What Makes Cromwell REIT a Top Investment Choice?

Introduction

Hi everyone, welcome back to The Investing Iguana, where we talk about all things related to investing and finance. I'm your host, Iggy, and today we're going to do a deep dive into Cromwell REIT, one of the largest diversified REITs in Europe. Cromwell REIT, or CEREIT for short, is a real estate investment trust that owns and operates a portfolio of income-producing commercial properties across Europe. CEREIT has a market capitalization of about 1.9 billion as of August 2021. It pays a quarterly distribution to its unitholders. According to the Cromwell European REIT Investor Relations website, as of August 25, 2023, CEREIT's market capitalization is €2.2 billion. This is an increase of 15.8% from its market capitalization of €1.9 billion as of August 25, 2021.
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​CEREIT: The Cheese Platter of European Real Estate

Before we get into the details of CEREIT, let me ask you a question: do you like European cheese? I know I do. I love cheese so much that I sometimes dream of visiting Europe and tasting all the different kinds of cheese they have there. From French brie to Italian mozzarella, from Dutch gouda to Swiss gruyère, from Greek feta to Spanish manchego, there’s so much variety and flavor to enjoy. But what does cheese have to do with CEREIT, you may ask? Well, it turns out that CEREIT is like a cheese platter of European real estate. It has a diverse mix of properties in different countries, sectors, and tenants, giving it exposure to various markets and economies. CEREIT’s portfolio consists of 107 properties in 11 countries, with a total net lettable area of about 1.5 million square meters. The portfolio is well-balanced between light industrial/logistics and office properties, which account for 75% and 25% respectively. CEREIT also has a high occupancy rate of over 95%, and a long weighted average lease expiry (WALE) of 4.5 years.
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​CEREIT's Tenant Base: Diversified and Resilient

CEREIT’s tenant base is also diversified, with no single tenant contributing more than 4% of its gross rental income. Some of its major tenants include global companies such as DHL, Siemens, Danone, Bosch, and Nestlé. These are well-established businesses that operate in essential industries such as e-commerce, healthcare, food and beverage, and technology. They provide stable and resilient rental income for CEREIT, especially during times of uncertainty and volatility.

So why should you invest in CEREIT? Well, there are several reasons why CEREIT could be a good addition to your portfolio. First of all, CEREIT offers attractive returns to its unitholders. In the first half of 2021, CEREIT delivered a net property income (NPI) of €87.8 million, which was 3.9% higher than the same period last year. This was mainly driven by the strong performance of its light industrial/logistics properties, which saw an 8.7% increase in NPI. CEREIT also paid an adjusted distribution per unit (DPU) of 7.79 Euro cents, which translates to an annualized yield of about 7.5?sed on its current share price. That’s a pretty decent yield compared to other REITs in the market.
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​Key Factors Driving CEREIT's Positive Performance in 2022

CEREIT's performance in 2022 was positive overall. The REIT's NPI grew by 1.3% year-on-year to €179.5 million, and its DPU increased by 1.2% to 8.695 Euro cents. The REIT's portfolio occupancy was at a record-high of 96.0%, with strong positive 7.6% rent reversion in 2H 2022.

Here are some of the key factors that contributed to CEREIT's positive performance in 2022:

• a. Strong demand for logistics and industrial properties: The demand for logistics and industrial properties in Europe continued to be strong in 2022, driven by the growth of e-commerce and the need for businesses to store and distribute goods more efficiently.
• b. Resilient assets: CEREIT's portfolio of properties is well-diversified and located in key markets across Europe. This helped to insulate the reet from some of the challenges that the global economy faced in 2022.
• c. Proactive asset management: The reet's asset management team is highly experienced and proactive. They took steps to mitigate the risks posed by the global economy and the European real estate market, such as by negotiating rent reversions and extending leases with tenants.

