At first glance, Cromwell European REIT doesn’t have that kind of allure of an attractive Singapore-listed REIT.
It doesn’t have the huge commercial offices like Keppel REIT’s S$2 billion Ocean Financial Centre.
Or Ascendas REIT’s high-profile US industrial assets, leased to tech giants.
Instead, Cromwell REIT’s properties are much smaller in size – average EUR4 million to EUR170 million. For instance, Cromwell REIT recently sold three industrial and logistic assets (at a 28% premium to valuation) at a grand total of EUR22 million.
But what struck me about this European-focused REIT was two things.
First, Cromwell REIT’s properties are, surprisingly, defensive.
Since this REIT got listed in November 2017, it has yet to record negative rental reversion.
Rental reversion shows whether new or renewing leases have a higher or lower rent than before.
In fact, during COVID, Cromwell REIT’s properties continued to grow their rent. And continued to maintain its high occupancy rate of 95%.
Not too bad.
Source: Cromwell REIT’s 1H2022 Presentation
Second, and more interestingly, Cromwell REIT trades a dividend yield of not just 6%, or 7% — shares now trade at a massive, projected 9.2% dividend yield today. Man, I would say this is something worth looking.
Why is Cromwell REIT’s dividend yield trading so high today?
And is it worth buying into this REIT?
Let’s find out.
Cromwell REIT — A Niche European-Focused Singapore REIT
At EUR1.1 billion market cap, Cromwell REIT has 113 office and industrial properties worth at least EUR2.6 billion.
It owns assets in Western Europe – mostly in The Netherlands, Germany, France, Italy and the UK.
The thing is, over the last three years, total online retail sales in the big European markets have soared, growing from EUR250 billion in transactions to more than EUR350billion.
Source: Cromwell REIT’s 1H2022 Presentation
The rapid rise of e-commerce sales in Europe has pushed up demand for warehouses and logistics space.
Supply chain disruptions further increased demand for storage space – you see, inventories getting stuck needs a place to store.
This led to low vacancy rates across the big European e-commerce markets.
And Cromwell REIT’s properties operate in these locations.
This Singapore REIT continues to grow revenues, NPI and DPU
In its latest financial results, Cromwell REIT’s gross revenues, net property income and DPU continued to improve. This was mostly driven by Cromwell REITs newly bought industrial assets.
What’s more, Cromwell REIT’s overall rent grew by another 2.9%.
Source: Cromwell REIT’s 1H2022 Presentation
Even BlackRock took a stake in Cromwell REIT
BlackRock, the world’s investment manager, took a 5.88% stake in Cromwell REIT.
It’s not common, nor often that a foreign institutional investor would invest in a Singapore REIT. And
BlackRock is known for its risk management in investing.
My guess is taking a stake in Cromwell REIT is a testament to Cromwell REIT’s niche, quality assets.
Source: Cromwell REIT’s Annual Report 2021
Cromwell REIT’s cheap borrowing costs
What I liked about investing in developed countries like Japan and Europe are their cheap borrowing costs.
Fitch Rating gave a BBB- credit rating to Cromwell REIT, which reflected higher credit risk than Ascendas REIT and Mapletree Industrial REIT.
Yet, Cromwell REIT’s “all-in” interest costs is only 1.7%. This is far lower than many of Singapore REIT’s average borrowing costs of 2.5%.
Cromwell REIT can be more aggressive by investing in lower yielding, higher quality assets across Europe. And still make good money.
In its latest 1H2022 results, Cromwell REIT only paid a EUR10.4 million of interest from its EUR107 million of gross revenues.
One problem — high gearing means more rights issue
One big problem is Cromwell REIT’s ability to expand. Gearing ratio is already close to 40%, which means if Cromwell REIT wants to add more properties, it most probably has to do a huge rights issue.
Not exactly a fun thing if you’re tired of pumping money into a REIT to avoid dilution.
Cromwell REIT’s sponsor — strong?
At AUD2 billion, Cromwell Property Group, a sponsor to Cromwell REIT, is a mid-sized property investment firm, is much smaller than our S$13 billion CapitaLand Integrated Commercial Trust.
But Cromwell Property Group actually manages over 330 properties – worth at least AUD11 billion of properties, across Australia, New Zealand and Europe.
Source: ShareInvestor Webpro
Again, I prefer sponsors that either have a large size or have unique properties like Elite Commercial REIT – offices fully leased to the UK government. This allows the sponsor to stand out in a highly competitive property sector.
Well, I find Cromwell Property Group just doesn’t have that kind of edge.
Why Cromwell REIT trades at such high dividend yield?
When Cromwell REIT got listed five years ago, and expected distribution yield was already 7.8%. That’s pretty high.
Despite cheap borrowing costs, European industrial property yield tends to have a much higher yield.
And higher than Singapore’s property yield.
Source: Cromwell REIT’s IPO prospectus
Industrial properties’ valuation in Europe are lower, in order to compensate for their leasehold nature, plus these assets are much smaller in size with only a handful of tenants.
This makes the property more risky. And pushes up the average property yield.
