Cromwell Property Group (CMW) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the Cromwell Property Group FY '21 Results Announcement. [Operator Instructions] I'd now like to hand the conference over to your first speaker, Dr. Gary Weiss. Thank you. Please go ahead.

Thank you, and good morning, everyone. I'm Gary Weiss, the Chairman of Cromwell Property Group and would like to welcome you all to this call to go through Cromwell's full year FY '21 results. With me and certainly as Acting Chief Financial Officer, Brett Hinton and our Chief Investment Officer, Rob Percy and in Brisbane, we have are Chief Executive, Michael Wilde, our Head of Property, Bobby Binning and Head of Retail Funds Management, Hamish Wehl. Before Michael and the team gets started on the FY '21 results, I would like to provide an update on board composition. The process to renew the Cromwell Board is now substantively complete and Cromwell has a diversified board with significant commercial, real estate and capital markets experience in place. With the recent appointments of Rob Blain, Eng Peng Ooi and Jialei Tang, security holders may be assured that the board will act at all times in their best interest and seek to enhance the long-term value of their investment. The Board was pleased to appoint Jonathan Callaghan as Chief Executive Officer; and Jonathan will commence on the 1st of October, 2021. Jonathan is an outstanding leader and industry veteran, well known for his achievements in his previous role as Chief Executive Officer of Investor Property Group. The Board is confident that his leadership and experience in property and funds management will drive the strategy for the benefit of security holders. The Board has been actively reviewing Cromwell's strategy and business model. The aim is to simplify the group structure with a view to improve capital efficiency, using our existing portfolio assets to create new funds and accelerate the growth in our funds management and development businesses. We have initiatives underway, which we believe will unlock value for security holders, position Cromwell to grow and provide increased opportunities for our team. An update will be provided to the market as soon as the formal strategy has been approved by the Board. I'm happy to take further questions at the end of the presentation. But for now, I would like to hand over to acting Chief Executive Officer, Michael Wilde, to take you through Cromwell's FY '21 results.

Thank you, Gary. For today's presentation, I'll start by making some initial remarks on the business and then I'll pass to acting Chief Financial Officer, Brett Hinton to run through the financial results and capital management. Head of Property, Bobby Binning, will talk to our Australian property portfolio; Chief Investment Officer, Rob Percy, will cover investment management, and Hamish Wehl will cover our retail funds management platform. I will then finish by providing some comments on the outlook for FY '22. Cromwell was established in 1998 and now has an operating platform consisting of a culturally diverse team of 460 people located across 15 countries and 28 offices. Total assets under management are $11.9 billion, of which $7.6 billion is managed for third parties. Our core objectives are to actively invest, develop and manage commercial property assets to deliver strong risk-adjusted returns for fund investors and sustainable growing total returns for our security holders. Our local on-the-ground teams drive superior returns through active asset management and value-add strategies and our established funds management platform supports the investment objectives of our investors and capital partners. Importantly, we do this through the lens of a long-standing ESG and sustainability framework, which supports our responsible and balanced pathway to investment success. Turning to the FY '21 results. Today, Cromwell reports full year FY '21 statutory profit of $308.2 million, equivalent to $0.1178 per security. This represents a 73% increase on the prior year due in part to a $97.5 million increase in the fair value of our investment properties. Operating profit was $192.2 million, equivalent to $0.0735 per security, which represents a reduction of 13% compared with the prior period. Total assets under management increased to $11.9 billion from $11.5 billion in FY '20. Cromwell paid distributions of $0.07 per security in the year, a reduction of $0.05 per security on the prior year. The payout ratio for FY '21 was 95.3%. COVID-19 continues to impact all our lives, and while not unaffected, I believe Cromwell has come through a tough year in good shape. We have continued to drive operational resilience in our business through our sustainability framework and environmental, social and governance activities. This long-standing commitment has helped us navigate the COVID-19 pandemic, seeing our business continuity plans implemented in every country in which we work as the vast majority of our people worked from home for large portions of the year. Through their continued efforts, we've been able to maximize the cash flows within our property investment portfolio, establish a pipeline of future development opportunities and launch new initiatives to grow our funds management business. This is a testament to the quality of our people who have supported their colleagues throughout the pandemic while also remaining focused on their roles and our objectives. I would now like to hand over to acting Chief Financial Officer, Brett Hinton, who will take us through the financial results in more detail as well as capital management.