​CEREIT's Prudent Capital Management Strategy

Secondly, CEREIT has a prudent capital management strategy that ensures its financial stability and flexibility. As of June 30, 2021, CEREIT had an aggregate leverage ratio of 39.5%, which was well below the regulatory limit of 50% set by the Monetary Authority of Singapore (MAS). This means that CEREIT has ample headroom to borrow more money if needed, or to reduce its debt if it wants to lower its interest costs. CEREIT also has a diversified debt profile, with no single lender accounting for more than 15% of its total borrowings.
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Key Principles of CEREIT's Capital Management Strategy

​CEREIT has a prudent capital management strategy that ensures its financial stability and flexibility. This strategy is guided by the following principles:

• Leverage control: CEREIT maintains a low leverage ratio, which means that it has a relatively small amount of debt compared to its assets. This provides CEREIT with a buffer against financial shocks and gives it the flexibility to borrow more money if needed to fund growth opportunities. As of June 30, 2021, CEREIT's aggregate leverage ratio was 39.5%, which was well below the regulatory limit of 50% set by the Monetary Authority of Singapore (MAS).
• Debt diversification: CEREIT's debt is diversified across a number of lenders, with no single lender accounting for more than 15% of its total borrowings. This reduces CEREIT's exposure to any one lender and helps to protect it from financial distress.
• Liquidity management: CEREIT maintains a strong liquidity position, with sufficient cash on hand to meet its debt obligations and operating expenses. This ensures that CEREIT will be able to meet its financial commitments even in the event of unexpected events.

CEREIT's prudent capital management strategy has helped to make it a financially strong and resilient reet. This strategy is one of the key factors that has contributed to CEREIT's strong track record of performance.
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CEREIT's Growth-Oriented Strategy

Thirdly, CEREIT has a growth-oriented strategy that aims to enhance its portfolio value and income over time. CEREIT actively seeks opportunities to acquire new properties that are accretive to its DPU and NAV. For example, in June this year, CEREIT announced the divestment of a non-core office property in Italy for €93.6 million, which was 52?ove its book value. The proceeds from the sale will be used to fund future acquisitions or to repay debt. CEREIT also invests in asset enhancement initiatives (AEIs) that improve the quality and attractiveness of its existing properties. For instance, CEREIT recently secured a new 15-year lease with a leading global asset management firm at Haagse Poort in the Netherlands, which is one of its flagship office properties. The lease was signed after CEREIT completed an AEI that upgraded the building's facilities and sustainability features.
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Key Risks Impacting CEREIT

As with any investment, there are risks and challenges associated with investing in CEREIT. Some of these risks and challenges include:

• Geopolitical risks: The European real estate market is exposed to geopolitical risks, such as the ongoing conflict in Ukraine. These risks can have a negative impact on the value of CEREIT's properties and its ability to generate income.
• Economic risks: The European economy is facing a number of challenges, such as high inflation and rising interest rates. These risks can also have a negative impact on the value of CEREIT's properties and its ability to generate income.
• Currency risks: CEREIT's properties are located in different European countries, each with its own currency. Currency fluctuations can have a negative impact on the value of CEREIT's assets and its ability to generate income.
• Tenant risks: CEREIT's income is dependent on the rent it receives from its tenants. If tenants default on their rent payments, CEREIT's income will be negatively affected.
• Leverage risks: CEREIT uses debt to finance its investments. If interest rates rise, CEREIT's debt servicing costs will increase, which could put pressure on its profitability.
• ESG risks: CEREIT is exposed to environmental, social, and governance (ESG) risks. These risks can have a negative impact on the value of CEREIT's properties and its ability to generate income.

It is important to carefully consider these risks and challenges before investing in CEREIT.
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To Sum Up

To sum up, CEREIT is a diversified REITthat owns and operates a portfolio of commercial properties across Europe. It offers attractive returns, prudent capital management, and growth potential to its unitholders. It is also a good investment for those who want exposure to the European real estate market. ​