Cromwell E-Reit reports 7% lower H2 DPU at 0.07903 euro

CROMWELL European Real Estate Investment Trust’s (Cromwell E-Reit) distribution per unit (DPU) fell by 7 per cent to 0.07903 euro for the second half-year ended Dec 31, 2023, from 0.08494 euro the year before.

Gross revenue was down 5.7 per cent to 108.1 million euros (S$157.1 million) for the half-year period, from 114.7 million euros in the year-ago period.

Net property income (NPI) fell 5.3 per cent on the year to 65.7 million euros, from 69.4 million euros.

The manager attributed the NPI decline mainly to divestments in H2 FY2022 and FY2023, loss of income from Italian office asset Maxima for redevelopment, lower rental income due to the rent reduction by government decree for eight Italian properties, and lower turnover rent received by Starhotels Grand Milan, Italy.

Distributable income declined 7 per cent to 44.4 million euros, compared with 47.8 million euros previously.

For the full year, DPU was lower at 0.15693 euro, and distributable income fell 8.7 per cent to 88.3 million euros. Gross revenue was 2.5 per cent lower at 216.5 million euros.

NPI eased 1.8 per cent to 134.3 million for the full year, mainly due to the loss of income from the sale of two Italian assets and from the redevelopment of two Italian offices. Excluding the divestments and developments, NPI for the full-year would have been up 4.1 per cent.

The manager noted that inflation indexation, positive rent inversions and one-off tax benefits brought higher NPI growth, which was however offset by higher borrowing costs and asset sales.

The distribution will be paid on Mar 28 after the record date on Mar 5.

Simon Garing, the manager’s chief executive officer, said during an earnings briefing that the results were “pleasing” and underpinned by positive market fundamentals in both office and logistics.

“We anticipate fundamentals to be supportive for NPI growth, although there may still be DPU headwinds from the transition back to the normal borrowing costs, as well as from the asset sale programme that we’re undertaking,” he said.

He noted that the Reit’s portfolio valuation declined only 3 per cent, with net asset value (NAV) per unit at 2.12 euros.

The 2.12 euro NAV per unit attributable to unitholders was a 12.4 per cent decline from end-2022, which the manager attributed to net valuation loss, fair value loss on derivative financial instruments, and distributions paid out during the year, partially offset by income generated.

In response to a question on whether management would consider unit buybacks, given the current discount to NAV, Garing noted that it is considered at almost every board meeting.

However, he added that the Reit is also selling assets, largely to ensure it has ample liquidity to do developments – which are expected to substantially increase NAV – and to assist in refinancing a bond that would come due at the end of next year.

“Our thought process and our strategy to date is to refinance our debt, ensure that investors have the confidence on the balance sheet, and then if there is any excess or surplus proceeds from asset sales... then a unit buyback really makes sense,” he said. 

Garing said the manager’s priorities include continuing its asset recycling programme as it looks to execute a further 200 million euros of divestments.

It is also working on continued asset management to keep portfolio occupancy high, as well as investing in redevelopments and asset enhancement initiatives to future-proof the portfolio.

The manager has a development pipeline that is projected to cost over 200 million euros. Properties in the pipeline include Haagse Poort in The Hague, Maxima in Rome and De Ruyterkade 5 in Amsterdam

“Our sponsor is helping us with the development of these assets within our own balance sheet, so we’re not having to go into the market and buy prime assets located in this district,” Garing said, noting that this can provide investors a higher yield on cost.

Even so, such developments also come with risk, and the board has opted for a “conservative approach” where it caps the proportion of development to only 5 per cent of the balance sheet, lower than the regulatory cap of 10 per cent.

As at Dec 31, 2023, Cromwell E-Reit portfolio’s weighted average lease expiry remained at 4.7 years, longer than the 4.6 years a year earlier. Portfolio occupancy stood at 94.3 per cent as at December 2023, down from 96 per cent the previous year.

Net gearing, calculated as aggregate debt less cash over total assets less cash, was 38.4 per cent as at end-2023, slightly lower than 38.5 per cent as at end-2022.

The manager highlighted that it completed about 492 million euros of debt refinancing and bond buyback transactions in FY2023, leaving no debt expiring until November 2025.

Some 88 per cent of the Reit’s total debt book was hedged or fixed as at Dec 31, 2023, with an all-in interest rate of 3.19 per cent.

“While we believe that most of the interest rate increases are behind us, we remain vigilant to the headwinds and continue to identify opportunities to offset the related financial and valuation risks brought about by the tighter credit conditions and softening eurozone economy,” Garing said.

“We are cautiously optimistic that the cycle will turn in 2024 and that Cromwell E-Reit is well-placed to capture the opportunities ahead of us.”

Units of Cromwell E-Reit closed on Friday up 0.7 per cent or 0.01 euro at 1.36 euros.