Cromwell Property Group (CMW) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Cromwell Property Group HY '20 Results Announcement Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Weightman, Chief Executive Officer. Please go ahead.

Thank you, and good morning. Welcome to Cromwell Property Group's 2020 Half Year Results. As per the introduction, I'm Cromwell's CEO, Paul Weightman; and with me today is group CFO, Mark Wilde. Today, Cromwell reports half yearly statutory profit of $227.3 million, equivalent to $0.0878 per security, which is up 59% from a $0.0552 per security reported in the prior comparable period. Operating profit considered by the directors to best reflect the underlying earnings of Cromwell was $134.1 million, equivalent to $0.0518 per security, a 26% increase from the $0.041 per security reported in the prior comparable period. We've delivered an exceptional set of results in the first half. Our long-dated balance sheet assets continue to drive operating earnings above our rolling net operating income target of 3%. Our "Invest to Manage" strategy, which involves investing to acquire or develop assets, creating new funds, selling them down to capital partners and then recycling the proceeds, also continues to bear fruit. In the half year, we sold Northpoint Tower and recycled capital into 400 George Street, our LDK Healthcare joint venture, and in acquiring the third-party interests in the Cromwell Polish Retail Fund. I'm happy to announce the sale of the 50% stake in 475 Victoria Avenue, Chatswood, through a private fund managed by BlackRock Real Estate and a joint venture relationship with them for the expansion of the asset. Similar to the strategic approach we took with Northpoint Tower, the location of the asset, it's high countable tenants and expansion upside positions this asset as an attractive investment proposition. We'll review our existing plans with BlackRock and explore further ways to improve the value of the opportunity and expand on our relationship. Overall, the group has a clear proven strategy, a long WALE portfolio of balance sheet properties, a $1.2 billion plus value-add development pipeline, a host of "Invest to Manage" opportunities, a successful and growing platform in Singapore and a robust platform and presence in Europe. We're exceptionally well placed to continue to add value for all of our securityholders. Turning to our direct property investment segment. Profit was up -- profit was $105.7 million, up 69% on the prior comparable period. The portfolio was valued at $3.2 billion and is split into 3 components. The core portfolio comprises 10 assets, representing 75% of the Australian portfolio by value and has a WALE of 8.2 years. It has an occupancy of 99.7% and has generated NOI growth of 3.4%. The Core+ portfolio comprises 6 assets or 23% of the portfolio by value and has 36% occupancy, a WALE of 3.2 years and NOI growth of 2.1%. And the active portfolio consists of 5 assets or 2% of the portfolio by value, is at lower WALE of 0.1 years, reflective of the vacancy generated as buildings become available and been able to be recycled and redeveloped. During the year, the weighted average cap rate tightened by 0.1% to 5.63%, with a fair value increase in investment property of $110.1 million net of property improvements, lease costs and incentives. The WALE was 6.1 years due to strong leasing outcomes with 64 transactions over 83,775 square meters of space. Our Core and Core+ portfolios are performing strongly. Combined, they represent over 98% of the portfolio by value, have occupancy of 98.75% and are generating consistent, strong NOI growth above our rolling 3% target. We also have a very strong portfolio of value-add projects. The ongoing Seniors Living project at Greenway in the ACT is progressing well. And we have the opportunity I've just mentioned with BlackRock at Chatswood. Our development application for a new $85 million, 18,000 square meter PCA, A-Grade office building at 19 National Circuit ACT has also just been launched, and we're considering a master plan and feasibility review at Wakefield Street in Adelaide. In conjunction with other confidential projects, we have a strong line of sight to at least $1.2 billion of development work, which is either underway or likely to commence within the next few years. We anticipate our pipeline of development opportunities and a demonstrated ability to execute on large value-add accretive transactions will attract interest from existing and new capital partners. Our indirect property investment segment includes Cromwell's 30.4% interest in the Cromwell European REIT, or CEREIT, as we call it, a 50% interest in LDK Healthcare and the Cromwell Polish Retail Fund, or CPRF. Segment operating profit was $25.5 million, up 31% from $19.4 million in the prior comparable period. CEREIT announced its 2019 financial year annual results for the Singapore Exchange Securities Trading Limited earlier this week. Net property income was EUR 116.1 million, with 2009 financial year distributions per unit of EUR 0.0408, again, above our original IPO forecast. Cromwell's 30.4% equity-accounted share of CEREIT's operating profit for the period was $26.1 million. The stake itself is now valued at over EUR 400 million or AUD 637 million. Needless to say we're very pleased with our investment with the efforts of the CEREIT management team and all of those who have contributed to its undoubted success. CEREIT has exceeded its IPO forecasts and its strong pipeline of potential opportunities should see it continue on its growth trajectory. During the half, we acquired all third-party investor interests in CPRF for EUR 512.9 million or $823.3 million. CPRF consists of a portfolio of accretive destination centers in desirable metropolitan regions across Poland and has been temporarily warehoused on Cromwell's balance sheet as part of our "Invest to Manage" strategy. The fund will be restructured by the end of March and will then be offered to capital partners, and we expect to return an eventual long-term co-investment stake of 20% to 30%, similar to our exposure in CEREIT. Whilst this has occurred, the capital released from the sell-down of our interest in the fund will be applied to repay debt, will be recycled into one of our other "Invest to Manage" opportunities. LDK continues to make impressive progress in restructuring the membership scheme at The Landings, one of Sydney's premium seniors living villages, which comprises 220 architecturally designed homes. 