Cromwell Property Group (CMW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cromwell Property Group Half Year ' 25 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Jonathan Callaghan, Chief Executive Officer. Thank you. Please go ahead.

Good morning, everyone, and thank you for joining us today for Cromwell Property Group's Half Year Financial Results to 31 December 2024. I'll begin today's presentation by acknowledging the traditional custodians of the land from where this call is being hosted, the Gadigal people of the Eora Nation. We pay our respects to their elders past and present. The highlight of the year was completion of the sale of Cromwell's European platform on 24 December. The sale included our co-investment stakes in Cromwell European REIT and the Cromwell Italy Urban Logistics Fund and was a significant step in the group's strategy to simplify the business and return capital to our home market. Following the completion of the sale, proceeds were used to reduce the net debt. As a result, gearing now sits almost 10% down at 29.1%, with group net debt now down to $646 million, 66% down since the group started its simplification strategy in 2021. The journey to simplify Cromwell's business has taken some time, commencing in 2021. We have exited $1.6 billion of noncore investments since then, enabling us to stabilize the business and refocus efforts locally. We now manage AUD 4.5 billion of assets across Australia and New Zealand. This includes 8 core office properties valued at $2.1 billion in our investment portfolio and $2.2 billion of third-party assets managed by Cromwell's funds management business. We are very pleased that Cromwell is now positioned to deploy capital to fund value and earnings growth for our security holders. I'll pass now to Michelle Dance, Cromwell's CFO, to cover the financial performance and capital management for the half year.

Thank you, Jonathan, and good morning to you all. The group reports underlying profit of $55.1 million for the half year, equivalent to $0.021 per security. This was a 34.4% decrease from the prior corresponding period, which included income from noncore assets that form part of our business simplification and deleveraging strategy. The Australian investment portfolio delivered an ongoing strong result in line with the prior corresponding period with earnings of $78 million. This is due to Cromwell's strong asset management, including leasing activities, which Rob will discuss later on the call. On a statutory basis, Cromwell Property Group reports a loss of $28.6 million for the 6 months to 31st of December 2024. This was mainly driven by revaluation of the investment portfolio, down $99 million on a like-for-like basis. Also adding to this were fair value losses from interest rate and currency derivatives of $31.6 million. Losses were offset somewhat by foreign exchange gains of $54.9 million and a $23.2 million gain on sale of the European platform. Net tangible assets per security moved from $0.61 to $0.57 due to a $0.04 per security decline in investment portfolio valuations over the period. Distributions of $0.015 per security were paid over the 6-month period, which represents a payout ratio of 106.4% to AFFO for the 6 months to 31 December. Adjusted funds from operations for the period was $36.9 million or $0.0141 per security. Within Funds and Asset Management, both Australia and Europe generated around $4 million of income each. Overall, the total segment was down 33% over the half year compared to HY '24, largely due to a 50% decline in earnings from Europe. Corporate costs were flat and financing costs were 27% less over the half year compared to HY '24 due to interest saved after repaying the debt associated with Cromwell Polish Retail Fund, which was sold and completed in May 2024. Debt across the group is significantly low, which we are very pleased about as we move into the next phase of Cromwell's growth journey. As you can see on Slide 12, group net debt is down more than 60% since we started the group simplification strategy down to $645 million. This puts gearing now at 29.1%, which is below Cromwell's target range of 30% to 40%. Weighted average cost of debt is 4.8%, and our weighted debt maturity is 2.3 years. The group now has ample headroom to covenants following completion of the sale of the European platform and subsequent debt repayment on the 10th of January this year. As you can see on the chart on the left side of Slide 13, there is significant undrawn debt available to the group. This provides the group flexibility to take advantage of growth opportunities as they present themselves. While the group may use some of this capacity to consider capital management and growth initiatives, we are guided by the group's target gearing range of 30% to 40% and intend on prudent capital deployment to stay within these bounds. The chart on the right of this slide shows that in the very near term, following the recent debt repayment, we are close to fully hedged. These derivatives taper off throughout the years into our target range. Our current weighted average cost of debt will drift up marginally as derivatives entered into some time ago at very low coupon rates begin to expire. Rob Percy, Cromwell's Chief Investment Officer, will now step through performance within the investment portfolio and funds management businesses.

