Cromwell EREIT Management Pte. Ltd., the manager (the “Manager”) of Cromwell European Real Estate Investment Trust (“Cromwell European REIT” or “CEREIT”), refers to the announcement dated 15 June 2023 relating to the divestment of Viale Europa 95, Bari, Italy (the “Divestment” or “Bari Europa”). The Manager is pleased to announce the completion of the Divestment for €94.0 million (S$135.41 million) (the “Sale Consideration”).
1. Introduction
The Manager’s Chief Executive Officer, Mr. Simon Garing, said, “I am pleased to announce that we have completed the divestment of this large and bespoke Italian government campus asset at a healthy premium to the December 2022 valuation.
“The Divestment is consistent with our previously stated strategy of targeted asset sales, reducing exposure to the office and ‘other’ sectors and focusing more on the logistics/light industrial asset class. We have so far completed €187.6 million of divestments in 2023, at a healthy €17.4 million or average 10.2% premium to December 2022 valuations, representing almost half of our targeted €400 million divestment programme to 2026.
“Viale Europa is one of CEREIT’s largest non-core ‘other’ assets, representing 6.9% of CEREIT’s net asset value (“NAV”) as at 30 June 2023. CEREIT’s portfolio is now majority-weighted to logistics/ light industrial, sectors that REIT investors continue to largely price at a premium.
“Post the Divestment, CEREIT’s proforma NAV / Unit would have increased by 3.6 Euro cents, and aggregate leverage would have fallen to 36.8%2, further underpinning the balance sheet strength. By lowering CEREIT’s leverage proactively, we enable further funding options for CEREIT’s accretive development and AEI pipeline. We also align with investors’ preference for lower-geared S-REITs and the preservation of NAV during higher interest rates times. The flipside of this deleveraging strategy is a slight decline in DPU in the short term until we complete the new projects and they become income- producing again, while we deliver a more future-proof and sustainable portfolio in the long term.
“CEREIT’s Units currently trade at a 50% discount to NAV / Unit and a high 13% 12-month trailing DPU yield3, at levels like those of far more troubled ‘foreign’ S-REITs. I believe that CEREIT’s track record of high cash generation, investor-aligned strategy and stronger market fundamentals as compared to the US and China merit greater recognition. For example, European Grade A office market fundamentals and current market vacancy rates are less than 3% for pan-European logistics and less than 4% for CEREIT’s gateway grade A office markets (source: CBRE).
“I would also like to acknowledge the expertise and deep local relationships of Cromwell’s Italian team that enabled them to divest the asset off-market.
“We look forward to providing market updates on further divestments, portfolio performance and development opportunities at the appropriate time.”
2. Principal Terms of the Divestment
CEREIT (through Cromwell Europa 1, an indirect and wholly-owned real estate investment fund of CEREIT) has completed the sale to the Italian Tax Police (Guardia di Finanza) on behalf of the Italian State Property (Demanio dello Stato) (“the “Buyer”) of Bari Europa.
Following the signing and execution of the SPA on 14 June 2023, the SPA’s required final customary approval and settlement took place on 6 October 2023, a month ahead of the previously expected November 2023.
3. Bari Europa Details
Bari Europa is a 123,260 square metres (“sqm“), 22-year-old campus comprising 11 buildings with different uses, indoor and outdoor car parking areas, indoor and outdoor sports facilities, a large parade ground and external areas used for road network. Agenzia del Demanio let 100% of the campus under a master lease agreement.
4. Rationale for the Divestment – aligned to strategy
a) Maintain gearing in policy range 35-40%:
The Divestment aligns well with CEREIT’s previously stated strategy to divest up to €400 million of assets over the next 2-3 years to maintain its long-term aggregate gearing within 35-40% Board policy range and pivot to a majority weighting to logistics/light industrial sector, while reducing exposure to the non-core and non-strategic office and ‘other’ assets. The Manager further aims to recycle capital into redevelopments and asset enhancement initiatives to provide superior risk-adjusted returns and drive longer-term sustainable DPU and NAV/unit growth.
b) Achieve strategic target of majority weighting to logistics/light industrial sector:
CEREIT’s portfolio weighting to the logistics/light industrial sector (based on valuations as at 30 June 2023) will increase to a majority weighting following the Divestment and reduce “other assets” to only 2.0%, as illustrated in the table below:
c) Reduce exposure to Italian government-leased non-core assets:
The Divestment will reduce CEREIT’s portfolio weighting to Italy from 21.1% to 17.8% based on 30 June 2023 valuations. The total proforma rent collected from the Italian government will drop to 4.0% (from 8.5%) as a proportion of total headline rent.
This reduction factors in the previously announced 15% rental decline on the eight assets leased to the Italian government that came into effect in 2022 and 2023 as part of a nationwide decree across all its tenanted buildings. Another benefit of reducing the exposure to the Italian government properties is that its leases are now on shorter rolling six-monthly break notice periods to expiries in 2028/2029. 2023 is also the first year for which no further annual inflation indexation applies to rents, providing a drag on growth to the rest of the portfolio.
d) Reduce reliance on Top 10 tenant-customers:
The Top 10 tenant-customers now make up 24.7% of CEREIT’s total headline rent (down from 28.2%), a reflection of the well-diversified nature of CEREIT’s income sources, an important credit strength metric.
