Cromwell Property Group (CMW) Earnings Call Transcript & Summary

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

Good morning to everyone, and thank you for joining us today for Cromwell Property Group's results for the half year ending 31 December, 2025. I open 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, and pay our respects to their elders past and present. On Slide 5, we outlined some highlights over the 6-month period. Pleasingly, we have been able to deliver growth in key areas. Importantly, operating profit increased 1.5% on the prior corresponding period to $55.9 million. Additionally, since June last year, we've been able to grow assets under management by 13.6% to $5 billion. Cromwell's investment portfolio, which continues to perform strongly with sector-leading occupancy of 97.2%, recorded a valuation uplift of $72 million. This valuation increase has driven an increase in the group's NTA, up 3.6% to $0.58 per security. Our balance sheet remains in good shape. At 30.2% gearing, gearing remains at the lower end of our stated gearing range of 30% to 40%, and we have ample liquidity of $418 million to fund growth opportunities and capital expenditure. Our interest rate hedging profile is robust with 71% of our net debt being hedged at period end. Over the past 6 months, Cromwell is pleased to have delivered on key pillars of our growth strategy outlined on Slide 6. This includes the launch of a new wholesale office fund to acquire 100 Creek Street in Brisbane, an asset benefiting from one of the most positive outlooks in Australian office. The capital raise is on foot and remains on track to raise more than $100 million. Cromwell's Barton1 development in ACT is underway and is progressing on time and on budget and completion is expected in April 2027. We are currently looking for capital partners for this project, which we hope to introduce by completion. Preliminary discussions on this front are progressing positively. In December 2025, we announced expansion of the Cromwell platform through the acquisition of Terre Property Partners. This platform brings strong industrial investment management and development capability to Cromwell as well as $560 million of assets under management. Cromwell has taken a 19.9% stake in a portfolio of industrial assets managed by Terre Property Partners, currently called the Cromwell Industrial Partnership, which we'll describe in more detail later. The remaining 80.1% of this portfolio is currently owned by Straits Trading Company, a preeminent Singaporean investment conglomerate. Our intention is to recapitalize and grow this vehicle. This capital raise is planned to commence next week. Turning to Slide 7. Despite the current interest rate environment, we believe the valuations have stabilized. This will support our investment portfolio as well as capital demand for income-producing assets and projects. Across the market, economic rents continue to comfortably exceed prevailing market rents. Research from CBRE shows office sector economic rents have increased by 50% to 70% since 2020, while industrial economic rents have risen by 60% to 90% over the same period. At the same time, new development remains challenging for projects without cost and income certainty. As a result, the future supply line will be constrained. Between 2025 and 2030, supply is forecast to fall below 10-year average across every major sector, with the tighter supply emerging in shopping center and office sectors. Higher interest rates will continue to make it difficult for new speculative projects to commence and construction costs are expected to rise faster than inflation in every capital city. This dynamic is particularly acute in Queensland, where major infrastructure projects are competing aggressively for already scarce labor, a story that we see driving demand for our 100 Creek Street, Brisbane capital raise. Set against ongoing population growth and limited new supply, we see conditions that are supportive of a tightening commercial real estate vacancy, which in turn underpins the positive outlook for rental growth and capital demand. I will now pass to Michelle, Cromwell's CFO, to provide an overview of the financial results and capital management for the half year.

