PhillipCapital initiates coverage on Cromwell European REIT (CEREIT), with a “buy” call and target price of EUR1.91 ($2.77), citing its asset rejuvenation strategy as a key driver of organic growth.
As it stands, CEREIT has a EUR2.3 billion portfolio comprising 110 predominantly freehold properties in or close to major gateway cities in the Netherlands, Italy, France, Poland, Germany, Finland, Denmark, Slovakia, the Czech Republic, and the UK.
It has an aggregate lettable area of about 1.8 million square metres and over 800 tenant-customers. CEREIT’s portfolio consists predominantly of light industrial/logistics (53%) and office (45%) assets.
PhillipCapital’s analyst Darren Chan raises three key investment merits of CEREIT. First, the REIT has a resilient portfolio with high occupancy and rent reversions.
As at Dec 2023, CEREIT’s portfolio occupancy remained high at 94.3% despite the challenging economic environment, says Chan, while portfolio occupancy is expected to remain stable in 2024, with only 13.5% of leases due for renewal.
CEREIT observed its sixth consecutive half of positive rent reversions, with FY2023 reversions coming in at 5.7% due to positive reversions from both the light industrial/logistics and office segments.
Next, CEREIT has made divestments to keep its capital management in check — since FY2022, the REIT has made eight divestments for EUR237 million at a blended 14.6% premium to the most recent valuation. Of which three were divested in FY23 for EUR196.5 million at a blended 13.6% premium.
The REIT has EUR170 million of assets remaining earmarked for sale from its Polish and Finnish office assets. These proceeds could either be used to pay off debt to lower interest costs and keep gearing within the management target range of 35-40% or to recycle capital into accretive redevelopments of some of CEREIT’s trophy projects, the analyst notes.
He adds that a successful divestment in the weaker Polish and Finnish office assets would also bring CEREIT closer to its long-term 60% light industrial/logistics target weightage to capitalise on the growth of e-commerce and nearshoring.
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Finally, Chan notes that most of CEREIT’s leases contain annual rental escalation clauses that are based on 100% of the y-o-y increase in consumer price index (CPI) except for leases in Italy, which will help CERT tide through difficult periods of high inflation.
As such, Chan initiates coverage on Cromwell European REIT. His “buy” call and dividend discount model-derived target price of EUR1.91 is based on a cost of equity of 10.2% and a terminal growth rate of 2%.
“We forecast a distribution per unit of 13.76 EUR cents for FY2024, translating into a forward yield of 10%,” he says.
As at 11.19am, units in CEREIT are trading 1 EUR cents higher or 0.719% up at EUR1.40.