5. Pro forma financial effects of the Divestment
FOR ILLUSTRATIVE PURPOSES ONLY: The pro forma financial effects of the Divestment on the distributions per unit (“DPU”) and net tangible asset value per unit (“NTA/unit”) presented below are strictly for illustrative purposes only and were prepared with reference to the audited financial statements of CEREIT and its subsidiaries for FY2022.
The pro forma financial effects are for illustrative purposes only and do not represent CEREIT’s DPU and NTA per Unit following the completion of the Divestment.
5.1. Pro forma DPU
FOR ILLUSTRATIVE PURPOSES ONLY: The pro forma financial effects of the Divestment on CEREIT’s DPU for FY2022, assuming the Divestment was completed on 1 January 2022, are as follows:
5.2. Pro forma net tangible assets/Unit (“NTA/unit”)
FOR ILLUSTRATIVE PURPOSES ONLY: The pro forma financial effects of the Divestment on CEREIT’s NTA for FY2022, assuming the Divestment was completed on 31 December 2022, are as follows:
6. Sale consideration and use of proceeds
Bari Europa was divested for a sale consideration of €94.0 million (approximately S$135.41 million). The Sale Consideration was arrived at on a willing buyer and willing seller basis, taking into account the valuation of the property.
The Sale Consideration is 13.1% above the 30 November 2017 purchase price of €83.1 million (or €20.2 million including divestment costs).
The net proceeds of approximately €93.5 million from the Divestment reflect the transaction costs of
€0.5 million, made up of the Manager’s €470,000 disposal fee and €60,000 professional fees. No agent was engaged, given the off-market nature of the transaction.
Bari Europa was independently valued by Savills Ltd (as commissioned by the Manager and Perpetual Asia Limited, in its capacity as trustee of CEREIT) at €73.3 million as at 31 December 2022, using the discounted cash flow method.
The use of proceeds from the sale of Bari Europa is likely to be initially earmarked towards repaying CEREIT’s existing debt facilities and/or held for working capital purposes.
7. Disclosures under Rule 1010 of the Listing Manual
The Divestment could fall into any of the categories set out in Rule 1004 of the Listing Manual of Singapore Exchange Securities Limited (“SGX-ST”) depending on the size of the relative figures computed on the following applicable bases of comparison:
(i) the net asset value of the assets to be disposed of, compared with CEREIT’s net asset value;
(ii) the net profits attributable to the assets to be disposed of, compared with CEREIT’s net profits; and
(iii) the aggregate value of the consideration received, compared with CEREIT’s market capitalisation.
The relative figures for the Divestment using the bases mentioned above of comparison are set out in the table below:
Under Rule 1010 of the Listing Manual, where any relative figures computed on the bases set out above exceed 5% but do not exceed 20%, the Divestment is regarded as a discloseable transaction.
8. Interests of Directors and controlling Unitholders and Directors’ service contracts
Other than the Units held by the directors of the Manager (“Directors”) and Controlling Unitholder (as defined in the Listing Manual of the SGX-ST), none of the Directors has an interest, direct or indirect, in the Divestment.
No person is proposed to be appointed as a director of the Manager in connection with the Divestment or any other transaction contemplated in relation to the Divestment.
9. Documents for inspection
Copies of the following documents are available for inspection during regular business hours at the registered office of the Manager at 50 Collyer Quay, #07-02, OUE Bayfront, Singapore 049321, from the date of this announcement up to and including the date falling three months after the date of this announcement:
(i) the SPA; and
(ii) the independent valuation report from Savills Ltd in relation to the Divestment.
10. Other information
A divestment fee of €0.5 million (0.5% of the sale consideration) is payable to the Manager in accordance with the trust deed constituting CEREIT.
As previously disclosed in November 2017, certain vendor earn-out agreements were entered into upon the acquisition of certain Italian properties, which include Bari Europa. The maximum payable under all of these earn-out agreements is €15.83 million, however it is uncertain whether the terms of this sale of Bari Europa crystallise any earn-out payment. The Manager will make further announcements in future if required.
While CEREIT remains a long-term investor in real estate, divestments from time to time are consistent with the Manager's proactive asset management strategy to improve the risk-return quality of CEREIT's portfolio. This is in line with CEREIT's primary purpose to provide CEREIT's unitholders with stable and growing distributions and net asset value per unit over the long term.
By Order of the Board
Simon Garing
Executive Director and Chief Executive Officer
1 Based on an exchange rate of $S1.44 : €1.00 as at 5 October 2023
2 On a pro forma basis based on the 31 December 2022 balance sheet
3 Based on the 4 October 2023 closing price of €1.25 and actual 1H 2023 / 2H 2022 distributions