Thank you, Michael. As Michael just mentioned, the operating profit was $192.2 million, which is the equivalent to $0.0735 per security. This does represent a reduction of 13% year-on-year. In FY 2020, we had not seen the full impact of COVID on product creation that we unfortunately saw in the first half of FY 2021. This has resulted in lower levels of development completions, their subsequent disposals and suppressed European transactional activity, all impacting fee generation. During the year, the total value of investment properties held on balance sheet rose to $3.9 billion, reflecting positive valuation gains in Cromwell's Australian office portfolio contributing to net tangible assets increasing from $0.99 per security to $1.02 per security as at 30 June 2021. Cromwell's property investments comprise direct interest in 31 balance sheet assets. That consist of 18 Australian, primarily, office assets, 7 Italian logistics assets and 6 Polish shopping centers plus indirect interest in the Cromwell European REIT, which is a 28% interest, LDK Senior Living at 50% interest and the 7th Polish shopping center personnel, a 50% interest. Total profit for these investments was $193.6 million, a small decrease of $2.6 million or 1.3% on the prior year. From a balance sheet perspective, these 31 assets have a combined value of $3.9 billion with fair value gains in investment properties during the year of $101.2 million in Australia, $2.7 million in Italy and a reduction of $6.4 million in Poland. Fund and asset management profit of $41.7 million was 44.1% lower than the prior corresponding period due to the impact on COVID-19 to transactional activity and the resultant lower performance fees and development fees. The corporate costs that cannot be allocated to specific segments, though, reduced by 13%, mostly due to a decrease in our income tax expense. Finance income was up marginally and corporate costs came down. Gearing at 42% is unchanged in the year, and we maintain a substantial liquidity and covenant headroom with a strong interest coverage ratio of 6.1x. Debt has recently been reprofiled and extended with a weighted average debt maturity of 3.2 years, which provides time and contractual flexibility for us to execute any identified strategies to lower gearing. I'll now hand over to the Head of Property, Bobby Binning, who will take you through the performance of Cromwell's Australian property portfolio.

Thanks, Brett. The Australian portfolio valuation gains have been supported by increased levels of office transactions, which highlights the demand for high-quality assets with long leases to strong covenant. The portfolio has a weighted average lease expiry of 6.1 years and occupancy of 94.7%, with 78% of our tenants being either government authorities or large multinational organizations. The Australian portfolio had a like-for-like net operating income growth of 2.8%. We have manageable exposure to lease expiries over the coming 4 years with only 7% of leases expiring each year on average. Our property services team has been actively engaging with our tenant customers to understand their drivers and expectations for office accommodation today and into the future. A clear message from our customers is they still value office accommodation as a key pillar to reinforce their organizational culture, learning and development. The type of space they are occupying is evolving with increased focus on collaboration spaces, more technology, flexibility and wellness facilities. I believe our portfolio is well positioned to meet this acceleration of customer expectations. In the second half of 2020 and the start of 2021, we witnessed office demand pick up quickly after a pause in market activity. Occupier demand started with the smaller-sized tenants by move to encompass all tenant sizes. The demand was primarily focused for fitted-out accommodation in good quality buildings. This resulted in base rental holding firm but increased incentives. Unfortunately, the current lockdowns halted this momentum. However, increased vaccination distribution and take-up has boosted confidence that positive occupier sentiment will again return fairly quickly once lockdowns are lifted and it is safe to return to the office. The Victorian and New South Wales state governments have recently reintroduced the code of conduct, which requires landlords to provide rental relief and deferment to eligible SME tenants proportionate to the tenant's reduction in turnover. The entire SME segment of our tenant customer base represents just 10% of total gross passing income and not all of these tenants are impacted. As per the previous lockdown, we will ensure all our eligible tenant customers are directly engaged by formal employees and arrangements will be agreed on a case-by-case basis. I'll hand over to our Chief Investment Officer, Rob Percy, to talk about the properties in Italy and Poland and our indirect investments.

