Cromwell European REIT - Pivot To Logistics Has Paid Off
- Despite the prolonged COVID-19 pandemic, Cromwell European REIT (SGX:CWBU) was able to report a relatively resilient set of results. Its pivot towards more light industrial/logistics assets has enabled it to offset some of the weaknesses felt in its office portfolio. In FY21, light industrial/logistics acquisitions to the tune of EUR212.6m were done on a blended NOI yield of 6.3%, which is very attractive, given how cap rates for logistics properties have compressed significantly over the past two years.
- We believe that its office portfolio will likely face further pressure as tourism in Europe remains muted and businesses continue to rationalise their space as they shift towards more work-from-home arrangements. However, we understand that Cromwell European REIT is actively working on repositioning some of its office assets and undertaking AEIs and redevelopment work at some of the underperforming properties. The office portfolio is likely to see further headwinds until at least the second half of FY22.
- While Cromwell European REIT continues its pivot towards more light industrial/logistics exposure, we expect to see further divestments of low-yielding assets and those which are fully valued. This repositioning of its portfolio will likely lead to some near-term disruptions to earnings, before seeing a pick-up by FY23.
- Over the past month, Cromwell European REIT has divested a warehouse unit in Italy for a consideration of EUR2.8m, and subsequently completed the acquisition of another light industrial/logistics property in Italy for EUR24.5m. The absence of income from the redevelopment of Via Nervesa 21, and another two potential redevelopments will also cause a near-term disruption to its earnings. As such, we have moderated our earnings estimates for FY22 to account for these earnings disruptions, before projecting a rebound from FY23 onwards.
- Moreover, we have also taken a more conservative approach in our valuations by assuming that long-term borrowing costs inch up to ~2.0%.
- Although we remain positive about Cromwell European REIT given its relatively resilient earnings, we revised our projections to take into account near-term earnings disruptions and adjust its WACC to 5.7%, as a result of the rising interest rate environment.
- With our revised projections, we expect Cromwell European REIT's FY22 DPU to remain relatively flat before staging a rebound of ~2.3% in FY23.
- Based on the higher WACC, our revised target price of EUR$2.80 for Cromwell European REIT implies an attractive target yield of ~6.1%. As such, we maintain our BUY recommendation on Cromwell European REIT.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-02-24 2022-02-24
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