• Resilient portfolio in terms of portfolio occupancy (FY23: 94.3%) and rent reversions (FY23: +5.7%). Occupancy is expected to remain stable this year, with only 13.5% of portfolio leases due for renewal.
• CERT’s long-term 60:40 target asset class split between light industrial / logistics and well-located Grade A offices stands to benefit from the growth in e-commerce and the nearshoring trend, as well as flight to quality.
• Divested €237mn at a 14.6% premium. Another €170mn of assets remaining that are earmarked for sale. The loss of income from divestments and redevelopments is a near-term softness but will keep gearing at their target range of 35-40%. We initiate coverage with a BUY recommendation on Cromwell European REIT with a DDM-derived target price of €91. The FY24e forward dividend yield is 10% based on the current share price. CERT is trading at a P/NAV of 0.65x.

Company Background

Cromwell European REIT (CERT) was listed on the SGX in Nov 2017. Its €2.3bn portfolio comprises 110 predominantly freehold properties in or close to major gateway cities in the Netherlands, Italy, France, Poland, Germany, Finland, Denmark, Slovakia, the Czech Republic, and the UK, with an aggregate lettable area of c.1.8mn sq m and over 800 tenant-customers. CERT’s portfolio consists predominantly of light industrial/logistics (53%) and office (45%) assets. It is managed by Cromwell EREIT Management Pte. Ltd., a wholly owned subsidiary of CERT’s sponsor, Cromwell Property Group, a real estate investor and manager with operations in 14 countries and is listed on the ASX.

Key Investment Merits

• Resilient portfolio with high occupancy and rent reversions. As at Dec 23, portfolio occupancy remained high at 94.3% (Dec 22: 96%) despite the challenging economic environment. Portfolio occupancy is expected to remain stable in 2024, with only 13.5% of leases due for renewal. CERT observed its sixth consecutive half of positive rent reversions, with FY23 reversions coming in at 5.7%. This was due to positive reversions from both the light industrial/logistics (FY23: 3.7%) and office (FY23: 7.5%) segments.
• Divestments to keep capital management in check. Since FY22, CERT has made eight divestments for €237mn at a blended 14.6% premium to the most recent valuation - of which three were divested in FY23 for €196.5mn at a blended 13.6% premium. CERT has €170mn of assets remaining that are earmarked for sale, with most coming from the weaker Polish and Finnish office assets. The proceeds from the divestments could either be used to pay off debt to lower interest costs and keep gearing within the management target range of 35-40% or to recycle capital into accretive redevelopments of some of CEREIT’s trophy projects. The successful divestments in the weaker Polish and Finnish office assets would also bring CERT closer to its long-term 60% light industrial/logistics target weightage to capitalize on the growth of e-commerce and nearshoring.
• CPI-indexed rental escalations. Most of CERT’s leases contain annual rental escalation clauses that are based on 100% of the YoY increase in CPI except for leases in Italy, where it is based on 75% of the YoY increase in CPI. This will help CERT tide through difficult periods of high inflation.

We initiate coverage on Cromwell European REIT with a BUY rating and a DDM-derived target price of €1.91, based on a COE of 10.2% and a terminal growth rate of 2%. We forecast a DPU of 13.76 cents for FY24e, translating into a forward yield of 10%.   

Background

Cromwell European REIT (CERT) was listed on the SGX in Nov 2017. It has a principal mandate to invest, directly or indirectly, in income-producing real estate assets across Europe that are used primarily for light industrial/ logistics and office purposes. Its €2.3bn portfolio comprises 110 predominantly freehold properties in or close to major gateway cities in the Netherlands, Italy, France, Poland, Germany, Finland, Denmark, Slovakia, the Czech Republic, and the UK, with an aggregate lettable area of c.1.8mn sq m and over 800 tenant-customers. CERT’s portfolio consists predominantly of light industrial/logistics (53%) and office (45%) assets. It is managed by Cromwell EREIT Management Pte. Ltd., a wholly owned subsidiary of CERT’s sponsor, Cromwell Property Group, a real estate investor and manager with operations in 14 countries and is listed on the ASX.

• We visited 12 assets in three of CERT’s key markets, namely the Netherlands, France, and Italy, which account for 62% of CERT’s portfolio. Assets visited were enviably located near highways and train stations.
• Key office and logistics markets benefitting from positive fundamentals; portfolio largely insulated from inflation.
• Local expertise championing value creation through off-market deals and portfolio optimisation through AEIs/redevelopments and divestment of non-core assets.

Company Background

Cromwell European REIT (CERT) was listed on the SGX in November 2017. Its portfolio comprises 115 predominantly freehold properties with an appraised value of approximately €2.5bn as of April 2022. Its assets are located in or near major gateway cities in the Netherlands, Italy, France, Poland, Germany, Finland, Denmark, Slovakia, the Czech Republic and the United Kingdom with an aggregate lettable area of c.1.8mn sqm and more than 800 tenant-customers. The portfolio consists predominantly of  office and light industrial/logistics assets which make up c.52% and c.43% of total assets respectively.

Investment Merits

1. Key office and logistics markets benefitting from positive fundamentals. Approximately 43% of CERT’s portfolio is in light industrial and logistics assets. Demand for these asset types is well supported by increased e-commerce penetration, pivot to just-in-case inventory management and on-shoring of production. While structural, economic and geopolitical risks headwinds for the Polish and Finnish office markets remain, the Netherlands office market, which represents 23% of CERT’s AUM, continues to experience rental growth on the back of favourable demand-supply imbalances.

2. Largely insulated from inflation. CERT’s portfolio occupancy is at an all-time high of 94.8% with a WALE/WALB of 4.6/3.4 years. European leases have inflation-linked annual escalations embedded in the lease, while energy and utility costs are passed through to the tenant, minimising impact to CERT’s earnings.

3. Boots on the ground executing rebalancing strategy in spades. Local expertise has allowed CERT to source off-market deals at favourable yields and discounts to valuation, while simultaneously divesting non-core assets above valuations. Having boots on the ground allows CERT to accelerate its rebalancing strategy, pivoting towards its target 60% light industrial/logistics and 40% office asset allocation from its current 52% office and 43% light industrial/logistics allocation. CERT completed €212.6mn/€344mn in light industrial/logistics acquisitions at a blended 6.3%/6.5% NOI yield since FY21/FY20.

4. €250mn in redevelopment and new development potential to be unlocked. CERT has identified a €250 million development pipeline over the next few years. Initiatives are expected to rejuvenate the portfolio, command higher rents, and in some cases, increase portfolio NLA.

Key Risks

1. Country risk. CERT is exposed to country risks including economic, political or policy changes in the EU or in countries where its assets are located.
2. Foreign currency risks. While DPUs are Euro denominated, earnings from three out of nine - Denmark, Poland and the Czech Republic - are paid in their respective currencies. and account for c.15% of earnings.

Investment Actions

No stock rating or price target provided, as we do not have coverage on CERT.

We visited 12 assets in three of CERT’s key markets, namely the Netherlands, France, and Italy, which account for 62% of CERT’s the portfolio. We met with the local asset managers and independent property consultants to gain deeper understanding of CERT’s top three key markets.

Figure 1: Portfolio breakdown by country and asset type

Other property assets consist of 3 government-let campuses, 1 retail asset and 1 hotel, all located in Italy.