Thanks, Bobby, and good morning, everyone. In Italy, the 7 logistics assets fully let to DHL have ceded a Pan-European Logistics Fund, which is currently being offered to capital partners. The assets have remained operational throughout the pandemic, experiencing increased trading volumes and we are intending to retain up to 20% in the funds going forward. Poland has seen 4 separate lockdowns since the start of the pandemic, and the shopping centers in the Cromwell Polish Retail Fund have remained open throughout given their focus on grocery, pharmacy and essentials. Discretionary retail, however, has been more impacted by COVID-19 with a large number of leases renegotiated during the year. Total invoice collection for the 12 months to 30 June 2021 was 89%. This is expected to increase given the normal collection lag and as outstanding invoices are pursued. The centers remain accretive to earnings and Cromwell will hold them until conditions allow for the original recycling strategy to be executed. Cromwell has a 50% ownership in LDK Healthcare which owns 2 seniors living villages, The Landings and Greenway Views. The redevelopment at LDK's Greenway Views continues in stage 2, due to complete on time in February 2022. 148 of the 210 stage 1 apartments have already been sold with 134 settled. Stage 2 will deliver 117 more apartments. Presales are strong with 67 sales achieved so far, representing a further 25 sold in the 6 months to 30 June 2021. Cromwell's equity accounted share of CEREIT's profit for the year based on its 28% interest was $43.3 million with the total stake valued at $621 million. The CEREIT portfolio once again recorded a strong 3.2% uplift in value to EUR 2.3 billion for the 12 months with a 94.9% occupancy rate by net eligible area. The 109 properties are managed by Cromwell's experienced local teams in Europe and showed their resilience to COVID-19 with an approximately 96% cash collection rate since February 2020. CEREIT also expanded into new geographical markets in Slovakia and earlier this month announced its first acquisition in the U.K., highlighting substantial future growth opportunity. The European platform has benefited from the arrival of Managing Director, Europe, Pertti Vanhanen, who commenced in January 2021 having joined from Aberdeen Standard Investments. He brings deep institutional funds management experience and strong capital partner relationships. He has already launched new initiatives to grow FUM including a joint venture with Dasos Capital to launch a wooden building fund, signed agreements with new capital partners in Germany and Italy and has taken the European logistics fund to market. Cromwell is committed to enhancing our investment management capabilities and driving growth and funds under management. We are also focused on identifying possible development opportunities in our managed property portfolio across both Europe and Australia in order to unlock potential value and to ensure a higher and more consistent and regular flow of future development fees. A total of 29 projects across 10 different countries have been identified, 19 of which are undergoing an initial assessment with 6 in planning or approval stages and 4 currently underway. The 10 projects that have progressed past the initial assessment stage have a combined estimated end development value of $2.2 billion, covering gross floor area of circa 329,000 square meters. While not all projects will proceed, a robust future development pipeline will add significant value for both Cromwell and its capital partners. Hamish Wehl, Head of Retail Funds Management, will now take us through what has happened with the retail funds business during the year.

