• Keep BUY, TP revised to EUR2.05 from EUR2.10, 38% upside, 10% yield. Cromwell European REIT’s indicative 1Q DPU came in slightly below on a timing mismatch from divestment income losses and contributions from redevelopment projects. Nonetheless, the REIT has been making steady progress on its EUR400m divestment plans, with another three asset divestments since the start of 2024. YTD, CERT has been amongst the best performers with a 5% gain, and we see share price recovery continuing with the European Central Bank well poised to begin rate cuts in 2H.

• EUR400m divestment plans on track. Despite challenging capital market conditions CERT announced the divestment of three non-core assets (one each in Poland, Italy, and Finland) so far this year for EUR23m in total and at a blended c.5% premium to the latest valuation. This brings total asset divestments to 11 since the announcement of its asset recycling plans in 2022, with total divestment proceeds of EUR261m at a blended 14% premium over valuation. Another EUR60m worth of assets are currently in advanced stages of divestments. The divestment proceeds should help bring CERT’s net gearing close to c.39% levels and help fund some of its planned asset redevelopment initiatives.

• Contributions from three asset redevelopments to kick in from 2Q. Redevelopments of Nervesa 21 (Italy), Lovosice ONE Industrial Park I (Czech Republic), and Novo Mesto ONE Industrial Park I/III (Slovak Republic) have been completed on budget for EUR60m. Pre-leasing for these assets stands at 70-90%, with full leasing expected by mid-2024 based on current active leasing interest. CERT expects an ROI of c.6.5% on these redevelopments, well above market comparable cap rates of c.5%.

• Strong portfolio rent reversion (1Q) of +9.2% (FY23: +5.7%) – aided by the office (+10.3%) and logistics (+5%) portfolios. Portfolio occupancy did decline 2.2ppts QoQ to 93.4% – mainly on inclusion of redevelopment assets that are currently being leased up. We expect this to increase back to c.94-95% levels in the coming quarter on expected full leasing of redevelopment assets.

• 1Q indicative DPU fell 10% YoY due to lower net property income (NPI) (-3% YoY) on non-core asset sales last year, excluding which same-store NPI would have been higher 5% YoY with increased financing costs (+20%) – partially offset by one-off reinstatement income of EUR1.2m from Padova, Italy. Financing costs rose 9bps QoQ to 3.28%. We expect it to peak at mid- 3% levels this year with c.86% debt hedges and no loan maturity till 4Q25.

• We lower FY24F-26F DPU by 3%, factoring in divestments and tweaking margins and financing cost assumptions. The ESG score of 3.3 (out of 4.0) is above the 3.1 country median score, so we embed a 4% ESG premium to TP.

Source: RHB Research - 3 May 2024