The Motley Fool

Why This 9%-Yielding REIT Could Increase Its DPU Further

Cromwell European Real Estate Investment Trust (SGX: CNNU) reported a strong set of results in the first half of 2019. Its 2019 first-half adjusted distribution per unit (DPU) increased 3% from a year ago and was 4.6% higher than the forecast in its initial public offering prospectus.  Here are three reasons why its DPU may rise further.

Yield-accretive acquisitions

The REIT, which is backed by Australian listed property giant Cromwell Group (ASX: CMW), has been aggressively making yield-accretive acquisitions. The REIT ended the first half of 2019 with 97 properties. Since then, it has purchased another five properties, bringing its portfolio up to 102 properties. The REIT is also in the midst of completing the acquisition of a sixth property.

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The acquisitions, which were funded by a mix of equity raised through a private placement, and debt, are expected to be accretive to DPU. Based on the private placement size of €150 million, which was used to find the acquisition, the pro forma DPU accretion was calculated as positive 2.3%.  

Positive rental reversions

For the second quarter of 2019, the REIT reported a positive 4.8% blended rental reversion rate. The rental reversion rate is calculated by taking the new rental rates over the expiring rental rates. A positive reversion rate indicates that the new leases signed were higher than the expiring leases.

The REIT also experienced a 1.4 percentage-point increase in portfolio occupancy year-on-year. Both these factors should provide an uplift to Cromwell REIT’s rental income.

Low cost of capital with decent debt headroom

Lastly, the REIT is positioned to further capitalise on its debt headroom. As of 30 June 2019, the European REIT had aggregate leverage of 35.4%, some way below the 45% regulatory ceiling.

More importantly, it has access to a very low cost of debt. Its annualised cost of debt was just 1.34% per annum, giving it the financial flexibility to pounce on any further investment opportunities.

The Foolish bottom line

Besides the possibility of higher DPU, Cromwell European REIT also has an attractive valuation. At the time of writing, units of the Europe-focused REIT are selling at €0.47 each. This translates to a 10% discount to its book value and an attractive 8.7% annualised yield.

All things considered, despite the uncertainty surrounding Europe and the global economy, Cromwell European REIT is a buy in my books.

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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 contributor Jeremy Chia doesn’t own shares in any companies mentioned.