Updated 19 Sept 2017
Cromwell REIT (CEREIT) recently published new information regarding their upcoming IPO on Sept 21, 2017.
Had a look through their latest prospectus (18 Sept 2017) at MAS OPERA to find out the key points.
Assets in Denmark, Poland, Netherlands, Germany, France and Italy
Diversified portfolio
Greater value of properties in Poland, Netherlands and Italy.
Even exposure to office, industrial and retail. Suggests good diversification benefit. However, manager needs to have expertise to manage properties in different asset classes.
Yield of 7.5% to 7.7% on face value is attractive
Majority of leases expire after FY2022
Suggests stable and fairly secure stream of income for the next few years.
WALE of 5.1 years
For such a diversified portfolio by asset class, the WALE is average. No pluses or minuses here.
Portfolio tilted towards logistics tenants
Expected leverage between 34.2% and 36.5%
Personally would have preferred it to be about 31% or below to be on the safer side and to provide headroom for acquisitions.
Only one rental guarantee
Good sign compared to other recently listed REITs that had rental guarantees/ financial engineering.
While all rental guarantees should be avoided, a small one like this shouldn’t raise many red flags.
Growth drivers
Positive: Inflation linked leases that protect against inflation erosion. Not a big issue as inflation in Europe is quite low at approximately 1.5% in 2017.
Positive: Leasing up vacant space as occupany of the IPO portfolio was 89.3% at 30 April 2017.
REIT managers
Executive managers of the REIT look fairly experienced based on their past careers.
Will not be able to tell their future performance of team dynamics until after IPO.
Negatives
No mention of a pipeline of properties. Management will need to be able to sniff out good deals on the ground. This cannot be tested until after 1 or 2 years from IPO.
Will I invest?
Yes but the allocation will not be big based on my own portfolio situation. Disclaimer: this decision is based on my own investment circumstances.
- I want some exposure to Europe real estate
- Yield of approximately 7.5% is quite attractive based on my own portfolio
- No income guarantee is a good sign
- Sponsor is a reputable company
- Negative: The IPO looks like a listing for the sellers to reap a good return off their portfolio. Is the Singapore investing public the suckers?
- Preferred not to have such a big portfolio. Can the managers cope with managing 1,000+ leases across logistics, office and retail asset classes?
- Preferred the REIT to have gearing of about 30, 31% instead of approximately 35+%
Section below published on 7 Sept 2017
SGX recently announced that Crowmell Property Group, a global real estate manager, is setting up a REIT in Singapore. This post lists reviews a few things before dropping some money in the IPO.
At S$1.6 billion, the IPO is one of the largest REIT IPOs in recent times.
Some REITs that listed recently include EC World, Manulife REIT and BHG Retail REIT. Honestly, I had never heard of Forchn Holdings (sponsor of EC World) and BHG (apparently not the same as the BHG department store in Clementi Mall and Bugis Junction according to BHG’s website).
And when news broke of Cromwell coming to Singapore, I was wondering, why is SGX attracting sponsors of all shapes and sizes?
I do hope that Cromwell does not engage in financial engineering (aka distribution waivers, master-leased arrangements) like other REITs that recently listed.
If all goes well, the IPO will take place at the end of September.
In preparation for possibly investing in the IPO, I decided to do some digging on Cromwell Property Group’s background.
Who are they?
They’re a global property group with AUD$10.1b in assets under management.
They’ve got 340+ properties,spanning 4.1 million sqft with 3,600 tenants.
3 business lines
- Direct property portfolio
- Wholesale funds management
- Retail funds management
No news is out yet on which business line the Cromwell REIT listed on the SGX will be under.
Direct property portfolio
They have 30 properties in Australia under their direct property portfolio line. Some of them are notable buildings such as Qantas HQ and Oracle building. This speaks of their tenant quality.
15 assets are in Sydney, followed by Brisbane with 7, Melbourne with 5 and Adelaide with 3.
Wholesale funds management
Their wholesale funds management business targets global institutional investors, private equity, banks, capital partners and sovereign wealth funds from around the world.
Their funds mandate contribute AUD9.8 billion to their AUM.
A selected list of their funds on their website include the following
Retail funds management
Their retail funds management business has listed and unlisted property funds.
Cromwell Partners with Phoenix Portfolios Pty Ltd, a boutique investment firm, and jointly manage two listed property securities funds.
