#6 Investing Ideas – Why Cromwell European REIT Is A Great Diversification Stock?
November 6, 2019
We chat with Ian Tai, one of our regular contributor here at Value Invest Asia. Ian is sharing with us why Cromwell European REIT is interesting, especially for income investors looking for more diversification in your portfolio.
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****Disclaimer: The show is for entertainment purposes only, and should not be taken as investment advice. Please seek professional advice or do your own research when making any investment decision. Disclosure: Stanley and Ian do not own Cromwell European REIT at the time of recording.
Stanley: Hi! This is Stanley, and welcome to
another episode of investing ideas. This week, our guest is none other than Ian
Tai; our core contributor here at valueinvestasia.com,
Ian is also the founder of bursaking.com,
where he shares a lot about what he knows about the Bursa Malaysia market. Ian
also invests very regularly in the Singapore market, and he call himself a
dividend investor, so he seeks out stocks and companies with very strong cash
flow and stable dividend. So, this week he’s going to share with us, one of
such ideas, and I am very sure that you guys will find this company very
interesting, and definitely worth for you guys to add it into your watch list. So,
without further ado, let’s get started.
from valueinvestasia.com, this is
investing ideas; where we talk to investors from all walks of life, learn from
them, and find out some of their favorite investment ideas.
to another episode of investing ideas, this week we have Ian. Hello! Ian, how
Ian Tai: Hey! Hi!
Stan, how are you?
Stanley: Yeah! I
think our audience are quite familiar with you, given that you are a regular
contributor to us at VIA, but before we you know, dive straight into your
investment ideas, which is a very interesting one, why don’t you just share a
little bit about yourself, and explain your core investment strategy; what is
it, and how do you define yourself as an investor?
Ian Tai: Okay! Sure,
and before I do that, first and foremost, thank you so much Stanley for having
me on the show, and it’s a pleasure to not only just speak in your events, and
as well as to write a bunch of articles in VIA. So, that is actually one of the
key things that kept me busy, which is to write quality articles to Value
Invest Asia, of course I do a whole lot bunch of writing to KCLau.com, which is
a personal finance website in Malaysia, and as well as of course perhaps your
competitors, Fifthperson, and as well as small-cap Asia. Alright! So, in terms
of my investment style, I’m pretty simple, I like to keep things really, really
simple. So, I’m dividend investor all right, and I primarily invest for
dividend income, so that is my main focus. Currently, I’ve built a portfolio where 80% of
my portfolio consists of SGX stocks, I mean to say, if you are a Singaporean
perhaps, this may not be anything, but just to give you how would I say, more
background into it, I’m a Malaysian, so for those of you who are listening and
you’re from Malaysia. So, I’m a Malaysian who invests quite a lot in Singapore
stocks, and currently my portfolio, I have calculated my dividend yield; on the
average, it’s about six plus % per annum, and I do collect dividend income
every now and then, so if every year we have like twelve months, I will collect
dividend practically speaking around eight to nine months, in those twelve
Stanley: Yeah! So,
you don’t even need to work?
Ian Tai: Still
need to work on to build up my dividend income, so but at least to say this dividend
income they pay some of my bills. So, I find they are quite helpful, as I’m
speaking right now, of course that is the surface part of what I do, and what I
aim for when I invests, but if you dive a little bit deeper, I have a system to
building that kind of portfolio, like for example, my primary aim of course, is
to increase dividend income, so naturally I will go with stocks that not only
pay dividends, but they have to pay growing dividends on a consistent basis,
and of course, since I’m into dividend investing of course, I would like to buy
all of these stocks at the cheapest possible price. So, valuation ratios like P/E
ratio, P/B ratio, and dividend yields, are my favorite kind of ratios to assess
whether or not it’s a good time to buy.
Okay. So, you say that you are dividend based investor; does that mean that you
completely don’t have any stocks that don’t pay dividend?
Ian Tai: No,
all my stocks pay dividend.
Okay! Cool, and today you’re going to share with us another dividend stock, one
that to be honest, caught me by surprise when you suggested this stock. So, why
don’t you go ahead, and introduce it, and tell us a little bit about this stock,
what is this stock about?
Ian Tai: Okay!
So, the stock is about – so this time my pick is on Cromwell European REIT, so
this is my stock, and of course we have the SGX symbol which is CNNU.
it is listed in Singapore.
Ian Tai: Yeah!
So, is a once again, listed in Singapore, and Cromwell; so I would just briefly
use it as Cromwell, so if you talk about Cromwell, it is Cromwell European REIT.
