Cromwell European Real Estate Investment Trust
SGX:CWBU
Earnings Call Analysis
Q3-2023 Analysis
Cromwell European Real Estate Investment Trust
Cromwell European REIT (CEREIT) provided their Q3 update highlighting a EUR 2.3 billion portfolio of European commercial real estate managed by a robust team. Despite macroeconomic challenges, CEREIT reported an indicative Distribution Per Unit (DPU) increase of 3%, occupancy above 95%, robust rent reversion at 10.6%, and a reduction in net gearing to 37.4%. The Fitch rating remained stable at investment-grade. Logistics and industrial assets are now a majority at 51% of the portfolio, following strategic divestments completed well above valuation. Despite lower transaction volumes and softening economy, with expected 0.5% growth in 2023, CEREIT's focus remains on high occupancy, proactive capital management, and selective asset enhancement initiatives.
CEREIT experienced a 7.6% decline in net property income (NPI) compared to the previous quarter, attributed to one-off items. On a like-for-like basis, considering normalized factors, the decline was a modest 2%. The rise in finance costs, around 52%, is due to the increased Euribor and higher margins from new loans, although most debt remains hedged. The partial offset through release of tax accruals in the Netherlands contributed to a 3% higher indicative DPU of EUR 0.04. Long-term performance shows stable distributions when adjusted for non-recurring components and the impact of market conditions.
CEREIT's asset management success is exemplified by over EUR 229 million in divestments at a 13.7% premium to valuations. Recent logistics developments in the Czech Republic and Slovakia are nearly completed with significant pre-let rates. A cautious approach is adopted for new developments amidst the cyclical downturn. The REIT's commitment to ESG is evident by achieving a 4-star GRESB rating and an MSCI ESG AA rating, having invested in sustainable initiatives and recorded improvements in key performance indicators.
CEREIT observes falling inflation in the Eurozone, though energy prices present risks. Economic softening in export-heavy countries contrasts with recovery in tourism and consistent employment. Real estate values and transaction volumes are challenged by high interest rates, and CEREIT avoids forecasting future valuation impacts. Instead, efforts center on active portfolio management and capital strategies, including judicious divestment proceeds usage, to mitigate financial risks from tighter credit conditions. Notably, the REIT's cash position is solid with substantial funds from recent asset sales.
The REIT management addressed investor queries concerning capital management strategies, including the potential use of buybacks and vendor financing options. Though difficult due to the nature of REITs, they are considering vendor financing to support transactions. With a solid cash situation including EUR 94 million awaiting debt repayment, CEREIT endures high interest rates, with minimal impact on DPU due to effective hedging. Planning for further divestments and continuously weighing the ideal office and logistics portfolio ratio, CEREIT is well-prepared for potential valuation shifts and is poised to retain a strong investment profile.
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Good afternoon, and welcome to the Cromwell European REIT Third Quarter Update Briefing. We will begin with a presentation by the Cromwell European REIT management team followed by Q&A. [Operator Instructions]. Now I will hand across to the COO and Head of Investor Relations of the Manager of the Cromwell European REIT, Elena. Elena, over to you.
