The comparison made by @Vince including IREIT Global got me thinking: if sponsor holds a 50% stake in the REIT, why did they tank it so hard by making highly dilutive equity fund raising for their Spanish and French properties?
Let’s dig through the past 5 years financial reports and try to find and answer and see where IREIT Global is headed.
First, here’s the TTM DPU chart for IREIT Global, the one that is raising this investigation:
Since 2016, this translates to -6.32% DPU CAGR. DPU has lost close to 28% since 1H2016. Some people might invoke “COVID” but I would like to remind you that other REITs have been doing great and the Eurozone economy lives pretty much restriction free and rebounded over 10% in 1H2021.
Now, let’s look at the growth of management fees:
Management fees were stable until they exploded by 2H2020, due to the acquisition of the Spanish properties. The structure of IREIT management fees is determined as 10.0% distributable income. It doesn’t matter if they make dilutive acquisitions for them. If they grow, they collect more.
IREIT Global’s management fees increased by 8.59% and 10.90% CAGR over 2H2020 and 1H2021 respectively.
Another interesting chart to consider is the total cost of running the REIT. This includes the management fees, but also the trustee’s fees and operational expenses.
In that case it is more nuanced but still show the trend. In 2H2016 the trust awarded itself a huge performance bonus and this is what you see here. Since then, they have kept cost under control until they didn’t.
In 2H2018, trust expenses were 17% of management fees. In 1H2021, trust expenses were 36% of management fees. In fact, these expenses have close to doubled between 1H2016 and 1H2021. So not only IREIT’s management fees are growing at an alarming rate while the DPU is shrinking, but their expenses are also growing relative to the fees they collect.
With the expansion into other countries and the cost associated with it (setting up a local entity, hiring new employees, etc. etc.) this isn’t surprising, but this wouldn’t be an issue if the REIT was returning money to unit holders at the same rate of growth.
Finally, let’s see IREIT Global TTM yield vs the 10 years US treasure notes. The yield is computed using the TTM DPU and the VWAP of IREIT Global over the half year timespans.
What’s interesting to me is that the spread was more compressed in 2018 than it is now. This means that despite the poor performance, the REIT could still see its share price appreciate. That being said we now have a good idea of the DPU “long term growth” based on all this information, we can now attempt plug these numbers in a DDM model:
THIS IS NOT A BUY OR SELL CALL. MY OWN RESEARCH ONLY. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN DUE DILIGENCE.
Once again, this article is a guest post and was originally posted on tantan88‘s profile on InvestingNote.
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