Cromwell European REIT: Recycling capital into higher-yielding developments
- Lower 1H23 DPU of 7.79 Ects mainly due to absence of capital gains distribution
- Positive rental reversions of +5.9% continuing to help partially offset higher borrowing costs
- Revised projections to account for absence of capital gains distribution and recent divestments
- Maintain BUY with revised TP of EUR2.00
Revenues and NPI were 0.9% and 1.8% higher y-o-y
- Higher revenues and NPI were due mainly to better performances in the light industrial/logistics (L/L) portfolio
- This was partially offset by weaker performance for the office portfolio along with the ongoing redevelopment of Nervesa 21 and Maxima (both in Italy)
- L/L portfolio’s better performance mainly came from the higher inflation indexation
- Weaker performance for the office portfolio was mainly due to the lease expiry at Maxima in December 2022 (currently under redevelopment)
- CERT acquired five L/L assets in Italy, Germany, and the UK in FY22
- Piazza Affari 2 was divested for EUR 93.6m on 28 June 2023
- Proceeds will mainly be used to repay loans
1H23 DPU of 7.79 Ects was 10.4% lower y-o-y
- Decline in DPU was mainly due to the absence of income from redevelopment (Maxima) as well as higher financing costs
- On a h-o-h basis, DPU was c.8.3% lower
- This was also a result of the lack of capital gains distribution in 1H23
- EUR 1.1m in capital gains was distributed in 1H22; accounted for c. 0.197 Ects to DPU
- CERT did not pay out capital gains distribution in 1H23 as they remained conservative due to weaker macro fundamentals and tighter credit markets
- EUR21m in capital gains remained at their disposal
- 1H23 DPU came in slightly below our estimates, accounting for c.45.6% of our FY23 DPU projections
Gearing inched up to 41.5%; but will improve to 39.5%
- Gearing inched up to 41.5% in 2Q23, 90bps higher q-o-q
- This was mainly due to a slight revaluation loss in portfolio
- Portfolio valuations were 1.6% lower compared to 31 December 2022
- Valuations were also down 3.2% y-o-y
- Lower valuations were mainly due to a c.3.9% decline for the office portfolio which was partially offset by the c.0.8% valuation uplift for the L/L portfolio
- Positive rental reversions due to inflation indexation and healthy leasing activities helped prevent further valuation decline; this was better than we had anticipated
- Overall portfolio cap rates expanded by c.74bps
- NAV declined slightly to EUR 2.30 per unit
- Gearing will improve to c.39.5% once sales proceeds from Piazza Affari 2 are used to repay its Revolving Credit Facility
- All-in interest rate of 2.85% was 15bps higher q-o-q
- Mainly due to higher 3M Euribor and Euro Short Term Rate
- Borrowing costs expected to continue creeping up due to higher interest rates and the recent refinancing of FY24 loans
- No debt expiring until November 2025 following refinancing
- 94% of loans remains hedged to fixed rates
- All-in financing costs expected to inch up to 3.0-3.1% by end-FY23
Revenues and NPI were 0.9% and 1.8% higher y-o-y
- Higher revenues and NPI were due mainly to better performances in the light industrial/logistics (L/L) portfolio
- This was partially offset by weaker performance for the office portfolio along with the ongoing redevelopment of Nervesa 21 and Maxima (both in Italy)
- L/L portfolio’s better performance mainly came from the higher inflation indexation
- Weaker performance for the office portfolio was mainly due to the lease expiry at Maxima in December 2022 (currently under redevelopment)
- CERT acquired five L/L assets in Italy, Germany, and the UK in FY22
- Piazza Affari 2 was divested for EUR 93.6m on 28 June 2023
- Proceeds will mainly be used to repay loans
1H23 DPU of 7.79 Ects was 10.4% lower y-o-y
- Decline in DPU was mainly due to the absence of income from redevelopment (Maxima) as well as higher financing costs
- On a h-o-h basis, DPU was c.8.3% lower
- This was also a result of the lack of capital gains distribution in 1H23
- EUR 1.1m in capital gains was distributed in 1H22; accounted for c. 0.197 Ects to DPU
- CERT did not pay out capital gains distribution in 1H23 as they remained conservative due to weaker macro fundamentals and tighter credit markets
- EUR21m in capital gains remained at their disposal
- 1H23 DPU came in slightly below our estimates, accounting for c.45.6% of our FY23 DPU projections
Gearing inched up to 41.5%; but will improve to 39.5%
- Gearing inched up to 41.5% in 2Q23, 90bps higher q-o-q
- This was mainly due to a slight revaluation loss in portfolio
- Portfolio valuations were 1.6% lower compared to 31 December 2022
- Valuations were also down 3.2% y-o-y
- Lower valuations were mainly due to a c.3.9% decline for the office portfolio which was partially offset by the c.0.8% valuation uplift for the L/L portfolio
- Positive rental reversions due to inflation indexation and healthy leasing activities helped prevent further valuation decline; this was better than we had anticipated
- Overall portfolio cap rates expanded by c.74bps
- NAV declined slightly to EUR 2.30 per unit
- Gearing will improve to c.39.5% once sales proceeds from Piazza Affari 2 are used to repay its Revolving Credit Facility
- All-in interest rate of 2.85% was 15bps higher q-o-q
- Mainly due to higher 3M Euribor and Euro Short Term Rate
- Borrowing costs expected to continue creeping up due to higher interest rates and the recent refinancing of FY24 loans
- No debt expiring until November 2025 following refinancing
- 94% of loans remains hedged to fixed rates
- All-in financing costs expected to inch up to 3.0-3.1% by end-FY23
