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Cromwell REIT thrives on in-depth local industry knowledge in 19 European cities

Emelia Tan
Emelia Tan • 8 min read
Cromwell REIT thrives on in-depth local industry knowledge in 19 European cities
Cromwell REIT thrives on its in-depth local industry knowledge
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SINGAPORE (May 29): Cromwell European REIT (CEREIT) invests in a diversified portfolio of income-producing real estate assets in Europe primarily used for office, light industrial/logistics, and retail purposes. It has properties in seven major gateway cities and is the first REIT with a diversified pan-European portfolio to be listed on the Singapore Exchange. Its sponsor, Cromwell Property Group, is listed in Australia and a real estate investor and manager with operations in 15 countries.

How has the portfolio of CEREIT evolved since its IPO?

Our portfolio has grown by more than 50% by asset value since IPO. We enhanced our risk-return profile by adding 33 high-quality assets, while divesting 13 non-core ones. Our portfolio is now more resilient, with stability and long WALE provided by the office sector and growth offered by the light industrial/logistics sector, while remaining well-diversified across seven European countries. We target accretive high-quality assets in strategic, “on-theme” cities and markets. Our focus remains primarily on office and light industrial/logistics assets with at least a 75% weighting to Western Europe.

Can you share more about your investment and divestment strategy?

In March, we completed the divestment of 12 light industrial/logistics properties in the Netherlands, France and Denmark at a 4.1% premium above valuation and a 15.2% premium above our purchase prices. We also completed the acquisition of three German light industrial/logistics assets and initiated the acquisition of a fourth which was acquired 50% below replacement cost excluding land.

Our long-term strategy is to acquire and manage “core +” and “value add” European commercial assets in “on-theme” markets. We employ a “barbell approach”, balancing the growth potential of our light industrial/logistics properties with stability and security of the long leases provided by our office properties.

CEREIT has outperformed two years of its IPO forecasts and reported 1Q DPU largely in-line, what is management’s guidance for the coming FY?

Management reported DPU for 1QFY2020 ended March to be broadly in line with DPU for 1QFY2019 on a like-for-like basis. CEREIT will continue to pay its DPU to unitholders on a six-monthly basis. The distributable income and distribution payout ratio for 1HFY2020 will only be confirmed after 2QFY2020.

It is difficult to fully quantify the impact of Covid-19 on the REIT’s full-year earnings at this point. That said, we are maintaining close to full occupancy and agreeing to only a few alterations to lease terms. We are mindful that a number of our tenant-customers are facing difficulties that cloud their outlook for the year. Hence, we are taking measured steps to protect income streams, conserve cash and reduce costs.

Management remains very optimistic on the REIT’s long-term value proposition.

What is the impact on your tenants and on your rent collections from the Covid-19 pandemic?

As at end April, tenant-customers representing approximately 15% of yearly headline rent have requested reprofiling of rental payments (change from quarterly to monthly rent payments, rent deferrals and abatements). About 10% of our yearly headline rent comes from leases to small and medium enterprises that have been more affected by lockdown measures.

There are currently no specific government decrees in our countries of operations that allow rent deferrals or rent waivers, apart from a few instances in Italy around hotels and cinemas. Our Starhotels Grand Milan and cinema-anchored retail asset near Milan remain closed since Feb 24 and we have submitted a claim on the REIT’s virus event insurance for loss of rent from these and other smaller Italian tenant-customers.

To date, we have agreed to only EUR236,000 ($366,723) in rent abatements, with all respective tenant-customers either agreeing to early lease renewals or to the removal of one to three-year lease breaks, thus improving CEREIT’s WALE.

What is your view on Europe’s macroeconomic outlook given ongoing global challenges? How will CEREIT position itself then?

Like the rest of the world, Eurozone’s economy is also impacted by Covid-19 and Oxford Economics is expecting 2020 GDP to be negative 7.6%. The month of May saw the easing of many lockdowns, albeit gradual, and activity should start to slowly recover in 3QFY2020.

In the immediate term, management remains focused on preserving unitholder value, ensuring appropriate levels of cash and stewarding our operations. We have reduced non-essential capital expenditure and rolled over some projects to 2021. We are also actively exploring capital recycling opportunities to reduce risks and reinvest into new value adding opportunities, especially in the logistics sector. We are also closely monitoring other global concerns including the US-China trade tensions and Brexit in order to respond accordingly.