What I found disappointing for Cromwell REIT was this
This REIT’s IPO price was at EUR2.54 per unit, yet the highest price its shares traded was EUR2.90 per unit back in 2018, and just before the COVID pandemic unfolded.
Though Cromwell REIT shares have recovered from its lowest point – EUR1.60 per unit — during COVID in 2020, this REIT continued to trade below its IPO price.
Why are their shares trading like that?
Offices in Europe have yet to recover from the aftermath of COVID, where people are used to working from home. And companies are also trying out a “office and home” hybrid working arrangement. In fact, except for its Italy properties, Cromwell REIT’s office occupancy hasn’t been that strong.
Source: Cromwell REIT’s 1H2022 Presentation Slides
Also, consider rising rates and the war in Ukraine is scaring the market away from this European-based REIT.
Would I buy Cromwell REIT today?
Cromwell REIT is a great mix that diversifies away from our usual Singapore retail, office and industrial properties.
Europe industrial assets are pretty strong because of rising demand in e-commerce. More importantly, Cromwell REIT’s assets tend to be more defensive.
So far, there isn’t any negative rental adjustments yet.
With the projected high dividend yield, this makes a great candidate for an income portfolio.
Over the last 12 months, Cromwell REIT has paid a solid dividend of EUR 17.15 cents per unit. That’s a 8.3% dividend yield.
Source: Cromwell REIT’s Website
But the problem here is, owning this REIT means you’d expect a more aggressive rights issue because its gearing has already hit close to 40%. In order to grow, Cromwell, has to borrow BOTH debt and equity to grow its portfolio.
Its sponsor, Cromwell Property Group has more than 330 properties. I won’t be surprised if Cromwell REIT takes on more properties from its sponsor.
Another thing here — currency risk. Since Cromwell REIT is denominated in EUR, a stronger SGD currency could well affect dividends collected from this REIT.
The good thing is a 9.2% dividend yield could help buffer losses due to currency depreciation. So expect this dividend yield to drop if EUR depreciates against SGD.
Overall, I find this REIT a speculative dividend play — small, niche European-focused REIT, which carries both currency risks and problem of heavy rights issue in the future.
If you ask me, Cromwell REIT is a decent buy for income. But this will probably go into my “non-core” part of a dividend portfolio.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Willie, I agree with most of what you said, but there are a few headwinds with European reits. The Euro is low at present after steadily falling for the last year or two against the SGD. Further, industry expectations are for slow economic growth in the EU zone and this will put more pressure on the reits value and trading performance. However, gearing of 40% is not that high for real estate based stocks outside Singapore, and the maximum allowable gearing is now 50%, thus they still have some room for growth without rights issues. Cash position seems quite good too. I have had Cromwell on the radar for a while without buying any as I have watched the currency values affect it.
Unlike many Asian nations, the EU zone has not recovered lost ground from Covid in the last few years. Growth last quarter was 0.7% after it fell 5.9% in 2020, and forecasts for 2023 are 0.9% to 1% which is too low to maintain employment growth, and GDP per person will be flat. And frankly, I think the EU and major European countries are being overly optimistic at around 1%. This isn’t encouraging and suggests more headwinds for Cromwell. And of course, the war in Ukraine is shaking up many markets, with high inflation likely to continue in the short term. Frankly, without a resolution in Ukraine, it will be a long term issue.
Finally, I do not have a lot of faith at present in European govts and their heads. Their plans never seem to focus on wealth creation, but on wealth distribution and a lot of political theatre, and that is discouraging. The vacancy rate in European properties is also rising despite the fact that Cromwell has so far done okay and has achieved good rental revisions.
In short, I see Cromwell as a trade and buyers need to watch the currency rates as well as European macro economic indicators. I do not see it as a long term stock unless the war is resolved, the currency stabilises and economic growth in Europe improves.
Hi Mark,
Good macro insights.
Yeah, I see Cromwell REIT as a speculative play too. While I was surprised at their decent positive rent adjustments, their properties tend to be smaller in size.
So far, many Singapore REITs have an “internal” gearing cap of 45%. Typically, I don’t see Singapore REITs willing to go beyond 45%, even though MAS gearing cap is 50%. Singapore REITs are conservative this way.
That’s why I thought debt headroom for Cromwell REIT is limited. Thus, they could do more rights issue in future instead.
Willie
A very detailed, balanced and objective analysis indeed. What’s your take on Elite Commercial Reit, has it some edge over Cromwell
Hey Raymond!
To be honest, I don’t like ECR’s small market cap. What I found out about ECR is their long term leases with the UK government.
Actually, most of ECR’s tenants are UK govt agencies, and 92% of their leases are with the UK’s Work and Pension Department. To me, that’s a steady recurring income amidst all the macro headwinds UK is facing.
I don’t expect UK to default (AA-sovereign rating), and even though UK is now faced with currency sell off and rising rates, I doubt that will affect rent payment to ECR.
Willie
What’s your view on CWBU now, following the drop in price since September?
Operationally CEREIT seems to have things under control executing their strategy to move away from office and towards logistic and industrial spaces