Thanks, Rob. Within the retail funds business, the majority of unitholders in Cromwell Property Trust 12 and the Cromwell Direct Property Fund continued with their investments after liquidity events earlier in the year. As part of Cromwell Property Trust 12 liquidity events, the Rand Distribution Centre in South Australia was sold for $63 million, a $10 million premium to book value. The Cromwell Direct Property Fund acquisition of 545 Queen Street at the entrance to Brisbane CBDs Golden Triangle for $117.5 million completed in May. The asset benefit from the 2,735 square meter island site, providing ample natural life to all sides and tenancies and is 100% occupied. Post year-end, the Cromwell Direct Property Fund sold Bunnings assets in Munno Para West, South Australia. The sale represents a great outcome for unitholders in the fund. Initially applied for $27.5 million in 2015, the sale price of $48.8 million represents a material premium on the 30 September 2020 valuation of $36.5 million. The Cromwell Direct Property Fund continues to see strong equity inflows. We continue to market the funds to investors and are looking at opportunities to take advantage of the ongoing appetite for quality retail fund offerings. There remains substantial opportunity in the sector. As of 31 March 2021, self-managed super funds retained a 19% weighting for cash and term deposits, representing in excess of $149 billion. Phoenix portfolio's investment team continues to perform with the Cromwell Phoenix Property Security Fund, retaining high recommended ratings from 2 major independent research houses. The fund is the #1 performing Australian property securities fund over a 10-year period as of 31 July 2021. In New Zealand, total AUM at Oyster Group, of which Cromwell has a 50% interest, grew to NZD 2.1 billion. Oyster now manage 37 commercial properties on behalf of fund investors and is currently marketing a new large-format retail fund while continuing to grow both its industrial fund and diversified property funds. Cromwell's FY '21 share of operating profit was $3.7 million for Oyster. I'd now like to hand back to Michael for the outlook.

Thank you, Hamish. The executive team and I continue to focus on a clear set of priorities. We will continue optimizing the performance of the core Australian portfolio driving NOI growth and minimizing vacancy. We will focus on the value-add opportunities identified in our development pipeline, and we will continue our efforts to grow our funds management business. The last 12 months have been dominated by COVID-19 lockdowns, social distancing restrictions and the status of vaccination programs. We are cognizant of the current and ongoing implications of the current COVID-19 situations, not only in Australia but globally, and expectations remain of continued subdued market conditions. Cromwell does not provide earnings guidance for FY '22 at this time, but expects to continue to pay distributions at the current quarterly rate of $0.01625 per security until further notice. With the security price of $.905 at the close of business on the 25th of August 2021, this represents an annualized distribution yield of 7.18%. I would like to thank everyone at Cromwell for their dedication and hard work over the last year. It has truly been a great team effort, and I have very much appreciated the support since stepping into this role. We enter FY '22 with a refreshed board, a new incoming CEO, Jonathan, and we are optimistic about the opportunities that lie ahead. I would now like to hand back to the operator to open the call for questions.

[Operator Instructions] Our first question comes from Fiona Buchanan at Morgans.

Just a couple of questions. Maybe the first one, just to Gary. Just if you could provide any timing around that strategic review. Obviously, conscious Jonathan starts in October. If you're just thinking calendar year or just any views on that? And then I might just ask one for -- on the funds management side after that.

Thanks, Fiona. I'm very hesitant to put a particular timeline around anything here. As I said, the board has been reviewing business models and so on. We have a number of work streams underway, as you correctly observed, Jonathan commences with us on the 5th of October. And all I can say is that we will update the market promptly once we're in a position to do so.

Okay. And then just on the Italian logistics one. Just, again, probably coming back to timing, just obviously, with some COVID around the world. Just your thoughts on timing there. And obviously, the market there would just view on transactional sort of activity currently.

Yes. Thanks, Fiona. So on the European logistics fund, we got full regulatory compliance for that vehicle for 30th of June. We've now been working through the marketing process. So we've only started to hard market that fund over the course of last week. But initial interest seems strong, we would be hoping that we would see that reaching a first close by the end of the calendar year. In relation to the transactional volume across Europe, I think this is one of the areas where we're sort of waiting to see the impact of the summer holidays, are going ahead in relation to COVID and if there's any further new waves of COVID outbreaks and the resulting restrictions that come from that from the governments. So at this stage, it's -- we're pretty unclear as to what is going to happen as a result of that, but we're obviously keeping a pretty close eye on and watching brief.