IREIT Global – Poised For Recovery?

IREIT Global

IREIT Global is the first Singapore-listed real estate investment trust (REIT) established with the investment strategy of principally investing, directly or indirectly, in a portfolio of income-producing real estate in Europe that is used primarily for office, retail and industrial (including logistics) purposes, as well as real estate-related assets.

I have done a stock analysis of IREIT Global in July last year. Since then, there has been some changes to the portfolio under IREIT Global which I think is worthy of an update to investors out there.

First, let us look at the FY19 full year financial results. As you can see from the table below, gross revenue increased by 1.3%. Net property income also improved by 0.1%. Distribution Per Unit in € cents declined by 0.6%. The weak EUR/SGD exchange rates caused the Distribution Per Unit in Singapore dollar cents to decline by 2.8%.

FY2019 Full Year Financial Results

FY2019
(€‘000)
FY2018
(€‘000)
Change (%)
Gross Revenue35,26534,8081.3
Net Property Income30,66230,6300.1
Distributable Income22,73822,6310.5
Distribution Per Unit (“DPU”) (€ cents)3.573.59(0.6)
Distribution Per Unit (“DPU”) (S$ cents)5.645.80(2.8)

Now, let us look at the updates for IREIT Global since my last review.

In December 2019, IREIT Global completed the acquisition of four freehold office buildings located in Spain. This is done via a joint venture whereby IREIT held 40% and 60.0% is held by Tikehau Capital SCA. Prior to the acquisition, IREIT Global own 5 properties. They are Berlin Campus, Bonn Campus, Darmstadt, Münster Campus and Concor Park. The newly acquired four Spain assets are Delta Nova IV, Delta Nova VI, II.Ilumina and Sant Cugat Green.

Debt

The acquisition was funded via a term loan facility of €32m maturing in May 2021. It was mentioned that the manager is looking at further debt to acquire the remaining 60% stake. As of 31st March 2020, the gearing ratio for IREIT Global stood at 38.0% which I am not comfortable with. Further debt could bring the gearing ratio higher.

However, I can see the effort that the manager is trying to bring the debt ratio down from a gearing ratio of 39.3% in December 2019 to the current lower gearing ratio of 38.0%.

Occupancy

As of 31st December 2019, the overall portfolio occupancy stood at 94.6%. The occupancy of the German portfolio stood at 99.7%. You may have guessed it right. The overall portfolio occupancy was dragged down by the Spain’s portfolio occupancy rate. On a positive note, the manager shared that the lower occupancy provides opportunity for rental upside from new leases and positive rental reversions.

As of 31st March 2020, the portfolio occupancy has increased slightly to 94.7%. The occupancy remained bogged down by its Spanish portfolio.

German Portfolio

BERLIN
CAMPUS
BONN
CAMPUS
DARMSTADT
CAMPUS
MÜNSTER
CAMPUS
CONCOR
PARK
CityBerlinBonnDarmstadtMünsterMunich
Occupancy100%100%100%100%97.5%

 Spanish Portfolio

DELTA NOVA IVDELTA NOVA VIIL-LUMINASANT CUGAT GREEN
CityMandridMandridBarcelonaBarcelona
Occupancy93.7%94.5%69.2%77.1%

Portfolio WALE (“Weighted Average Lease Expiry”) remained healthy at 4.2 years with 97.7% of the portfolio leases due for renewal only from FY2022 and beyond.

Management

The effective date of Mr Aymeric Thibord’s cessation as Chief Executive Officer is on 23rd April 2020. Mr Louis d’Estienne d’Orves has taken over the position as Chief Executive Officer of the Manager. Mr d’Estienne d’Orves joined Tikehau Capital’s Real Estate team in November 2018. Before joining Tikehau Capital, Mr d’Estienne d’Orves spent 11 years at AXA IM Real Assets, most recently as the Co-Head of European Transactions – Special Situations.

Current Dividend Yield

Based on the FY19 distribution pay out of 5.64 cents and current share price of S$0.68, this translate to a current dividend yield of 8.29%. The dividend yield is definitely attractive but of course you need to consider the risks involved such as further weakening of the EUR dollar.

Summary

As mentioned in my last review, IREIT Global has been suffering from lack lustre financial results and year on year distribution per unit has been rather inconsistent.

However, I do notice some positive points worth mentioning on IREIT Global.

  • Newly acquired Spanish assets added to the portfolio which is a form of diversification.
  • Debt has been reduced to current ratio of 38.0%.
  • 96.5% of portfolio leases will be due for renewal only in FY2022 and beyond.
  • Tikehau Capital and City Developments Limited (CDL) have substantially increased
    their respective unitholdings in IREIT as a vote of confidence, bringing their combined stake to over 50%. Tikehau Capital now owns 29.20% while CDL owns 20.87% of the units in IREIT.
  • A new unitholder, AT Investments has also acquired a substantial 5.50% stake in IREIT, alongside Tikehau Capital and CDL. AT Investments is owned by Mr Arvind Tiku,
    whose family office has an asset portfolio worth approximately US$2bn.

The following are downsides

  • IREIT Global is also impacted by the COVID-19 pandemic. As a result of the pandemic, the eurozone economy is expected to contract. This results in the slow down of the take-up of office space and real estate investment in Europe.
  • Recent change in CEO means a change of leadership which may take IREIT Global into a different direction. Time will tell.
  • Foreign exchange risks (EUR to SGD). Thus, the Distribution Per Unit in SGD may decline further.

