CROMWELL EUROPEAN REIT (SGX:CNNU)
Cromwell European REIT - Emerging EU Logistics Play; Re-initiate Coverage With BUY
- Initiating coverage on Cromwell European REIT with a BUY recommendation and target price of EUR0.60.
- Exciting growth potential through Sponsor’s acquisition pipeline; EUR1bn data centre platform.
- Resilient financial performance underpinned by diversified portfolio and proactive realignment of assets.
- Potential index inclusion to drive a re-rating.
Cromwell European REIT - A unique European play listed on the SGX.
- Cromwell European REIT (SGX:CNNU) is the first S-REIT with a diversified pan-European portfolio and it is currently valued at ~EUR2.3bn. Its 107 properties are located in major gateway cities in the Netherlands, Italy, France, Poland, Germany, Finland, Denmark, the Czech Republic, and Slovakia. The portfolio consists of predominantly office and light industrial/logistics assets which make up ~57% and ~38% of total assets respectively. The remaining 5% of its portfolio include three government-let campuses, one leisure/retail property and one hotel in Italy.
Portfolio growth of ~70% in 3 years.
- Since its listing in November 2017, Cromwell European REIT’s portfolio has grown by ~70% (from EUR1.35bn at IPO). Cromwell European REIT’s portfolio breakdown by geography has grown from five nations to 10 currently. The Netherlands, Italy and France continue to be its three largest markets, making up ~68% of its portfolio. The Czech Republic and Slovakia are the newest markets Cromwell European REIT expanded into with the acquisition of 11 light industrial and logistics properties in March 2021.
Resilient financial performance underpinned by improved portfolio metrics.
- Despite the COVID-19 pandemic and resurgence of infections in Europe over FY20, Cromwell European REIT has been reporting a steady improvement in portfolio occupancy rates. Its current portfolio occupancy of 95.1% is the highest level achieved since its IPO (87.7%).
- Cromwell European REIT's portfolio WALE has also been maintained at a very healthy level of 4.9 years currently, a marked improvement from the low of 4.4 years in December 2019. Given its proactive lease management and portfolio repositioning with increasing exposure into the industrial / logistics space, we believe that Cromwell European REIT has successfully added new assets with healthy operational metrics that complement its portfolio, while divesting fully valued assets.
Proactive lease management complemented by long WALEs of various sub-markets.
- Although there was a slowdown in leasing activities in FY20, Cromwell European REIT has been proactively renewing leases that are expiring. Approximately 59% of lease expiries that were to be due in 1H21 have since been de-risked. Currently, only 8.1% of leases by WALE will expire in 1H21, while a further 7.6% of leases will expire in 2H21.
- Cromwell European REIT also benefits from a combination of long leases across the various markets, and this has enabled it to maintain a long portfolio WALE for its overall portfolio. In its office portfolio, Italy and the Netherlands have long WALEs of 5.9 years and 5.0 years respectively. Under its light industrial/logistics portfolio, Germany and France reported the longest WALEs of 5.8 years and 5.1 years respectively.
- Having a diversified portfolio of assets spread out across nine European nations, the longer office leases compensate for the inherently shorter light industrial/logistics leases.
Optimal gearing levels and well-staggered debt maturity profile.
- Gearing currently stands at ~38.1%, within the comfortable range of 35-40% which the Management has set. With the regulatory leverage limit of 50%, this implies that Cromwell European REIT will potentially have a further debt headroom of ~EUR550m. With all its borrowings denominated in Euros, Cromwell European REIT’s all-in interest rate stands at a very competitive 1.66%.
- Cromwell European REIT has been proactively transforming its debt structure over the past three years and ~91% of its debts are currently unsecured, compared to only 7% unsecured during IPO. Interest coverage ratio remains at a very healthy 6.4x with a weighted average term to maturity of 3.8 years.
A track record of capital recycling to enhance portfolio yield.