It is actually a diversified REIT with a wide range of portfolio, wide range of
assets, like for example, we have office properties; Light industrial
warehouses, logistics, properties, and as well as retail assets. So, all of
these assets are based in Europe, in seven countries mainly in Holland, Italy
and France, so Cromwell European REIT has a very good sponsor, and the sponsor
is Cromwell Property Group; which is an Australian listed real estate
conglomerate, so later I’ll get into that, and currently as I speak, it is in
the midst of acquiring another six more properties, and when that happens, it
will have 102 properties in its portfolio, valued at 2.07 billion Euros. So,
that’s a brief info of Cromwell European REIT.
So, definitely not a small REIT, but you mentioned the sponsor Cromwell
Property Group listed in Australia, so this is the Australian property company,
but the REIT is only a European asset, is that right correct?
Ian Tai: So,
if I may just go straight into the sponsor, so I would just give you a little
bit of background, of who Cromwell is, and maybe we can understand the
relationship a little bit better. So, Cromwell, what I’ve gather is this;
Cromwell Property Group is a listed company in Australia, but then it has
assets globally, mainly in Australia, New Zealand, and as well as Europe. So,
currently it has 270 plus properties, which is worth about 7.5 billion Euros,
or if you want to convert it into Australian dollars, it’s about 11.9 billion
dollars, and that is property portfolio, huge customer base of three thousand
tenants, and Currently Cromwell Property Group owns about thirty five point six
five percent of Cromwell European REIT. So, what they do is that; the sponsor,
which is Cromwell Property Group, actually they form the REIT, which is Cromwell
European REIT to all other European assets, or at least part of its European
assets in the REIT. Yeah!
and so far you say they’re a diversified REIT, what does that really mean, do
you have the breakdown of where are the property located geographically; number
one, and also the type of asset that they have that is the breakdown of the
type of assets they have?
Ian Tai: Okay!
So, let me just go through review the geographical breakdown. Alright! So, it
has properties in seven countries, all of them are based in Europe currently,
okay but I will give you the top three now, because that’s more memorable. So,
the first one is in Holland, or the Netherlands, so you know in the Netherlands,
it has around seventeen properties, and the portfolio valuation as I speak is
627 million Euros, which accounts for thirty point four percent of the total
valuation of the portfolio. So, that’s Holland, in rank number two, we have
Italy, where it also have seventeen properties, worth around 459 million Euros,
and which accounts for twenty two point two percent of the total portfolio
valuation, and the third one is France, it has about twenty seven properties,
although it has larger amount of quantities in terms of properties, but the
portfolio valuation is 421 million Euros, but it still accounts for 20% of the
total portfolio valuation. So, if you add it up; Holland, Italy and France, it
has around 73% of the total portfolio Valuation, and the remaining countries,
which includes Denmark, Germany, Finland and Poland; so they will make up the
final 27 percent of the portfolio valuation, which is around 558 million Euros,
and that’s about 41 properties. So, that’s the geographical breakdown for Cromwell
Okay. So, actually from what you say, it’s actually quite diversified, and just
listening to you talking about how many properties that they own, and across so
many countries, I feel safe already. On the other hand, how do they match up
with the asset classes? You say they have office; Light industrial warehouses,
Logistic, and even retail. So, do you have the breakdown for that?
Ian Tai: Okay!
So, currently I may not have the breakdown for that, because I thought this
will be a very brief and very swift session.
no, you thought wrong, you thought wrong. I’ll dive very deep with you on this
one, from the top of your head, do you remember like, which is the main asset
class that they are focusing on?
Ian Tai: How
about we skip that for now, I will work through that review shortly, as I
download its annual report and stuff like that,
let’s jump to that tenant mix first, you mentioned that they have so many
properties, and actually a lot of them they are multi-tenanted. So, they have
many tenants as well, from your own observation, do you like the tenant mix and
the tenant concentration do you see any issue there?
Ian Tai Okay!
