SINGAPORE, Nov. 10, 2023 /PRNewswire/ — Quarz Capital commend the Board of Directors and management team of Cromwell European REIT for their operational excellence. CEREIT is currently trading at a massive discount of nearly ~50% to NAV, with an attractive recurring forecasted dividend yield of ~13.2% despite its high quality portfolio and strong recurring rental income. There is a number of significant and attractive engines of growth which can further drive DPU growth. We urge Cromwell European REIT to take advantage of the attractive pricing opportunity to buy back its units, potentially increase dividend yield to ~14% and deliver a potential total return of >40% to unitholders over the mid-term.
QUARZ CAPITAL ISSUES OPEN LETTER TO
THE MANAGEMENT AND BOARD OF CROMWELL EUROPEAN REIT (SGX: CWBU)
ALL RECIPIENTS ARE ADVISED TO READ
"IMPORTANT DISCLOSURE INFORMATION"
AT THE END OF THE ATTACHED LETTER
10 November 2023
TAKE ADVANTAGE OF THE SIGNIFICANT ~50% DISCOUNT IN UNIT PRICE TO NAV BY INITIATING A UNIT BUYBACK TO POTENTIALLY INCREASE DIVIDEND YIELD ABOVE 14% AND BENEFIT ALL EXISTING UNITHOLDERS
– POTENTIAL TOTAL RETURN IN EXCESS OF 40% OVER THE MID-TERM –
Dear Mr Garing, Mr Lim and Members of the Board,
Quarz Capital with its affiliates collectively are one of the top 10 unitholders of Cromwell European REIT ("CEREIT", "Cromwell REIT", "CERT SP", "SGX: CWBU" or "SGX: CWCU"). We commend the Cromwell team for its first-rate operational execution. Our investment demonstrates our conviction that CEREIT is a highly attractive investment opportunity.
CEREIT is the 16th largest[1] SGX-listed REIT with more than ~S$3.5 billion (€2.4 billion[2]) of office, industrial and logistics assets predominantly in the strongest and largest developed European economies, such as France, Germany, Italy, and the Netherlands.
Cromwell’s high-quality office and industrial portfolio
Cromwell REIT’s high-quality office portfolio, which accounts for ~47% of asset value[3], is mainly located in the Netherlands and Italy. Nationale Nederlanden, the largest insurer and pension provider in the Netherlands, is the 2nd largest tenant in CEREIT’s portfolio and the largest tenant in the iconic Haages Poort Grade A office asset in the Hague. It recently renewed its lease for another 15 years. Other major tenants in Cromwell’s office assets include Essent (largest energy company in the Netherlands), Employee Insurance Agency of the Netherlands and Kamer van Koophandel (Chamber of Commerce of the Netherlands[4]), Coolblue (largest electronic e-commerce company in the Netherlands), Aramco Europe and McDermott (global energy solutions provider).
CEREIT was also one of the earliest S-REITs to strategically pivot to the faster-growing and more resilient logistics and industrial segment (~51% of asset value[3]). Being the first mover in this area has enabled Cromwell REIT to own a number of assets with sizeable landbanks with the potential for further significant development to increase rental income and DPU. This allows CEREIT to execute its own development projects so that all unitholders can benefit from the development profit and valuation uplifts. This is far more advantageous to unitholders than buying fully developed and optimized assets where there is potentially less upside for rental and valuation uplifts.
‘Engines’ to drive substantial growth in DPU and NAV
The completion of Nervesa21 (Milan) in 1Q2024 (9 minutes by train to Duomo, already 70% pre-leased to a communications MNC and a technology firm), Maxima (Rome) in late 2025 will further drive Cromwell REIT’s rental income in the near-term.
We are particularly excited about Cromwell’s freehold Parc des Docks asset in Paris. The asset is just 4km from the Arc de Triomphe and Avenue des Champs Elysees. The Olympic village for the 2024 Paris Olympics is just 1.4km away. Infrastructure preparation for the Olympics has resulted in a new metro station to be built just 500m from the Parc des Docks asset which links to Central Paris with just 3 stops. The rejuvenation of the surrounding as well as the construction of the Olympic village has resulted in the area to be currently termed as ‘Europe’s largest construction site[5]’ as large-scale residential and commercial developments as well as transportation infrastructure and amenities are built in the area.
