As mentioned in an earlier post, IRET Global will be the first SREIT in Singapore to feature European assets. The assets are all freehold office assets located in Germany. Given an 8% projected yield for 2015, it actually looks pretty attractive.
IREIT Global IPO
Offering Price: $0.88
Industry: Office REIT
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Projected 2015 Yield : 8.0%
P/Net Asset Value: 1.13x
Weight Average Lease to Expiry: 7.6 years
Offer Ends: 11 Aug 2014, 12pm
The 4 offices are located in key German cities Bonn, Darmstadt, Munster and Munich. 2 of them are located close to public transportation, while most of them are actually quite close to city center, making them well located. All of the properties are freehold, so there is no issue with leases running out.
The weight average lease to expiry is actually quite high at 7.6 years. The occupancy is 100% with strong tenants such as Deutsche Telekom, Allianz and Microelectronics. While 100% occupancy is a signal of good properties, it also means that further upside has to come from rental increases.
Innovation in Management Fee Structure to Align to Shareholders
IREIT Global has done something different from the SREITs by linking the management fees to DPU. The Manager will receive 10% per annum of the Annual Distributable Income as well as a performance fee of 25% of the difference in DPU of IREIT in a financial year compared to previous year. Most of the other REITs usually calculate base fees on total asset value and the performance fee if any is generally not so high at 25%. This is good as it incentivizes the management to maximize income instead of acquiring assets to charge higher base fees.
IREIT Global Income Statement
IREIT Global Pro Forma Balance Sheet
Looking at the income statements, the revenue and dpu growth is minimal from 2015 to 2016. So this is primarily a yield play as the initial yield is high at 8.0%. The leverage is about 33%, which is ok for a REIT. The price to net asset value is approximately 1.13x, which is somewhat higher than most of the office REITs which are trading below 1.0x P/NAV. The interest rates are also fixed for 5 years, which is a very good strategy as interest rates is at all time low.
Comparison to German Risk Free Rate and Peers
German risk free rate, comprised to 10 year German 10 Year Government Bonds is very low right now at 1.0%. So a yield of 8.0% is very attractive. Compare that to the Indian Reliance Business Trust which wanted to list earlier on SGX. The projected yields are quite similar, but Indian interest rates are far higher so IREIT is a lot more attractive.
At 8.0% yield, it is higher than all the office REITs which are mostly yielding 6.0% to 7.0%, with the exception of Fraser Commercial Trust which is at high 7s. While P/NAV is slightly higher, it is ok as the properties in Germany probably have better rental yields.
As always, all foreign assets do have exchange rate risks, the German Euro is no different. Look at IREIT Global as a diversification strategy for the REIT portfolio.