Cromwell European REIT‘s (SGX: CNNU) (SGX: CSFU) share price (technically known as unit price for REITs) stands at €0.535 (or S$0.825) at the time of writing.
According to Seedly’s REITs tool, at that unit price, Cromwell European REIT has an attractive distribution yield of 7.6%.
Even though the yield looks enticing, we shouldn’t buy REITs based on distribution yields alone. Instead, we should analyse a REIT holistically by looking at other aspects of the REIT as well.
Here, let’s use a 10-step framework to understand if Cromwell European REIT is an excellent REIT to buy.
As a summary, here are the 10 steps to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
Cromwell European REIT owns real estate assets in Europe that are mainly used for office, light industrial or logistics, and retail purposes. The REIT was listed here in November 2017 at an IPO price of €0.55.
As of 31 December 2019, Cromwell European REIT had 103 properties scattered across Denmark, the Netherlands, Italy, Finland, Germany, Poland, and France.
Cromwell European REIT’s sponsor is Australia-listed Cromwell Property Group (ASX: CMW), a real estate investor and manager with operations in 15 countries.
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
Cromwell European REIT’s financial year ends on 31 December each year.
I like to look at five-year growth rates as that will be more representative of long-term growth.
However, since Cromwell European REIT was only listed recently, I will compare the REIT’s 2019 financial results with that of 2018.
| 2018 | 2019 | Year-on-year growth | |
|---|---|---|---|
| Gross revenue (€' million) | 124.6 | 177.0 | 42.1% |
| Net property income (€' million) | 82.9 | 116.1 | 40.1% |
Cromwell European REIT’s gross revenue and NPI both grew strongly in 2019.
The strong topline performance was largely due to income contributions from newly acquired and onboarded office assets, as well as the better leasing performance from the REIT’s light industrial/logistics portfolio.
Even though Cromwell European REIT’s gross revenue and NPI have exhibited growth, I’m only giving half a point here since the REIT doesn’t have a five-year listed history yet.
Verdict: Pass (0.5 point instead of 1)
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
With the uptick in 2019 gross revenue and NPI, Cromwell European REIT’s DPU has grown as well.
| 2018 | 2019 | Year-on-year growth | |
|---|---|---|---|
| Distribution per unit (Euro cents) | 3.75 | 4.08 | 8.8% |
In the latest earnings release, Cromwell European REIT’s manager said that it expects the REIT’s 2020 DPU to be at or above that of 2019, barring unforeseen circumstances.
Just like the previous factor, since the REIT has a short listed history, this criterion is only getting half a point.
Verdict: Pass (0.5 point instead of 1)
3. Property Yield Check
Check for: Property yield of between 5% and 9%
For 2019, Cromwell European REIT had an NPI of €116.1 million and a portfolio value of €2.103 billion. This translates to a property yield of 5.5%.
Cromwell European REIT passes this criterion.
Verdict: Pass
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 December 2019, Cromwell European REIT had a healthy gearing ratio (also known as aggregate leverage) of 36.8%, which is below 40%.
Cromwell European REIT’s latest gearing ratio is also well within the 35% to 40% range set by the REIT manager’s board.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
Cromwell European REIT has a high interest coverage ratio at 8.6x, which is commendable.
Verdict: Pass
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
As of 31 December 2019, Cromwell European REIT’s portfolio occupancy stood at 93.2%, an improvement from 90.8% at the end of 2018.
Verdict: Pass
7. Rental Reversion Check
Check for: Positive rental reversions
For 2019, around 8% of Cromwell European REIT’s portfolio net lettable area was renewed, and its overall rental reversion was a positive 3.7%.
Verdict: Pass
8. Growth Prospects Check
Cromwell European REIT has many ways to grow.
For one, the majority of its properties have leases that are linked to inflation or similar indices, providing Cromwell European REIT with organic growth.
The REIT’s growth can also come from asset enhancements. In its 2018 annual report, it mentioned:
“We have also identified a number of suitable refurbishment and repositioning opportunities for a number of assets in our portfolio and will embark on asset enhancement initiatives to improve their marketability.”
Other than built-in rental growth and potentially higher income post-asset enhancements, Cromwell European REIT also grows through acquisitions.
On that front, the REIT’s manager said in its 2019 earnings release that it is acquiring a portfolio of three freehold light industrial / logistics assets in Germany. The properties come with an attractive 15-year, triple-net, 100% index-linked leases.
Cromwell European REIT is able to have access to such acquisition opportunities due to its sponsor’s pan-European platform and pipeline sourcing capabilities.
Verdict: Pass
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At Cromwell European REIT’s unit price of €0.535, it is valued at a PB ratio of 1.04x, which seems to be fair.
Verdict: Pass
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At Cromwell European REIT’s unit price of €0.535, its distribution yield stands at 7.6%, which is way above 5%.
Verdict: Pass
The Final Verdict
Cromwell European REIT has a final score of 9/10.
The REIT ticks the right boxes with its growing gross revenue, NPI, and DPU; strong balance sheet; high portfolio occupancy rate; and decent growth prospects.
However, I’m not willing to invest in Cromwell European REIT right now given its short listed history.
I prefer to invest in companies and REITs that have a track record as a listed entity.
Therefore, I’m placing Cromwell European REIT on my watchlist to monitor how things pan out in the next few years.
What Are Your Thoughts on Cromwell European REIT?
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Stock Discussion on Cromwell European REIT
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
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