Thank you, Kiara. Turning to Slide 3. Good morning, and good afternoon, everyone. I will be standing in for Simon today as he's currently away in Europe. Together with the Board, they have been visiting our assets and spending time with our teams on the ground and with our agents to get a first-hand view of the sentiments and state of the market. Most of us -- most of you already on the call know us probably, but as a way of quick introduction, CEREIT has a portfolio of EUR 2.3 billion of European commercial real estate managed by more than 200 experienced Cromwell team members on the ground in the 10 countries where we have invested. Turning to Slide 4, provides a snapshot of the 3Q business update. I won't spend much time on it. As Shane will talk in more details later on about the financial results and the real estate performance, but I would like to highlight a few key numbers for the quarter. First, third quarter's indicative DPU of EUR 0.04 was 3% higher sequentially. Second, Asset Management continued to perform well with occupancy remaining about 95% of the portfolio and rent reversion was a strong 10% -- 10.6% in 3Q. Third, capital management continued to be a major focus, and you will hear more details later on, on how we brought up the pro forma net gearing down to 37.4%. And fourth, Fitch reaffirmed series investment-grade rating with stable outlook in October 2023. Turning to Slide 5. Series resilience of income is underpinned by our strong talent roster, with 836 mostly government, MNCs and large [indiscernible] but tenants across more than 1,000 leases. So there's plenty of diversification and high credit quality. Our top 10 tenant customers now account for only 24% of the portfolios, total headline rent, while not one tenant industry segment accounts for more than 16% of the portfolio. Following the divestment of Bari Europa on the 6th of October, the exposure to the Italian government has now reduced to only 4%. As a reminder, that's down from close to 20% at IPO. On Slide 6, we demonstrate here that we continue to execute our investment strategy. As I mentioned, 6 October was an especially important date as we completed the divestment of Bari Europa well above valuation providing proceeds of EUR 94 million, which will be used to repay debt and reduce headline gearing. Our pivot to Logistics and live industrial continued. And with CEREIT's portfolio now weighted to a majority 51% to the sector. Since announcing our divestment program in 2022, we've sold 7 assets in Germany, Finland, France and Italy for a total of approximately EUR 229 million at a blended 13.7% premium to the most recent valuations. In the last few months, we completed the sales -- 2 sales totaling EUR 190 million at a blended 12.5% premium to the most recent valuations. Globally, as you will see later on, transaction volumes have significantly reduced in the last 6 months, especially when it comes to office. So it's certainly taking longer for buyers to secure finance with less pressure from domestic buyers to close on [Technical Difficulty]. We feel that our local teams will continue to deliver on our targeted [Technical Difficulty] doing sales program scheduled over the next 2 years. Turning to Slide 7. On the sustainability count, I would highlight again that CEREIT's achieved a 4-star rating, which is up from a star a year ago and a record high score of the 5 points in the most recent 2023 GRESB real estate assessment. GRESB is the global standard for ESG benchmarking and reporting for listed and unlisted real estate. CEREIT's 85 points score is well above the European average score of 76 and we are also first in our mixed-use office and industrial peer comparison group. Investors today increasingly seek detailed environmental data, tangible performance, commentary and comprehensive quantitative ESG disclosures. GRESB's 4-star score is also supported by CEREIT's current MSCI ESG AA rating, which is another important rating criteria for investors. And by the 2023 sustainability best practices recommendations got award according to CEREIT by the European Public Real Estate Association or EPRA. Moving to Slide 8. So why does it matter this -- why does this matter to you? Because we have now completed more than EUR 580 million in sustainability linked loan facilities, and we are tracking ahead of our 3 KPIs as per what you see on this chart. This year's results also include an investment of close to EUR 400,000 in a portfolio-wide energy audit and adoption of [indiscernible], which led to a great extent or make later on our reporting. We continue to improve our data collection and analysis to inform our longer-term strategy, waste and water consumption and emissions reductions planned on which we expect to share more in the coming year. And now I hand over to Shane to discuss the financial and real estate performance.
