• Keep BUY and EUR1.90 TP, 16% upside and c.9% yield. Cromwell European REIT’s 3Q operational and financials were a slight beat. We believe the REIT is on course with its active divestment and redevelopment plans, besides tactically entering into early refinancing of its Nov 2025 bond. CERTis among the best performing overseas S-REITs on the back of proactive operational management in navigating post-COVID-19 and high interest rate challenges, and is set to benefit further with the outlook steadily improving.

• Further divestment of c.EUR70m worth of assets expected in the near term from weaker non-core office market assets such as Poland and Finland. This follows CERT’s active portfolio rebalancing and deleveraging strategy since FY22 with 11 divestments worth EUR261m, at a blended 14% premium. Aggregate leverage slightly rose to 41% due to a drawdown of debt for capex, and four redevelopments planned in the medium term (EUR200m capex estimate), funding for which will likely come from divestments. Valuations have stabilised and we expect final valuations to be in the 0-5% range.

• Bridge debt in final stages for refinancing of Nov 2025 bond. CERT is in final stages of securing a EUR340m bridge loan with a final maturity in 2027. The proceeds, along with EUR192m in undrawn revolving credit facilities (RCF) will be sufficient to refinance its EUR450m bond maturing in Nov 2025. While interest cost of the bridge facility is likely to be significantly higher (~4%) compared to maturing bonds (at c.2%), the bridge debt could eventually be replaced by another lower coupon bond at an appropriate time. This comes as Eurozone’s inflation outlook is moderating significantly and with expectations of more aggressive rate cuts. Fitch Ratings has also revised CERT’s credit outlook to positive, which could help lower its borrowing margin. All in, financing cost was flat QoQ at 3.16%, with 88% of debt currently hedged.

• Portfolio occupancy rose 30bps QoQ to 93.9%, driven by slight occupancy improvements in both office (90.9%) and logistics/light industrial portfolio assets (95.1%). Rent reversion (3Q) was stronger for its industrial portfolio at 8.8%, driven by the signing of new leases in Milan (+30.1%) and Amsterdam (+44.7%). While overall office rent reversion was -4.3% for 3Q, mainly dragged down by the renewal of a single large lease in Krakow, Poland. Overall average portfolio passing rents are still below market rental and as such, positive rent reversions are expected to continue in FY25.

• 3Q same-store NPI rose 7% YoY from higher office portfolio income on the back of occupancy and rent growth, contribution from newly completed assets and NPI margin expansion of 380bps YoY. Distributable income (DI) was lower 8% YoY due to higher interest cost and divestments, but was up 4% QoQ. No changes to estimates. Our TP includes a 6% ESG premium.

Source: RHB Securities Research - 13 Nov 2024