally think CDL is using IREIT to expand its footprint in Europe, not to sell its European properties into IREIT. I doubt that 35%-unitholder Tong will support such a move.)

    And as stated above, I believe diversification will be for the better.

    3. Tenant expiries for several of their 5 properties come due in 3 to 4 years time. IREIT may need to find a way to stagger the maintainance or upgrade of their properties if the tenants stay on. They cannot risk having a majority of properties suddenly becoming empty at the same time.

    Hope this helps give a different perspective.


    1. Hi Goondu

      Thanks for your extensive views on Ireit.

      I actually like the so called "issues" you mentioned on your above points which Ireit is apparently trying to fix so I am not sure why they need to "fix" those "issues".

      For one, I think concentration of tenant is great. I myself being a concentrated portfolio knows how beneficial this can get, for as long as I pick the right company. In the same breadth, I think Ireit faces a good problem given most of their tenants are blue chip in nature. There's no point in trying to diversify into more tenants but they are not as solidified as their current blue chip tenants.

      Also, improving DPU through foreign currency in EUR terms takes a lot of correct hedging positional position and decisions. I know this because I used to work for a foreign Reit once and we had to do the same hedging activities which is incredibly difficult to predict, plus costly. So the hedging part is a "show" in my opinion to investors that they are trying to mitigate the movement, but everything else it is a moving part with equal probability of going either way.

  2. Fixing a typo on the WALE and spelling:

    3. Tenant expiries for several of their 5 properties come due in 4 to 5 years time. IREIT may need to find a way to stagger the maintenance or upgrade of their properties if the tenants stay on. They cannot risk having a majority of properties suddenly becoming empty at the same time.

    - - -
    Disclosure: I own units in IREIT.