So, in terms of tenant concentration; so, let me just give you a breakdown, first
and foremost, Cromwell European REIT has a large customer base, it derives
income from 911 tenants, so it’s about one thousand tenants, currently the
portfolio occupancy rate is ninety one point six percent, which is quite
healthy, and most of these leases they are quite long term with built in vendor
escalation, and family overall in terms of its portfolio, it’s weighted average
lease of expiry or will is 4.9 years, which is quite a very long time, 75% of
its leases will begin to expire only in financial year 2022; which means to say
that’s pretty good, considering that right now we are in 2019, which means for
the next two or three years, we can expect to see income visibility, or we can
say that the income from all these leases will continue for at least the next
three years, pretty good. Now, in terms of its tenant breakdown, what I have
here is that in terms of its trade sector, if you look – what I gather is this,
it is pretty much diversified, it’s not concentrated on any single, or any
particular industry, because it is quite well spread towards government sectors,
which is known as public administration, we have financial services, we have
people in the science industry, transportation, administration, construction,
retail, manufacturing, IT, and entertainment, and so on, and so forth. So, it
is not exactly quite biased towards any certain kind of industry, which is
quite diversified, and of course, when it comes to its top 10 tenants; 37% of
its top 10 tenants, — no, what I mean
to say is the top 10 tenants actually account for to 37 percent of the total
hit line rent of European Cromwell REIT, and most of them are actually if you
can see, the most of them are actually from the government sector, especially
the first one, which is from Italy we have that Agenzia Del Demanio which is
the Italian State Property Office. So, they account for 15% of the total rent
of European Cromwell REIT. So, that’s breakdown…
So, essentially betting on the Italian government, for this: Yeah! I guess the
dynamics is very strong and everything, from your investigation, are you able
to see what’s the typical rental contract that they have, we see a lot of
oversea REIT in Singapore where they have a rental reversion, according to say
the CPI numbers or anything, do they have like such a step-up mechanism for
their typical rental agreement?
Ian Tai: In
a way, yes most of them have, in terms and they are basically indexed to the
inflation, right so they are inflation adjusted or required CPI.
the problem is, Europe is not having much inflation some country may also be
experiencing you know negative inflation, does that mean the rent will go down?
Ian Tai: Hopefully
not, usually when it comes to a step up rent, it’s not exactly like it’s always
like there’s a downside protection whereby, there’s the initial base rent, so
that is like a minimum thing and then on the year-on-year basis, then only we
add to its a inflation. That’s why it’s called inflation adjusted; if it’s
negative, let’s say negative one percent in inflation rate, which is a
deflation then our supposed year, will maintain the base rental rate for the
following year. Yeah!
Fair enough, I guess, I sort of can see it from your point of view; you know,
why don’t you share a little bit about their financials, why do you like this
Ian Tai: Okay!
So, in terms of its financials; first and foremost, it is actually pretty
stable, ever since listed, it has been quite, it has actually generated quite a
relatively stable income. Partly, I’m going to give snapshot of its latest 12
months financial results, so as you can see here, when it comes to the net
property income; quarter three, quarter four, it’s about 21 million dollars,
but then quarter one, quarter two, it has a step up, as you can see from
quarter four 2018, net property income is about 21 million; quarter one 2019,
that is a step up of 6 plus million euros, and quarter two 2019, net property
income has again increased slightly to twenty seven point seven million Euros.
this is because in the course of let’s say 2018, what quarter for 2018 to
quarter one 2019, what happened was Cromwell European REIT has actually
increased alright its property portfolio once again, it has actually completed
a number of acquisitions; particularly in France, and Poland. So, this has
actually contributed to the step-up in net property income for the REIT, and
this has actually translated into growth, in terms of its distributable income,
where the disputable income in quarter three quarter four of 2018, it’s about
seventeen million, quarter one quarter two 2019, it has increased to 22 million,
which is very positive. if I may continue on its – a little bit about its
distribution; per unit quarter three quarter four is about one point zero eight
cents, quarter one quarter two 2019, it’s one point zero two cents, although
that is an increase in distributable income, there’s a marginal decline in
distribution per unit, simply because Cromwell European REIT has actually
exercised or undertaken rights issue to acquire these properties, and therefore
it has enlarged its unique holder base, and therefore that causes a slight drop
in DPU, alright by anyway…
I’m just going to stop you here, because I found something that I cannot resist
I have to say, you mentioned it’s growing very well, but we see that – in a lot
of – in many REITs, that’s one of the key problem of a lot of REIT’s, which is
that you know, they grow their net property income, but because they are REITs,
and they don’t have excess cash lying around, when they make acquisition, they
always have to have private placement, or right issue and it ends up diluting
the existing shareholders, so even if their distribution income is increasing,
but as a unit holder, my distribution per unit is actually dropping, as the
size of this REIT is increasing, don’t you see that as a negative rather than a
Ian Tai: There’s
a mix there, in terms of rights issue. So, for me, there are two sides to a
coin. So, if I were to say from the positive, from one angle, let’s say we have
Cromwell European REIT, initially it has that amount of properties, let’s say
around like 90 plus properties, and finally, after having undertaken a rights
issue, it has actually grown is portfolio to about hundred Plus properties. So,
in that sense, you can say that the income will be much more stable, because
instead of generating income from 90 over properties now, it has hundred over
properties; more properties, more tenants. So, it actually reduces the
concentration risk of each property, each country, and as well as each tenant,
when it comes to its income generation, so I believe that in that way it adds
to the stability of the REIT. So, that’s the positive part, but of course I do
agree with you in terms of its negative, because sometimes it may enlarge the
base of the unit holders, the number of units issued out to the market, and
therefore it will cause slight adjustments, and usually the adjustments are
downwards towards the distribution per unit. So, when it comes to this; of
course, where we calculate our returns from our dividend yield, from this
particular REIT, we have to exercise a little bit of caution, and we have to
take into this as a consideration.
