Long leases 'protect Cromwell's Italy assets from Covid-19 impact'

Singapore

CROMWELL European Reit CEO Simon Garing believes Covid-19's impact on its Italian properties will be limited, given long leases locked in at its logistics, industrial and office buildings, which would be less affected compared to retail and hospitality establishments.

Italy is one of the most affected European countries by the Covid-19 virus outbreak, with more than 200 confirmed cases and already seven dead.

While discussing the group's financial performance for FY19, which came in stronger than projected in its 2017 listing prospectus, Mr Garing said capitalisation rates will likely continue to "firm" in Italy, which will offset expected rental increases when the lease of its main tenant, Agenzia del Demanio, the Italian state property office, comes due.

"We have nine properties leased to the Italian government - eight office properties and one campus," he said. In total, it has 18 assets in Italy.

Cromwell European Reit's distribution per unit (DPU) rose 30.4 per cent to 1.03 euro cent for the fourth quarter ended Dec 31, 2019, from 0.79 euro cent a year ago.

Gross revenue was up 64.2 per cent to 50.9 million euros (S$77.2 million) for the quarter, from 31 million euros a year ago. Net property income (NPI) grew 60.4 per cent on the year to 33.6 million euros for the quarter, from 20.9 million euros a year ago. Income available for distribution to unitholders rose 52.6 per cent year on year to 26.3 million euros, from 17.2 million euros a year ago.

The Reit will pay out a distribution of 2.03 euro cents per unit for the period of July 2 to Dec 31, 2019, to unitholders on March 30.

For the full year, DPU was 8.8 per cent higher at 4.08 euro cents, versus 3.75 euro cents a year ago. Gross revenue was 42.1 per cent higher at 177 million euros, while NPI increased 40.1 per cent to 116.1 million euros.

This was driven by demand for its logistics facilities especially for last-mile deliveries. Some of its Paris and Amsterdam properties that serve this need have seen 30 to 40 per cent increases in rentals, Mr Garing said.

The Reit saw income contributions from newly added office assets and better leasing performance in the Reit's light industrial or logistics portfolio. In all, it saw 3.7 per cent rent reversion across new leases in FY19, with occupancy improving 2.4 per centage points to 93.2 per cent from a year ago.

The Reit manager expects the Reit's DPU for FY20 to be at or above FY19's, barring unforeseen circumstances.

It also noted "minimal" impact of the Covid-19 virus in Europe to date, although recent developments in Italy and political disruption in Europe, as well as the post-Brexit impact of a smaller European Union budget may bring headwinds to the European economy.

Meanwhile, Europe's negative interest rates play into its favour and allow it to enjoy an all-in interest rate of less than 1.5 per cent per annum, giving it higher returns on equity compared to spreads in Singapore. "We are a beneficiary of (the central bank's monetary policy) and we see that going for the next three years."

At its Italian properties, precautionary measures such as using hand sanitisers and suggestions to tenants to work from home have also been implemented. Mr Garing said: "We have had a lot of experience in Asia which we have transferred to our Italian team on how to increase sanitary measures."

Units of Cromwell E-Reit closed flat at 0.56 euro.