There are certainly more positives in IREIT Global than negatives right now. However, as a cautious investor, we should monitor the REIT for a longer period of time. Consistency is the key to success and time will tell whether the manager can turn the assets around.

For those who can’t resist buying into IREIT Global because the share price has been beaten down due to the pandemic, you may wish to split up your purchases over the next few quarters.

ST Engineering – Why I Am Not Selling

Smart City

ST Engineering makes up 12.6% of my stock portfolio. If you are not familiar with this company, it derives its revenue from four key business segments: Aerospace, Electronics, Land Systems and Marine.

After ST Engineering has held its Annual General Meeting on 15th May 2020, the share price of ST Engineering has started to decline as investors started their sell off because of the impact of the COVID-19 pandemic to ST Engineering’s businesses.

First, let us understand how the COVID-19 pandemic has impacted ST Engineering. Second, how the company tries to mitigate these factors. The last is what the company is doing to keep investor’s confidence?

1. How COVID-19 Pandemic Has Impacted ST Engineering?

The COVID-19 pandemic has impacted ST Engineering in three areas: reduction in customer demand, supply chain and workforce disruptions. ST Engineering expects the Aerospace and Electronics sectors to experience more impact than Land Systems and Marine sectors. Land Systems and Marine have a higher portion of defence related projects, which collectively have provided revenue stability.

In the Aerospace sector, we have read about commercial planes being grounded and airport closures. ST engineering expects lower demand for airframe and engine and component MRO (maintenance, repair and operations). The production manufacturing timeline for original Equipment (OE), largely the engine nacelle manufacturing and composite floor panel manufacturing needs to be shifted to follow its customers timeline. The income stream from military customers continues to be steady.

In the Electronics sector, ST Engineering experienced deferments in some projects and tenders previously launched are now being placed on hold. These are due to travel and movement restrictions imposed in the countries they serve.

In the Land Systems sector, the defence related projects continues to provide revenue stability. Similarly to projects in the electronics sector, projects in its commercial business are deferred.

In the Marine sector, ST Engineering’s yards in Singapore and the U.S. are still operating, albeit on a reduced scale in Singapore mainly due to the workforce disruption.

2. Mitigation Measures Taken

ST Engineering has a diversified income streams from different business sectors and geographies. The income is further differentiated between customers from the commercial and military defence. As mentioned previously, the income from the military defence customers remains steady.

The directors have taken a cut in their director’s fees. As of 1st May 2020, the President and CEO will reduce his salary by 10%, while the senior management team will reduce their salaries by percentages ranging between 5% and 10%.

The group has received also support from various government aids and stimulus packages.

For the nine months from April to December 2020, the group expects to recognise $4.5b from the order book of $16.3b as of 31 March 2020, after delivery for the first quarter.

ST Engineering COVID-19 Mitigation

What is the company doing to keep investor’s confidence?

It is heartening to know that for the past seven years, ST Engineering has been consistently paying out 15 cents per share. This is also the reason why I am not selling away. The group has assured they have a strong balance sheet to sustain long-term growth and they will want to continue rewarding its shareholders by creating long-term shareholders’ value.

My Sweet Retirement – How Much Are You Paying For It?

Iceberg Illusion of A Sweet Retirement

When I first started My Sweet Retirement, I wrote about The Path to Financial Freedom which is about the underlying hard work and dedication to achieve our own determined success.

All of us define our own success differently. Some people define success as climbing to the top of the corporate ladder. Entrepreneurs define success as being their own boss and not having to work for others. For a few financial bloggers I knew, they often define achieve FIRE (Financial Independence, Retire Early) as our success.

The recent post “How Much Are You Paying For Financial Independence?” written by Brian has inspired me to reflect on the effort and hardship that I have put in towards my vision of a sweet retirement.

My past experience of being retrenched without any compensation has sparked me to scrimp, save and invest hard over the years. Prior to being retrenched, I have no concept of building an emergency funds for rainy days as I never expect retrenchment to fall onto me. During the period when I was jobless, I saw my savings falling as there are still expenses to pay such as utilities bills and living expenses.

During the days when I was jobless, I limited my spending on meals to S$2.50 per meal. After sending hundred of resumes, I found a job after three months. The job was not ideal and working hours was long, as much as 20 hours per day. Most of the time, I left office at 4 am in the morning. I quit after 6 months as my body could no longer sustain the long working hours.

The COVID-19 pandemic has reconfirmed that I have embarked on the right path to my sweet retirement. You may have read from the news that almost 800 and more businesses closed down during the COVID-19 period. Businesses could not operate because of “Circuit Breaker” measures and only essential services could operate. Companies had to lay off employees and they are unable to foresee when they are allowed to open again. I am ready this time as I have my emergency fund ready in Singapore Savings Bonds in the event I am retrenched.

You probably thought that I am working at home and my working hours are shorter than normal. The sad truth is that my company is in the business classified as essential service and I have to work longer hours during this period. I have to work 12 hours night shift on certain days. This is also probably why I dislike work because it takes away time from myself with my family. The tiredness build up from the long working hours made me reiterate to myself not to lose focus and continue my routine of saving, spending prudently and investing for more passive income.

During this difficult period, I continue to save part of my monthly salary. As the interest rates of Singapore Savings Bond has fallen drastically, there are alternative options such as Singlife Account and CIMB FastSaver which both offer higher interest rates.

There is a price to pay for a sweet retirement and I am paying for it now.

How are you working towards your sweet retirement?