Cromwell European REIT - DBS Research 2018-08-14: On Track To Outperform

Cromwell European REIT - DBS Group Research 2018-08-14: On Track To Outperform CROMWELL EUROPEAN REIT SGX:CNNU

Cromwell European REIT - On Track To Outperform

  • 2Q18 DPU of 1.08 EURcts in line with expectations. 
  • Cromwell European REIT on track to exceed its IPO forecasts. 
  • In-line rental escalations offset marginal drop in occupancy. 
  • Potential decision by French government not to acquire part of Parc Des Docks provides an opportunity to lift occupancy and rents. 

Leveraged to an improving Europe.

  • We maintain our BUY call on Cromwell European Real Estate Investment Trust (CERT) with a Target Price of EUR0.66.
  • We continue to be bullish on Cromwell European REIT’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.

~ SGinvestors.io ~ Where SG investors share

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 Cromwell European REIT 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 Cromwell European REIT’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 Cromwell European REIT 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 re- rating catalyst for the stock.


  • We maintain our DCF-based Target Price of EUR0.66. 
  • With total return exceeding 15% over the coming year, we retain our BUY call.

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 - Steady performance

2Q18 DPU in line with expectations but on track to exceed IPO forecasts

  • Cromwell European REIT delivered 2Q18 DPU of 1.08 EURcts. This translates into 1H18 DPU of 2.12 Scts which represents c.49% of our FY18F DPU and is in line with our expectations.
  • However, for the period between 30 November 2017 to 30 June 2018, Cromwell European REIT delivered a DPU of 2.53 Scts which exceeded IPO forecasts by c.3% mainly due to stronger occupancies for the last month of 2017 of 89.6% versus prior guidance of 88.8%. Thus, Cromwell European REIT remains on track to exceed its IPO forecasts.

5% sequential improvement in revenue and NPI

  • On the back the inbuilt rental escalations typically pegged to inflation, Cromwell European REIT’s 2Q18 revenue and NPI improved 5% q-o-q to EUR31.8m and EUR20.7m respectively.
  • Over the quarter, Cromwell European REIT also marginally benefitted from the acquisition of an office building in Ivrea, Italy which was only completed on 27 June 2018.
  • The sequential uplift was despite occupancies generally being softer. Occupancy for the office portfolio stood at 96.1% down from 96.3% at end-March 2018. An increase in occupancy in Italy (98.3% vs. 97.2%) helped offset the decline in the Netherlands (94.3% versus 95.7%). Going forward, while there are some planned vacancies in the Netherlands portfolio (CB&I planning to vacate further space in December), Cromwell European REIT remains hopeful of maintaining current occupancy levels given refurbishment works at the Blaak property.
  • Meanwhile, occupancy for the industrial portfolio was weaker at 83.8% down from 85.3% at end-1Q18. This is largely attributed to loss of tenants in Germany and Denmark which resulted in occupancy hitting 80.7% and 73.6%, down from 87.4% and 76.1% respectively. Nevertheless, occupancies at the core French and Netherland portfolio remain healthy at 86.3% (85.5% at end-1Q18) and 93.3% (92.0% at end-1Q18).

Negative rental reversions in the office portfolio with improvement in the industrial portfolio

  • Over the quarter, Cromwell European REIT reported 2% negative rental reversions, which is largely a function the signing of a new lease with Coolblue. However, we understand, offsetting the lower near-term signing rents was the ability to sign a long lease of 7.5 years.
  • Post the renewals, the office portfolio has significantly been de-risked with 82% of expiries and breaks in FY18 (6.4% of leases) having been extended. For FY19, Cromwell European REIT has minimal offices leases up for renewal (0.2% of leases).
  • Meanwhile, on a positive note, the industrial portfolio achieved 1% positive rental reversions over the quarter which was mainly driven by higher signing rents in France.
  • Likewise, risk surrounding the industrial lease has also been reduced with 66% of 19.7% of leases having been extended. Heading into FY19, 25.2% of leases are due for renewal.

Reduction in payment for Parc Des Docks reduces gearing

  • Following negotiations with the vendor of Parc Des Docks, Cromwell European REIT will now pay a lump-sum payment of EUR6m rather than initially agreed deferred consideration of c.EUR12m in light of the French government potentially no longer acquiring part of the property.
  • The result is an uplift in overall portfolio valuation by EUR6m and aggregate leverage falling to 33.9% from 35.1%. Net asset value per unit now also stands at EUR0.57, an increase from EUR0.559 in the previous quarter.
  • Another positive from the French government potentially not acquiring part of Parc Des Docks is the ability to improve occupancy from the current 87.4% level and to raise rents by double digits. Occupancy and rents have somewhat been depressed given the uncertainty over the French government’s decision.
  • Meanwhile, Cromwell European REIT’s effective borrowing costs remain relatively stable at 1.46% with the proportion of fixed rate debt improving to 85.4% from 79.5% at the end of 1Q18.

Supportive market fundamentals

  • Based on various property consultant reports and data, rents in Cromwell European REIT’s key markets are generally expected to be stable if not on an uptrend.
  • This, combined with rents pegged to inflation, underpins a steady improvement in DPU going forward.

Maintain BUY, revised Target Price of EUR0.66

  • With 2Q18 results in line with expectations and the stock offering a total return exceeding 15% over the coming 12 months, we maintain our BUY call with a Target Price of EUR0.66.
  • In our view, Cromwell European REIT offers investors a unique opportunity to gain exposure to the improving office and light industrial markets in Europe combined with an attractive yield.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-08-14
SGX Stock Analyst Report BUY Maintain BUY 0.660 Same 0.660