Friday, February 22, 2019

IREIT Global (SGX:UD1U) 4Q18 Review



While 4Q18 results did not spring any major surprises, I noticed several salient points regarding IREIT Global (IREIT). Please refer to my initial piece here.

Gearing continues its gradual slide on upward revaluation of assets. As per the quarterly presentation, IREIT’s upward revaluation of its buildings accounted for the reduction of gearing. This is not surprising as rising rental rates in the office market and declining capitalisation rates (cap rate) in Germany has led to higher asset values. While its high gearing levels was always cited as a concern, I believe that the current level (36%) provides the REIT with some breathing room.






Loan has been refinanced at a lower rate, though borrowing sum has increased marginally. IREIT refinanced its outstanding loan of EUR 193.5 million with an 2.0% interest rate successfully with a new loan of EUR 200.8 million with a 1.7% effective interest rate. This lower interest rates will reduce the REIT’s interest expense by EUR 456k a year, though negligible on the REIT’s DPU level (0.07 cents).

However, to me, an  interesting piece of information is the tenure of the loan, that is a 7-year loan maturing in 2026. It is somewhat unusual for a bank to offer a loan beyond the lease profile of tenants. This either speaks of the bank’s lax credit policies, or perhaps, it is comfortable with the assets of the REITs that are presumably used as collateral for the loan. Which leads me on to the next point.




Office market remains hot in Germany. Vacancy rates continue to plummet in Germany as office take-up outstrips new supply of construction. Despite the hot property market, cosntruction activity remains subdued. This is important to note as it points to the likelihood that vacancy rates will remain low in the coming years, on the back of low supply of new office buildings. This is favourable for IREIT as its leases approach expiry in 2022. Should the office market remain tight and rental rates remain on an upward trajectory, the investor need not fear a concentrated tenancy profile. In fact, as highlighted in my previous post, IREIT may be a deep value stock, as investors can expect a jump in DPU come 2022. 

 Refer to the reports from JLL and Cushman & Wakefield for research details on the health of the Germany office real estate market.

Exchange rates on a downtrend. The Euro has been on a weakening trend over the last year due to a combination of politics and weaker economic data. The dividends for 2018 was hedged at 1.63, while the EUR/SGD has been declining steadily through 2018 and currently stands at 1.54. As IREIT hedges its dividends one year in advance, this implies that the the dividends for 2019 will be converted at progressively weaker levels. For this precise reason, I am not in a hurry to buy this REIT, and intend to accumulate in periods of sharp corrections, perhaps when the price is closer to 70 cents.



Conclusion

IREIT remains a deep-value REIT although in the short term, I am concerned about the effects of the weakening Euro. I am in no hurry to add this REIT to my portfolio, though it remains on my to-buy list should this REIT experience a correction.
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