DBS Group Research UD1U analysts Dale Lai and Derek Tan have downgraded IREIT Global to “hold” from “buy” after the REIT’s distribution per unit (DPU) for the 1HFY2023 ended June 30 fell by 23.8% y-o-y to 0.93 Euro cents (1.37 cents).
The lower DPU, which was mainly due to the vacancy at the REIT’s Darmstadt campus, a four-month rent-free period at Bonn Campus, as well as its enlarged unit base, stood below Lai and Tan’s estimates.
“With the non-renewal at Darmstadt, there will be a near-to-medium-term impact to earnings. Moreover, the slowdown in the office leasing market may lead to prolonged vacancies at some of these assets,” write the analysts, who have also lowered their target price to 45 cents from 60 cents previously.
“Another potential risk with the slowdown in the European market is a valuation cap rate expansion,” they add. “So far, IREIT’s portfolio has experienced a 50 basis point (bps) expansion in cap rates, and further expansion could be expected in the coming quarters.”
To this end, any further significant cap rate expansion could put pressure on the REIT’s gearing and a prolonged slowdown in the European office leasing market could lead to slower backfilling and a downside to earnings, the analysts warn.
However, they’re still upbeat about the REIT’s “well-diversified” portfolio across Western Europe. Once IREIT’s acquisition of the 17 retail assets in France is completed, its assets under management (AUM) will increase to EUR1 billion.
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Following the acquisition, the REIT’s portfolio will lower its exposure to the office sector and further diversify its key tenant, geographical, lease expiry, and sector concentration risks. It will also have a total of 54 assets located across Germany, France, and Spain that consist of office and retail assets with a relatively long weighted average lease expiry (WALE) of around five years. As most of the leases are pegged to annual consumer price index (CPI) indexation, this will help drive some organic income growth, note the analysts.
As at 2.51pm, units in IREIT Global are trading flat at 42 cents.
