RHB Bank Singapore analyst Vijay Natarajan is keeping “buy” on Cromwell European REIT (CEREIT) at an unchanged target price of EUR2.15 ($3.13), despite the REIT’s sharp decline in its unit price of over 12% in the past month. The decline in the prices of CEREIT’s units came amidst broader selldowns across Singapore REITs (S-REITs) with overseas properties.
Natarajan’s target price includes a 4% environmental, social and governance (ESG) premium based on RHB’s in-house methodology.
“We believe this sell-down is unjustified considering CEREIT’s strong operational performance track record, highly hedged debt position, and more importantly, ability to divest assets despite challenging a market,” writes Natarajan.
In his Sept 20 report, the analyst believes the REIT’s well-diversified European portfolio with minimal tenant concentration risks mitigates potential downsides.
He observes: “We find valuations compelling at an over 40% discount to book and offering around 12% yields.”
The analyst is also positive about CEREIT’s operational metrics, noting that its portfolio occupancy for the 1HFY2023 ended June 30 stood at 95.4%. To this, he points out that the REIT’s occupancy rate has been “steadily trending up” from below 90% to steadying at above 90% since the REIT’s IPO at the end of 2017, despite challenges from the Covid-19 pandemic and high interest rates.
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“We attribute this to the REIT’s strong and knowledgeable local ground team, pivot to the industrial logistics sector, and proactive asset enhancements and divestments,” writes the analyst.
Rent reversions have similarly remained positive since 2HFY2018 and is expected to remain so based due to the under-rented nature of CEREIT’s assets and higher reversionary yields. To be sure, CEREIT also reported a positive rental reversion of 5.9% in the 1HFY2023.
Meanwhile, gearing looks to be comfortable at around 38%, due to divestments by the REIT.
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Despite a challenging investment landscape, CEREIT completed the divestment of Piazza Affari 2 earlier this year for EUR94 million ($136 million) following six non-core divestments worth EUR135 million last year.
The REIT is also currently in the process of divesting Europa 95 in Bari, Italy, for around EUR94 million, which translates to a 28% premium to the asset’s latest valuation.
Proceeds from the divestments will be used to repay debts and fund the redevelopment of two assets.
The first, Via Nervasa 21, has achieved 70% in pre-leases and is on track for completion by 1QFY2024, whilst Maxima in Rome is slated to commence redevelopment next year.
Natarajan writes: “We like CEREIT’s value-add strategy of recycling capital internally via non-core divestments and strengthening core assets at a time when the external funding environment remains challenging.”
On the debt front, the REIT recently increased its debt hedge by 10 percentage points (ppts) to 94%, until the end of 2024, with no debt maturity until November 2025.
The analyst observes that this “shields” CEREIT from prolonged higher interest rates, likely allowing interest costs to lay in the low 3%.
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Therefore, Natarajan’s estimates have no material changes, as the analyst presently assumes EUR3.5 million in divestment gains distribution for FY2023.
Key drivers to a re-rating of CEREIT’s unit price include its diversified European portfolio of which nearly half are in the resilient logistics and light industrial sectors, rental uplift from inflation-like escalations, as well as active capital recycling, hands-on investment and the REIT’s property teams in individual markets.
Conversely, key risks noted by Natarajan include a weakening Eurozone macro outlook and deep recession, an increase in potential tenant defaults and slowdown in rent collections, and lastly a continued rise in interest rates, impacting borrowing costs and reducing yield spreads.
As at 2.25pm, units in CEREIT are trading at three cents lower or 2.29% down at EUR1.28.
