Pivot to logistics has paid off
- FY21 NPI increased 10.9%, mainly due to industrial/logistics acquisitions valued at EUR212.6m during the year
- Positive rental reversions of 5.0% despite some pressure on office occupancies
- Some disruption to earnings in the near term due to ongoing portfolio repositioning; earnings to rebound in FY23
- Maintain BUY with a revised TP of EUR2.80
Investment Thesis:
Diversified portfolio in European gateway cities. Cromwell European REIT (CERT) is a fast-growing Pan-European S-REIT with a diversified portfolio of office, industrial, and logistics assets valued at more than EUR2.5bn. CERT has been an active asset recycler, driving portfolio yields and optimising returns to unitholders. CERT is currently repositioning its portfolio and pivoting towards more light industrial/logistics exposure.
Resilient financial performance amid COVID-19. CERT has weathered the COVID pandemic well in our view, reporting resilient occupancies and achieving positive rental reversions. Although the office portfolio is facing some near-term headwinds, there are plans in place to reposition some of the older properties and carry out AEIs and redevelopment work to prepare for the economic rebound and long-term growth.
Emerging logistics play. We remain excited about the management’s pivot to the industrial/logistics sector, which accounted for c.53% of assets as of February 2022. The REIT continues to increase exposure in this fast-growing subsector, and we believe this strategy will drive a further compression in yields for the stock.
Valuation:
Our target price of EUR2.80 is based on DCF valuation with a WACC of 5.7% (risk-free rate of 2.5%). This implies a target yield of 6.1% and a P/NAV multiple of 1.1x.
Where we differ:
CERT is gradually emerging as a logistics play with its pivot towards greater portfolio exposure in the industrial/logistics segment. We believe this could drive a further compression in its yield.
Key Risks to Our View:
The key risk to our view is lower-than-expected rental income arising from loss of tenants or slower upturn in rents/inflation.