Portfolio occupancy of 95.4% unchanged y-o-y; positive rental reversions of +5.9%
- 2Q23 portfolio occupancy was 95.4%, unchanged y-o-y
- Occupancy rate was 40bps lower q-o-q, mainly due to weaker occupancy rates for office portfolio
- Office portfolio occupancy rate declined 1.4pp, while L/L occupancy rate only fell marginally by 0.1pp
- Decline in office portfolio occupancy mainly due to divestment of Piazza Affari 2 (100% occupancy)
- Healthy rental reversions of +11.4% for L/L portfolio in 2Q23; average rental reversions for 1H23 were +6.9%
- Driven by inflation indexation and continued record low market vacancy of only 2.3%
- Office rental reversions were down slightly by -0.9% in 2Q23
- Average reversions for 1H23 still positive at +5.7%
- CERT is prioritizing tenant retention over higher rents as office market continues to face pressure from tenants downsizing
- Only 8.8% of portfolio leases remain to expire in 2H23
- Majority of expiries coming from the L/L portfolio
- 3% of L/L portfolio due to expire in 2H23, and 7.6% of office portfolio due to expire in 2H23
Portfolio repositioning ongoing; continues working on divesting lower yielding assets to fund redevelopments
- EUR 135m in asset divestments have been carried out in 1H23
- On track to divest a total of EUR 200m in FY23
- The c.EUR94m divestment of Viale Europa 95 in Bari expected to complete by November/December 2023
- Divestments were carried out at a c.5.4% premium to valuations
- Two ongoing redevelopments at Nervesa 21 and Maxima
- Nervesa 21 expected to complete in 1Q24 with a pre-commitment of c.70%
- Maxima redevelopment expected to complete in FY25
- Expansion of Lovosice ONE Industrial Park was completed in July 2023
- 46% of the property has been pre-let
- CERT expects full occupancy by end of FY23
Our thoughts
The slight miss in our DPU projections was mainly due to the absence of capital gains distribution in 1H23 (c.EUR 1.1m in capital gains was paid out in 1H22). Although management had previously guided on the use of capital gains distribution to offset income from assets undergoing redevelopment, we understand that they are now adopting a more conservative approach due to macro-economic uncertainties and tight credit market. Having said that, management will continue to consider the use of capital gains distribution to offset the absence of income from ongoing redevelopments.
On the operational front, CERT’s office portfolio continues to see headwinds from economic uncertainties, especially for its assets in Finland, France and Poland. However, their pivot to L/L over the past three years has certainty helped create some stability in earnings and occupancy rates. The L/L portfolio has been outperforming and enjoying strong occupancy rates with double-digit positive rental reversions. On the capital management front, rising interest rates continue to be a concern as it erodes higher revenues. However, CERT has now hedged c.94% of its entire loan books to fixed rates and they will not have any refinancing due until November 2025.
We have revised our projections to consider higher financing costs, absence of income from redevelopments and divestments, and the removal of capital gains distribution gains in FY23. This has led to a c.8.8% cut in our FY23 DPU estimates, and a resumption of the capital gains distribution will be an upside to our revised estimates.
Looking ahead, the redevelopment of Nervesa 21 is on track for completion in 1Q24, and the high pre-commitment rate of c.70% will drive organic income growth. For CERT’s redevelopment of Maxima, the pending divestment of Viale Europa 95 in Bari is expected to complete in 4Q23, and will provide additional debt headroom for CERT as it enters Phase 2 of the redevelopment.
Although our revised DPU estimates have led to a slightly lower TP, we continue to remain positive on CERT as we look forward to the completion of Nervesa 21, and the continued resilience of their overall portfolio. Over the medium-term, the redevelopment of Maxima will drive further organic income growth, while the divestments of lower yielding assets will enable CERT to fund these projects and maintain their capital management metrics. From a valuation perspective, CERT is currently trading at a very attractive forward yield of more than 10%, and we believe the stabilization of interest rates and further improvement in its gearing (through divestments) will drive a re-rating in its share price.
We will be maintaining our BUY recommendation with a revised TP of EUR2.00.
FY Dec | 1H2022 | 2H2022 | 1H2023 | % chg y-o-y | % chg h-o-h |
Gross revenue | 107 | 115 | 108 | 0.9 | (5.5) |
Property expenses | (40.1) | (45.2) | (39.8) | (0.7) | (12.0) |
Net Property Income | 67.3 | 69.5 | 68.5 | 1.8 | (1.3) |
Other Operating expenses | (6.5) | (7.8) | (4.6) | (29.7) | (41.7) |
Other Non Opg (Exp)/Inc | 6.84 | 9.50 | (1.0) | - | - |
Associates & JV Inc | 0.0 | 0.0 | 0.0 | - | - |
Net Interest (Exp)/Inc | (10.4) | (14.0) | (15.7) | (50.6) | (12.7) |
Exceptional Gain/(Loss) | 0.0 | 0.0 | 0.0 | - | - |
Net Income | 57.2 | 57.2 | 47.3 | (17.4) | (17.3) |
Tax | (9.9) | (3.9) | 2.29 | - | - |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 47.4 | 53.3 | 49.6 | 4.7 | (7.0) |
Total Return | 53.1 | (11.2) | (15.6) | - | 39.1 |
Non-tax deductible Items | (3.1) | 60.1 | 60.5 | - | 0.7 |
Net Inc available for Dist. | 49.1 | 47.8 | 44.0 | (10.4) | (7.8) |
Ratio (%) |
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Net Prop Inc Margin | 62.7 | 60.6 | 63.3 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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