Thanks, Michelle. Good morning, everyone. As mentioned by Michelle, the investment portfolio income remains strong, underpinned by strong asset occupancy of 95.8%, up 1.7% since June 2020. While the portfolio's valuations are down AUD 99 million or 4.5% to $2.1 billion over the 6 months to 31 December 2024, the pace of market cap rate expansion appears to be slowing. Our investment portfolio weighted average cap rate has expanded in the period by 40 basis points to 7%. The slowing of devaluations, combined with the strong period for leasing gives us a level of confidence that the market is nearing a positive inflection point. New and existing tenants have been active in key core leasing markets where our investment portfolio assets are located. During the 6 months, over 16,000 square meters of new or renegotiated leases were agreed in our portfolio. Slide 16 shows our strong tenant mix with almost 70% of portfolio income attributed to government, Qantas and metro trains, all very low-risk income. The portfolio weighted average lease expiry across the portfolio is now 5.1 years. Slide 17 outlines Cromwell's active asset management ethos, which supports leasing through tenant engagement, strategic asset upgrades and various other initiatives to drive occupancy and maximize rental income. The bar chart on the right illustrates that the investment portfolio's weighted average lease expiry stands at 5.1 years, reflecting a strategic focus on mitigating near-term lease expiries. This has been achieved through mutually beneficial negotiations that secured longer lease terms for several large tenants that have near-term expiries. Through this leasing activity, we have significantly de-risked the portfolio, which will drive value over the longer term. We have included a case study on the development of CoLab at Kent on Slide 18. This is an example of an initiative to drive asset values by developing unused or difficult space to provide a third space of common area to be made available for tenant use. In this instance, the space includes new and modern kitchen and break outs at Kent Street, Sydney. There is an auditorium that can sit 100 people to be used as a conference or learning space. The room can be divided to have 2 spaces half the size and capacity. A full room space is also available for smaller groups or meetings. Our funds management business is now managing $2.2 billion of third-party funds under management across Australia and New Zealand. This number remained largely flat over the period with valuation increases in Cromwell Phoenix Securities funds offsetting asset devaluations in Cromwell Direct Property fund. Details can be found on Slide 20 of the presentation. In the Cromwell Direct Property Fund, valuations are down by 5% to $470 million and the weighted average cap rate of 7.3%. The weighted average lease expiry remains stable at 3.6 years and occupancy is strong at 94.6%. More than 7,000 square meters of space was leased over the 6 months. I'll now hand back to Jonathan to talk more about the path forward for Cromwell.