Cromwell REIT’s Parc des Docks spans more than 1 million sqft of land space but currently has a built-up lettable area of just ~789,500 sqft. We are highly excited about the potential development of this mega site which can be developed in phases into a substantial ramp-up logistics hub and mixed-use development (residential, commercial, life science cluster etc). All this can potentially yield more than ~3x its current lettable area and substantially increase CEREIT’s rentable income, DPU and NAV. CEREIT is currently in planning phase 3 for the redevelopment of Parc des Docks.
The significant number of attractive developments due to the excess landbank and AEI opportunities at CEREIT’s portfolio to increase DPU and NAV also means that there is minimal need for CEREIT to take market and pricing risk to purchase 3rd party assets.
~94% of loans hedged and low leverage of ~36.8% provide strong DPU visibility and stability in 2024
The sale of more than ~S$270 million (€188 million) of assets in the last months at a premium of ~10% to CEREIT’s December 2022 book value despite the higher interest rate environment further affirms the attractiveness of Cromwell REIT’s high-quality portfolio. The asset sale has also significantly reduced CEREIT’s leverage to ~36.8%, with a potentially insignificant impact on DPU.
More than 94% of Cromwell REIT’s debt in 2024 is hedged to a fixed rate. This provides strong DPU visibility and stability for 2H2023 and 1H2024 DPU.
With core euro area inflation rate MoM[6] declining significantly to an average of ~0.2% for the last 3 months to October 2023 (annualized ~2.3%), we believe that the ECB, which has stopped increasing interest rates in September 2023, will potentially begin cutting rates from 2Q2024. This is in view of the potentially lower inflation rate going forward.
The potential reduction in interest rates is projected to provide a strong lift-off in Cromwell REIT’s DPU from 2H2024 as CEREIT’s interest rate hedges begin to roll off. This will potentially result in lower interest rate expenses, which will drive DPU to unitholders substantially higher.
CEREIT’s unit price is trading at a massive discount of ~50% to NAV, with an attractive recurring forecasted dividend yield of ~13.2%[7]
Despite the high-quality portfolio and the DPU growth catalysts, Cromwell REIT is currently trading at a severe discount of ~47% to its NAV per unit of €2.3[8]. This is the 2nd largest discount among S-REITs with assets of more than S$3 billion. CEREIT’s current unit price of €1.22 is ~13% lower than its lowest unit price of €1.40 during the depths of the COVID-19 crisis in 1H2020.
Due to the substantial fall in unit price, CEREIT’s forecasted dividend yield for 2024 is currently a highly attractive and compelling ~13.2%.
This forecasted dividend yield is strongly supported by the 94% fixed-rate hedge and lease expiry of only 11% in 2024. The forecasted 2024 dividend yield is also at a high premium of ~70% to Cromwell REIT’s average dividend yield of ~7.8% from 2019 to 2022. This is an increase of more than 500 bps which is far in excess of the increase in the 3-month SIBOR rate.
Unit buyback can increase forecasted dividend yield to ~14% and NAV for all existing unitholders
Cromwell REIT proudly states on its website that ‘our investors are at the forefront of everything we do’. When the board tabled the unit buyback mandate in April 2023, the primary intention seemed (and still seems) to be to protect and benefit CEREIT’s unitholders by repurchasing units when the price trades at an abnormal and unreasonable discount to CEREIT’s intrinsic value and potential.
With Cromwell REIT’s unit price dropping to nearly half of its current NAV of €2.3, this enormous valuation gap provides an unparalleled and highly attractive opportunity for CEREIT to buy its units back, to the substantial benefit of existing unitholders given its still low leverage level.
A ~S$60million unit buyback program, which will only increase leverage slightly from ~36.8% to ~38.5%, will result in both CEREIT’s DPU and NAV per unit to potentially increase by more than ~6%, driving a dividend yield of more than 14% and NAV per unit of €2.44 for all existing unitholders. This is as the DPU and NAV from the repurchased units will be re-distributed to all existing unitholders.
Most importantly, the unit buyback at nearly half of CEREIT’s NAV will also demonstrate the manager’s confidence in the high-quality portfolio and its own execution capability to further create value for CEREIT.
CEREIT previously raised money from investors near its NAV to purchase assets near book value. This correspondingly increased the fees to the REIT and property manager. Now is the time for management and board to act in the best interest of unitholders and demonstrate their confidence in the assets that they have purchased by buying back the portfolio at a near 50% discount to NAV.