Thanks, Elena, and good morning. Starting with the third quarter financial results summary. The third quarter net property income was just over EUR 32 million, which was 7.6% lower than the last quarter, mainly due to a number of one-off items such as lower income due to the sale of Piazza Affari 2 in Milan, which occurred in June. Higher expenses, which included a one-off provision for rental adjustment claims made by the Italian government for some of the assets in Italy and higher service charge expenses and nonrecoverable expenses, of which a portion of these has been received through service charge income. If we look at the result on a like-for-like basis, assuming we normalize the Italian government provision, the third quarter NPI was only 2% lower than the previous quarter. Although total finance costs were a little higher quarter-on-quarter, the net interest cost, which excludes amortized establishment costs, were 8.8% lower than the previous quarter as the amount of debt fixed and hedged remained at 91% on lower debt due to the proceeds from the sale of Piazza Affari. The third quarter indicative DPU of EUR 4.005 per unit was 3% higher, as Elena mentioned. And this was mainly due to a lower tax expense due to the release of a tax accrual previously made in the Netherlands, which is now no longer required. And this is partially offset by the NPI. Turning now to the year-to-date figures. The net property income was 1.1% lower due to a number of reasons. We had divestments. We had vacancy at Maxima in Rome due to the strip out works being undertaken currently and the lower contribution from the one-off Italian government rent reduction that I spoke about. On a like-for-like basis, the year-to-date NPI was 2.1% higher than in the prior corresponding period. Adjusting for acquisitions, divestments in both Nervesa 21 in Milan under development and Maxima in Rome under strip out. Finance costs were 52% higher due to the higher all-in interest rate, which averaged 2.58% over the quarter compared to 1.73% in the prior corresponding period resulting in a higher 3-month Euribor, higher margins from new loans and higher borrowings drawn down over the year. Although headline indicative DPU was 9% lower, if we look at it on a like-for-like basis, the indicative DPU is only 4% below the corresponding period. On the next slide, we see the year-to-date indicative DPU alongside the 5-year track record. CEREIT has recorded relatively stable distributions as the like-for-like numbers in the dark blue button of this chart. This should be seen positively in the context of COVID, rising interest rates, valuation declines and inflation. Most of the decline in the DPU was due to the turnoff of the payment of asset management fees in units. Removing this capital top-up protects future [indiscernible] value with DPU more in line with fund from operations. We have been very busy on our liquidity and extension of debt facilities. During the third quarter, we signed EUR 336 million of new sustainability-linked debt facilities with good support from existing and new lenders. And CEREIT now has no debt expiring until November 25. We have recently received credit committee approval from an existing vendor for a further EUR 35 million under the accordion option to increase our working capital facility up to EUR 200 million, and this will be used to help fund our AEIs and other capital management initiatives. Although we have 91% hedged and fixed, interest expenses, nonetheless, increased due to the much higher 3-month Euribor and the higher bank margins, which I spoke about, around 50 to 70 basis points higher on average than previous facilities. So we have been actively managing our interest rate risk with the hedged and fixed rate debt, sheltering investors from the shock of immediate rent increases. And if you look at this chart, you can see, CEREIT's all-in interest rate was about 3% at the end of the quarter, about 120 basis points higher than it was in June '22. Whereas as you can see, the 3-month Euribor is 415 basis points higher over the same period. The 91% hedged and fixed has an average of 2 years to run. On the next slide, while CEREIT's aggregate leverage ratio was 41.2% at the 30th of September, this will reduce in November following the Bari Europa sales proceeds being used to partially repay the RCF. So on a pro forma basis, the net gearing is only 37.4%, taking into account the cash received. The current leverage is well inside the loan covenants and MES limits of 50% while we continue to operate inside the Board policy long-term range of 35% to 40%. We do expect further decline in asset valuations, which is one of the drivers to have switched last year to the staggered asset sale program to stay ahead of the down cycle and protect CEREIT's balance sheet. We continue to remain very focused on our liquidity, and we will defer speculative developments and nonessential CapEx if we need to. We remain committed to maintaining CEREIT's investment-grade rating of BBB- with stable outlook, which as Elena mentioned, was