Analysts at OCBC Investment Research (OIR) and PhillipCapital Securities have kept “buy” on Cromwell European REIT (CEREIT) with higher fair value estimate and target price of EUR1.89 and EUR1.95 respectively following the release of its 3QFY2024 ended September results.
In his Nov 5 report, OIR analyst Donavan Tan notes that the REIT has secured a new EUR340 million debt facility in preparation for its EUR450 million bond, which expires in November 2025. This will provide CEREIT with some bargaining power when pricing a new bond to refinance this among as it offers liquidity for the refinancing, he adds.
“We believe this is a key strategy, especially since the existing bond was priced at a very low rate of 2.1%. The cost of refinancing this bond will significantly impact its distributions, serving as a ‘final reset’ before we see stability in distribution growth, with the exception of any black swan events,” says Tan.
PhillipCapital’s Darren Chan points out that CEREIT’s overall cost of debt has improved slightly q-o-q to 3.16%, with 87.6% of debt hedged to a fixed rate. Gearing on the other hand rose 0.7% points q-o-q to 41% due to the drawdown of revolving loan facility to fund capital expenditure.
Moving forward, CEREIT remains focused on maintaining high portfolio occupancy and rental income growth, managing the November 2025 bond maturity by issuing long-term debt at optimal pricing and completing the remaining EUR70 million in non-strategic divestments to increase its portfolio weighting in the logistics/light industrial sector — which currently stands at 54%.
Chan expects CEREIT’s all-in cost of debt to remain at 3.2% in FY2024, rising to 4% in FY2025 following the bond refinancing. He also highlights Fitch Ratings’ recent revision of the trust’s outlook from “stable” to “positive”, while reaffirming its BBB- rating. An upgrade to BBB could result in margin savings of 20-30 basis points, he says.
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“We expect FY2024 year-end portfolio valuation to remain stable. CEREIT’s pivot towards a 60% target asset class weight in light industrial/logistics aims to capitalise on positive structural trends, such as increased e-commerce penetration and the nearshoring of supply chains.
“Catalysts include further European Central Bank rate cuts to secure a low coupon rate for the new bond issuance,” says Chan.
Meanwhile, with a healthy gearing ratio below 40% and a significant discount to net asset value due to the tough economic conditions in Europe, Tan believes CEREIT presents an attractive opportunity for S-REIT investors seeking high-quality returns and exposure to the European market.
As at 11.32 am, units in CEREIT are trading 1 cent lower or 0.6% down at EUR1.60.