98% of residents have elected to convert from a deferred management fee structure to the new LDK membership model, and all future residents will be offered this structure going forward. Significant capital appreciation of the underlying assets is expected as a result. As I mentioned, Greenway Views is also in the process of being transformed into a seniors living village. The first residents have moved in and 210 apartments are expected to be operational by the end of April. From a standing start a year ago, we'll now have 430 seniors living apartments operational by the end of April. We're keen to style-up and expand this joint venture further. Funds and asset management segment profit was $31.1 million, up 67% from $18.6 million in the prior comparable period. Total fund was $8.3 billion. Europe, again, saw substantial transactional activity in 2019, including the managed sell-down of the German portfolio within the Cromwell European Diversified Fund, generating an investor IRR of 19%. We continue to execute on our clearly articulated strategy to broaden capital sources and generate enterprise value while the creation and growth of funds providing long-term or perpetual fee income, with 72% of the EUR 3.8 billion under management in Europe in long term or open funds. This level of recurring income will underpin the platform and its future growth. 2020 is also the last year with any material expiries relating to the legacy funds we inherited on the acquisition of our business in Europe. After 2020, if we just maintain our current level of acquisitions, we'll see the platform begin to scale upwards towards the medium-term targets of EUR 8 billion. Within the retail component of the segment, the highlight was the continued growth of the Cromwell Direct Property Fund, which acquired 11 Farrer Place in Queanbeyan, New South Wales, of $35 million and benefited from strong inflows with gross assets increasing to $449 million. The fund continues to be popular with investors due to its low gearing and its ability to play secure distribution with some liquidity. In New Zealand, AUM at Oyster Group increased to NZD 1.8 billion from its previous NZD 1.7 billion level. Highlights of the half with the popularity of the Oyster Industrial Limited offer, an acquisition of a 60% ownership share in Tauranga Crossing, which will be marketed to institutional investors from 2020. Turning now to outlook and guidance. Our assessment is that 2020 will be a difficult year for the world economy as the knock-on effects of the coronavirus are fully felt. In Australia, bushfires, floods, reduced numbers of tourists and international students and our susceptibility to any downturn in the Chinese economy have had a negative effect on most economic forecasts. The consensus is that economic growth for 2020 is likely to be well below the previous consensus forecasts of 2%. We're also subject to continuing agitation from our largest shareholder, the latest episode of which is to call an AGM. We'll respond to the notice that we received this morning and the leaking of the notice to the media in due course. We don't underestimate these challenges. 2020 was already looking like a year of muted global economic growth prior to the recent natural disasters and the coronavirus. Given current asset pricing levels, we remain highly selective and very cautious. We retain a strong balance sheet. NTA is up to $1.04, a pro forma gearing of 39% is within our target range prior to the sell-down of any interests in CPRF. We have a long WALE of 6.1 years, 40% of growth passing income is sourced from government tenants, and we have a wide range of value-adding accretive options within our current portfolio. At the half year, we're ahead of run rate and strategy. And despite the considerable uncertainty in the general external environment, the distractions from consistent securityholder agitation and the looming economic impact of the coronavirus, we're confident to maintain the FY '20 operating earnings guidance of not less than $0.083 per security previously provided to the market. Cromwell's also undertaking a strategic review in conjunction with its advisers, UBS and Goldman Sachs. The strategic review led by incoming chair, Mr. Leon Blitz, will examine all aspects of the business, the current "Invest to Manage" strategy and all possible options to maximize securityholder value. This may include a formal sale process of the group or part of the group, a review of capital structure required to execute the group's strategy and all other options. This review is not driven by any concerns about performance or lack of alignment or direction, but rather to ensure that all securityholders receive maximum value from their investments. The Board welcomes input from all of Cromwell's securityholders and other stakeholders. While we're confident in our "Invest to Manage" strategy and the results are planned received from our results, we're not so inflexible that we won't listen to securityholders and consider ways to maximize value that is in the best interest of all of them. We expect the strategic review to conclude prior to Cromwell's full year FY '20 results. Thank you. Now I'd like to welcome the line for any questions.

