Tuesday, March 3, 2015

IREIT, you've got to be kidding me.

AK just blogged about IREIT and his thought's on it. I've been watching this counter for a while, but I don't feel enticed to even take a nibble yet.

Last year before the IPO came out, I wrote a little post about my thoughts on IREIT. I have to admit that my thesis of a weaker German property market is not the cause of the weakness in the counter. Instead, it has to do with the currency fluctuation which I did mention, but did not stress and emphasize. Personally, I did not expect such wild swings in the Euro to affect the counter so much. This is a good lesson learnt without having to pay any lesson fee. I must remember it!

Unlike the average Singaporean herd investor (my father included), I very much dislike IPOs. The reasons why I think IPOs are horrible will be a post for a different day I suppose, I have quite a bit to say about them.

Anyway, you can read about their last quarter results through their website or their presentation. I like to see presentations because the prettier colours is easier for my simple brain to digest.

They collected 1.53c Euros for the period of 13 Aug til year end. That represents 20 of the last 26 weeks of the year. Extrapolated, that gives almost exactly 2c Euros per half year. Last year's rate that they used was 1.68 EUR/SGD. All the numbers makes sense and add up. No fraud here, don't worry.

However, moving into 2015, their hedging for EUR/SGD is now a measly 1.55. This means that if the DPU for the 1st half of 2015 is maintained at 2c Euro and the price paid is the current share priced of $0.86, we would get a yield of 7.2%.

If you wanted a yield of 8%, share price would have to drop to $0.775, which is a 10% drop from where we are.

Underlying NAV of the assets are 0.48c Euros, which at the current spot rate of 1.52 gives a NAV is local currency to be $0.73. So at the current prices, IREIT is priced at 17.8% premium over NAV. To yield 8%, it would be priced at the highest, 6.1% over NAV.

Given that the natural premium on this REIT sector is -2% (number quoted from an old Green Street presentation), I think that this is way out of whack.

This REIT has a few problems:
  • Small ($400m market cap)
  • Undiversified (4 buildings in 4 cities in 1 country)
  • FX Risk 
  • Unexciting future prospects
The only positives that I can see is that their lease expiry starts in 2017 and it is small. Their largest customer is Deutsche Telekom which is 80% of their revenues. Is that a positive point to have a stable tenant or a negative point that your 1 single tenant is basically your entire business?

After weighing the pros and cons, I would imagine that they should command a MASSIVE discount over their natural premium. This bad boy? I wouldn't touch it at it's current state unless it's under $0.70 SGD.

That might seem like a huge margin of safety that I am asking for... but is it really? At $0.70, it is only a 4% discount to NAV and yield would be 8.8%.

Keppel REIT trades 18% discount to NAV.
OUE Com REIT trades 27% discount to NAV.
CapitaCom REIT trades 3% premium over NAV, and they have the best brand equity of all the REITs. But CapitaCom has a mix of retail, so a pure office play by them would probably trade at or just below NAV.

Why was, and why is IREIT still priced at a premium to all these REITs? Safety? Growth?

Beats me. I would guess the answer is "Madness".

Or maybe it's the legendary "ang moh premium"?


  1. Well take on the iREIT, like your ang moh premium! lol

    1. Hahaha, thanks Richard! A lot of things got ang moh premium and asian discount, lol!


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