Thank you, Jonathan. On Slide 10, you'll see that Cromwell reported an increase of 1.5% in operating profit to $55.9 million, supported by the continued strong performance of the investment portfolio, which recorded property valuation gains of $72 million during the period. The group reported funds from operations of $55.3 million, equivalent to $0.0211 per security, reflecting a payout ratio of 71%. Net tangible assets increased to $0.58 per security, up from $0.56 per security at 30 June, 2025, largely due to the strong performance from the investment portfolio. We are focused on maximizing the value of our investment portfolio, driving further improvements in NTA and the execution on our growth strategy, which, over time, should close the gap between NTA and our security price. As Jonathan mentioned, our gearing is at the lower bound of our target range at 30.2%, giving us plenty of balance sheet capacity and significant headroom under our debt covenants. With $418 million in liquidity, we've got the flexibility to respond quickly to seize opportunities to deploy capital into growth opportunities as they arise. 71% of our debt is protected with derivatives, and this high level of interest rate hedging will continue to provide protection from increasing market interest rates over the coming years. At the same time, the construction of the hedge portfolio allows us to participate in interest rate falls, should inflation moderate, causing the RBA to reverse course. Turning to the earnings table on Slide 11. Investment and asset management EBIT increased by 90%, supported by higher fee income from Cromwell's listed securities joint venture and fees generated from the ongoing Barton1 [indiscernible]. We are taking a disciplined approach to managing corporate costs, which have stabilized following the exit from Europe in calendar 2024. Savings are also being delivered through reduced net financing costs, which have decreased from $28.9 million at 30 June, 2025 to $15.2 million for the 6 months to 31 December, '25, due in large part to the significant debt reductions realized from the European asset sales. Slide 12 provides an overview of the movements in Cromwell's balance sheet over the last 12 months. Prudent deployment of capital, diligent asset management and pleasing improvement in market valuation sentiment, all drove growth on the asset side of the balance sheet, both on a total assets and an NTA per security basis. Our balance sheet strength is a key competitive advantage, and we will continue to carefully manage liquidity and interest rate risk with the objective of supporting our expansion ambitions. I'll hand back to Jonathan now to review the investment portfolio and investment management platform performance.

Turning to Cromwell's investment portfolio overview on Slide 14. Cromwell's investment portfolio of 8 wholly owned assets recorded positive valuation movements of $72 million over the 6 months to 31 December, 2025, with all assets being externally valued. This uplift was driven primarily by strong leasing outcomes at 400 George Street, Brisbane, along with modest portfolio weighted average market cap rate expansion of 8 basis points to 7.15%. Portfolio occupancy remains high at 97.2%, providing a solid foundation for income performance. Notably, 68% of portfolio income is derived from our top 5 tenants, with approximately 40% coming from Australian government tenants across both state and federal levels outlined in the table on Slide 15. Also on this slide, you can see the investment portfolio's lease expiry profile and changes to it since 30 June, 2025. The change to the 2027 expiry profile is primarily driven by government lease extension at 400 George Street, Brisbane. To further underscore the high caliber of Cromwell's property team, our facility management team was recently recognized as the FM Organization of the Year by the Facilities Management Association of Australia, a very strong endorsement of the expertise and commitment embedded across our platform. On the ESG front, the investment portfolio's GRESB green score improved by 12 points to 90 out of 100, driven by renewed Green Star certifications. This result is an 11-point outperformance against the GRESB average of 7.79, and reflects our continued focus on sustainability and operational excellence. We have included some case studies you can read through on Slide 16 relating to capital works, which have assisted leasing and, in turn, valuation outcomes. As a fully integrated real estate management team, providing asset, property and facilities management, we focus on all aspects of real estate performance and tenant amenity, driving tenant retention. Turning to Slide 18. Cromwell's investment management platform grew by $560 million to $2.8 billion over the half year to 31 December, 2025, following the acquisition of the Terre Property Partners industrial platform. The Cromwell Direct Property Fund has now commenced its wind-up process following the periodic liquidity event approved by investors in late 2025 and has already sold 545 Queen Street, Brisbane. Our 60% interest in Oyster increased by $24 million, largely due to valuation gains, while Cromwell listed securities were up $116 million. We have provided further details on the acquisition of Terre Property Partners on Slide 19. The Terre Property Partners team brings to Cromwell a deep sector expertise and impressive track record and incredible knowledge of the assets they manage. The Cromwell Industrial Partnership portfolio, outlined on Slide 20, comprises 7 high-quality logistics assets located across key hubs in Bayswater, Salisbury South and Port Adelaide. The portfolio maintains a strong occupancy rate of 98.4% and has a weighted average cap rate of 6.1%. This portfolio, comprising real estate largely development by the platform, delivers stable, dependable income underpinned by long-term and diverse tenant base. Looking ahead, our strategy is focused on bringing new capital partners alongside us to accelerate growth. Together, this platform and portfolio forms key foundation for core -- a core pillar of the group's future growth strategy. An update on our Barton1 development in the ACT is shown on Slide 21. It highlights the strong progress of this development. The project remains on schedule and within budget. We look forward to welcoming new capital partners into what will be a highly compelling investment opportunity. Our near-term outlook on Slide 23 remains firmly focused on the ongoing expansion of our third-party assets under management. Growing our investment management platform is central to our strategy. We are progressing a strong pipeline of new products across the industrial and office sectors designed to meet the evolving needs of our capital partners while strengthening our presence across Australia's core real estate markets. Work will continue in the retail sector, which remains a focus. Alongside organic growth, we will continue to deploy capital selectively to accelerate the expansion of our platform. Strategic acquisitions remain a key lever for scaling our investment management capabilities, and we are actively assessing opportunities that align with our disciplined approach and long-term vision. Maintaining strong occupancy across our investment portfolio remains a crucial priority. Our active asset management approach, backed by targeted leasing campaigns and value-add initiatives, continue to support long-term income resilience. As we work to grow WALE and maintain high occupancy, our focus remains on delivering consistent high-quality outcomes for both tenants and investors. We continue to manage the balance sheet with discipline. This means deploying capital in a measured and responsible way, preserving gearing headroom so we are positioned to act when compelling opportunities emerge. We are managing our financing proactively to protect interest costs and safeguard liquidity in the current interest rate environment. This discipline remains fundamental to our strategy and our capacity to continue to grow. Finally, turning to guidance. The group reaffirms the expectation of an annual distribution of $0.03 per security for the 2026 financial year to be paid quarterly. Thank you for dialing in today to hear our update. I'll now hand back to the operator to open the question-and-answer portion of this call.

