Cromwell European REIT (CEREIT) is proving its resilience and is positioned to capture leasing tailwinds, say analysts, following the release of the REIT’s results for FY2023 ended Dec 31, 2023 on Feb 26.
DBS Group Research analysts Dale Lai and Derek Tan think CEREIT’s FY2023 distribution per unit (DPU) of 15.693 Euro cents (22.87 cents) is in line with projections.
FY2023 DPU fell 8.7% y-o-y, attributed to divestments, redevelopments, increased financing costs and the absence of a one-time capital distribution top-up in the prior year.
Excluding the impact of these disruptions to earnings, the DPU would have only declined by around 4.1% y-o-y, partially offset by higher rents, note the DBS analysts.
In a Feb 27 note, Lai and Tan maintain “buy” on CEREIT with an unchanged target price of EUR2.
“Despite the slight downward revision in DPU estimates in the near-term, the current attractive valuation that implies a forward yield of 10.5%, and expectations for a rebound in earnings in the next 12 to 24 months, we maintain our ‘buy’ recommendation” write the analysts.
See also: Cromwell European REIT announces DPU of 15.693 Euro cents for FY2023, down 4.1% yo-y
Lai and Tan anticipate that the EUR196.5 million in divestments completed in FY2023 will have a temporary impact on DPU. “Despite the proceeds being primarily allocated to loan repayment and into asset enhancement initiatives (AEI) and rejuvenation projects, the timing differences in the completion of significant rejuvenation projects are expected to result in a near-term drag on earnings.”
The completion and stabilisation of these assets are “crucial” to reversing this impact and contributing positively to the overall earnings trajectory, they add. “Our revised projections estimate that DPU will return to growth trajectory in FY2025 when the Maxima redevelopment [in Rome, Italy] is completed.”
Target price slash
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
Meanwhile, CGS International Research analysts Natalie Ong and Lock Mun Yee are reacting to CEREIT’s lower property values post-revaluation.
Portfolio valuation fell 3.1% and 1.5% y-o-y and h-o-h respectively, as valuation gains in the light industrial and logistics portfolio partially offset valuation loss in the office portfolio.
Hence, in a Feb 27 note, Ong and Lock are maintaining “add” on CEREIT with a lower target price of EUR2.06, down from EUR2.15 previously.
FY2023 portfolio reversion came in at 5.7%, on par with FY2022, with reversion from industrial leases at +3.7% (FY2022: +8.2%) and office at +9.4% (FY2022: +5.8%), says Ong and Lock.
Industrial reversions were weighed down by two German leases, where the tenants exercised their option to extend the lease by five years at the same rent.
FY2023 portfolio occupancy of 94.3%, down 0.9 percentage points (ppts) q-o-q and down 1.7% ppts y-o-y, was weighed down by the divestment of three fully-occupied Italian assets and the ramping up of two newly-completed developments: Lovosice ONE Park I in the Czech Republic (46% leased as at 4QFY2023) and Novo Mesto ONE in Slovakia (62% leased as at 4QFY2023).
Ong and Lock write: “While leasing volumes for office and industrial spaces are still 20%-30% below 2019 levels, we expect CEREIT’s portfolio to deliver positive reversions in FY2024 on the back of flight-to-quality and tight vacancy rates in CEREIT's key industrial and Grade A office markets, [which were] 2.9% and 3.2% as at December 2023, versus 9.3% for all office grades.”
For more stories about where money flows, click here for Capital Section
Gearing stable
Meanwhile, CEREIT’s divestment and bond buyback strategy kept gearing stable y-o-y at 38.4% at end-FY2023 despite its redevelopment capex obligations and asset devaluation.
Interest cost averaged 3.19% in FY2023, up from 2.96% as at 9M2023.
Management has guided that the cost of debt will remain at these levels due to CEREIT’s high interest rate hedge of 88%, but could increase to some 3.6% by end-FY2024 if it repurchases EUR100 million to EUR150 million worth of bonds in FY2024.
CEREIT hopes to narrow the discount to its net asset value per share (NAVPS) through de-risking its balance sheet. “Management’s primary focus is capital management, divesting EUR170 million in assets by 2025 to reach its EUR400 million divestment target, which will eliminate the need to fund capex with debt and keep gearing within 38%-40%,” say Lock and Ong.
This will also allow CEREIT to pre-emptively de-risk its FY2025 debt, after which it will then consider share buybacks if its share price is still trading at a significant discount to NAVPS.
Further divestments
Indeed, management is targeting another EUR170 million in divestments in the next two years.
The bulk of the divestments ahead are likely to come from its Poland and Finland office portfolio, says RHB Bank Singapore analyst Vijay Natarajan.
CEREIT has been the “standout” among overseas S-REITs that have managed to successfully execute divestments in the last two years amid the challenging market, he adds. “It has divested eight assets since FY2022, raising EUR237 million in proceeds at a blended 15% premium to the latest valuation.”
To Natarajan, the successful divestments are a testament to the REIT’s “strong on-the-ground management team efforts” and “good quality, bite-sized assets in attractive locations”.
Hence, Natarajan is maintaining “buy” on CEREIT in a Feb 27 note, with an unchanged target price of EUR2.10, which represents a 47% upside and an 11% yield.
Natarajan’s target price includes a 4% ESG premium based on RHB’s proprietary methology.
“CEREIT has a comfortable balance sheet position with high liquidity on the back of its proactive divestment strategy over the last two years,” he adds. “Asset redevelopment plans offer medium-term upside potential, in our view, and the REIT is undervalued, trading at more than 30% discount to book.”
As at 2.04pm, units in Cromwell European REIT are trading 1 Euro cent lower, or 0.69% down, at EUR1.43.
