Excerpts from DBS Group research report
Cromwell European REIT (SGX: CWBU)
- Cromwell European Reit (CERT) trades at an attractive 8.1% yield, close to +1 standard deviation as market is pricing in risks of a slowing European economy.
- Pivot to logistics and positioning in key capital cities in Europe with relatively stronger economies places CREIT well to deliver resilient returns
- CERT’s local teams in key European cities provide them an edge in the sourcing for deals
Maintain BUY with lower TP of EUR2.60, as we revise our risk-free rate assumptions
Cromwell European Reit logistics pivot could drive yield compression
Faced with a slowing economy, weakening EUR, Cromwell European REIT (CERT)’s year-to-date (“YTD”) 20% decline in share price appears to have priced in most of these risks.
Yields have expanded to > +1 SD above normal to c.8.1% currently, which we believe to be attractive. As the REIT pivots to focus more on logistics sector, this is expected to drive earnings resilience.
Thus, we expect a compression in yields, given its improved earnings visibility and growth profile.
Navigating a slowing European economy
CERT has weathered the COVID pandemic well, but we see new risk emerging, with Europe expected to face a period of low-growth and high inflation given the ongoing geopolitical crisis.
We believe that CERT’s focus in Italy, France, and the Netherlands, which form c.67% of the portfolio and have relatively better fundamentals as evidenced by our recent site visit, will result in more resilience, going forward.
The CPI-pegged rental escalations in place for its leases will drive steady, organic growth.
ESG focus to futureproof portfolio
We remain excited about the management’s focus on “greening” its portfolio, targeting net zero operational carbon emissions by 2040. We see this as a multifold strategy, with operational efficiencies to drive cash flows and capital values.
This has also enabled them to capture tenant demand, given an increased focus on properties with “green” attributes.
Key Risks
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. The key risk to our view is lower-than-expected rental income arising from loss of tenants or slower upturn slower upturn in rents/inflation
Valuation
Our target price of EUR2.60 is based on a DCF valuation with a WACC of 5.7% (risk-free rate of 3.0%). This implies a target yield of 6.1% and a P/NAV multiple of 1.1x.
