by: Tam Ging Wien
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This is a follow up post relooking at the revised offer of Cromwell European REIT's Re-Launched IPO. Refer to ProButterflyTM's previous post entitled Analysis of Cromwell European REIT IPO and Cromwell Suspends CEREIT’s IPO.
Australian real estate investment manager Cromwell Property Group (Cromwell) has relaunched it Cromwell European REIT IPO in Singapore again. This comes after its initial launch in September which it later suspended. We understand from various news reports that this is due to an underwhelming response for its IPO due to locations which are unfamiliar to the target investment market.
Cromwell aims to inject 74 (down from 81 previously) of its Europeans assets into Cromwell European REIT (SGX; CEREIT). CEREIT is a Real Estate Investment Trust (REIT) which draws rental income from various real estate classes across Europe; mainly in Netherlands, Italy and France with limited assets in Germany and Denmark.
The 7 Polish retail assets have been removed from this current re-launch.
The nature of the real state are a mix of offices (47.4%), light industrial/logistics (42.1%) and others (10.5%).
At the time of writing, CEREIT has lodged a preliminary prospectus for a listing on the Singapore Stock Exchange (SGX) mainboard. There is a total of 428,535,000 (428.5mil) units on offer at a price of €0.55 per unit.
Another 581,819,000 (581.8mil) units are reserved for the cornerstone investors namely:
Gordon Tang and Celine Tang are the founders of property firm SingHaiyi Group are new cornerstone investors in this re-launch and will collectively acquire 13.9% stake in CEREIT alongside original cornerstone investors Cerberus Singapore and Hillsboro Capital, each with a 11.6% stake.
This would mean that the total gross proceed targeted to be raised from both the cornerstone investors and public offer will amount to €555.7mil, a reduction from the previous target figure of €871.2mil. The appraised value of the Polish assets in the earlier launch stood at €480.4mil.
This listing will be denominated in Euros (€) making it the first euro-denominated REIT listed on SGX.
Source: Cromwell European REIT Preliminary Prospectus
The revised public offer has been summarised in the table below:
Source: Cromwell European REIT Preliminary Prospectus
The way CEREIT’s asset portfolio is structured doesn’t make it very easy to compare. It has a mix of offices, industrial/logistics among other asset types. There is only one other European REIT at the moment which is IREIT Global which has assets only in Germany for offices only. This makes our comparative analysis a little more difficult due to its mixed-European assets.
Therefore, we have decided to use IREIT Global to give us a sense of European real estate and compare them to 2 other office and industrial each based on the largest market capitalisation. This allows us to produce an equally weighted average and engineer our own pseudo-mixed REIT. As IREIT Global is the only REIT with European exposure, our pseudo-mixed REIT is still not able to give us the full European flavour to the comparison. But without a better way to compare, we decided to continue on.
We tabulated the data up with the following comparison table:
Source: Various Annual Reports and Presentation Slides
Using the largest market capitalisation method of selecting the comparison, our selections tend to be REITs which are quite well known to local investors. However, the selection is also geographically skewed to assets located in Singapore.
Looking at the averages, it appears that CEREIT is fairly valued with an offer of between Price/NAV per unit of between 1.0341. Gearing is on the slightly higher side with 36.80% giving us the impression that this is a more mature REIT. However, it offers a much higher yield of 7.82% making CEREIT quite attractive compared to the average yield of only 5.69%. However, its higher yield is comparable to IREIT Global with a pure play of European assets.
We would have personally preferred that the CEREIT had a lower gearing (say lower than 30.0%) so that it would have more debt headroom to borrow and grow in the future. With an average gearing, we don’t expect future growth through acquisitions to come fast without either raising more capital through rights issue or perpetual securities. The later will not affect its gearing but will contribute to higher interest payments.
We did notice however that their occupancy rate is lower than 90% and this doesn’t compare as favourably as our other REITs.
We like the REIT better now that the sponsor has a much higher interest of 35.8% compared to 12.7% previously. This gives us some comfort that the sponsor now has a much better aligned interest with shareholders and does not appear to give the impression that they wanted to package and divest as much of its stake as possible.
For a more in-depth look at other aspects of CEREIT, to refer to our previous analysis entitled Analysis of Cromwell European REIT IPO.
We have chosen to a value CEREIT based on Discounted Dividend Model as the projected growth rates of 2.32% is provided by the preliminary prospectus for Forecast Period 2017, Projection Year 2018 and 2019 with an annualised figure of 4.08c, 4.30c and 4.40c respectively.
We have also chosen a discount rate of between 3.5% to 4.0% as this represents the premium that we demand over the risk free rate of the CPF ordinary account interest rate of 2.5%.
We have also chosen to a flat 15-year period to sum with no terminal value. We believe that these assumptions account for both the benefits and stability that CEREIT brings as well as the risk that investors take on.
Using the dividend discount modal, we get a range between €0.539 and €0.559 which is within the range of the €0.55 offer price.
While there is no REITs that we are aware of with the similar characteristics of CEREIT, we have chosen to create our own pseudo-mix REIT using an equally weighted average of IREIT Global and 2 of each office and industrial REITs each based on the largest market capitalisation. The result of our comparison is summarised in the table in the early section of the article.
Based on the comparison, we conclude that the valuation is slightly undervalued with a Price/NAV per Unit of only 1.0341 vs IREIT Global’s 1.1243 and “Pseudo-Peer’s” 1.1437. The yield on the other hand is much higher than its Singaporean REIT counterparts but comparable to IREIT Global.
Together with the information from the Discounted Dividend Modal, we think that Cromwell has priced this REIT at its most optimal point taking into account the positive sentiments of the REITs and pricing them at fair value both from a Price/NAV perspective and Dividend Discount Modal.
We think that the offer now is far more attractive. However with the higher gearing, we suspect that the upside for investors is also somewhat limited.
We encourage readers to also review our past analysis for CEREIT as in our previous post in September entitled Analysis of Cromwell European REIT IPO for a more wholistic perspective.
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