I woke up on Monday morning to see Singapore REITs unit prices falling, once again.
IREIT Global (SGX: UD1U), one of the 40-odd REITs listed here, saw its unit price tumble 3.7% to S$0.66.
At IREIT Global’s current price, it is going at a distribution yield of 8.5%, which may attract yield-hungry investors.
However, the headline yield alone is not the only thing to look at when it comes to REIT investing.
Let’s find out by using my 10-step guide to pick the best Singapore REITs if IREIT Global provides an attractive investment for those with a long-term view.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
IREIT Global invests in income-producing real estate assets in Europe, which are mainly used for office, retail, and industrial (including logistics) purposes.
The REIT was listed on the Singapore stock market in August 2014.
IREIT Global’s portfolio currently comprises five freehold office properties in Germany and four freehold properties in Spain.
The German properties are located in Berlin, Bonn, Darmstadt, Münster, and Munich, while the Spanish assets are located in Madrid and Barcelona.
The following shows the breakdown of IREIT Global’s properties by valuation and geography:
IREIT Global’s key tenants are also blue-chip companies such as Deutsche Telekom — one of the world’s largest telcos — and Deutsche Rentenversicherung Bund, Europe’s largest statutory pension insurance company.
IREIT Global is managed by IREIT Global Group Pte Ltd, which is jointly owned by Tikehau Capital, an asset management and investment group listed in France, and Singapore-listed property outfit, City Developments Limited (SGX: C09).
As of 7 April 2020, City Developments had a 20.9% stake in IREIT Global.
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
First up, let’s look at IREIT Global’s gross revenue and NPI from 2015 to 2019 (the REIT has a 31 December year-end):
| FY2015 | FY2016 | FY2017 | FY2018 | FY2019 | Compound annual growth rate (CAGR) | |
|---|---|---|---|---|---|---|
| Gross revenue (€ ’000) | 26,924 | 34,399 | 34,959 | 34,808 | 35,265 | 6.7% |
| Net property income (€ ’000) | 24,029 | 30,856 | 31,528 | 30,630 | 30,662 | 6.3% |
In 2016, IREIT Global’s gross revenue and NPI jumped mainly to the full-year contribution from the Berlin Campus, which was acquired in August 2015.
Post-2016, the REIT’s gross revenue has not grown much while its NPI fell.
Overall, though, IREIT Global’s gross revenue and NPI have shown growth.
The impact from COVID-19 on the REIT’s performance is also limited thus far as the majority of its rental income is backed by long-term leases with blue-chip tenants.
Verdict: Pass
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
IREIT Global’s DPU follows a similar trend to its gross revenue and NPI.
| FY2015 | FY2016 | FY2017 | FY2018 | FY2019 | CAGR | |
|---|---|---|---|---|---|---|
| Distribution per unit (Euro cents) | 3.39 | 4.14 | 3.72 | 3.59 | 3.57 | 1.3% |
| Distribution per unit (Singapore cents) | 5.24 | 6.33 | 5.77 | 5.80 | 5.64 | 1.9% |
The REIT’s DPU peaked in 2016 and has shown a downtrend since then.
The steep DPU fall from 2016 is not to my liking.
Verdict: Fail
3. Property Yield Check
Check for: Property yield of between 5% and 9%
Next, let’s explore IREIT Global’s property yield.
For 2019, the REIT had an NPI of €30.7 million and a portfolio value of €574.9 million. This translates to a property yield of 5.3%.
(Note: The valuation figure doesn’t include IREIT Global’s 40% stake in the Spanish properties acquired on 20 December 2019; more about the acquisition later.)
Verdict: Pass
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 December 2019, IREIT Global’s gearing ratio (also known as “aggregate leverage”) stood at 39.3%, very close to my threshold of 40%, but still acceptable.
2019’s gearing rose 2.7 percentage points from 31 December 2018 as a €32 million term loan was taken up to fund the Spanish portfolio acquisition late-2019.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
IREIT Global passes this criterion with flying colours.
As of 31 December 2019, it had an interest coverage ratio of 10.4x.
Verdict: Pass
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
Next, let’s do a check on IREIT Global’s occupancy rate.
The following shows the occupancy at the REIT’s German portfolio, as of 31 December 2019:
Meanwhile, IREIT Global’s Spanish portfolio’s occupancy rate was lower at 80.7%.
The occupancy rate at its Spanish portfolio seems low, but overall, IREIT Global’s portfolio occupancy was a strong 94.6%.
Verdict: Pass
7. Rental Reversion Check
Check for: Positive rental reversions
For 2019, gross rental income for IREIT Global’s German portfolio increased by 1.6% to €32.1 million, up from €31.6 million a year back.
The increase is in line with Germany’s average inflation rate of 1.4% last year.
Verdict: Pass
8. Growth Prospects Check
In its 2019 annual report, IREIT Global highlighted four pillars for growth:
In line with its growth plans, IREIT Global acquired four Spanish commercial properties in December 2019 through a joint venture, which is 40% held by IREIT Global and 60% held by Tikehau Capital.
The purchase marks IREIT Global’s maiden entry into Spain and its first acquisition since Tikehau Capital and City Developments formed a strategic partnership in April 2019.
In a press release back in December 2019, IREIT Global’s manager explained the rationale behind the Spanish portfolio acquisition:
“[T]he passing rents of the Spanish properties are generally below the current market rents, while the overall occupancy rate currently stands at 80.9%. This presents an upside potential for IREIT by bringing the under-rented properties nearer to market levels and increasing the occupancy rate through active asset management. With the call option granted by Tikehau Capital to IREIT to acquire its 60.0% stake in the joint venture, it also provides a future growth opportunity for IREIT.”
If IREIT Global can increase the occupancy rate at its Spanish portfolio to near-100%, just like the German properties, and acquire the remaining 60% once the properties show more promise, it could be a nice booster to IREIT Global’s gross revenue, and hopefully, DPU.
Verdict: Pass
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At IREIT Global’s current unit price of S$0.66, it has a price-to-book (PB) ratio of 0.78x.
Over the past five years, its average PB value stood at 1.11x.
Therefore, IREIT Global looks undervalued with its current PB ratio being below its five-year average.
Verdict: Pass
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At IREIT Global’s current unit price of S$0.66, its distribution yield stands at 8.5%, which meets my criterion.
Verdict: Pass
The Final Verdict
IREIT Global has a final score of 9/10.
IREIT Global has some great things going on for it. Some of its investment merits are:
- Exposure to the commercial sector in Germany and Spain underpinned by blue-chip tenants;
- Reasonable historical growth in gross revenue and NPI;
- High occupancy rate;
- Possibility for higher income from its Spanish portfolio; and
- Attractive valuation (both PB ratio and distribution yield).
Having said that, I’m not comfortable with IREIT Global’s falling DPU over the last four years, after peaking in FY2016.
There’s also a tenant concentration risk as two tenants — Deutsche Telekom and Deutsche Rentenversicherung Bund — contributed 77.4% of 2019 gross rental income (pie chart under “Business Background”).
Therefore, I’d place IREIT Global on my watchlist.
Going forward, I’ll monitor to see if its portfolio becomes less concentrated due to acquisition-driven growth, which could also give rise to higher DPU.
What Are Your Thoughts on IREIT Global?
Come discuss them and more in the Seedly Community under a page specifically dedicated to IREIT Global (SGX: UD1U).
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