reaffirmed by Fitch in October. Turning now to the real estate slides. Portfolio occupancy was maintained at 95.2% at the end of the third quarter with occupancy of core countries such as Netherlands, Italy and Germany, well above 95%. And this has been underpinned by over 200,000 square meters of leases being completed so far in the year-to-date. CEREIT's Dutch portfolio occupancy increased by almost 2% due to a new 10-year lease in Haagse Poort to Aramco , which started in August '23, and that's over 6,600 square meters. The occupancy drop in France of 1.8% is mainly due to the expiry of the Atlantic Media lease of 200 square meters, and this expired in August in [indiscernible] in France, for which we have already secured new tenants on most of the sites and at higher rents. We have already [Technical Difficulty] the positive 10% in the third quarter. Year-to-date, the portfolio rent reversion is 7.4% positive [indiscernible] showing some monetary growth, the smaller sample size of leases were completed and as economic growth slows. In the third quarter, overall portfolio tenant retention was slightly lower at 54.2%, taking the year-to-date retention to 66.9%. The WALE, weighted average lease expiry for the overall portfolio improved [indiscernible] years from 4.4 years, helped [indiscernible] leasing activity in Haagse Poort in The Hague. This slide shows the whole European market leasing take up between Office and Logistics. As you can see, European leasing volumes were generally lower this year with tenants being selective on energy-efficient, modern and well located. For the office sector, take-up is still robust in Grade A buildings but it's still below the long-term average due to the soft economic conditions, some larger employers looking to reduce their footprint. Occupied demand for Logistics space has decreased slightly from the levels seen in 2021 and 2022 as the post-COVID [indiscernible] has moderated to a more normal level. However, annual take-up is still around 10% above the average recorded over the period from 2014 to 2019, reflecting the ongoing structural tailwinds. E-commerce take-up has softened in line with retail sales and focus on consolidation. After such a flurry of activity but the broader reconfiguration of global supply chains continues to drive demand for Logistics space with limited new space available. Now turning back to CEREIT's portfolio and specifically, the performance of our light industrial logistics portfolio. So consistent with the broader market, occupancy was slightly down to 97.1% despite 64,000 square meters of leasing being done in the year-to-date. The Dutch occupancy dropped by 3.6% due to 2 leases expiring in the property named [indiscernible], where negotiations are underway at present and occupancy rate should increase very soon. As I mentioned earlier, the occupancy drop in France of 2.3% is mainly due to the lease expiring in [indiscernible], which we expect to be back to 100% within the next few weeks. Turning to CEREIT's light industrial/logistics sector, rent reversion was 5% in the year-to-date. For the third quarter only, rent reversion reported was only 2.7% as 1 key German tenant prolonged as 5-year option at the same rent. 25 new and renewed leases were signed in the third quarter compared to 21 in the third quarter last year. A new 9-year lease in France in [indiscernible] was signed at a 34% rent reversion, displaying that income in this sector is continuing to grow whilst maintaining a high occupancy and the sector WALE has improved to 5.1 years from 4.9 previously. The chart here shows the European market data for the logistics sector. The top left chart shows the high quarterly take-up of logistics space during the last few years. Although the 6 months rolling trend shows a slight decline, logistics occupier take-up in CEREIT's operational countries actually rose between Q2 and Q3 due to growth in Germany, France and the U.K. The green line shows that the overall European logistics vacancy sits at a still very low 2.6%, although increasing by 30 basis points sequentially, similar to our own portfolio vacancy. While the take-up has slowed down marginally in the last quarter with few empty sheds available to be leased and reduced supply underway, rents continue to grow, with the latest rolling 6-month rent growth reported at 2.4%, as shown in the bottom left chart. Now this page -- the next page just shows an example of some of the leases that have been signed during the quarter in our logistics sector. And the interesting point to note here is that all of the rent reversions are at least double digits, so a very impressive result for the quarter. Now turning to the office portfolio. That's been pleasing to note that the overall office occupancy has increased 140 basis points over the quarter to 89.1% at the end of September. This increase is coming mainly from Grade A Dutch portfolio driven by the Aramco lease that I've spoken about. We also recently secured a new 10,000 square meter lease in Haagse Poort to a global asset manager