Fitch Ratings has revised its outlook on Cromwell European REIT (CEREIT) to “positive” from “stable”, and affirmed its long-term issuer default rating at ‘BBB-’, according to a note dated Oct 7.
The credit rating agency has also affirmed the 'BBB-' long-term rating on the trust's outstanding EUR450 million ($643.97 million) unsecured notes due November 2025, as well as the 'BBB-' rating on its medium-term notes programme.
This re-rating reflects CEREIT’s significant progress in making logistics and light industrial properties the majority of its portfolio, in addition to its core office assets, says the agency.
The REIT’s light industrial and logistics assets rose to 54% of the total portfolio valuation by end June 2024, from 38% when the strategy to increase the focus on these properties was announced in 2022.
CEREIT disposed of EUR261 million of non-core, mostly office properties, over the period at an average premium of 14% to carrying value. This was achieved despite the challenging environment for European real estate amid rising market interest rates and asset valuation declines, supported by CEREIT's active asset management, notes the agency.
“The trust has an additional EUR90 million of properties earmarked for disposal, including EUR40 million currently under discussion,” the agency continues. “We expect CEREIT to gradually exit regions where it has limited scale and lower-quality assets with weaker occupancy, potentially including its Finnish and French offices, and part of its Polish portfolio.”
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The agency expects CEREIT to continue to enhance its portfolio via redevelopments and upgrades, and will keep its regulatory gearing no higher than 40% including development costs below the 10% regulatory threshold.
CEREIT has a medium-term development pipeline of over EUR200 million, mainly for three assets, with a fourth, Parc Des Docks in Paris, still in the conceptualisation stage, they note. “We factor in EUR150 million in capex in 2025 - 2027, with EUR90 million for the most likely redevelopments announced,” they say.
The agency highlights that there is also increasing visibility over CEREIT’s ability to maintain its funds flow from operations (FFO) above 2.5 times, a key upgrade sensitivity, as market interest rates fall from two-year highs. This is based on their expectation that the European deposit facility rate will fall by 75 basis points (bps) in 2025 and 50 bps in 2026, following a further 25 bp cut in 4Q2024.
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They forecast ebitda net leverage of 7.0 times - 7.5 times in 2025-2026, with proceeds from the disposals of non-core properties utilised to refurbish and redevelop assets
Falling rates are also supportive of a stabilising property investment- and leasing climate in CEREIT's key markets, the agency adds.
Fitch expects the upcoming change in CEREIT's sponsor to Stoneweg Global Platform SCSp to be neutral to the trust's credit profile. Stoneweg announced in May 2024 that it will acquire Cromwell Property Group's 27.79% stake in CEREIT, 100% of the trust's Singapore management company, and Cromwell's European business, including the trust's property manager.
“We do not expect the change in sponsor to alter CEREIT's existing investment strategy, governance framework and capital structure, or key management,” Fitch notes.
Finally, the agency says that it treats the trust's $100 million in perpetual securities as 100% equity, as they have strong going-concern and gone-concern loss-absorbing features. They note that the CEREIT aims to maintain perpetual securities as a permanent part of its capital structure.
As at 9.30am, units in Cromwell European REIT are trading flat at $1.59.
