Analysts keep 'buy' on Cromwell European REIT, expecting DPU to bottom this year

CEREIT targets to divest EUR400 million in non-strategic assets over the next one to two years.

Analysts are still constructive on Cromwell European REIT’s (CEREIT) CWBU valuations and divestments, after its business update for 1QFY2023 ended March revealed higher revenue and net property income (NPI) y-o-y.

Gross revenue for the quarter rose by 4.2% y-o-y to EUR54.8 million ($79.72 million) while NPI rose 3.6% y-o-y to EUR33.6 million. The growth in NPI was attributed to the 15.7% NPI growth in the light industrial/logistics sector. On a like-for-like basis, 1QFY2023 NPI was up by 4.2% y-o-y with the light industrial/logistics sector 9.5% higher and office also 1.8% higher.

According to UBS analysts Terence Lee and Michael Lim, CEREIT’s management expects divestments to be possible ahead, while growth in incomes could help offset the effect of higher cap rates.

On May 15, CEREIT reported an indicative distribution per unit (DPU) of 4.12 Euro cents for the 1QFY2023, 2.4% lower y-o-y.

Excluding divestment gains for two of the REIT’s properties vacated for redevelopment, the REIT’s indicative DPU would’ve been at 3.90 Euro cents, 5.8% lower y-o-y. On a like-for-like basis, however, the quarter’s DPU remained “resilient”.

In a May 15 note, the UBS analysts maintain “buy” on CEREIT with a target price of EUR2.17. “We reiterate our ‘buy’ rating on an attractive 2023 dividend yield of 10.6% and long-term portfolio transformation strategy.”

The REIT pays out its distributions semi-annually, in September and March.

Listed in November 2017, CEREIT is the first diversified pan-Europe REIT in Singapore. It is externally managed by Cromwell Property Group and has a mandate to invest in office, light industrial/logistics and retail properties in Europe.

The sponsor is listed in Australia and has a 30% stake. CEREIT has a portfolio of 113 properties in Denmark, Finland, France, the UK, Germany, Italy, the Netherlands, Poland, the Czech Republic and Slovakia, with a total appraised value of EUR2.5 billion as at December 2022.

CEREIT targets to divest EUR400 million in non-strategic assets over the next one to two years; management says the proceeds will be used to fund its current development pipeline of EUR250 million.

RHB Bank Singapore analyst Vijay Natarajan expects these assets to mainly come from Italy, Poland and Finland, and are set to be sold above book value with gains used to mitigate the distributable income drop.

“A successful rebalancing will also accelerate CEREIT’s portfolio to its medium-term pivot of deriving 60% of income from logistics/light industrial assets with the balance from the office segment. Given the current market volatility, acquisitions are not a focus for now,” he adds.

In a May 15 note, Natarajan stays “buy” on CEREIT with a target price of EUR2.15, inclusive of a 4% ESG premium based on RHB’s proprietary methodology.

CEREIT is also one of RHB’s “Top 20 Singapore Small Cap Jewels 2023”, an in-depth report of its top picks released on May 16.

As at March 31, the REIT’s aggregate leverage was at 40.6%, which is above the board’s policy of gearing levels between 35% to 40%. The higher-than-expected leverage is largely due to a temporary timing difference between development expenditure and divestments.

According to the manager, it is in “advanced negotiations” to sell some of its non-strategic assets. Its interest coverage ratio (ICR) remained high at 5.0x for the quarter. Including perpetual securities coupons for the quarter, the REIT's ICR stood at 4.5x.

UBS’s Lee and Lim say CEREIT’s cost of debt should inch up slightly towards 2.8% with small impact to DPU. “84% of debt are on fixed rates while there are no material debt expiries till 4QFY2024.”

They add that CEREIT’s management “appears confident” that the 4% increase in NPI growth can be sustained. “Management will hold off on potential acquisitions and the outlook over gearing depends on the timeline of divestments; to which management sounded constructive over deals that were either under documentation or in advanced negotiation.”

Lee and Lim say CEREIT’s management also appears confident of its upcoming mid-year valuation exercise. “Logistics and office market vacancies contracted q-o-q with positive rental growth and reversions/escalations on the portfolio. This can help to offset a rise in cap rates. Together, capital management appears comfortable and we think DPU could bottom in 2023 with a recovery expected in 2024 (without having to assume a drop in cost of debt).”

Stable metrics

In 1QFY2023, the REIT manager signed and renewed 86,474 sqm of property, or around 4.6% of the total portfolio, at an average rent reversion of 6.7% with a tenant retention rate of 76.4%.

As at March 31, CEREIT’s portfolio occupancy level stood largely unchanged q-o-q at 95.8% with the REIT’s light industrial/logistics portfolio occupancy at 98.0% and its office portfolio occupancy at 89.1%.

Its weighted average lease expiry (WALE) stood at 4.5 years as at the same period, down from the 4.6 years in 4QFY2022. The REIT’s weighted average lease to break (WALB) remained at 3.2 years.

Overall, DBS Group Research remains positive on CEREIT “given their stable operating portfolio metrics”. “Although there has been a slight dip in occupancy rates q-o-q, CEREIT’s overall operating metrics remain stable. Continued positive rental reversions and inflation indexation will continue to drive earnings even as its portfolio leases undergo transitional vacancies.”

In a May 15 note, DBS analysts maintain “buy” on CEREIT with a target price of EUR2.10, slightly lower than UBS’s and RHB’s target.

As at 9.42am, units in Cromwell European REIT are trading 1 Euro cent lower, or 0.65% down, at EUR1.54.

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