at a 37% rent reversion with the lease commencing in 2025 at the expiry of the current tenant lease. We are in advanced discussions with our anchor tenant, Nationale Nederlanden for a long-term lease from 2025 onwards, which will see an exciting partnership with them for a major energy efficiency upgrade. Occupancy, however, fell slightly in Italy, Poland and Finland, in line with the softer peripheral location and older building age. While our BREEAM-rated French office asset [indiscernible], is attracting good leasing momentum. The 3 out of our 6 Polish assets are in various stages of sale to local developers. So occupancy levels are not quite as critical given the pending conversion projects. The year-to-date leasing activity in CEREIT's office sector accounted for 77,000 square meters made up of 27 new leases and renewals in the quarter. And it was a positive rent reversion reported of 19.9%, driven primarily by the demand for the grade A offices. The tenant customer retention rate for office was at 64% for the third quarter and the WALE improved from 3.6 years to 4. Market data for the office sector in CEREIT's key cities show that take-up rose from Q2 to Q3. But vacancy was up due to the impact of occupiers recalibrating their requirements to take lesser but better quality space. This explains the overall market vacancy remaining at 8.8%, same as a quarter ago versus the 30% fall in grade A vacancy. Most occupiers are focused only on the best quality space, which is undersupplied. So polarization between prime and secondary is accelerating. We see this impact in higher levels of precommitments to new developments and rental growth for prime locations. On the next slide, I would just like to highlight 1 important statistic, and that is that 73% of CEREIT's office portfolio is BREEAM or LED certified versus 20% for all of the office stock across Europe. This puts us at a significant competitive advantage as occupiers are focused on similar footprints for best-in-class space. And this slide just shows some of the office leases signed in the quarter, all but 1 had positive rent reversion with the larger one, as I mentioned in Haagse Poort at 37% rent reversion. And lastly for me on our committed developments, they are progressing well. The EUR 32 million, 10,000 square meter Nervesa 21 LEED platinum office redevelopment in Milan is now 70% pre-let, 4 months ahead of the planned completion. The incoming tenants include blue-chip media company, Universal Music Group and 2 other significant communications and tech tenants. And the 3 new logistics developments and redevelopments in the Czech Republic and Slovakia, So Lovosice ONE Industrial Park and Nove Mesto ONE Industrial Park I and III in Slovakia are largely completed with close to 50% to 60% pre-let with ongoing tenant discussions for the remainder of the space. At present, we are adopting a cautious approach to commencement of new developments without the higher level of precommitment until the Board is more confident in the timing of the cyclical recovery and the improvement in CEREIT's cost of capital. I'll now turn back to Elena to cover the macro context and outlook.
Thanks, Shane. Moving to Slide 31. As you can see on this chart, inflation in Eurozone has fallen markedly this year and further imminent falls are likely despite in energy prices, last autumn and winter drop out. However, the underlining inflationary drivers like the food prices and energy prices may moderate sizable for the [indiscernible]. Europe remains exposed to energy price fluctuations, especially oil, given the new Hamas-Israel conflict and gas prices as Europe still needs to access global markets despite high domestic gas storage levels. Moving to Slide 32. Economic growth was better than expected in the first half of the year as improved global supply chains boosted industrial output and tourism search, especially in Southern Europe, while employment levels have generally held up post COVID. Economies in some countries with higher export industries like -- such as Germany and the Czech Republic are experiencing a softer 2Q, which is expected to carry into another soft 2024. Better performance is expected in France and Denmark with government fiscal support and in Denmark, the rise in pharma success will continue to drive above-average growth. Slide 33. This slide illustrates weaker European transaction volumes, of which we talked about earlier on. As you can see, Q3 volumes are lowest since 2010, while year-to-date volumes are down 54%, cross-border and foreign investors are waiting for lower pricing before stepping back into the markets, leaving mainly local buyers. Europe has attracted a small share of global cross-border capital than ever. While cap rates are generally rising up to 100 to 150 basis points, the expectation is core markets and prime assets have not repriced sufficiently yet relative to financing costs to attract core investors while vendors price expectations and do not meet the pricing requirements for more opportunistic and value-add buyers with higher