As a value manager, Phoenix looks to achieve outperformance by identifying securities representing good value and whose fundamental attributes are inconsistent with their current prices and selling once they become overpriced.
Assets are in small European cities
In the straits times, it was reported that
[…] this Reit would comprise European properties with a focus on Europe’s smaller cities […]
Now this is something that caught my eye, but not in a good way.
Few questions arise
- Why would Cromwell list an SGX REIT that has a portfolio of properties in Europe’s smaller cities?
- Naturally, which European cities are these?
- What asset classes would these assets be in?
- How are these European cities and asset classes performing?
- What is the motivation of Cromwell in injecting these assets in the smaller European cities into the REIT?
From JLL’s Office Property clock for European cities, majority of the markets are in the stage where rentals are slowing. Not a good sign.
Brexit would be something to watch out because it can help non-UK countries with space absorption, rental growth and inbound investments etc.
Suffice to say, the macro economy and state of property market in these cities should be something to watch out for.
Based on what I know, the smaller European cities aren’t doing so well in terms of their property market performance.
We shall wait and see which cities the assets are exactly in.
There should be nothing to worry in terms of corporate governance and expertise in real estate investments and asset management.
This is because a mid-tier developer is unlikely to be able to list multiple property funds, partner with sovereign wealth funds and maintain a global presence.
Cromwell also appears to have experience across the capital stack (debt and equity), listed and unlisted, and special situations based on their case study statement.
Sponsor stake
From deal street asia, another important piece of information I picked up is that the sponsor intends to hold 10% in Cromwell REIT following the IPO.
Why the small-ish amount?
It could possibly be that Europe has a widely held rule. The Australia and US version of this tax rule reads something like – if any single investor, person or company, owns more than 10% in the REIT, the REIT will have to pay a higher tax rate.
That’s why no single investor in Frasers Logistics and Industrial trust owns more than 10%. In that way, Frasers logistics and industrial REIT can enjoy a favourable tax regime for all their Australia assets.
Singapore media won’t have much information on the listing, but The Australian has other pieces of good information.
In all, the vehicle could have rights over about $900 million worth of additional properties, which would allow it to give Cromwell’s existing private equity investors in Europe an exit and help the trust grow into one of Singapore’s largest funds.
The statement “[…] give Cromwell’s existing private equity investors in Europe an exit […]” is of importance because it gives a clue as to why Cromwell is listing the REIT.
The next question would be why are the private equity investors looking to exit?
In my experience, most of these sophisticated investors exit when they feel they have extracted full value from the properties. So it means the assets are possibly doing well, and the investors feel it can fetch top dollar.
The IPO route is also one way for private equity investors to exit. Another way is a portfolio sale to another investor.
Bottom line, there must have been a reason for Cromwell to have chosen this exit route. I suspect this has a two pronged purpose
- Cromwell to create another route for them to sell their properties in their parent company
- The private equity investors feel this is the exit that gives them the highest return. It’s well know that Singapore has a strong appetite for REITs.
Yields
The big question that remains for which there is presently no information is the yields commanded by the assets.
With bond yields depressed, equity prices high, real estate valuations high, I won’t be surprised if Cromwell REIT needs some form of financial engineering to give a dividend of 6% which is the average for REITs on SGX.
Then again, ‘smaller’ European cities command higher yields, so that in itself may help the REIT to hit 6%.
The flip side is that investors buy into a REIT that has, uh-hum, crappy assets.
Issue managers are Goldman Sachs and UBS. DBS is the global coordinator.
Invest or not?
Can’t give a yes or no at this present moment, but in summary this is what I will look for.
- Cromwell is a reputable sponsor. This is good.
- Any financial engineering? If yes, not good for investors. Though it does not mean that one can’t invest in a REIT that does financial engineering.
- How is the economy and property market doing in the ‘small’ European cities?
- Who are the REIT managers and what is their capability? Are they proven? (As seen from the Sabana case, REIT managers are an important factor in how the REIT performs)
- Size of REIT at S$1b+ is good which should attract institutional investor interest. Liquidity should be ok.
- For me, oversubscription is not a sign of whether the REIT has sound fundamentals. Heck, investors also subscribe to junk 100 year bonds.
- Historical performance of properties in the portfolio
Share with us, are you looking to invest in Cromwell REIT? What will you be looking out for?
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