Cromwell European REIT (CEREIT) has repurchased EUR50 million ($72.6 million) worth of bonds, or 10% of the EUR500 million 2.125% bonds that are due to mature on Nov 19, 2025.
“I am pleased to announce that we have successfully achieved another first for the manager with this EUR50 million bond buyback, funded from recent divestment proceeds. This aligns with our strategy to reduce the refinancing risk of CEREIT’s November 2025 bonds ahead of time, to minimise the distribution per unit (DPU) impact of rising interest rates as all REITS transition from the zero interest rate policies of the recent years and to protect unitholders equity,” says Simon Garing, CEO of the manager.
According to him, the REIT manager will be able to book a profit of some EUR3 million from the discounted purchase price of the bonds.
He adds that the manager expects to finish the FY2023 ending Dec 31 with an aggregate leverage of 40%, which takes into account any “minor” moves expected from the December investment property valuations.
“Further planned asset sales in 2024 will also assist our liquidity management, which aims to keep CEREIT’s gearing in the 35% - 40% range,” says Garing.
“We acknowledge that CEREIT’s current 38% discount to net asset value (NAV) and 11.5% trailing distribution yield, notwithstanding the recent market rally, creates an impression of substantial valuation declines and significant reductions in distributions from the impact of transitioning to higher interest rates,” he adds. “In addition to being 91% hedged for next two years, the bond buyback should provide investors additional confidence in our capital management strategies and allow CEREIT to be well-placed for when the interest rate and real estate cycles turn.”
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
If the REIT had not repurchased the bonds, the excess cash would have been used to buy back equity, continues Garing.
“Once we progress further on the bond refinance strategy and see the asset valuation cycle turn more favourable, we could potentially use further asset sale proceeds for equity buybacks – noting we are not inclined to use expensive debt to fund equity buybacks,” he says.
“With European credit markets currently implying a 100-basis point rate cut by the European Central Bank (ECB) next year, we believe we are close to an inflexion point for listed REITs, he adds. “Underlying Europe property market occupancy fundamentals have remained very healthy: the pan-European logistics vacancy rate was a very low 2.6% at September 2023 while Grade A office market vacancies in CEREIT’s core cities also showed a very low 3.2%, with minimal new supply in both sectors. We believe S-REITs that manage this higher debt cost transition well will be better rewarded by investors when the sentiment becomes favourable for S-REITs again.”
As at 9.17am, units in CEREIT are trading 1 cent higher or 0.71% up at EUR1.41.
