Cromwell European REIT: Another Yield Accretive but DPU Dilutive Acquisition and Rights Issue

by: Tam Ging Wien

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ProButterfly covered the Cromwell European REIT (“Cromwell”) IPO rather extensively last year. You may review our analysis and coverage below:

Based on our analysis in September, we estimated the fair value of Cromwell to be in the range of €0.54 to €0.57. It listed at €0.55 on 01-Dec-2017 and traded in the range of €0.50 to €0.64, much more volatile than the fair value range that we estimated.

Cromwell has made acquisitions during the last 12 months. Recently on the 31-Oct-2018, it announced its first rights issue to raise approximately €224.1mil to fund its acquisition of a portfolio of 16 predominantly office properties in the Netherlands, Finland and Poland. Besides this acquisition, there are two more acquisitions of 4 logistics and 1 DIY home improvement centre in France and another 2 office properties in Italy.

The portfolio of 16 European assets are valued to be at €315.9mil. Cromwell has received an agreement to purchase these assets at €312.5mil, or about 1.1% below valuation.

The details of the 16 assets are as follows:


As a result of this acquisition, the number of properties in its portfolio will grow from 75 assets to 98 assets. From a total portfolio valuation perspective, the portfolio will grow from €1,390.4mil to €1,780.5mil, more than 28% increase.


But, those size matter?

Are REITs all just about growing its portfolio size and number of assets?

We will examine how this latest announcement will affect Cromwell as a whole.

Reviewing the Impact of Acquisition

The most immediate impact of the acquisition is the increased diversification of Cromwell’s portfolio in terms of geography.

From a real estate sector perspective, the REIT will have a higher concentration of European office portfolios – increasing from 47.9% to 57.0%. Cromwell is now predominantly a European office play and could be somewhat compared to IREIT Global.



The enlarged portfolio does not introduce any new concentration risk in terms of significant tenants. Agenzia Del Demanio or the Italian State Property Agency still remains the largest tenant contributing 13.8% of Cromwell’s gross rental income.

Agenzia Del Demanio is the government agency that is responsible for managing, rationalization and development public real estate assets to maximizing their economic value. We think that the risk of a government agency defaulting on its rental obligations are minimal, hence we think that Agenzia Del Demanio provides stability in Cromwell portfolio.


The management has provided detailed figures of each of the proposed acquisition in the table below:


Overall, we do not see any significant risk introduced to Cromwell’s portfolio through this acquisition.

A Deeper Look at the Rights Issue

Cromwell announced a 38-for-100 rights issue at €0.373 per unit. As a result, a total of 600,834,459 new shares will be created; or approximately a 38% increase in the total unit base. Assuming all the rights will be taken up; Cromwell stands to raise €224.1mil gross to fund the acquisition.

The issue price of €0.373 per rights unit is:

  • approximately 31.6% to the closing price of €0.545 per Unit on 30-Oct-2018, being the last trading day of the Units prior to the announcement of the Rights Issue
  • approximately 25.0% to the theoretical ex-rights price (“TERP”) of €0.498 per unit

We consider the discount rather steep, but similar to the recent rights issue announcements made by Keppel-KBS US REIT and OUE Commercial Trust. You would recall that Keppel-KBS US REIT announced a rights issue to fund the acquisition of its Westpark Portfolio while OUE Commercial Trust raised a rights issue to fund its acquisition of the office components of OUE Downtown. Do click on the links to take a look at our analysis of these acquisitions.

Similar to Keppel-KBS US REIT and OUE Commercial Trust, such steeply discounted rights issue would push its price below the theoretical ex-rights price. As at point of writing on the close of 07-Dec-2018, Cromwell's share price ended at €0.42.

The manager estimated that after deducting the cost of fund raising, the would have net proceeds of €219.9mil of which €170.8mil would be used to partially fund the proposed acquisition of 16 European assets while the remaining €53.3mil will be used to partially fund the remaining Italian and French properties.

This means that the acquisition of the 16 European assets portfolio will be acquired at approximately 45.9% gearing while the remaining Italian and French assets will be acquired at a modest 25.9% gearing. This compares to the current portfolio gearing of 33.9%.

Putting Both the Rights Issue and Acquisitions Together

Source: REITScreener Research, ProButterfly Research

The increase in NAV is estimated by adding the difference between the valuation of the total acquisitions and the total debts incurred in the acquisition. This results in an increase of approximately 18.2%.

On a per unit basis, the NAV per unit would fall from €0.5705 to €0.4887, or a fall of 14.33%.

The units are increase assuming all the rights are taken up according to the 38-for-100 ratio – in other words, the total unit base will increase by 38.0%.

The DPU forecasted are based on annualisation of its financial period since listing on the 30-Nov-2017 until its latest reported results on 30-Sep-2018. The DPU forecast of the enlarged portfolio was estimated based on the pro forma DPU figures provided in the acquisition announcement. DPU is expected to fall 7.78%.

Gearing is also expected to increase from 33.6% to 35.4%.

There is a slight increase in the yield from 8.09% to 8.17% based on the ex-rights price of €0.498.

As a result, this acquisition is yield accretive, however it is not DPU or NAV per unit accretive.

A Quick Comparison with IREIT Global

As IREIT Global is the closest peer that Cromwell would have in terms of real estate assets being predominately European focused in the office sector, perhaps it is a worthwhile exercise to just do a quick comparison between the two.

Source: REITScreener ResearchProButterfly Research

Clearly from the NAV and Market Cap perspective, Cromwell is a much larger REIT compared to IREIT Global. The figures used for the trading price is based on the latest close price for both Cromwell and IREIT Global.

However from a valuation and yield perspective, they are quite similar.

What We Think of the Deal

Interestingly, we think that this deal is very well engineered in terms of the financial figures, very similar to the numbers presented during the IPO. The acquisition and rights issue taken together is well calculated to provide a yield accretive acquisition to the unitholders.

However, while it may be yield accretive, it is not DPU or NAV per unit accretive. Therefore unitholders who do not take up the rights issue will suffer a fall in their DPU as a result of the dilution.

Based on the closing price of €0.42 at the time of writing, the yield is forecasted to be 9.69%. We expect that Cromwell too will likely stay below its theoretical ex-rights price €0.498 of in the medium term.

Cromwell has held up relatively well since its IPO in December 2017. We have previously covered the IPO of Cromwell European REIT and it may serve unitholders to review the assumptions made at that point of time. However it seems just like OUE Commercial REIT and Keppel-KBS REIT, Cromwell European REIT is not immune to the effects of a dilutive DPU and NAV per unit and its share price would have to fall to compensate for the lower DPU and NAV per unit.

As a result of this deal, NAV per Unit is dilutive owing to the fact that the base units are increased by 38.0%, much more than the NAV gain of 18.2%.

Gearing will also increase by 1.8% to 35.4%. This will also likely result in a slightly higher interest cost.

The increase in the portfolio size will also likely increase the management fee to the REIT Manager going forward.

It remains to be seen on how the acquisition can contribute to the organic growth of Cromwell in the longer term.

We personally won’t be too quick to jump into this REIT just yet and would rather watch on the sidelines and monitor its performance going forward before making a decision.


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