Rosesyrup Research

Rosesyrup Research

A comprehensive assessment of IREIT Global

Call: Buy / subscribe

Target Price  = $1.093

Upside: 24.2%

Major Selling points

Most points listed here are already highlighted in the prospectus, I only try to summaries it for the benefit of those who don't read the prospectus.

1. The one and only REIT in Singapore that provide investors with exposure in Germany office rental market.
2. Germany office market and economy show strong recovery in the previous quarter and is likely to continue, though at a more modest rate.
3. Contract tenure with lessee guaranteed for next 7 years.
4. Huge subscribe (60%) by China Tycoon who would greatly reduce the free float. Low supply = high price.
5. Inflation adjusted yield=> A protection which wasn't provided by most REITs listed on SGX.

Foreseeable Key disadvantages and risks

1.    No growth story: With debt standing at 33% there is little opportunity for expansion without liquidation of existing shareholders' stake. Leasing contract also sealed for the next 7years making it  hard, if not impossible, to increase rent to market rate.

2.    Very undiversified: All properties located in Germany and revenue source come mainly from Deutsche Telekom only.

3.    EURO Zone Debt crisis: The 2010 crisis was subdued not solved, which requires extensive restructuring of the economies and is not likely to happen. Thus it is a matter of time the crisis resurface again. And if that happens, developed nations in Euro zone stand to lose most.

I did a quick scan over other blogs and read their opinions on IREIT. Some of their valid concern includes:

1. Forex risk: Revenue of IREIT is in EUR while it's distribution is in SGD, thus risk of EUR depreciating and lowering the promised yield of IREIT. 
• My Opinion: SGD, which has risen significantly in the past few, is more likely to depreciate than EUR in the near future. (MAS will choose to let SGD depreciate rather than hiking interest rate for the fear of bursting the housing bubble)
2. Issuance price is 1.13X of NAV: In short, these bloggers think that investors would not want to pay a 13% premium over the asset value as they could avoid the premium by directly buying an office in Germany! (A very problematic assumption)
• My Opinion: Out of the 13% premium, 9% already goes to pay for the underwriting fee which is a must for all publicly listed asset. Thus investors in fact only pay 4% premium which I think is worth it because:
• Affordability: Surely Investors with 10k cannot afford to buy an office space in Germany but now they can buy 11 lots in IRET.
• Liquidity: If a direct owner of office building wants to dispose of his asset, he needs to pay an agent fee and waits for some period of time before finding an interested buyer. With IREIT, Reit holders simply buy and sell on SGX with minimum brokerage fee.
• Goodwill: The properties come with a 7 years (average tenure, not overall) commitment from lessee, thus REIT holders need not worry about finding lessee for the next 7 years.
• No choice: This is the only REIT in Singapore which provide investors with exposure to Germany's office market. Unless investors willing to trade on other stock exchanges around the world, they got little option on SGX.
3. Interest rate hike: It is fear that EU's current near zero interest rate policy won't hold forever and the resulting hike would decrease the yield from IREIT, which is 33% funded with debt.
• My opinion: The loan has a fixed interest rate for the next 5 years
• Average tenure of contract is 7years, after which IREIT can mark its rental to market rate.
• Hence only 2 years worth of yield is likely to be affected.

Valuation method 1

Model: DDM

g: 1.75%

r: 8.35%

CF1: $0.0704

Target Price: $1.067           

Upside: 21.2%

Valuation method 2

Model: DDM (Phase 1) + NAV (Phase 2)

Phase 1: 7 years with the same assumption made as in method one above.

·         PV=  $0.3797

Phase 2: 7 years and thereafter

·         Property price: $478.30M

·         Appreciate: 1.33%

·         Discount: 8.35%

·         Number of shares: 419.4M

·         PV per shares = $0.7136

Target Price  = $1.093

Upside: 24.2%

Conclusion

Given that IREIT contract with its main customer only last for 7 years and IREIT is free to adjust its rental rate thereafter, I would say that method 2 is more realistic than method 1.