Fitch Ratings has revised the Outlook on Singapore-listed Cromwell European Real Estate Investment Trust (CEREIT) to Positive from Stable, and affirmed its Long-Term Issuer Default Rating (IDR) at 'BBB-'.
The agency has also affirmed the 'BBB-' long-term rating on the trust's outstanding EUR450 million unsecured notes due November 2025, as well as the 'BBB-' rating on its medium-term notes programme.
The programme and notes are issued by CEREIT's wholly owned subsidiary, Cromwell EREIT Lux Finco S.a.r.l, and are guaranteed by Perpetual (Asia) Limited in its capacity as CEREIT's trustee.
The Positive Outlook reflects CEREIT's significant progress in making logistics and light industrial properties the majority of its portfolio, in addition to its core office assets. We believe the shift will raise the trust's exposure to positive structural trends, including increased e-commerce penetration, nearshoring of supply chains and greater inventory stocking.
There is also increasing visibility over CEREIT's ability to maintain its funds flow from operations (FFO) interest coverage above 2.5x, a key upgrade sensitivity, as market interest rates fall from two-year highs. Falling rates are also supportive of a stabilising property investment- and leasing climate in CEREIT's key markets.
The trust's 'BBB-' IDR reflects its geographically diversified portfolio of light industrial or logistics, and core office assets, which generate inflation-indexed rents with a record of healthy occupancy and rental reversions. The trust has demonstrated active property and balance-sheet management, minimising asset value declines during the recent downturn. CEREIT's high-yielding property portfolio, with reported net initial yield (NIY) of 6.3% as of June 2024, is counterbalanced by its strong financial profile and sound liquidity.
Key Rating Drivers
Pivot to Light Industrial, Logistics: Light industrial and logistics assets rose to 54% of the total portfolio valuation by end-June 2024, from 38% when the strategy to increase the focus on these properties was announced in 2022. The trust disposed of EUR261 million of non-core, mostly office properties, over the period at an average premium of 14% to carrying value. This was achieved despite the challenging environment for European real estate amid rising market interest rates and asset valuation declines, supported by CEREIT's active asset management.
Further Disposals Planned: The trust has an additional EUR90 million of properties earmarked for disposal, including EUR40 million currently under discussion. We expect CEREIT to gradually exit regions where it has limited scale and lower-quality assets with weaker occupancy, potentially including its Finnish and French offices, and part of its Polish portfolio. The trust sold EUR23 million in assets in 1H24, including in Finland, Poland and Italy. Our base case does not include asset sales until they are announced, but disposals may present upside to CEREIT's credit metrics.
Measured Redevelopment Activity: We expect the trust to continue to enhance portfolio quality via redevelopments and upgrades. We believe CEREIT will phase redevelopments to keep its regulatory gearing (debt/assets) no higher than 40%, including development costs below the 10% regulatory threshold. CEREIT has a medium-term development pipeline of over EUR200 million, mainly for three assets, with a fourth, Parc Des Docks in Paris, still in the conceptualisation stage. We factor in EUR150 million in capex in 2025-2027, with EUR90 million for the most likely redevelopments announced.
Fitch forecasts the first phase of CEREIT's refurbishment at its core office asset, Haagse Poort in the Netherlands, to span 2026-2027. This is backed by a key tenant's pre-commitment to renew the lease for a significant duration, with minimal downtime during construction. We also expect the trust will redevelop its Amsterdam office, De Ruyterkade, in 2027-2028, following the expiry of the tenant lease, although this will result in significant downtime and temporarily weigh on the asset's occupancy.
Sound Financial Profile: We forecast EBITDA net leverage of 7.0x-7.5x in 2025-2026 (2023: 7.2x), with proceeds from the disposals of non-core properties utilised to refurbish and redevelop assets. Meanwhile, we forecast FFO interest coverage, which includes dividends paid on the trust's perpetual securities, will remain mostly above 3.0x through 2027, based on our expectation the European deposit facility rate will fall by 75bp in 2025 and 50bp in 2026, following a further 25bp cut in 4Q24.
CEREIT had 88% of debt on fixed rates as of 1H24, but its EUR450 million unsecured notes maturing in November 2025, and bank loans of around EUR345 million due in 2026, which were locked in at lower interest rates, will raise the trust's average borrowing costs.
Sponsor Change Neutral: Fitch expects the upcoming change in CEREIT's sponsor to Stoneweg Global Platform SCSp to be neutral to the trust's credit profile. Stoneweg announced in May 2024 that it will acquire Cromwell Property Group's 27.79% stake in CEREIT, 100% of the trust's Singapore management company, and Cromwell's European business, including the trust's property manager. We do not expect the change in sponsor to alter CEREIT's existing investment strategy, governance framework and capital structure, or key management.
Diversified, High-Yielding Portfolio: We expect CEREIT's portfolio occupancy to rise above 95% in the next 12-24 months (1H24: 93.6%) as redevelopments are fully leased and asset-enhancement initiatives are completed. The trust's plans to dispose of more of its non-core properties will also lift portfolio occupancy. CEREIT's rental reversions were strong in 1H24 at 5.2%, with like-for-like net property income rising 2.3%, adjusted for recent asset disposals. The tenant retention rate was sound at 69% amid the healthy rental reversions as lower-yielding tenants repriced or exited.