Our discussions with a number of long-term CEREIT unitholders have also confirmed overwhelming support for CEREIT to buy back its units due to the attractive and sizeable increase in DPU and NAV benefits for all existing unitholders.
Unit buyback at CEREIT can catalyze potential total return of more than 40% in the mid-term
We want to be very clear that we are highly supportive of the current management team, not only for its operational achievements, but also its strong commitment to ESG and investor relations. Our only concern relates to the unit buyback program which we believe should be executed immediately to benefit CEREIT and its unitholders.
With investors’ increased confidence and higher DPU and NAV due to CEREIT’s unit buyback, incremental rental income from the completion of Nervesa21 (Milan) and Maxima (Rome), increased visibility on the Parc des Docks (Paris) development project as well as a potentially lower interest rate environment from 2H2024, we are highly confident that Cromwell European REIT can potentially deliver a total return of more than 40% for all unitholders in the medium term. Quarz looks forward to working with the board and management team of CEREIT to move expeditiously on delivering value to all unitholders.
Sincerely,
Mr. Jan F. Moermann
Chief Investment Officer, Quarz Capital
Mr. Havard Chi, CFA
Head of Research, Quarz Capital
For further information, please contact:
[email protected]
Important Disclosure Information
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF CROMWELL EUROPEAN REIT’S SECURITIES AND ACTION THAT CROMWELL EUROPEAN REIT’S BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. CROMWELL EUROPEAN REIT ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE, NOR DO WE INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF CROMWELL EUROPEAN REIT’S SECURITIES, THIS LETTER DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE AT WHICH CROMWELL EUROPEAN REIT’S SECURITIES MAY TRADE AT ANY TIME. AS NOTED, THIS LETTER EXPRESSES OUR CURRENT VIEWS ON CROMWELL EUROPEAN REIT. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF CROMWELL EUROPEAN REIT SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING CROMWELL EUROPEAN REIT WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING CROMWELL EUROPEAN REIT AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED IN THIS LETTER.
As of the publication date of this report, Quarz Capital and its affiliates (collectively "Quarz"), others that contributed research to this report and others that we have shared our research with (collectively, the "Authors") have long positions in and own options on the stock of the company covered herein (CROMWELL EUROPEAN REIT) and stand to realize gains in the event that the price of the stock increases. Following publication of the report, the Authors may transact in the securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented "as is", without warranty of any kind – whether express or implied. The Authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this report or any information contained herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors’ views as of this date, all of which are accordingly subject to change. The Authors’ opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of the Authors. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors’ abilities and beliefs, all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that the Authors are long units of CROMWELL EUROPEAN REIT and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the company’s common equity is higher than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors’ operations and their affiliates. The compensation structure for the Authors’ analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors’ documents.
The information contained in this document may include, or incorporate by reference, forward- looking statements, which would include any statements that are not statements of historical fact. Any or all of the Authors’ forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the Authors’ control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this letter are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance or activities and are subject to many risks and uncertainties. Due to such risks and uncertainties, actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Forward-looking statements can be identified by the use of the future tense or other forward-looking words such as "view," "believe," "convinced," "expect," "anticipate," "intend," "plan," "estimate," "should," "may," "will," "objective," "project," "forecast," "management believes," "continue," "strategy," "promising," "potential," "position" or the negative of those terms or other variations of them or by comparable terminology.
Important factors that could cause actual results to differ materially from the expectations set forth in this letter include, among other things, the factors identified in the risk sections in CROMWELL EUROPEAN REIT ANNUAL Report for the year ended DECEMBER 31st, 2022 and prospectus. Such forward-looking statements should therefore be constructed in light of such factors, and Quarz Capital is under no obligation, and expressly disclaims any intention or obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
[1] By asset value
[2] Based on Cromwell European REIT’s Financial Statement end 30 June 2023.
[3] Pg 3 of Cromwell European REIT Divests Viale Europa 95 in Bari, Italy (9 Oct 2023)
[4] https://business.gov.nl/partners/netherlands-chamber-of-commerce/
[5] https://www.sortiraparis.com/en/news/olympic-games-paris-2024/articles/290975-paris-2024-olympic-games-we-visited-the-athletes-village-construction-site
[6] Euro Area Core MUICP MoM NSA (Bloomberg)
[7] Unit price of €1.22 on 9 November 2023
[8] Based on Cromwell European REIT’s Financial Statement end 30 June 2023
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