Results First Take: Light Industrial and Logistics assets continue to power ahead
- Performance in line with expectations; portfolio occupancies remained resilient and rental reversions continued on an up trend
- Key positives: i) continued pivot towards logistics with the EUR68.3m acquisitions in Italy and Germany, ii) development at Lovosice ONE Industrial Park will drive additional income when completed in 4Q23, iii) profit margins expected to remain stable with minimal exposure to rising utility costs and minimal debt expiry in FY22
- What we are watching out for: i) weakness within its office portfolio especially in Poland and Finland, ii) 14.7% of lease expiries for its office portfolio in FY22
- Maintain BUY with TP of EUR2.80
| Key operational data | 1Q22 | 4Q21 | %q-o-q | 1Q21 | % y-o-y |
| Revenue | 52.6 | 50.5 | 4.2% | 48.5 | 8.5% |
| NPI | 32.5 | 32.6 | -0.5% | 30.8 | 5.4% |
| DI | 23.4 | 23.2 | 0.9% | 21.7 | 7.6% |
| Portfolio occupancies | 94.8% | 95.0% | -0.2 ppt. | 94.6% | +0.2 ppt. |
| WALE (years) | 4.6 | 4.6 | – | 4.8 | -0.2 years |
| Rental reversion | 4.2% | 6.4% | – | -1.3% | – |
| Aggregate leverage | 38.6% | 36.6% | +2.0 ppt. | 38.5% | +0.1 ppt. |
| Interest Coverage Ratio | 6.8 | 6.7 | +0.1x | 6.0 | +0.8x |
| All-in Borrowing Cost | 1.7% | 1.7% | – | 1.7% | – |
(+) DI increased 0.9% q-o-q
- 1Q22 DI of EUR23.3m was c.0.9% higher q-o-q
- The higher DI was due to higher revenues from recent acquisitions, CPI lease indexation and positive rental reversions
- Partially offset by lower occupancies for Office portfolio and higher tenant incentives for Poland
- Higher DI was also due to the issuance of S$100m of perps in 4Q21 to fund acquisitions
(+) Accelerating pivot towards light industrial/logistics with EUR68.3m of acquisitions in Italy and Germany
- Completed acquisition of 3 freehold light industrial/logistics properties in Italy and Germany on 22 April 2022
- Attractive blended NOI yield of 6.8%
- Properties are 100% occupied with a blended WALE of 5.4 years
- Acquisitions has been funded by cash and additional debt
(+) Expansion at Lovosice ONE Industrial Park in the Czech Republic has commenced
- EUR15m development at Lovosice ONE Industrial Park has commenced
- Adding 14,679 sqm of A+ grade logistics facilities at the property
- Development is expected to complete in 4Q23
- 40% of the additional space has already been pre-committed
- Strong demand from 3PL in the area is expected to lead to more take up and potentially higher rents
(+/-) Positive rental reversions of +4.2%, but occupancy inched down slightly to 94.8%
- Portfolio occupancy inched down 0.2% q-o-q to 94.8%; mainly due to declining occupancies for its Office portfolio
- Light industrial/logistics portfolio occupancy increased 0.5% q-o-q to 96.2% in 1Q22
- Occupancies at all markets improved except a slight decline for the Denmark assets
- However a lease was signed in Denmark on 1 April 2022, and occupancy for Denmark portfolio will increase to above 90%
- Office portfolio occupancy continued declining by 2.1% q-o-q to 89.8% in 1Q22
- Occupancies declined in all markets except Italy that remained stable
- Light industrial/logistics portfolio occupancy increased 0.5% q-o-q to 96.2% in 1Q22
- Overall portfolio rental reversions of 4.2% in 1Q22, mainly contributed by light industrial/logistics portfolio
- Light industrial/logistics portfolio reported positive rental reversions of 5.8% in 1Q22
- Further positive rental reversions expected in coming quarters
- Office portfolio reported slight positive rental reversions of 1.6% in 1Q22
- Light industrial/logistics portfolio reported positive rental reversions of 5.8% in 1Q22
(+) All-in borrowing costs remained stable at 1.72%
- Leverage increased by c.2.0% q-o-q to 38.6% in 1Q22
- Mainly due to acquisition of the 3 properties in Italy and Germany
- All-in borrowing costs remained at 1.72%; loans are fully hedged to fixed rates until October 2022
- After October 2022, percentage of debt hedged will revert to c.77%
- Only c.EUR23m of loans will be due to mature in FY22
- A further EUR157m will be maturing in FY23
Our thoughts
Despite the continued weakness at CERT’s Office portfolio, its light industrial/logistics portfolio remained resilient. Occupancy for its light industrial/logistics portfolio continued on its up trend, and rental reversions in 1Q22 remained strong at +5.8%.
In the past week, CERT continued its pivot towards light industrial/logistics with the EUR68.3m acquisition of 3 logistics properties in Italy and Germany. The 3 properties were acquired at an attractive average NOI yield of 6.8%. In addition, CERT has also commenced the expansion works at Lovosice ONE Industrial Park, and the additional 14,679 sqm of logistics space is expected to be completed by 4Q23.
Looking ahead, we expect CERT’s operating margins to remain stable as healthy portfolio occupancy rates will be complimented by CPI linked rent increases and continued positive rental reversions. Furthermore, utility costs are mostly recoverable from tenants and short-term loans in Europe remain in the negative territory (-0.45%). In the unlikely event that the negative 3-month Euribor rates reverses and increase by a further 100 bps. (total increase of 145 bps.), this would impact distributions by c.2.1%.
We continue to remain positive on CERT as it continues its pivot towards light industrial/logistics assets and offset the weakness within its office portfolio. CERT will also be accelerating its plans to unlock value from its portfolio thorough the c.EUR250m of developments in the pipeline. As such, we will be maintaining our BUY recommendation and TP of EUR2.80.