- Over the span of three years, Cromwell European REIT has successfully acquired 45 properties for a combined value of more than EUR880m. The assets were acquired at an attractive average NOI yield of 6.9% and have been accretive to its DPU. During the same period, Cromwell European REIT had also unlocked value for unitholders by divesting 13 properties for ~EUR85m.
- The divestments were done at an average of ~6.1% premium to carrying value (~EUR4.8m divestment gains), and 14.5% premium to purchase price. Divestment proceeds were recycled into higher yielding acquisitions in quick succession, and it helped negate the absence of income from the divested assets. This is evidence of Cromwell European REIT’s good track record in deal-making and ability to time its portfolio realignment efforts.
Alignment of interest and support from Sponsor.
- Cromwell European REIT’s Sponsor, Cromwell Property Group, is listed on the Australia Stock Exchange and has an AUM of A$11.5bn. The Sponsor’s established platform of 17 offices in 11 European nations complements Cromwell European REIT’s portfolio and provides it with on-the-ground market knowledge and expertise. In addition to providing Cromwell European REIT with an acquisition pipeline and access to off-market deals, the Sponsor has demonstrated its strong alignment of interest with the REIT by holding a 30.7% stake.
An emerging data-centre play.
- Most recently, the Sponsor entered into a strategic partnership with Stratus to invest in and manage rollout of a Europe and Asia Pacific private data centre investment fund. The fund is targeting an eventual gross asset value of over US$1bn, and Cromwell European REIT has been granted “first look” rights for 50% of the portfolio. In addition, the REIT has been given the option to acquire 50% stakes in two ongoing data centre projects in London and Frankfurt that are expected to be completed over the next two years.
Entry into the EPRA/NAREIT Developed Asia Index on the horizon.
- Following Cromwell European REIT’s latest private placement in March 2021, its market cap free float is now approximately EUR1.3bn. Given its improved trading liquidity as well, Cromwell European REIT is on track to be included in the EPRA/NAREIT Developed Asia Index. We believe that inclusion into the EPRA/NAREIT Developed Asia Index would put Cromwell European REIT on the radar of the large institutional funds and would lead to its re-rating. The index is reviewed after the end of each quarter in March, June, September and December.
Cromwell European REIT - Valuation
- We have assessed Cromwell European REIT’s fair value using the discounted cash flow valuation method (DCF). In our view, Cromwell European REIT benefits from its portfolio of different asset types that are well diversified across nine European markets. This diversification had paid off in FY20 as Cromwell European REIT’s earnings remained resilient despite the prolonged COVID-19 pandemic.
- The combination of its portfolio’s high occupancy rates and long WALE will provide for stable and visible income, and the triple-net and double-net leases will limit large fluctuations to its portfolio’s expenses. Leases with rental escalations and those that are index-linked provide organic growth for its portfolio. As such, we believe that the discounted cash flow method would be an appropriate valuation tool.
- Our DCF analysis has factored in a normalised risk-free rate of 2.5%, market return of 9.4%, beta of 0.80x, post-tax cost of debt of 2.0% and cost of equity of 8.0%. With an estimated gearing of ~38% (similar to current gearing levels), our WACC is 5.7%.
- Assuming terminal growth rate of 1.5%, we derive a fair value of EUR0.60 using DCF. This implies an annualised yield of 5.9% for both FY21F and FY22F.
- In terms of sensitivity to changes in terminal growth, Cromwell European REIT’s valuation is sensitive to changes in WACC. For every 1-ppt movement in WACC, our DCF valuation would move by ~12% while a 1-ppt shift in terminal growth would result in a ~34% shift in DCF value.
- See
- See the 25-page report attached below for complete analysis on Cromwell European REIT (SGX:CNNU).
Dale LAI
DBS Group Research
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Rachel TAN
DBS Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2021-05-03
SGX Stock
Analyst Report
3.00
SAME
3.00