Thanks, Rob. If you've got the presentation pack in front of you, we're now at Slide 22. We will be a capital-light investment manager serving retail, wholesale and institutional investors through the investment in and management of traditional real estate classes. We will drive growth through 3 key channels, which we outlined on Slide 23. We will drive organic growth within the investment management business, focusing on markets we know well in asset classes we are well acquainted with. This is a slower, low-risk growth path, which requires targeted and specialized asset selection, often single assets at a time to build new funds and investment mandates. This attracts capital from all markets, retail, wholesale and institutional investors. Our second growth channel is growth through our existing products, which will build on the funds Cromwell currently manages. We may join with like-minded partners to grow through single asset or multiple asset funds that align to an existing product strategy using scale to drive returns. Platform acquisitions are our third path to growth. In the current market, opportunities are likely to present themselves for us to acquire and merge investment management platforms or take on the management of funds as separate vehicles. This provides a faster growth trajectory and provides the opportunity to add to the breadth and skills within the group. We've had great past success operating in traditional office sectors over the years. We have an incredible strong property team to drive core returns from our investment portfolio through active asset management. We will continue to focus on this space for our clients. The office sector has faced notable headwinds recently in the form of demand uncertainty caused by evolving work habits and the oversupply of new stock. This has caused it to be out of favor in most investment strategies. However, we believe that following substantial repricing and gradually improving fundamentals, we will see investor demand improve for well-located assets with affordable rents that meet the amenity requirements of tenants. The retail sector has long been a key market in Australia, and we believe there continues to be opportunity in neighborhood convenience. Often anchored by supermarket chains, these assets service a captive neighborhood market and benefit from nondiscretionary spend by consumers. We also see opportunity in large-format retail real estate tenanted by hardware or furniture retailers, particularly in areas of strong population growth. In the industrial space, we will focus on smaller lot and value-add assets where location is key and the assets may be unloved and mismanaged. Ownership in this sector remains fragmented, reflected in non-standardized stock with value-add potential. These assets also cater to a diverse tenant base, providing leasing opportunities for institutional ownership. In the near term, we reiterate our commitment to Cromwell's growth in an orderly and value-accretive manner. Stable growth in returns through prudent capital management and deployment is the key to Cromwell's future. The distributions expected to be paid for the March 2025 quarter is $0.75 per security. Thank you for dialing in today and to hear the group update. I'll now hand back to the call operator to open the Q&A portion of this call.

[Operator Instructions] Your first question is from Solomon Zhang from JPMorgan.

First question from me, I guess, is just on the guidance and outlook. The business is significantly more simplified, but you still haven't sort of provided EPS guidance. Is there a reason for that? And I guess, what are the key moving parts in your view? Is it mainly the corporate cost line or I guess, your thinking there, please?

Yes. Solomon, thanks for that. I think there are a few reasons. One is it's a continuation of the habit that the Board has evolved over the last 3 years. The second is we're probably in a little bit of a flux moment for capital deployment. So we think there will be some moving bits in that piece, which makes sort of providing guidance a little bit problematic. But it is something that the Board is watching and we'll review at each meeting. I think probably if we do change the habit, it will be at the end of the financial year, which just seems like as good a time as any to sort of sit down and reflect on practices.

Yes, that makes sense. And just looking at the corporate cost line, it's flat half-on-half, but I guess, post the EU sale. Can you just talk about how that will evolve given I understand there's some costs relating to, I guess, support of some of those EU funds, special purpose vehicles and the like. Comments there, please?

Yes. I mean we do expect that cost line to come down for the full year and you'll see some -- that change in the full year number.

Yes. And maybe just turning to office leasing. Can you just comment on, I guess, you're facing effective rent spreads on the circa 16,000 square meters of leasing you've done in the fall?

Yes, I can take it. So effectively, the main ones that we've done, Solomon have been Kent and Collins Street, and there's another one in HQ. So the total reversion was about 2.6% down off the back of effectively extending leases and dropping the rents a little bit. Incentives on those rents were about market for all of them other than one, the federal government in Collins Street, which was a bit elevated.

Yes. And given the leases have probably struck what 7 years ago, the effective rent spreads would be, I guess, negative a bit worse than the first correct -- and I guess government tenants are a decent proportion of your book. Any comments on just how your physical occupancy is tracking at the moment? Just knowing that New South Wales, obviously, the state government has put in some mandates, but just your thoughts on how that's evolving.

Yes. It does vary by location. So New South Wales is a bit better than, say, Queensland up at 400 George Street, Brisbane, which is then, again, a bit better than down in Canberra at the ACT, particularly at Soward Way. So it does vary. So it's hard to say exactly. But what we are finding is that it's maybe about 3 days a week, but that varies by state.

[Operator Instructions] There are no further questions at this time. Therefore, that does conclude our conference for today. Thank you all very much for participating. You may now disconnect your lines.