Despite a lower 1HFY2023 ended in June reported distribution per unit (DPU) from Cromwell European REIT (CEREIT), analysts at RHB Bank Singapore and DBS Group Research have kept their “buy” calls on the backings of a robust balance sheet, and resilient operational quarter.
RHB’s Vijay Natarajan has an unchanged target price of EUR2.15, noting “solid execution” from CEREIT, while Dale Tan and Derek Lai from DBS have lowered their target price to EUR2 from EUR2.10 previously.
CEREIT’s 1HFY2023 DPU of 7.79 Euro cents came in 10.4% lower than the DPU of 8.695 Euro cents in the 1HFY2022, which Natarajan attributes to income contribution for the last year from two assets that are currently undergoing redevelopment.
He says that 1HFY2023’s adjusted DPU declined 4.5% y-o-y, mainly on the back of higher interest costs.
Natarajan notes that CEREIT has a robust balance sheet, with about 94% of debt hedged and no debt maturing until end 2025. The REIT increased its debt hedge position higher by 10 percentage points (ppts) by entering into a new sustainably linked facility.
“All-in interest costs post this refinancing is expected to remain in the low 3%. Portfolio value also held up much better with just a marginal decline of 1.6%, as the impact of higher cap rates were offset by improved occupancy and rent growth,” he adds.
In addition, the analyst notes that CEREIT is making good progress on its portfolio rebalancing strategy. It is in the process of divesting Viale Europa 95 in Bari, Italy for EUR94 million, at a hefty 28% premium to its latest valuation. The transaction is awaiting approvals and is expected to be completed by year-end.
The REIT is also currently in the works for disposal of few of its weaker office assets in Poland, following the recent divestment of Piazza Affari 2 for EUR94 million. Proceeds from the above divestments will be used to repay debts bringing gearing to below the 38% level as well as fund its ongoing asset redevelopment plans.
Meanwhile, CEREIT’s Via Nervesa 21 redevelopment in Milan is on track to be completed by 1Q2024 and has achieved a healthy about 70% pre-leasing at a significant rent premium compared to earlier. A similar redevelopment is planned for Maxima in Rome, which is likely to commence next year.
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Natarajan says that CEREIT’s resilient operational performance continues, as portfolio occupancy saw a marginal 40 basis points (bps) decline q-o-q at 95.4% mainly due to weakness in the Polish and Finland office markets.
Rent reversion came in at +3.6% as the continued strong performance by the logistics/industrial segment (+11.4%) was offset by weaker (-0.9%) reversion from office leases. He expects occupancy to continue to remain high at the about 95% level and positive rent reversions at mid-single digit levels.
The analysts makes no material changes to his estimates, which currently assumes EUR3.5 million of divestment gains distribution for FY2023. He notes that CEREIT’s environmental, social and governance (ESG) score of 3.2 out of 4.0 is two notches above the country median, and applies a 4% ESG premium to his target price.
Similarly, Tan and Lai are positive on CEREIT, noting that it is a fast growing Pan-European S-REIT with a diversified portfolio of office, industrial and logistics assets valued at about EUR2.3 billion.
CEREIT’s revenues and net property income were 0.9% and 1.5% higher y-o-y, mainly due to better performances in the light industrial and logistics portfolio.
The analysts say that CEREIT has weathered the Covid-19 pandemic well, but they have identified new risks emerging with Europe expected to face a period of low growth and high inflation given the ongoing geopolitical crisis.
However, they believe CEREIT’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.
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“The consumer price index-pegged rental escalations in place for its leases are set to drive steady organic income growth,” they say.
With the onset of a slowing economy and weakening EUR, CEREIT’s decline in share price has been priced in, according to Tan and Lai.
“Yields have expanded to 2 standard deviations (s.d.) above average to about 10.0%, which we believe is attractive,” say the analysts. “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.”
Tan and Lai have revised their projections to consider higher financing costs, absence of income from redevelopments and divestments, and the removal of capital gains distribution gains in FY2023.
This has led to an about 8.8% cut in our FY2023 DPU estimates, and a resumption of the capital gains distribution will be an upside to their revised estimates.
Their target price of EUR2 is based on a discounted cash flow (DCF) valuation with a weighted average cost of capital of 6.4% (risk-free rate of 3.5%), implying a target yield of about 7.8% over the next two years.
Tan and Lai say that although their revised DPU estimates have led to a slightly lower target price, they continue to remain positive on CEREIT.
“From a valuation perspective, CEREIT is currently trading at a very attractive forward yield of more than 10%, and we believe the stabilization of interest rates and further improvement in its gearing (through divestments) will drive a re-rating in its share price,” they say.
Shares in CEREIT closed 3 Euro cents lower or 1.95% down at EUR1.51.