So, what I’m hearing from you is, yes they are decreasing their distribution
per unit, but as a unit holder, you don’t really mind because the whole REIT is
sort of reducing in risk exposure, because it’s becoming more and more diversified
more stabilized, is that fair to say
that’s your point of view?
Ian Tai: In
a way, yeah. You can say that.
before we go, before we continue as a disclaimer, you do own this REIT right?
Ian Tai: No.
it is something that you’re already looking at?
Ian Tai: I
mean to say this is something that I believe that because it has good, it has
the positive, and as well as some form of negative, I believe that is going to
be juicy enough for us to have a discussion, that’s the reason I choose this
Yeah, then since you already say that you don’t own this REIT, I’m going to
press you even harder, what’s holding you back right now on this REIT, and not
investing in them?
Ian Tai: Alright!
That’s a very good point; I’m not too sure whether I should reveal this here. Well!
Because I’m actually considering a real estate in Malaysia, because of that, I
need cash for the down payment for the property.
it’s more of personal reason rather than anything wrong with the REIT. Right!
Ian Tai: Yes.
if you have all the capital in the world, this is definitely one that you don’t
mind investing in as well? You’re saying.
Ian Tai: I
don’t mind having a small position in this REIT, if I have excess cash. Yeah!
Sure, before we go into the valuation path, I think a lot of people would be
interested in how you value this REIT, just before we go into that, why don’t
you share with us a little bit, what do you think is the most pressing risks
with this REIT, for an investor who is looking at Cromwell right now?
Ian Tai: Okay,
I would say that there are two. The first one of course is the currency risk,
because the unit price will be denominated in Euros, the financial accounts
will be reported in Euro, and if that’s it; for example, I’m investing from
Singapore, I’m currently using Sing dollar, I’m investing my Sing Dollar into
this REIT, I have to take note that the Euro has been depreciating against Sing
Dollar for quite some time right now, so that could, if you want to measure
your returns in Singapore dollars, then of course, you may want to take that
into consideration, but since I’m a Malaysian, and I’m using Ringgit; of course,
that actually differs, the point of view may differ, because from a Malaysian
point of view, I believe that the Euro is a far more reliable currency as
compared to the Ringgit. So, maybe it’s a chance maybe I will probably take,
and that is, if let’s say for example, if you are a Singaporean, or you’re
investing your Sing Dollars into Cromwell European REIT, then of course, do
take mind of this currency risk. Now, the second thing which I think is more
pressing to me is that, for me I’m a dividend investor, and I love to look at track
record, I love to look at stocks track record, and I will assess it based on
the 10-year basis, five to ten years basis, but Cromwell European REIT is relatively
a new REIT, because it was listed on November 2017. So, in terms of this
financial track record, it has shorter track record, as compared to other REITs.
So, in that sense, I may put a little bit of discount for this particular REIT because
of its short track record.
Ian Tai: Yeah!
guess it all links back to what we’re going to discuss right now, which is
valuation, because everything has a price, if you say that there is all these REITs,
and you know, if the possible return, the expected return from this REIT is
high enough, or attractive enough, then the investor might be willing to take
on that risk. So, why don’t you share with us a little bit about how you value
this REIT, and you know, what’s your opinion on the valuation right now?
Ian Tai: Okay!