IRR strategies. And our last but one slide, on Slide 34. So having heard this presentation and the statistics so far, what has been driving the structural shift and which structural shifts have been driving our strategy and influencing CEREIT's performance? In summary, I would like to touch on 3. First, the growing demand for logistics space. Pandemic has accelerated the growth of e-commerce with consumer habits changing for good. Second, flight to quality in the office space. As you've seen in some of the statistics that we shared earlier on, the shift to hybrid working arrangement means people are more discerning in their working environment. They need a good reason to go to the office, and thus companies are now driven to provide office space that has modern amenities as well as sustainability features. And third, higher interest rates for longer than previously expected. The increase in interest rates have been unprecedented in its pace, and now people are settling into realization that instead of going down, interest rates might need to stay elevated for longer periods due to many structural changes in the global economy. In conclusion, CEREIT has now achieved a majority of 51% weighting to Logistics & Industrial. 3Q indicative DPU is up 3%. Portfolio occupancy is strong at 95.2%, and the quarter also saw positive 10.6% rent conversion. Pro forma net gearing is 37.4%, down 110 basis points since December last year. We believe that most of the interest rate increases are behind us. However, we remain vigilant and continue to identify opportunities to offset related financial and valuation risks brought about by tighter credit conditions and softening Eurozone economy, which is now expected to grow only 0.5% in 2023. Globally, transaction volumes have reduced substantially, while real estate values continue to decline as a result. Our top 3 priorities for the rest of the year and coming into 2024 include: first, continued focus on active asset management of the existing portfolio to maintain high occupancy and drive positive rent conversion. Second, focus on proactive asset management, to minimize -- the proactive capital management, to minimize the impact of higher interest rates on distributable income and a focus on liquidity by preserving cash and maintaining sufficient committed undrawn debt facility. And third, judicious use of divestment proceeds towards partial debt prepayment unit and/or buybacks and funding of selected accretive assets under enhancement initiatives and developments. Thank you for your investment, and we can now open to Q&A.
Thank you, Elena and Shane. We will now begin the Q&A session. [Operator Instructions]. I will start with a question from Arthur Shale. Can you please explain why you're not buying back bonds at current bond price, the return is much higher than the AEI, please?
Yes. Thanks, Arthur. It's a very good question. I think you asked the question quite early. And hopefully, Elena sort of summarized our position on the last slide, if we can just turn to Slide 35, because we have mentioned there, one of our key priorities is divestment and asset recycling. And we've stated there that we will use the proceeds judiciously for a number of different potential capital management initiatives. But I think it's fair to say that we don't want to let the market run by stating that we're going to buyback either units or bonds. So it's just something that we have as consideration for applying the proceeds from our divestments. However, the main focus is on the gearing and the level of gearing. So for example, a unit buyback is negative to gearing as opposed to a bond buyback, which is positive to gearing because using proceeds from asset sales will help to reduce the gearing if we were to conduct the bond buyback as opposed to a unit buyback where there would be an impact on the gearing -- would move the gearing higher. So hopefully, I've answered the third question that was also there as well about the unit buyback.
We've got another question from Arthur. For your asset sales so far, do not seem to have offered any vendor financing. Is this something you are considering in order to maximize value and get deals done?
Yes. So Arthur, another very good question. And I think just in terms of vendor financing for REIT, it's actually a bit difficult because a REIT cannot really be a lender. So in any type of potential deal, we do have to take that into account. So we can potentially structure some type of vendor financing, but we can't be seen to be earning interest income as a REIT. So there are some restrictions for REITs in that regard. But it's definitely something that is under consideration as a possible structure because we do understand that some smaller investors who are interested in the properties around EUR 10 million to EUR 20 million mark are finding difficulty to get bank financing. So definitely, for us, there is an interest to help vendors if possible.
Next up, we've got a question from David Foo. Can you please explain your current cash situation at the moment?
