Cromwell European REIT reports indicative DPU of 4.12 Euro cents for 1QFY2023, 2.4% lower y-o-y, on finance costs

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Excluding divestment gains, the REIT’s indicative DPU would’ve been at 3.90 Euro cents, 5.8% lower y-o-y.

Cromwell European REIT (CEREIT) CWBU has reported an indicative distribution per unit (DPU) of 4.12 Euro cents (5.978 cents) for the 1QFY2023, 2.4% lower y-o-y.

Excluding divestment gains for two of the REIT’s properties vacated for redevelopment, the REIT’s indicative DPU would’ve been at 3.90 Euro cents, 5.8% lower y-o-y. On a like-for-like basis, however, the quarter’s DPU remained “resilient”.

The REIT pays out its distributions on a half-yearly basis in September and March, after its 1H and FY results announcements.

Gross revenue for the quarter rose by 4.2% y-o-y to EUR54.8 million while net property income (NPI) rose by 3.6% y-o-y to EUR33.6 million. The growth in NPI was attributed to the 15.7% NPI growth in the light industrial/logistics sector. On a like-for-like basis, 1QFY2023 NPI was up by 4.2% y-o-y with the light industrial / logistics sector 9.5% higher and office also 1.8% higher.

Indicative distributable income also fell by 5.8% y-o-y to EUR21.9 million due to “materially higher” finance costs that more than offset the higher gross revenue and NPI. Finance costs during the quarter rose by 44.5% y-o-y to EUR7.2 million.

As at March 31, CEREIT’s portfolio occupancy level stood largely unchanged q-o-q at 95.8% with the REIT’s light industrial/logistics portfolio occupancy at 98.0% and its office portfolio occupancy at 89.1%. Its weighted average lease expiry (WALE) stood at 4.5 years as at the same period, down from the 4.6 years in 4QFY2022. The REIT’s weighted average lease to break (WALB) remained at 3.2 years.

According to the REIT, its four core markets, the Netherlands, Italy, France and Germany, have continued to drive their organic rental income growth, making up a collective 75% of the portfolio by value. Their combined occupancy also remained well above 95%.

In the 1QFY2023, the REIT manager signed and renewed 86,474 sqm of property – or around 4.6% of the total portfolio – at an average rent reversion of 6.7% with a tenant retention rate of 76.4%. During the quarter, the REIT saw good leasing momentum with about 35% of lease breaks and expiries in the next six months up to Sept 30 de-risked compared to 24% at the same stage in the 1QFY2022.

As at March 31, the REIT’s aggregate leverage was at 40.6%, which is above the board’s policy of gearing levels between 35% to 40%. The higher-than-expected leverage is largely due to a temporary timing difference between development expenditure and divestments. According to the manager, it is in “advanced negotiations” to sell some of its non-strategic assets. Its interest coverage ratio (ICR) remained high at 5.0x for the quarter. Including perpetual securities coupons for the quarter, the REIT's ICR stood at 4.5x.

Based on the manager’s interest rate sensitivity assessment, and taking into account the new hedging, a three-month Euribor increase of around 100 basis points (bps) to 4% would impact CEREIT’s full-year DPU by 0.29 Euro cents per unit or 1.8% with all things else being equal.

“We are pleased to see the continued strong leasing demand and resilience across CEREIT’s portfolio, with high occupancy of 95.8%, positive 6.7% rent reversion and like-for-like NPI growth of 4.2% for 1QFY2023. This strong operational performance has helped offset most of the expected rise in finance costs and deliver only a 2.4% drop in indicative DPU for the first quarter 2023, equating to over a 10% annualised yield at today’s unit price,” says Simon Garing, CEO of the manager.

“CEREIT is also on track to achieve a majority portfolio weighting to the sturdy European light industrial / logistics sector by the end of 2023, through a combination of selective office and other non-core divestments and undertaking new developments, both of which are well-advanced,” he adds.

On the sale of the REIT’s assets, Garing notes that they should “help reduce leverage over the medium term and help fund accretive developments”.

“While acquisitions are on hold for now given CEREIT’s high cost of capital, our pipeline of sustainable developments and asset enhancements will serve to enhance, rejuvenate and future-proof CEREIT’s portfolio and provide long-term growth,” he says. “Although rising interest rates and asset divestments may have a short-term impact on earnings, we remain confident in CEREIT’s operational performance and European real estate logistics and Grade A office market fundamentals.”

As at 10.35am, units in CEREIT are trading 1 Euro cent lower or 0.65% down at EUR1.53.

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