Cromwell European Real Estate Investment Trust Outperforms IPO Forecast Again
Listed in November 2017, Cromwell European Real Estate Investment Trust (SGX: CNNU), or CEREIT for short, has a portfolio of 75 predominantly office and light industrial properties located in the Netherlands, France, Denmark, Germany and Italy. It is sponsored by its namesake, Cromwell Property Group, which is listed in Australia.
The REIT has been delivering better than expected performances over the course of its short history as a listed REIT. Here are the key takeaways from its 2018 third-quarter results.
The raw numbers
1. Gross revenue of €31.5 million beat initial public offering (IPO) forecast by 1.6%.
2. Net property income of €21.5 million was 6.9% higher than IPO forecast.
3. Distributable income of €17.1 million was in line with forecast.
4. Distribution per unit (DPU) for the 10-month period since IPO exceeded forecast by 1.9%, coming in at 3.61 Euro cents.
5. Gearing ratio was reduced by 1.9 percentage points to 34.9% as of 30 September 2018.
6. The REIT’s cost of debt was 1.57% per annum and interest coverage was 9.2 times.
7. Net tangible asset per unit was 55.3 Euro cents and net asset value per unit stood at 54.2 Euro cents.
What’s behind the numbers?
The better-than-expected results were largely due to strong performance from its Pan-European light industrial portfolio which generated €2.5 million more in net property income than initially expected. Notably, its portfolio in France and the Netherlands did particularly well.
The REIT manager’s chief executive, Simon Garing, commented, “We have now outperformed forecast in all three reporting periods since CEREIT’s listing.”
In addition to its strong operating performance, the REIT also has a healthy financial position with a low gearing of 34.9%, affording it debt headroom for acquisition growth. Its interest cover (a measure of how easily it can pay off interest expense with income) also remains very comfortable at 9.2 times.
Solid portfolio statistics
The REIT’s 75 properties had an overall occupancy rate of 89.6%, up 1.9 percentage points from when the REIT initially listed. It has a weighted average lease expiry of 4.9 years. This is long, in my view, and provides stable rental income. In addition, 88% of the REIT’s land is freehold, which is a big plus for its long-term stability.
With such a large portfolio of properties, the REIT rental income is also well-diversified. The chart shows the rental income by trade:
Source: Cromwell European Real Estate Investment Trust 2018Q3 Earnings Presentation
The REIT is also actively managing its portfolio by upgrading five properties in its office sector and six of its properties in the light industrial sector.
Looking for acquisitions to drive growth
Acquisitions are one way that a REIT can increase its DPU to unitholders. Cromwell European REIT looks like it’s not wasting any time in trying to expand its portfolio in a way that can benefit unitholders.
It is only 10 months as a listed REIT and already, the REIT is looking to make a major acquisition. The acquisition proposal is of three portfolios with a total of 23 properties across five countries in Europe.
The manager has proposed the acquisition at a consideration price of €384.4 million, with an initial yield of 6.4%. The REIT is looking to fund the acquisition via debt and fully underwritten renounceable rights issue of €224.1 million
The acquisition will bring its total portfolio count to 98 and importantly for unitholders, management has said that it expects the acquisition to be earnings accretive.
There is also room to increase the target portfolio’s yield from potentially higher occupancy and rental rates. CEREIT’s sponsor, Cromwell Property Group, has an “on-the-ground” team that can drive improved operating and financial performance and has a track record of enhancing value through asset enhancement initiatives.
The Foolish bottom line
Cromwell European REIT has delivered a strong set of results for the quarter and for the first 10 months since going public. Moreover, there seems to be good reason to believe that its future continues to look bright. The REIT’s manager is focused on improving the performance of its portfolio through inflation-linked leases and active asset enhancement projects, while also keen to grow its asset base through acquisitions that can be earnings accretive for unitholders. Based on what management has said so far on the target portfolios, the new properties should benefit unitholders and drive DPU growth over the long-term.
At the time of writing, units of Cromwell European REIT exchanged hands at S$0.51 per unit, giving a price-to-book ratio of 0.94 and an annualised distribution yield of 8.5%.