OCBC Investment Research (OIR) analyst Donovan Tan has initiated coverage on Cromwell European REIT (CEREIT) with a “buy” call. The analyst has also given the REIT a fair value estimate of EUR1.87 ($2.70), based on a cost of equity (COE) assumption of 8.65% and terminal growth rate of 1.5%.
The fair value estimate represents an implied price-to-book (P/B) ratio of 0.83 times, based on the dividend discount model (DDM) methodology.
In his report dated Sept 9, the analyst notes that CEREIT has high quality assets that include a well-diversified mix of tenants, providing a strong base for the firm’s growth. CEREIT’s portfolio achieved a positive 5.2% rent reversion for 1HFY2024 ended June 30, showing increased rental growth. CEREIT’s top 10 tenants contribute less than 23% of the total headline rent and no one industry or trade sector represents more than 17% of the total portfolio.
The REIT has also been aiming to increase its exposure to logistics and industrials (L&I) properties while reducing its office assets. In FY2022, CEREIT targeted a 60:40 mix of L&I assets and office properties. To Tan, this “portfolio composition “aligns well” with the current economic backdrop, which is characterised by resilient demand for prime logistics space.” Furthermore, CEREIT is changing their sponsor from Cromwell Property Group to Stoneweg, a sponsor with capital and asset management that aligns closely with CEREIT’s operations.
CEREIT is one of three Singapore REITs (S-REITs) that have attained an environmental, social and governance (ESG) rating of “AA” by MSCI. CEREIT engages in sustainable investment efforts including green leasing and 83% of its office assets are BREEAM or LEED certified. Additionally, CEREIT is at the forefront in corporate governance practices.
Further to his report, Tan has also highlighted several areas of opportunities for CEREIT, including their increased L&I exposure, a sector expected to possess more resilient earnings and positive growth profile. CEREIT also has a redevelopment pipeline in excess of EUR200 million, showing their commitment to continued improvement of their properties and is likely to lead to stronger yield on their assets.
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However, the analyst also noted that cost of re-financing, slower-than-expected rate cuts and higher than projected redevelopment costs pose a threat to CEREIT, “if inflation continues to persist, it could potentially slow down the expected path to interest rate cuts. This, in turn, may hinder the European economy from achieving stronger growth levels, which will have a continued impact on office leasing and the capital markets.”
While CEREIT’s DPU is expected to drop by 10.2% in FY2024 mainly due to asset divestments and continue declining till FY2026 before stabilising, Tan’s forecasted DPU for FY2024 and FY2025 translate to distribution yields of 9.2% and 9.1% respectively.
“Based on our projections and last close share price of EUR1.53 (as at Sept 9), CEREIT is trading at a consensus forward 12-month P/B of 0.69 times, approximately 0.66 standard deviations (s.d.) below its five-year historical average forward P/B of 0.79 times,” Tan writes.
As at 10.12am, units in CEREIT are trading at EUR1.55. Units in the REIT’s SGD counter are trading at $2.22.
