Saturday, November 14, 2015

IREIT: Nope, Not Ready Yet

I'm looking at the IREIT financial results and I must say, I am confused. With the rights issue, all the numbers are messed up and half the results on the same page uses the forecast in the prospectus while the other half of the numbers are based on the post-rights numbers.

Revenues and income up 30%? AWW YISS!
DPU... down 20%? Wait... what?

That's why you get ridiculous looking slides like this:

Anyway, let's see how things are going in commonsense land.

NAV is 0.41 Euros, which at the 1.53 rate now brings the NAV is SGD to $0.6273. At the last price done of $0.675, premium over NAV is 7.6%.

Gearing used to be 34.8%, but it has now increased to 45.3%. Why did they list their leverage ratio as 43% and don't use total liabilities over total assets instead for their calculations, I don't know, but that's how I always define my leverage.

EPS was expected to come in at about 1c Euro, but that fell short by 10%. The currency effect is another 10% drag on DPU in SGD.

Other office commercial names are trading at steep discounts to NAV:
Capita Comm - 24% discount to NAV - 67% office
OUE C-REIT - 25% discount to NAV - 90.3% office
Keppel REIT - 32% discount to NAV - 97.6% office

Other foreign exposed REITs are also trading at huge discounts to NAV:
Saizen REIT - 30% discount to NAV (until recently)
Lippo Malls - 17% discount to NAV
Fraser H-Trust - 14% discount to NAV
Ascendas HT - 15% discount to NAV
Capita ChinaR - 15% discount to NAV
Ascott REIT - 13% discount to NAV
Fortune HKD - 37% discount to NAV
Maple GCC - 20% discount to NAV
Croesus RT - 13% discount to NAV

Religare HT - 7% premium to NAV
Ascendas IT - 35% premium to NAV

All REITs and Trusts with high foreign exposure are trading at discounts over 10% to NAV, with the notable exception of the 2 trusts in India - Religare and Ascendas.

Will discount/premium to NAV in a REIT sector or high foreign exposure translate into something similar in another REIT? I will let you think if this information is even slightly useful or totally irrelevant to IREIT. Perhaps it is not useful given that the 3 office REITs are largely in Singapore, while IREIT is in Germany. Then again, the "usual" premium of commercial office as researched by Green Street is -2%. Relevant? Maybe... You decide lor.

I remember talking about IREIT back in March when it was 86c, 18% premium over NAV and yielding 7.2%.

This REIT still has a few problems:
  • Small ($413m market cap)
  • Undiversified (5 buildings in 5 cities in 1 country)
  • FX Risk
  • Unexciting future prospects

Now we're at 67.5c, 7% premium over NAV and yielding 8.4%. So, can someone please tell me: Why is IREIT so special?

I know that I talk about NAV A LOT. And I know that it bugs some people A LOT since there are quite a few people that don't agree that NAV is important. I'm not saying that other aspects of trusts are not important, but in my opinion, NAV is pretty important. It has worked out pretty well for me so far, so that's just how I roll. NAV probably affects 40% of my decision-making when it comes to trusts.

Current price is 23% discount to IPO price. Probably not so much if you took part in the rights issue I'm guessing. But even then, I'm still not interested at these prices.

At the current exchange rate, slap on a 20% discount to NAV and call me when IREIT is trading at 50c. I guess I'm just a really greedy guy. I'm perfectly happy never owning this counter if it never goes to where I think it is valued at.


  1. If you compare everything with NAV, they could just value their assets at higher NAV and it trades at a discount. if you look at things, there is a possibiity the Mapletree properties are valued at rather conservative NAV thus they are always at a small premium.

    if you look at the cap rate and the debt to asset versus the german reits, it is not too dissimilar.

    i grow not to trust discount to NAV too much, if NAV can be so easily manipulated.

    The reason perhaps why payout is lower is that the propery was bought in mid august and not all earnings are accounted for.

    1. Hi Kyith,

      I haven't gone about to compare IREIT with other german reits! I'm not sure how useful that would be, since my previous comparison of Saizen and other japanese residential reits only proved fruitful with the buyout offer. It Saizen was listed in Japan, the buyout price would have been much higher (about 50% more IMO) looking at both yield and book value.

      I think manipulation of numbers could happen to any number on the financial statement, so I find it hard to overlook NAV, but trust the other numbers. Usually I just apply a general level of distrust to a certain stock and just apply very conservative discounts to all their numbers in that case.

      I'll just wait and see. Compared to other counters, IREIT is not nearly as attractive as some other names!

  2. IREIT has long WALE (7 years) and bluechip tenants.... meaning stable income.

    1. Hi RayNg,

      That is true, their WALE is exceptional and their tenants are blue chips. However, just 5 properties? And just 2 tenants holding 85% of their income? That seems very undiversified to me, and I'm not willing take the risks at this price yet.

      I also do not believe in the miracle Eurozone recovery that Draghi is peddling, so I guess my pessimism is also affected by other macro themes as well.

  3. I have learnt to mistrust NAV as well as the valuation is not done regularly. Exchange rate also plays a huge part. I doubt the properties in Indonesia are still worth as much as listed in some of the Reits in S$ terms.

    1. Hi Jack,

      From the news that I recall, I usually see properties being disposed very close to, or higher than the recorded book value. For me, I think REITs have a more accurate valuation on their assets compared to other companies, but that's just me.

      Exchange rate does play a huge part. 10 years ago the EUR/SGD was at 2, now we're at 1.52. I don't believe in the Euro currency at all, so maybe 1 in another 10 years? Haha.

      Indonesia and Germany are facing opposite situations in demographics. Indonesia has a younger and growing populations which are moving to urban centres, while Germany doesn't really have much room for anything special.

      I guess I'm quite affected by my views on the macro themes.


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