Cromwell European REIT - DBS Research 2018-05-11: Just Warming Up

Cromwell European REIT - DBS Vickers 2018-05-11: Just Warming Up CROMWELL EUROPEAN REIT SGX: CNNU

Cromwell European REIT - Just Warming Up

  • Cromwell European REIT (CEREIT)'s maiden DPU ahead of expectations by c.3.%. 
  • Occupancies tracking higher than expected with 4% uplift in property values. 
  • Factoring in inorganic growth strategy to accelerate growth ahead. 

Leveraged to an improving Europe.

  • We maintain our BUY call on Cromwell European Real Estate Investment Trust (CEREIT) with a revised Target Price of EUR0.66. 
  • We continue to be bullish on CEREIT’s prospects, given expectations of rising rents on the back of an improving European economy as well as benefits from having inbuilt rental escalations in the majority of its leases. 

Where we differ – Upside from acquisitions.

  • Compared to consensus we have a higher Target Price as we have priced in a EUR238m acquisition and EUR150m equity raising. 
  • Our confidence in CEREIT delivering on DPU accretive acquisitions is due to the strong investor support as seen by the 10% share price rally since its listing and its Sponsor, Cromwell Property Group’s (CPG) expertise. Beyond CPG’s over 15 years of experience in Europe, it has a key advantage of having “on the ground” presence in CEREIT’s key European markets. 
  • Our confidence in CPG’s capability is also underscored by ARA Asset Management a well-known real estate fund manager, effectively giving the “stamp of approval” by taking a 19.5% interest in CPG. 

Delivery of IPO forecasts.

  • We believe CEREIT delivering or exceeding its IPO forecasts will provide assurance over management’s ability to manage its portfolio, as well as supporting the theme of rising rents on the back of an improving European economy. 
  • In our view, this would act a rerating catalyst for the stock. 


  • After incorporating an acquisition and equity raising which is 2% DPU accretive, we raised our DCF-based Target Price to EUR0.66 from EUR0.63. 

Key Risks to Our View: 

  • The key risk to our view is lower-than-expected rental income, arising from loss of tenants or slower upturn in rents/inflation. 

WHAT’S NEW - Out of the blocks

Beats IPO forecasts

  • Cromwell European REIT (CEREIT) reported its maiden results with its initial DPU for period between 30 November 2017 to 31 March 2018 coming in at 1.45 EURcts. This was c.3% above our and IPO forecasts.
  • The stronger than expected results were mainly driven by better overall portfolio occupancy of 89.6%. This compares to the original guidance of 88.8% occupancy for the last month of 2017 and 90.0% for the whole of 2018.
  • Excluding, contribution for December 2017, 1Q18 DPU (1 January to 31 March 2018) of 1.04 EURcts would have been in line with expectations, representing c.24% of our FY18F DPU.

Revenue and NPI also exceeds guidance

  • On the back of the higher occupancies predominantly within the light industrial/logistics portfolio, revenue and NPI for the period 30 November 2017 to 31 March 2018, exceeded IPO projections by 0.8% and 3.5% respectively, coming in at EUR41.0m and EUR27.0m.
  • Occupancy for the light industrial/logistics portfolio was at 85.4% at end 31 December 2017, versus IPO guidance of 84.2%. Occupancy has since been maintained at 85.3% for 1Q18 versus IPO guidance of 85.6%. The uplift was predominantly driven by higher occupancies in Germany and Netherlands of 87.4% and 90.7-92.7% versus prior guidance of 83- 84% and 84-85% respectively. Partially offsetting the uplift from Germany and Netherlands was a fall in occupancy for the Denmark portfolio to 76.1% due to the loss of two tenants, but Denmark only represents c.7% of the overall group 1Q18 NPI.
  • The office portfolio disappointed with occupancy down around 100bps compared to the prospectus. Occupancy at end 31 December 2017 and 31 March 2018 stood at 94.9% and 96.3% compared to IPO forecast of 95.9% and 97.4% for December 2017 and the whole of FY18. Nevertheless, there was a sequential improvement in occupancy.

Flat to slightly positive rental reversions

  • We understand since listing, CEREIT has been able to achieve flat to slightly positive rental reversions for leases renewed. For vacant space, it has been able to achieve 5% higher rents compared to the estimated rental value (ERV). ERV is essentially the spot market rent value of the property.
  • Following the renewals, around 14.7% and 11.7% of leases by the next permissible break date are due in FY18 and FY19.

Increase in property valuations

  • CEREIT reported that its property values have since risen by 3.9% since IPO, largely due to closing the 2.4%discount to the purchase consideration to the original appraised value at IPO. The additional valuation uplift is mainly due to slight compression in cap rates of around 10-15bps. However, there was a 1% decline in the value of the Italian portfolio owing to a small expansion in cap rates for certain assets.
  • On the back of the higher property values, gearing fell to 35.1% from 36.8% as per the IPO prospectus. However, on the back of CEREIT’s AEI plans and proposed acquisition of an office property in Italy, we believe CEREIT’s gearing will stabilise around the 36- 37% level.
  • NAV now stands at EUR0.559 per unit, up 5% compared to IPO forecast of EUR0.532.
  • We understand effective borrowing costs came in at around 1.44% and after accounting for the debt fees, CEREIT’s debt cost is around the 2% level as per IPO guidance. Around 79.5% of the trust’s borrowing costs are fixed.

Raising DPU estimates on acquisitions

  • CEREIT announced that it plans to purchase an office building in Ivrea, Italy for EUR16.9m on a net initial yield of (gross rent/purchase price) of 8.4% and NPI yield of around 7.4%. The freehold property has a weighted average lease expiry of 11.2 years (c.5.2 years to break). The property has two tenants with the anchor tenant being Vodafone Italia. The acquisition is expected to be completed by end June.
  • Beyond this acquisition, we also believe given the strong rally in CEREIT’s share price since listing, CEREIT has the necessary investor support to pursue a larger inorganic strategy. Thus, we have priced in a EUR238m acquisition on an 6.5% NPI yield at the beginning of FY19, partially funded with a EUR150m equity raising at EUR0.59 per unit.
  • On the back of incorporating these two acquisitions we raised our FY18-20F DPU by 1-2%. 
  • Given the DPU accretion we also raised our DCF based Target Price to EUR0.66 from EUR0.63.

Maintain BUY, revised Target Price of EUR0.66

  • Maintain our BUY call on CEREIT with a revised Target Price of EUR0.66.
  • We believe CEREIT offers investors a unique opportunity to gain exposure to the improving office and light industrial markets in Europe combined with an attractive 7.1% yield.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | 2018-05-11
SGX Stock Analyst Report BUY Maintain BUY 0.660 Up 0.630