Results First Take: 3Q23 – Attractive forward yield of c.13% as portfolio undergoes recalibration
- YTD 2023 DPU of 11.795 Ects is in line with our projections; implying a very attractive forward yield of c.13%
- Key positives: i) earnings are in line with our projections despite recent divestments, ii) maintained healthy positive rental reversions and stable operating metrics, iii) no refinancing needs until 4Q25, iv) divestments have been carried out a premiums to valuations
- What we are watching out for: i) relatively high gearing, but divestments will lead to slight improvement, ii) further divestments that will shore up balance sheet, Iii) portfolio valuations in December 2023
- Maintain BUY with TP of EUR 2.00
| Key operational data | 3Q23 | 2Q23 | %q-o-q | 3Q22 | % y-o-y |
| Revenue | 54 | 54 | – | 56 | -4.2% |
| NPI | 32 | 35 | -7.6% | 35 | -6.6% |
| DI | 23 | 22 | 3.0% | 24 | -6.8% |
| Portfolio occupancies | 95.2% | 95.4% | -0.2% | 95.7% | -0.5% |
| WALE (years) | 4.6 | 4.4 | 0.2 | 4.6 | – |
| Rental reversion | 10.6% | 9.9% | 0.7% | 6.8% | 3.8% |
| Aggregate leverage | 41.2% | 39.4% | 1.8% | 38.9% | 2.3% |
| Interest Coverage Ratio | 4.0 | 5.3 | -1.3 | 6.5 | -2.5 |
| All-in Borrowing Cost | 3.0% | 2.4% | 0.6% | 2.3% | 0.7% |
What has happened?
Cromwell European REIT has just published their 3Q23 business updates, revealing a YTD 2023 DPU of 11.795 Ects, aligning with our projections and constituting c.76% of our FY23 DPU projections. Despite a lower NPI q-o-q, this can be mainly attributed to recent divestments. Furthermore, there have been notable savings in financing costs, as divestment proceeds were utilised to reduce debt. The portfolio’s occupancy levels remained relatively stable at 95.2% (compared to 95.4% in 2Q23), accompanied by a robust positive rental reversion of 10.6% in 3Q23. While CERT’s light industrial/logistics portfolio experienced a slight dip in occupancy, this is perceived as transitional. On the other hand, their office portfolio witnessed an uptick in occupancy rates, primarily driven by the office in The Hague, the Netherlands. Although aggregate leverage has slightly increased to 41.2%, it is expected to improve to c. 38.9% following the completion of the sale of Viale Europa 95 on 6 October 2023. All-in borrowing costs have risen to around 3.0% due to higher interest rates, with 91% of loans hedged to fixed rates.
Our views.
Despite recent divestments, CERT has managed to achieve a YTD 2023 DPU in line with our FY23 projections, translating to an exceptionally appealing forward yield of approximately 13%. Operationally, CERT’s portfolio metrics remain robust, consistently reporting highly positive rental reversions from both the light industrial/logistics and office portfolios. Although there was a slight dip in occupancies q-o-q in the light industrial/logistics portfolio, we view this as transitional and expect CERT to swiftly backfill vacancies. Conversely, the office portfolio experienced a modest improvement in occupancies driven by new leases in Haagse Poort, where the rents signed were significantly higher than the previous passing rents. As anticipated, borrowing costs have continued to inch up to around 3.0%, but we anticipate relative stability since 91% of loans have been hedged to fixed rates. Furthermore, CERT is not facing any loan refinancing obligations until 4Q25.
Looking ahead, we will be keeping a close eye on portfolio valuations in December 2023 as cap rates in Europe have expanded, but we believe that strong rental growth will help to significantly offset valuation declines. Given CERT’s consistently stable operating performance and the highly attractive forward yield of around 13%, we will maintain our BUY recommendation with a TP of EUR 2.00.