Cromwell Europe REIT

Cromwell European Real Estate Investment Trust ("Cromwell" or CEREIT") is offering up to 1,583,955,000 Units at €0.55 to €0.57 per Unit. 79.198m Units will be available for public offering in Singapore, 267.857m for a public offering in Japan (without being listed there) and the balance units will be via the Placement Tranche. The REIT is currently in book-building phase with the pricing to be determined around 21 Sep 2017. The market cap will be €1,814.8 million based on the maximum IPO price. The IPO is expected to close on 26 Sep and be listed on 28 Sep 2017. The draft prospectus is here.

CEREIT is the first Singapore REIT with Pan-European portfolio as show in the diagram below. 

The portfolio is being acquired at 1.7% discount to the Appraised Value. The Portfolio is spread across office, light industrial or logistics and retail. The summary of the IPO portfolio by asset class and geographies are set out below.

What I like about Cromwell Europe REIT

• Decent yield - The yield of 7.5% to 7.7% is decent
• Well diversified portfolio across asset classes and geography - The 81 properties are diversified across asset classes in 6 countries, Denmark, France, Germany, Poland and the Netherlands. The offices are located in major cities in Netherlands and Italy, the light industrial and logistics are spread across the 4 countries while the retail assets are mainly in Poland.
• Freehold assets - The assets are predominantly freehold 
• Long portfolio lease with Weighted Average Lease Expiry ("WALE") of 5.1 years - implying stability in predicting income

• Potential upside if the Manager is able to execute as occupancy is currently at 89.3%
• Experienced sponsor and manager - The Sponsor is listed on ASX since 2006 and has global of A$10.1b, meaning it is not a "fly-by-night" manager
• Presence of cornerstone investors - The presence of Cerberus Singapore and Hillsboro Capital helped provide some institutional pricing to the issuance. The track record of the two cornerstone investors are not available
• Decent board composition and management  - The board comprise of independent directors who are experienced
• Exposure to Eurozone - This again depends on your view whether Europe has turned the corner. If your view is yes, then this is a positive factor, otherwise, you can move this to the "concerns" column 😋
• Not overly levered  - The leveraged ratio ranged from 34.3% to 36.6% and this provides some headroom to levered up to 40%

Some of my concerns

• Low alignment of interest - the Sponsor will hold only 12.7% as at listing date (and even lower at 8.7% if the over-allotment option is exercised). There is no alignment of interest. The Sponsor is cashing out on its portfolio and their timing is good with Euros at a high. In addition, they will have one of the lowest Sponsor's stake for REITs listed on SGX 🙄
• High fees - Seems like the Sponsor is not well-liked as it charges above market fees. There is an article that warns that CEREIT's overall management fees are on the high side and more than double the peer average 🤔
• Performance fee - I don't like the performance fee of 25% of the difference in DPU. This sound a tad too high and not in line with market. No reasons why i should pay performance fee if Manager managed to increase the occupancy from 89.3% to 100% right or use financial engineering to boost DPU? Plus the rental demand and rates is frankly market driven, why should the manager be rewarded for this? 🤕
• No economies of scale - The portfolio seemed to be so well-diversified that while it doesn't depend on any single property, the well spread out locations also mean that there is less opportunities for reaping scale in its operations. I have to caveat that i am not familiar with the properties and its location
• Sponsor cashing out at close to book value - The issue is priced to the max at around its book value of €0.54 per unit. There is no "upside" from this valuation and the Sponsor is cashing out cleanly
• Large free float - The huge free float of at least 87% probably mean that all the demand should be satisfied
• Euro Exposure - It depends on your views of Euro against SGD (see 5 year chart below). The distributions will be made in EUR and converted to SGD at each distribution date. Investors who don't mind Euro exposure would welcome the issuance but for the majority of retail investors here, be prepared for a "wild" ride as the exposure cuts both ways. The good thing is you can actually receive the distributions in Euro if you opt for it. Perhaps can buy some Units so that you can go Europe to spend it for holidays every year (natural hedge)? 😂

Listed Comparison IREIT (sourced from Shareinvestor.com unless otherwise stated)

The only listed peer is probably IREIT even though it owns only office buildings in Germany. My previous write up on IREIT was here. 

IREIT didn't really debut well and the share price dropped post listing. The current yield seemed to be around 5.78 cents (annualised DPS) / 76 cents (last traded) = 7.6%. It is currently trading at a price to book of around 1.12x but the gearing is at 41.3%) Source: here.

My Chilli Ratings

This is a one-chilli rating for me. Buy if you are bullish on Eurozone or goes to Europe for holidays🏖 as it offers pure exposure to that region. The yield of 7.5-7.7% is respectable and is 'better valued' when compared to IREIT as it has a lower leverage and not trading at a premium to its book value. My key concerns are the manager's fees and the perceived lack of aligned interest given the low sponsor's stake.

Given the huge float, this is not a "hit and run" or "stag" game. Buy it only if it is part of your retirement plan for passive income. You can probably get it from the ATM or from the open-market post listing.

Voting time

Will you be subscribing to the IPO? Cast your vote here or click on the picture below!

Subsequently, the Sponsor cancelled its IPO plans on 22 Sep 2017. The news is here.