In June 2023, IREIT announced yet another acquisition. This time, of the B&M stores in Europe.
The problem is, every time they announce an acquisition, it seems to drive their share price lower.
You probably got IREIT because you saw how it was focused on the European office market, and how it seemed to have good fundamentals.
This article focuses on the mindset mistakes we may make
As always, we want to add that if you’re looking for quantitative studies, this isn’t the place.
We focus on the mindset behind how we make money decisions, and why our psychology tends to lead to us to making bad decisions.
And if you’re reading into this article today, you’re probably wondering whether its still worth buying more of IREIT, with the upcoming rights issue to finance the buying of the retail parks.
When I first picked up IREIT
In April 2020, during the pandemic, I thought I saw an opportunity in IREIT.
After all, with:
- A relatively lower Price/Earnings ratio,
- A price/book ratio below 1,
- Assets in relatively stable economies like Germany;
This didn’t seem that difficult a decision.
I picked it up at $0.65.
But IREIT soon moved steadily downwards when it announced its acquisition of Spanish office parks in September 2020, and called for a rights issue in July 2021.
Discounts seem sexy
In July 2021, when IREIT announced that their rights issue to finance the acquisition of the Spanish properties would be priced at a discount of 32.9%, I was immediately sold.
After all, who didn’t want a discount? It was only later that I realised that this would drive down the share price.
In thinking about a rights issue, we often think that we are getting a discount, for more assets.
But therein lies the psychological mistake you may unwittingly make.
Buying more of a poorer asset, doesn’t necessarily make you more money.
Are acquisitions always good?
As you hold onto more and more REITs, you will soon realise that the name of the game is Assets Under Management (AUM).
During IREIT’s Extraordinary General Meeting in 2022, Louis, the CEO, explained how AUM was key in getting more institutional investment into the REIT.
Over time, institutional investment is supposed to grow the share price of the REIT.
But there are different ways in which REITs decide to expand the number of properties in their portfolio.
If you look at some of the best performing REITs over the past few years, they have been astute in terms of how they have decided to grow the REIT.
Divestments of non core properties
One of them is Mapletree Industrial.
They have been actively divesting properties that are ‘non-core’.
Another example is Frasers’ Logistics and Commercial Trust, which I hold. It divested its Cross Street Exchange property, a commercial property, at a premium of 28.3 per cent to 18, 20 and 22 Cross Street’s book value of S$632 million on Sep 30, 2021.
But if you look at IREIT, it continues to hold onto properties that may be poor-performing.
One of them is the Spanish office portfolio it acquired in September 2020, which continues to have a relatively lower occupancy rate.
But when IREIT was asked about their divestment strategy during the April 2023 Annual General Meeting, the reply was,
IREIT may not be in a favourable position to sell its assets based on the potential steep discount IREIT needs to give to attract investors.
But because of its stronger capital position (it has amongst the lowest gearing compared to other European REITs like Cromwell and Elite), it’s not forced to sell just because it’s underperforming.
It’s patiently waiting for the right price, rather than just selling to recycle capital.
It shows patience.
Moving into different asset classes
Another way REITs can grow is to choose to divest into different asset classes.
With COVID changing the shape of the office market, IREIT has chosen to divest into the retail parks segment.
Its rationale for going into the retail park segment is because of the relatively higher yield compared to other real estate asset classes.
It’s looking at an under-the-radar asset class, rather than chasing industrial properties like others, such as Cromwell, have done.
It’s not just yield, stupid
I confess.
I used to think that the dividend yield was the most important thing in deciding on the REIT to buy.
But as I’ve grown as an investor, I’ve realised that it’s also vital that one looks at how it preserves the capital of the investor.
Acquisitions financed poorly, such as through heavily dilutive right issues, have the potential of severely reducing the share price.
But if you look at how Mapletree Industrial did it, they managed to raise capital privately. It showed that the private markets did see the potential of the acquisition and was willing to finance it.
Compare this to IREIT.
Beyond their sponsors (Tikehau Capital and CDL), they don’t seem to have been able to have alternative sources of funding beyond raising more money from current shareholders, at a dilutive rights issue.
But it has to do with the challenge of being smaller, thus finding private placements harder.
Does it necessarily mean that IREIT is making bad acquisitions?
Is it a hope and a prayer?
It reminds me of what happened with First REIT, the previous media darling for how it was investing in the growth story of Indonesian healthcare.
And yes, I was that stupid shareholder that still held on, despite it falling 80% from where I first bought it at $1.01.
At First REIT’s January 2021 Extraordinary General Meeting, First REIT announced its rights issue to avoid it being unable to pay its upcoming debts.
Eventually, I sold it at a loss of 75%, or about $3100.
The data suggests that selling when the stock is down 20% tends to make more sense, than expecting it to rise again.
Lee Freeman Shor studied 946 losing investments of investors under his fund, and realised that only 37% of those went on to return more than 20% after they were sold.
If you’re still not sold, consider the following table.
If your stock has lost 20%, you would need a gain from that point of 25% so that you can break even.
For example, if you entered IREIT at an average price of $0.60 like me, looking at its price of $0.45 now, you have had a paper loss of 25%.
But you would need the stock to rise 33% from the price of $0.45 so that you can break even.
Is that possible?
Well I will leave you to find that out.
But for me, I do know what my choice will be.
I’m chose not to subscribe to their rights issue, not just because their asset choices have been bad.
It’s more because I didn’t have more money to buy into the issue.
But secondly, as a 27 year old, I thought the growth rates to be expected in mature economies like France, Germany and Spain, was not something I was excited about.
I had time, and I wanted faster money.
Thus, it’s also because it would take an incredible amount of time for them to make me money.
But if you were an older investor looking for stable yield, subscribing to this rights issue might make sense.