What are some of the risks and how do you manage them?

Liquidity risk: Many companies are currently facing cash squeezes. To that end, we have drawn down on our revolving credit facility of EUR150 million and currently sit on EUR230 million in cash to tide us through this period.

Regulatory risk: We maintain a conservative internal gearing ceiling of 40%, 5% below the regulated gearing limit of 45% for Singapore-listed REITs (S-REITs) and 10% below the new ceiling of 50%.

Tenant risk: Government shut-down measures have affected businesses, including our tenants’ ability to pay rents or stay solvent. CEREIT has recourse to insurance for force majeure cases.

Debt servicing risk: Our interest coverage ratio is 8.6 times, with 100% of debt hedged at 1.5% p.a.

Refinancing risk: Our portfolio has staggered debt expiries with no more than 48% of debt expiring in any one year.

How does the sponsor, Cromwell Property Group, play a role in your operations?

We leverage on our sponsor’s extensive on-theground pan-European platform, comprising more than 200 people in 19 European cities for in-depth local industry knowledge, disciplined research analysis, as well as strong pipeline sourcing and execution capabilities to identify accretive off-market deals that are below current valuations. The local teams are also experienced in executing proactive lease extension, asset enhancement and repositioning strategies for the REIT’s assets, resulting in higher asset valuations and positive rent reversion.

Why do you think investors should not overlook Europe as a key property market?

Europe offers higher and more attractive risk premiums (5.1% to 5.9%), compared to Singapore (4.0%) and Hong Kong (2.3%). It also has significantly cheaper capital values in the office and industrial sector. According to Real Capital Analytics and prior to the Covid-19 pandemic, prime office property in Hong Kong cost EUR21,000 per sq m vs. EUR5,700 per sq m in France and EUR4,100 per sq m in Germany.

In addition, prime office property in Paris and Amsterdam are supported by low vacancy rates (<2%) with a shortage of available space in the older heritage districts, thus creating increasing interest in the suburbs, which is where CEREIT has property in. Sustainability and Environmental, Social and Governance (ESG) have increasingly been a key focus, how is CEREIT committed to sustainability? Market-leading ESG practices are at the core of our business. Guided by our sponsor’s sustainability framework, we have sustainability commitments and targets for each of the five pillars of the framework. Our senior management team’s KPIs are also closely tied to these targets. We also participate in the annual GRESB assessment, receiving a score of 67 points in 2018, 43% higher than our inaugural score in 2017. What is CEREIT’s value proposition and what do you think investors may have overlooked about its business? CEREIT offers investors exposure to a diversified pan-European portfolio, managed by experienced asset management teams, who live and work in the cities that the REIT has assets in. Investors may note that there is no other S-REIT has our level of geographical diversification. Additionally, our management teams, unlike other S-REITs with European exposure, are based on-the ground in Europe. We believe that having local expertise gives us an operating edge over other S-REITs. E Emelia Tan is a research analyst with the Singapore Exchange><2%) with a shortage of available space in the older heritage districts, thus creating increasing interest in the suburbs, which is where CEREIT has property in.

Sustainability and Environmental, Social and Governance (ESG) have increasingly been a key focus, how is CEREIT committed to sustainability?

Market-leading ESG practices are at the core of our business. Guided by our sponsor’s sustainability framework, we have sustainability commitments and targets for each of the five pillars of the framework. Our senior management team’s KPIs are also closely tied to these targets.

We also participate in the annual GRESB assessment, receiving a score of 67 points in 2018, 43% higher than our inaugural score in 2017.

What is CEREIT’s value proposition and what do you think investors may have overlooked about its business?

CEREIT offers investors exposure to a diversified pan-European portfolio, managed by experienced asset management teams, who live and work in the cities that the REIT has assets in.

Investors may note that there is no other S-REIT has our level of geographical diversification.

Additionally, our management teams, unlike other S-REITs with European exposure, are based on-the ground in Europe. We believe that having local expertise gives us an operating edge over other S-REITs.

Emelia Tan is a research analyst with the Singapore Exchange

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