Cromwell E-Reit buys back 50 million euros in bonds due 2025
Michelle Zhu
CROMWELL European Real Estate Investment Trust (Cromwell E-Reit) has repurchased 50 million euros (S$72.6 million), or 10 per cent, of its 500 million euro 2.125 per cent bonds due Nov 19, 2025.
Following the repurchase, the aggregate principal amount of the bonds outstanding will be 450 million euros.
On Monday (Dec 18), Cromwell E-Reit’s manager said it expects to book three million euros in profit from the discounted purchase price of the bonds.
Recent divestment proceeds were used to fund the bond buyback.
Simon Garing, the manager’s chief executive, said: “This aligns with our strategy to reduce the refinancing risk of Cromwell E-Reit’s November 2025 bonds ahead of time, to minimise the distribution per unit (DPU) impact of rising interest rates as all Reits transition from the zero interest rate policies of the recent years, and to protect unitholders equity.”
He added: “The alternate use of excess cash would have been to buy back equity, which wouldn’t have diminished the bond refinance risk or helped investors price in the DPU impact of the transition from the low-interest 2.125 per cent coupon of the notes as they matured.”
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The Reit manager expects Cromwell E-Reit to finish FY2023 with an aggregate leverage of about 40 per cent, after accounting for a “minor move” expected from its December investment property valuations.
Garing said further planned asset sales in 2024 will also assist the Reit’s liquidity management, which aims to keep the gearing ratio within the 35 to 40 per cent range.
“Once we progress further on the bond refinance strategy and see the asset valuation cycle turn more favourable, we could potentially use further asset sale proceeds for equity buybacks – noting we are not inclined to use expensive debt to fund equity buybacks.”
The Reit’s latest third-quarter financials indicate that its net gearing as at end-September 2023 stood at 39.7 per cent.
Units of Cromwell E-Reit closed on Friday 0.05 euro or 3.7 per cent higher at 1.40 euros. Based on this, and a 12-month trailing DPU of 16.042 euro cents, the counter trades at an estimated 38 per cent discount to its net asset value with an 11.5 per cent trailing distribution yield.
Garing acknowledged that such levels create “an impression of substantial valuation declines and significant reductions in distributions from the impact of transitioning to higher interest rates”.
“In addition to being 91 per cent-hedged for the next two years, the bond buyback should provide investors additional confidence in our capital management strategies and allow Cromwell E-Reit to be well-placed for when the interest rate and real estate cycles turn.”
Cromwell E-Reit’s move comes ahead of an expected 100 basis point rate cut by the European Central Bank next year, as currently implied by European credit markets.
Considering this, Garing said he believes listed Reits are close to an inflection point as Europe’s property market occupancy fundamentals remained “very healthy”.
“We believe Singapore Reits (S-Reits) that manage this higher debt cost transition well will be better rewarded by investors when the sentiment becomes favourable for S-Reits again.”
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