DBS Group Research is keeping its “buy” call on Cromwell European REIT (CEREIT) with a target price of EUR2.60 ($3.65), as analysts Dale Lai and Derek Tan remain confident on the REIT’s operating performance and higher valuations backed by a growing income.
“Faced with a slowing economy and weakening EUR, the REIT’s year to date (ytd) 20% decline in its share price appears to have priced in most of these risks,” says the analysts, while noting that yields have expanded over 1 standard deviation (s.d.) above normal to about 8.1%, which they view as attractive.
Despite the continued weakness seen in the REIT’s office portfolio (mainly in Poland and Finland), its growing light industrial/logistics portfolio has led to earnings growth. With record low vacancies for logistics properties across Europe, the analysts believe that it would drive further growth in occupancies and rents for CEREIT’s light industrial/logistics portfolio.
“The REIT’s pivot to focus more on the logistics sector is expected to drive earnings resilience. Thus, we expect a compression in yields, given its improved earnings visibility and growth profile,” they add.
As CEREIT continues to pivot away from its office exposure, CEREIT will continue to look at divesting its office properties when the opportunity arises. While the REIT has already divested its Opus 1 office property in Finland for EUR16.2 million, the analysts are in the view that the REIT may further divest its office properties in Poland and redeploy the proceeds into higher yielding light industrial/logistics assets.
To that end, CEREIT has navigated through the Covid-19 pandemic relatively well by shifting its focus to light industrial/logistics assets, but new risks are emerging, with Europe expected to face a period of low growth and high inflation, thanks to the ongoing geopolitical crisis.
Notwithstanding the geopolitical issues, the analysts believe that the REIT’s focus in Italy, France, and the Netherlands, which form about 67% of the portfolio and have relatively better fundamentals as evidenced by their recent site visit, will result in more resilience, going forward.
Moreover, the analysts like that the Consumer Price Index (CPI) pegged rental escalations in place for the REIT’s leases will help support a steady organic growth.
On the other hand, the analysts are upbeat on CEREIT’s ESG focus to futureproof its portfolio.
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“We remain excited about the management’s focus on ‘greening’ its portfolio, targeting net zero operational carbon emissions by 2040. We see this as a multi-fold strategy, with operational efficiencies to drive cash flows and capital values. This has also enabled them to capture tenant demand, given an increased focus on properties with ‘green’ attributes,” writes Lai and Tan in their Aug 15 report.
As at 12.05pm, units in CEREIT are trading at EUR2.13.
