PhillipCapital analyst Tan Jie Hui has downgraded iREIT Global to “neutral” from “accumulate” with a lower target price of 68 cents from 76 cents previously.

While the REIT posted stable results for 1H20, it was offset by the weaker exchange rates between the Euro and the Singapore dollar. To that end, iREIT Global declared 2.7% y-o-y lower distribution per unit (DPU) for the same period.

The REIT’s occupancy rate improved q-o-q to 95.7% from 94.7%, with a weighted average lease expiry (WALE) of 3.7 years. Some 95.9% of the REIT’s leases were also locked in till 2022.

However, Tan says the revised recommendation came on the back of the REIT’s rights issue to fund its acquisition and repay loans is dilutive to the REIT’s DPU and net asset value per share (NAVPS).

On August 7, iREIT Global announced that it will be issuing 281.8 million new Rights Units to raise an estimated €90 million ($140.9 million). The money raised will be used to fund the proposed acquisition (of some €49.1 million), and repay the €32 million term loan facility granted by City Developments Limited.

The acquisition, according to iREIT, is expected to be completed in 4Q20.

Looking at the data based on 1H20’s numbers, Tan says the DPU for the enlarged portfolio is estimated to decline by 18.9% to 2.31 cents from 2.85 cents.

NAVPS for the enlarged portfolio is also expected to decline by 14.5% to 47 Euro cents from 55 Euro cents.

“Amid the looming recession, the take-up in office space and investment activity in Europe is expected to slow down in 2020. However, office rents where IREIT’s properties are located are not expected to be significantly affected due to strong local fundamentals e.g. low vacancy rates and lack of supply,” says Tan.

“iREIT’s portfolio has remained resilient with majority of the leases supported by blue-chip tenants. The impending acquisition will increase and diversify iREIT’s asset and tenant base, and mark what we believe to be the beginning to iREIT’s growth plans now that it is backed by supportive stakeholders. It has been a rough start to growth, but growth nonetheless,” she adds.

On the downgrade and lowered target price, Tan says that her target price “translates to a FY20e distribution yield of 6.9% and a total upside of 0.8%”.

“We factored in for the €90 million rights issue to fully fund the acquisition and repay the CDL loan,” she writes in a report dated August 13.

Tan has also lowered her DPU estimates for FY20e, FY21e and FY21e by 10%, 17%, and 17%, respectively.

“In light of more organic growth opportunities presented by the Spanish portfolio, we increased our terminal growth rate to 1.5% from 1% previously”.

As at 12.09pm, units in iREIT Global are trading 0.5 cents higher, or 0.7% up, at 73.5 cents.