Improved Portfolio Metrics: CEREIT's EUR2.2 billion portfolio has over 100 properties with the reported NIY of 6.3% at end-1H24. The trust's top-10 assets made up 39% of portfolio value, moderating from over 40% in the last few years. The 10-largest tenants' contribution to headline rent improved to 23% in 1H24 (1H23: 28%), consisting mostly of government agencies and multinationals. CEREIT has a weighted-average lease length (to first break) of 3.6 years and an average expiry of 4.8 years, supporting revenue visibility, with well-spread lease expiries in the medium term.
Perpetual Securities Treated as Equity: Fitch treats the trust's SGD100 million in perpetual securities as 100% equity, as they have strong going-concern and gone-concern loss-absorbing features. These include no maturity date, deep subordination, and the ability to cancel coupons on a non-cumulative basis. CEREIT aims to maintain perpetual securities as a permanent part of its capital structure.
Derivation Summary
CEREIT is rated one notch below SELP Finance SARL (BBB/Stable) and Sirius Real Estate Limited (BBB/Stable), but rated in line with Tritax EuroBox plc (BBB-/Rating Watch Positive). CEREIT's Positive Outlook reflects our view that its portfolio quality has improved and its financial metrics will stabilise at levels commensurate with a higher rating over the next 12-18 months.
SELP and Tritax EuroBox own portfolios of good-quality big-box logistics assets across continental Europe, with NIY of 4.9% at end-2023 for SELP and 4.8% in March 2024 for Tritax. On the other hand, Sirius Real Estate owns a portfolio of out-of-town industrial and office assets in Germany and the UK with a blended NIY of 7.3% in March 2024. CEREIT's portfolio benefits from structural tailwinds in the logistics and light industrial sector, which accounts for 54% of assets, counterbalanced by the structural challenges in parts of its non-core office assets, some of which are likely to be disposed of, or have been actively managed to maximise rental yield. CEREIT's portfolio scale is smaller than SELP's EUR6.7 billion, but is slightly larger than Sirius Real Estate's EUR1.7 billion and Tritax EuroBox's EUR1.5 billion portfolios.
CEREIT's portfolio occupancy of 94%-95% is lower than SELP's and Tritax EuroBox's rates of over 99%, but stronger than Sirius Real Estate's, which is around 85%, reflecting Sirius' focus on a somewhat unique business model of acquiring and refurbishing under-occupied assets and actively managing their leasing with the aim of raising cash flow yield. CEREIT's weighted-average lease length (to first break) of 3.6 years is longer than Sirius Real Estate's 2.7 years in its German assets and 1.2 years in its UK assets. Tritax EuroBox's and SELP's longer average lease lengths of around 9.5 years and 5.6 years, respectively, support greater income stability and visibility.
Fitch forecasts CEREIT's EBITDA net leverage will stabilise at around 7.0x-7.5x through 2026, which is similar to that of Sirius Real Estate. This reflects both portfolios' focus on assets that generate high rental yields. SELP's higher rating, despite our forecast of leverage of around 9x in 2025-2026, reflects the lower rental income yields and higher earnings visibility on its larger portfolio of higher-quality properties. Fitch forecasts Tritax EuroBox's leverage will remain elevated at around 10x-11x in 2025-2026, which reflects the low cash flow generated by assets acquired in the previously low interest rate environment.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue to increase by around 2% in 2024 and 2025, barring further disposals of non-core assets other than those announced.
Underlying rental growth, driven by inflation indexation of around 2% in 2024 and 1% in 2025-2026.
Rental reversions of 2% per annum for light industrial and logistics properties, and 0%-3% for office segments although stronger markets with better quality assets such as the Netherlands and Italy will be at the higher end of the range.
Capex of around EUR150 million during 2025-2027, mostly on portfolio maintenance and sustainability initiatives, as well as around EUR90 million on the most likely asset enhancement initiatives that have been announced.
No acquisitions or disposals factored in beyond those already announced.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to an Upgrade
EBITDA net leverage below 8.0x on a sustained basis;
FFO interest coverage above 2.5x on a sustained basis;
Factors that Could, Individually or Collectively, Lead to a Stable Outlook
Not meeting the positive sensitivities over an extended period, or a material shift in the REIT manager's investment- or asset-management approach, will result in the Outlook being revised to Stable.
Liquidity and Debt Structure
Adequate Liquidity: At end-June 2024, CEREIT had EUR63 million in cash and cash equivalents and access to EUR200 million in committed undrawn revolving credit facilities available through to mid-2028. The trust expects to finalise a syndicated unsecured bridging loan by end-2024 with an availability period of 12 months as a backstop to refinancing its EUR450 million unsecured notes due on 19 November 2025. This will ensure CEREIT's liquidity ratio (sources/uses) is above 1.0x, while it considers an unsecured bond issuance to refinance the notes.
CEREIT has demonstrated bank and capital market access over the last few years, supported by its steady operating performance through the cycle and healthy financial profile, as well as a largely (over 90%) unencumbered property portfolio with unpledged assets covering unsecured debt by around 2.5x, which underpins the trust's access to contingent liquidity.
Issuer Profile
CEREIT is a Singapore-listed REIT with an actively managed portfolio of over 100 properties valued at EUR2.2 billion as of 30 June 2024. The portfolio comprises 54% logistics and light industrial assets by value, with the remainder mostly in offices, with around 86% of the portfolio value in western Europe and the Nordic region.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
CROMWELL EUROPEAN REAL ESTATE INVESTMENT TRUST 
