Wednesday 5 June 2024

IREIT GLobal REIT: Exposure to Europe Office/Retail, 7% Expected Yield

 Ireit Global REIT is another SGX listed REIT, it has exposure is only to 03 Europe Countries: Germany, Spain [both office] & France [Retail Space].

Portfolio Composition

Ireit recently expanded into to the French Retail space to diversify into the Europe Retail Space. I will not be able to comment on the intelligence of this diversification since the results are still not apparent. But it is a sound diversification into a discount store outlets which is defensive (similar to Utdhampshire US REIT)

IREIT Risk- German Office/Commercial

Ireit suffered a hit when the tenant at Darmstadt Campus did not continue the lease. Occupancy  is now at 25% and truth be told, the REIT is struggling to find tenants to backfill the office space. I suspect a further downward valuation will happen in end 2024. The submarket within Darmstadt has an ongoing issue of high vacancy rates. Think what is happening to PRIME/Manulife/keppel US.

The next risk is its Berlin Campus office buidling. With a few tenants' lease running up, I forsee downsizing will happen. It is a relatively old building and I think the REIT will have to do CAPEX to refurbish, pherhaps a demolition and rebuilding of a Grade A building could help improve the status of the REIT. It should end up like One Washington Centre of PRIME REIT where an extensive refurbishment will be announced.

Similar to the US Office space, I do think the Europe Office space will struggle. This will hurt Ireit global revenue and for 2024 and 2025, Ireit office space revenue will decline. There should be a Euro 30 million downward valuation, which will push Ireit leverage to 38.5%.

01 Lucky- Diversifying into the French Retail

Its French Retail segment experienced a valuation gain and with the share placment of forcing existing Ireit investors to pump in money at 40.8 cents per share, the REIT now sports a 37.0% leverage. If the REIT was still a standalone office REIT, Ireit could have followed the US commercial REITs with drastic cuts in the dividend. 

Regardless, the past is past and the purchase of French Retail assets has rescued the REIT. In my view, this is now a much safer REIT. Even with a slight downward valuation of its office portfolios due to my view of further tenants downsizing, I do not think the REIT will breach the 45% leverage limit.

02. Lucky Hedging

Ireit has done almost perfectly in its hedging strategy. With a 96.5% hedging, it has enabled its effective interest rate in Europe to be at 1.9% when currently, many property loans in Europe are going at 1.5% + 3-mth Euribor of 3.75%; this means interest rates at 5% to 5.25% 

As investors, we have to be aware of it. As Ireit interest swaps expire, its effective interest rate will increase. This is because its old Euribor hedges were at very low rates and will not be renewed at such levels again.

So it's a definite its weighted average interest rates will go up. Most of its hedges expire in 2026. At that moment of 2026, I do expect the Europe central bank will announce about 4 rate cuts. So I will not be surprised Ireit's effective interest rate then could be about 4.25%. This means something....

DPU Stagnant

While revenue would grow over time, the increasing pace of Ireit's interest expense would eclipse; mainly due to its interest rate swap expiring. 

I forsee DPU will be 1.6 Euro cents on an annual basis and it will remain as such. The REIT was fortunate that it went into the French Retail segment, otherwise it would have struggled. Germany Office Space revenue is in a decline.

1.6 Euro cents equates to 2.3 SG cents. At a share price of 33 SGD cents, Ireit should be a 7% yielder. But this should be the level investors have to expect moving forth. In Singapore, the savings bond and T bills are yielding at 3.3% to 3.6% rates. IREIT is only at a 3.5% premium. Not much to fancy about, but I do think the market has valued IREIT just about fair value. Until Singapore interest rates fall, potential investors should not expect share appreciation.

But given how lucky IREIT was in diversifying and with a leverage ratio that is far away from MAS's regulatory limit, I do not think this REIT will go under. For investors, the question is: Is the 7% yield is justifable? I am not vested in Ireit but it is 1 of my candidates to evaluate under the 7%-9% yielder. Hang Lung Properties, Capitaland China Trust and ICBC are others I am considering.

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