Cromwell European Real Estate Investment Trust (SGX: CNNU) made an announcement that it is proposing to acquire a total of 23 properties across five countries to take its asset portfolio up to 98. Here are some of the key things to take note of the acquisition and funding proposal.
The acquisition targets
The 23 properties can be split into three main parts: (1) 16 office assets in the Netherlands, Finland, and Poland; (2) two office assets in Italy; and (3) a binding offer to acquire four logistics assets and one DIY home improvement centre in France.
The estimated cost of the 16 office assets is approximately €329.7 million, comprising of a purchase consideration of €308.8 million and other fees and taxes related to the transaction.
Much to like about the property portfolio
Besides expanding its portfolio count and diversifying its income stream, the new portfolio also has favourable characteristics that bode well for the long term.
For one, the net initial yield of the Italian and French properties are 7.4% and 8.5% respectively, higher than Cromwell European REIT’s current property yield of 6.5%. Even though the 16 office assets have a slightly lower yield at 6.2%, its yield can be improved through better management of the properties. Management said that its sponsor listed in Australia, Cromwell Property Group, has an “on-the-ground team” that can drive improved operating and financial performance and has a good track record of enhancing value through asset enhancement initiatives.
The current leases on the new properties are also indexed to consumer price indices, which will rise along with inflation, providing stable organic rental growth.
Second, the majority of the acquisition targets sit on freehold land. The higher proportion of freehold assets in the new portfolios will increase the percentage of its assets on freehold land from 69.8% to 73.2%.
Source: Cromwell European REIT’s acquisition announcement
Funding the acquisition
The acquisition of the 23 properties will be funded through a mix of debt and equity. Around 600 million new units will be raised through a rights issue that was announced on 24 November. The rights issue will raise approximately €224.1 million.
It is a fully renounceable rights issue that is priced at €0.373, representing a 31.6% discount to the closing price on 30 October 2018 and 25% discount to its theoretical ex-rights price. Unitholders are entitled 38 new units for every 100 units they have.
For unitholders who have access to the rights issue, the rights issue at such a large discount to market price certainly looks like a sweet deal.
Effect on distribution per unit
Based on the calculations released in the announcement, the acquisition will have a net dilutive effect on distribution per unit. The pro forma effects of the transaction would have reduced distribution per unit to 2.36 € cents compared to 2.53 € cents since its initial public offering (IPO).
This is perhaps due to the high cost of equity resulting from the low rights issue price being offered to unitholders.
The Foolish bottom line
Even though distribution per unit will decline due to the enlarged unit base after the rights issue, the long-term impact of the acquisition does seem positive in my view. The acquisition targets will diversify the REIT’s income stream and have the capacity for organic growth. Unitholders who are able to take advantage of the rights issue will also enjoy upside due to the highly discounted offer price.
All things considered, I believe this is a positive situation for unitholders over the long-term.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia doesn’t own shares in any companies mentioned.