Cromwell EREIT Continues Debt Reduction with $99M Sale of Italian Office Campus

Cromwell European REIT has completed the sale of an Italian office campus for €94 million ($99.2 million) as the Singapore-listed trust continues to sell of non-core assets to reduce debt.

After seeing its interest expenses more than double from €4.2 million in the first half of 2022 to €10.3 million in the first six months of this year, the Cromwell Property Group-sponsored trust said in an announcement on Monday that it will primarily use the proceeds from its divestment of the 11-building campus at Viale Europa 95 in the city of Bari, to pay down its borrowings.

“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,” said Simon Garing, the chief executive officer of the manager.

Cromwell E-REIT is selling the 123,260 square metre (1.3 million square foot) Bari Europa campus after the REIT offloaded an office property in Milan during June for €93.6 million, with the two deals bringing its total divestments so far this year to €187.6 million.

Greater Debt Headroom

Cromwell EREIT sold Bari Europa to the Italian tax police, Guardia di Finanza, on behalf of the state property agency, Agenzia del Demanio, the manager said. The Military Academy of the tax police currently occupies the entire campus.

In addition to the 11 buildings, the 22-year-old complex includes parking space, a parade ground and both indoor and outdoor sport facilities.

The manager said the sale price represented a 13 percent premium over the €83.1 million they paid in acquiring the asset in November 2017. The total consideration is also 28 percent higher than the property’s book value of €73.3 million as of end-2022.

The Bari campus accounted for nearly 7 percent of the trust’s net asset value (NAV) in 2022 and contributed 3.6 percent of its net property income, ranking it as Cromwell E-REIT’s largest non-core asset at the time. The disposal will pull down the trust’s distributable income in the near term, or until ongoing projects are completed and stabilised, the manager said.

With the net proceeds of €93.5 million allocated for debt repayments and general working capital, Garing said the trust’s debt level could be reduced to 36.8 percent from 39.5 percent at end-June to keep the trust within its gearing target of 35 to 40 percent. The trust’s equity has lost nearly 17 percent of its value on the Singapore exchange this year as many investors dump REIT investments in favour of bonds or higher yielding alternatives.

“We also align with investors’ preference for lower-geared S-REITs and the preservation of NAV during higher interest rates times,” the trust’s manager said in the statement, adding that they aim to recycle capital into redevelopment and asset enhancement projects.

In June, Cromwell E-REIT sold the Piazza Affari 2 office building in central Milan at a 14.6 percent premium to the asset’s €81.7 million price tag in 2017. The property was sold to local asset management company Kryalos SGR.

Turning to Sheds

The back-to-back divestments bring Cromwell E-REIT nearly halfway to its target of divesting €400 million by 2026, which it sees providing the opportunity to shift its €2.3 billion portfolio away from non-core office towards logistics and light industrial assets.

Cromwell Property Group, which holds around a 27.8 percent stake in Cromwell European REIT and controls the sponsor, is part of Hong Kong-listed ESR Group, which has made investing in properties benefiting from technological disruption of the economy central to its investment thesis.

Garing said deleveraging the trust is aimed at raising its appeal to investors and will help lift Cromwell E-REIT valuation on the stock market, where it currently trades at “levels like those of far more troubled foreign S-REITs.”

Units in the SGX-listed trust closed at €1.26 each on Monday, which is 45 percent below the trust’s NAV of €2.30 per unit as of end-June, based on its first-half financial results.

“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,” Garing said. “We look forward to providing market updates on further divestments, portfolio performance and development opportunities at the appropriate time.”

Following the divestment, logistics and light industrial assets account for 51 percent of the REIT’s portfolio – up from 49 percent previously. Across Europe Cromwell E-REIT owns more than 100 properties spanning 1.8 million square metres, primarily in the Netherlands, Italy, France and Germany.