Yes. So currently, at the moment, we have -- well, as for the third quarter business update, we don't actually disclose the balance sheet. However, I'm happy to give some numbers. And in particular, because on the 6th of October, so after the 30th of September, we completed the sale of Bari Europa and that was completed at a price of EUR 94 million. So we currently have that EUR 94 million in the bank account, we will be proceeding to repay debt with that when we have the money upstreamed from Italy. And then it's probably fair to say that the remaining cash balance if you put that aside, is similar to what we had on 30th of June around about EUR 60 million. So the cash position is quite solid. Now obviously, we continue to focus on the level of cash and the level of gearing that we have. And I think that probably leads us nicely into the next question, which is about valuation decline. And really, we cannot answer that question. We can't give a forward-looking statement about the valuation declines. But I guess what we can say is that interest rates are still high. So there's no particular catalyst for valuations to go up until we really see the interest rates start to decline. And as we see on Slide 34 -- if you go back 1, please. On Slide 34, you can see obviously, inflation has been very high, but has retraced a little bit lately. And so maybe that's a good sign for interest rates that if inflation is seen to be dropping on a longer-term basis, then that will be good for interest rates as well. And then hopefully, also for valuations as well.
If I can just add here that from what you've seen from us the last year, we've managed the portfolio very actively and we've maintained occupancy quite high. So we are doing everything that is within our control to minimize impact on valuations, but what we cannot control is the cap rates because these are things that are, to a large extent, is and what was happening in the market, yes.
[Operator Instructions] We do have a question from David. Would you -- what would the FY DPU impact if the interest rates were to rise 100 bps?
Yes. So I guess the point here is that currently, we have 91% of our debt fixed and hedged. So the impact on DPU is not significant. Okay. We haven't disclosed -- in this third quarter business update, we haven't disclosed a DPU impact sensitivity on interest rates. But what I can say is based on the current debt the impact is minimal. The next question -- I guess, the next question is related -- in relation to interest rates in the Eurozone. So yes, as we saw on the previous -- in the next slide -- the next one. Yes. So you can see the blue line is the 3 months Euribor. And as you will all be aware, that used to be negative as earlier as just over a year ago, really, it's like June '22, the 3-month Euribor was sort of minus 40 basis points. And now that as of September, that is close to 4%. The good news is that it has stopped. It's stabilized at around 3.9% to 4%. And if we look at the longer curve like the 5-year in Europe, the 5-year rates have come off a little bit. So hopefully, that's an expectation that in the longer term, the interest rates are going to come down a little bit.
We do have a question from Raymond, what would be the long-term portfolio ratio, office and logistics?
Yes. So we continue to focus to -- pivot to logistics. And so currently, that has just become the majority of just over 50%. And I think probably on a longer-term basis, we will see that around 60% or more. Maybe just moving on to Michael's next question, which is the cap rate of our properties. So I think currently, the average -- if we call it the NPI, income yield let's call it that, so there's no confusion is around 6% currently.
Thanks, Shane. And we do have another question from Michael. Will you be divesting more properties in the near future?
Yes. Yes, indeed, Michael. So we did -- we have been talking about a total of EUR 400 million of asset sales that we would think would be sort of non-core assets that we'll be divesting. And we've done -- we've already completed EUR 200 million of those this year. So our expectation is in the next year or 2, there will be another EUR 200 million of asset sales.
And a further question from Michael. What percentage of valuation drop can you withstand before the mass gearing limit is breached?
Yes. That question is quite easy to answer. If you just take the 30th June balance sheet, you can calculate it, but it's a significant number. It's a significant number in terms of euros. You're asking the percentage, but I just -- I haven't got the number right in front of me now, but it is a -- in euros, it is a significant number.
[Operator Instructions]. But if there are no further questions, I'll hand it back to Shane and Elena for closing remarks.
Thanks, Kiara. Since Shane did most of the talking, I'll take over. Just as a summary -- to leave you with some key highlights. We have now achieved majority 51% weighting to Logistics & Industrial. Indicative 3Q DPU is up 3%. Portfolio occupancy is 95.2%. We saw a positive 10.6% rent reversion over the quarter, and net pro forma gearing is down to 37.4%. So if you have any further questions, please feel free to reach out to myself. You know where to find us. We are quite easy to locate and our contacts and e-mails are on the website. We remain open for questions post this call, and we take meetings. Thank you.
Thank you.