So, let’s go back to, if I were to record back, what I’ve said about
distribution per unit. So, q3 2018 is 1.0, q3 and q4 2018 is one point zero
eight, that was before the rights issue, and after it has exercise its rights
issue, q1 and q2 2019, it has paid out one point zero two zero cents. So, with
that said, so in this sense, for me, I will actually ignore the one point zero
eight, rather I would take the quarterly distribution, the latest quarterly
distribution per unit of one point zero two Euro cents, as a basis of
calculation. So, if let’s say I would take one point zero two Euro cents, which
is the latest two quarters, and I will multiply by four quarters, I will get an
annual distribution of 4.08 Euro cents. On the per annum basis, the current
unit price is 51 cents, so if you take 4.08 and you divide by 51 Euro cents,
you will get eight point one percent in terms of its gross distribution yield
per annum. So, let’s keep that in mind 8.1%, so in terms of this P/B ratio, 51
cents current unit price, its net asset value per unit is fifty two point three
cents, so if you take 51 cents, and you be divide it by fifty two point three,
we have a P/B ratio of 0.975, basically it’s trading slightly below its book
value. So, these are the two valuation ratios that I can give to your audience
and then based on this two valuation, I guess ratio, do you feel that they are
quite undervalued at the moment, or do you think that they just fairly valued,
because you can say that the price to book is below one, but sometimes it does
not necessarily mean that its cheap, right? We’ve seen a lot of property
companies, even this Singapore, and Hong Kong land, or right now, all the Hong
Kong properties, they’re trading at 0.2, 0.3 book value, but I wouldn’t
consider them as undervalued. So, you know what do you think of the valuation
Ian Tai: Okay!
So, this one is a bit tricky, because for me, I personally like to compare the
current the current distribution yield and P/B ratio with its past track record,
but unfortunately for this REIT, we cannot compare with it’s past averages. So,
therefore we have to take another approach. So, if I’m the one investing, I
will have to compare it with its peers, so it’s immediate peers is actually iREIT
global REIT, or iREIT global. So, that’s another SGX listed REIT, which invests
in properties; usually office towers, office buildings in Germany, by they only
have five office buildings in Germany. So, if I want to compare iREIT global
with Cromwell; I’ll still go with Cromwell, now I’ve already calculated Ivy
global, in terms of its distribution yield zero, it’s again about eight percent.
So, if I were to compare Cromwell European REIT with Ivy global, I’ll still
take Cromwell European REIT, because of its large quantity of properties, and
it is actually more active in terms of its acquisition of new properties. So,
in terms of that, I will still prefer Cromwell, if I’m given a choice, but of
course, if I were to compare it with other REITs that pay more than 6% in
distribution yield, as I’m speaking right now, it could be an SGX listed China
based property REIT, it could be something like BHG Retail, and maybe CapitaLand
Retail China, or something like that, and maybe EC World, or stuff like that.
guess it’s totally different, why you would want to invest in say Capitaland
China retail trust compared to the Cromwell REIT, right?
Ian Tai: Of
course, I’m extrapolating it a little bit, because the common ground between
the two is the distribution yield. It’s not exactly the geographical location
of these properties, and in terms of this distribution yield, let’s say Cromwell
is paying around 8%, and let’s say EC World is paying around 7%, I will still
go with Cromwell, because most of its properties are free hold, and even if they
are lease hold, they are like perpetual lease hold kind of properties. If I
were to choose a China REIT, or China based REIT; they are predominantly leasehold
properties, and their leaseholds are usually below 50 years.
Ian Tai: So,
I’d still go with the European REIT.
Wow! Cool, I think you shared a lot
today you know, from what I heard, it’s definitely a very diversified REIT with
quite high quality asset all around Europe, and both tenants, both geographical
breakdown, they’re all quite diversified, but as an investor, we do have to
take on the current risks, and also you know, if they are continuously building
up the REITs, there will be some dilution risk for us as well. Would you agree
Ian Tai: Yes.
Cool. So, I guess do you have anything to add before we go Ian?
Ian Tai: I
believe that what we have discussed is quite a lot already about Cromwell REIT,
and of course, the addition depends on you now Stanley, whether or not you still
want to [Unclear 32:57]
I think we cover most of the basics, and I think you have convinced me that
this is a viable option for investors looking to diversify away, from say if
they already have a whole portfolio that is completely exposed to just one
country like Malaysia or Singapore. This is a great stock for them to consider diversifying
away, and yet still owning some quality asset as well. So, definitely I am so
on the idea, once again, thank you so much Ian Tai, from bursaking.com; he is also one of our most regular contributor here
at valueinvestasia.com. We’ll
definitely have him back again very soon. So, thank you for your time Ian, hope
to see you very soon.
Ian Tai: Alright!
Thank you so much Stanley, hope that you guys have benefited from me.
Ian Tai: Alright!
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Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.