Cromwell European REIT

Cromwell European Real Estate Investment Trust ("Cromwell REIT" or "CEREIT" or the "Trust") is offering 428.535m units (subject to over-allotment option) at €0.55 per unit. 392.171m units will be offered via placement with the balance 36.364m units open for the public. You can download the prospectus here.

The IPO will close on 28 Nov 2017 at 12pm. Investors can apply from the ATM and Internet banking website of participating banks. According to the prospectus (page 47), investors will pay around S$0.885 per unit, based on the fixed exchange rate of €1:S$1.6091 

This is the second time which Cromwell is trying to list the Trust, after aborting the previous attempt in Sep 2017. My previous write up on the IPO is here. The two key differences in the relaunch is the removal of the properties in Poland and the doubling of stake by its Sponsor from 12% to over 30%. You can read more about the makeover here.

Principal Activities

Cromwell REIT is the first Singapore REIT with a diversified Pan-European portfolio with a focus on office and light industrial/logistics sectors across 5 countries in Europe. CEREIT is sponsored by Cromwell Property Group ("Sponsor") headquartered in Brisbane, Australia.  

The stated objectives of CEREIT is to provide unitholders with regular and stable distributions and achieve long term growth in DPU and NAV per unit. This will be achieved primarily through active asset management and enhancement, acquisition of assets and adopting prudent capital management and best practices.

IPO Portfolio

The portfolio includes 74 properties in Denmark, France, Germany, Italy and Netherlands and is valued at €1,354 million. The properties can be classified almost equally between office and industrial/logistics. No single property account for more than 11.7% of the appraised value.

According to the prospectus, each property will be appraised by two independent valuations and the higher of the two valuations will be taken. The final purchase price of  €1,323 million is at a 2.3% discount to its appraised value. If i take the lower of the two by types of properties such as office, industries and others, my valuation for portfolio will be around €1,309 million

The portfolio is spread across 5 countries in Europe but Netherlands, Italy and France took up 86.5% of the value with the balance in Germany and Denmark. The properties has a long and well-staggered lease expiry profile.

Financial Statements

According to the pro forma statement, the NAV per unit (see highlighted above) is €0.53 per unit. This represents a price to book ratio of 1.038x. According to page 103 on capitalisation and indebtedness, CEREIT will have a leverage ratio of 36.8%. 58% of the debt will have to be refinanced in 2020. 

The above the the projections for the next 2 years and the projected yield is 7.8% for 2018 and 8% for 2019. 

Use of Proceeds

The bulk of the IPO proceeds will be used to pay for the properties and paying for the transaction costs.

Projected Yield

The projected yield of 7.8% in EUR terms for projection year 2018 seemed attractive, with the Sponsor forecasting that the yield will grow to 8% in projection year 2019. 

The first distribution will be for the period from listing till 30 June 2018 with the distribution paid before 28 Sep 2018. Subsequent distributions will take place on a semi-annual basis. Investors can elect to receive the distributions in EUR or SGD.

Shareholders

Separate from the offering, Cerberus Singapore (an affiliate of the vendor of certain properties), Hillsboro Capital, Mr Gordon Tang and Mrs Celine Tang (from Sing Haiyi) have entered into cornerstone agreement to subscribe up to 581.819m units. Only Cerberus Singapore are subjected to a lock-up whereas Hillsboro and Mr and Mrs Tang are not.

As you can see from the table below, the Sponsor, together with the selected Cornerstone investors will hold the bulk of the IPO and the investing public will hold about 30% of the REIT 

What I like about CREIT

• Diversified Portfolio with long WALE - the portfolio of 74 properties is highly diversified geographically in 5 countries and no single property accounts for more than 12% of the portfolio value. The long lease profile of 4.9 years weighted average lease expiry and high quality tenant base means that the recurring income will be stable 
• European economy seemed to be turning the corner - Following the shock Brexit, the European economy seemed to be recovering. I spoke to several global fund managers and interestingly, they are more bullish on Europe than on USA. This could be one way of gaining exposure to the European region. The impact of Brexit would also mean that more companies will relocate out from London to other European cities
• Freehold properties with slight upside - 88% of the properties are predominantly freehold and the occupancy rate is around 87.7%. The occupancy is expected to improve to 90% for PY 2018 and 92.6% for PY 2019
• Stronger alignment of interest - Compared to the previous prospectus, there is now a much stronger alignment of interest as the Sponsor took up a stake of approximately 35.8%
• Experienced sponsor with long track record in Europe - The Sponsor has a 15 year track record in Europe with 190 employees and 20 offices in 13 countries.  

Some of my concerns

• No economy of scale - The well diversified properties meant that it is hard to achieve economies of scale as the properties are spread out over different areas of the continent
• Quality of assets - While the properties are diversified, the properties are not the "grade A" type. It may not be able to held up its rental as well during periods of downturn 

• Continued doldrums in European countries  - Europe may continue to chug along with no real growth and the rental rates may suffer

Peer Valuation

The closest peer is frankly IREIT global even though it has only a few German properties. At the date of this write up, IREIT is trading at 7.656% yield and a price to book of 1.11x.

Assuming Cromwell REIT trades up to either of this metrics, it will imply a fair value range of €0.56 to €0.59 (before accounting for conversion to SGD) 

My Chilli Ratings

Consistent with my other chilli ratings for REITs, you will have to ask yourself if this counter fits into your retirement portfolio and invest for the longer term. 

My gut feel is that the downsized IPO will be easier to absorb by the market but this is not a counter for flipping. On this end, i did not ask for any placement allocation, but i may try for some at the ATM as i will save on the placement fees. 

It is a one chilli rating for me.

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