• Maintain BUY and EUR2.10 TP, 47% upside and 11% yield. Cromwell European REIT’s 2H23 DPU met expectations. Portfolio occupancy, although dipped slightly, remains high at >94% with positive rent reversions, which is expected to continue this year. CERT has a comfortable balance sheet position with high liquidity on the back of its proactive divestment strategy over the last two years. Asset redevelopment plans offer medium-term upside potential, in our view, and the REIT is undervalued, trading at >c.30% discount to book.

• Adjusted 2H DPU -4% YoY, +1% HoH; flattish FY24 DPU expected. Adjusted FY23 DPU (excluding divestments and acquisition) fell 4% YoY mainly from higher financing costs (+33%) offsetting NPI growth. Portfolio value (excluding capex) fell by a modest 3% YoY and 6% YoY (including capex), on stronger logistics performance and diversified asset portfolio. The resilient performance is backed by CERT’s ongoing pivot towards the European logistics sector, which now accounts for c.53% of total. All-in interest cost is expected to peak at c.3.4% this year as c.88% of its debt remains hedged.

• Targeting another EUR170m divestments in the next two years. The bulk of the divestments ahead are likely to come from its Poland and Finland office portfolio. CERT has been the stand out among overseas S-REITs that have managed to successfully execute divestments in last two years amid the challenging market. It has divested eight assets since FY22 raising EUR237m in proceeds at a blended 15% premium to the latest valuation. The successful divestments, in our view, is a testament to the REIT’s strong on-the-ground management team efforts and good quality bite-size assets in attractive locations.

• Portfolio occupancy saw a slight dip but remains high at 94.3% (-90bps QoQ) mainly from increased vacancies of its Denmark light industrial assets and development completions in the Czech Republic and Slovakia that are still ramping up. Office occupancy, on the other hand, rose 120bps QoQ to 90.3% with more leasing done in Netherlands and France. While some large office tenants have been reducing space upon lease renewals – this has been largely backfilled. Rent reversion (2H23) remains healthy, at +5.7%, and we expect this to remain in the mid-single digits in FY24.

• Asset redevelopment plans on track, with the completion of Nervesa 21, Milan and two smaller warehouse developments last year. CERT still has a pipeline of >EUR200m development plans across four assets, with the largest value driver being the redevelopment potential for Parc des Docks in Paris.

• We fine tune FY24F-25F DPU by +1%. ESG score of 3.3 (out of 4.0) is two notch above the country median and as such, a 4% ESG premium is included to our TP.

Source: RHB Research - 27 Feb 2024