[Operator Instructions] Your first question comes from Sholto Maconochie from Jefferies.

Just on the strategic review, it seems like it's all-encompassing. Is there anything that's off the table? And are you looking at everything, all aspects of the business? And can you elaborate on anything that's excluded or the like, please?

It's open, Sholto. We're looking at all options to maximize securityholder value.

All right. And then just on the development profit on Northpoint, was that -- I'm not sure if you've done this before, but the $32 million pretax is in the P&L rather than take on gain on sale, was that held for trading in the -- it was equity accounted or understand the account for that?

So let me just explain. We obviously managed the development of the asset through a fund. Under the joint venture terms, we're entitled to a development profit share and fee on sale of the asset. So we obviously couldn't crystallize that fee until the asset was sold, but at point-of-sale of the asset in September, we're able to recognize the fee.

So that was profit that would have taken to NTA in the fund, your share that you used at the end, when it was -- it was part of the agreement? Was it?

No. Effectively, we couldn't recognize the fee on our profit or the sales side until it crystallized. So if any fee value of the asset pre-sale, effectively, more the fee.

Okay, that's clear. And then on the performance fees, the funds management income was up quite -- 82.1% in the half. What performance fees were in that -- are at the PCP?

So the performance fees this half reflected a lot of the promotes that have been earned as a result of the roll-off of some of our legacy funds and some of the private equity funds in Europe that we've been managing over the last few years. As you'd appreciate, we generate performance fees from both the Europe platform, the retail platform and from our management of CEREIT. So it was a smaller performance fee generated out of CEREIT. But in the half, I think, predominantly, a lot of the promotes were generated in Europe. And look, I think it's fair to say those promotes are generated through transactional income. There's no pattern to them. And I think it sort of reinforces the reason that we're looking to restructure the nature of the platform in Europe towards more long-term recurring revenues, away from more episodic, short-term transactional revenues.

So out of the $82.1 million, what would you say would've been performance fees for this half? Do you know what that would be?

It was up to -- Sholto, it was round about $26 million.

Okay, great. Okay. And then just finally for me, on the gearing pro forma of around 39%. Just on the back of more -- you've got, in the fund, Polish Retail Fund is about -- including the other asset, about $857 million of assets. And then if you took 25% at the midpoint, that gives you a stake around $214 million. So that leaves you still down potentially $643 million. If you paid down debt on a balance sheet basis, you'd be looking at sort of gearing around the 30%. Is that maths work if you just -- before you reinvested it? Is that -- would that be about right?

Yes. That's right. And the other thing I should stress is that we'll achieve further gearing reduction from the sales of apartments in Greenway, which will further reduce our gearing and/or capacity for recycling, both on balance sheet level and all of through basis. But particularly, the impact of that would be that if we simply held that in cash or paid down debt, we would actually be well below our target range.

[Operator Instructions] Your next question comes from Stuart McLean from Macquarie Group.

Just a question on the Polish Retail assets. Saying you'd like to get down to a 20% to 30% stake. Just wondering what gives you confidence that there will be demand to take the other 70% to 80% for European retail assets?

Well, good discussions that we have had and continue to have with the investors into the fund.

Can you give any further color there? Maybe what type of investors? Are they also from Europe? As a private equity, is it institutional? Can you just give a bit of color on the demand that you are seeing?