[Operator Instructions] The first question comes from the line of Adam West with JPMorgan.

I'm just wondering on the 400 George Street asset, it looks like NPI is down 12%, but the occupancy has only dropped 50 basis points. I'm just wondering if you could provide some color around, I guess, the drop in the NPI from HY '25 to '26.

Sorry, Adam, the line wasn't good, but I think your question was about the fall in net property income for 400 George Street. Primarily, that's driven by the federal government left a reasonably large tenancy there. We have re-leased that space, but there is a hole between the tenant leaving and the new tenant arriving, and that's what's behind that.

Okay. That's clear. And I guess what were the leasing spreads on the old tenant leaving and the new ones coming in?

It's about 4%, 5%.

Yes. That's clear. And I guess my next question is just on 207 Kent Street. Do you just have some color, I guess, on the lease-up profile and how your level of inquiry on the assets is going?

It's ticking along. We're doing deals. At the moment, we're in a bit of a poorer performance period due to some handbacks, but inquiry remains reasonable. Inspections are happening. So it seems to be going okay.

It's just a little under 2,000 square meters in the last half. And we'll probably fit out another floor at least with some spec fit-outs, which seem to turn out fairly quickly once they're built.

Yes. That's clear. I guess just on to the Barton1 development. I'm just wondering what was the impact of development fees on funds management income for this half? And then, do you just have a guide around how much those development fee -- the development income is going to impact over the next half?

Well, we haven't landed on the timing for recognition of the fees.

Yes, the fees in this period were about $0.5 million.

Yes. It wasn't very much this half.

The next question comes from the line of Yingqi Tan with Morningstar.

Just a follow-up to your -- Adam's previous question on leasing spreads. Just wondering that 4%, 5%, is that positive or negative?

Positive.

Okay. Great. And just wondering what your incentive level was for the past 6 months and how it compared to the previous period?

Well, the [ legal 81 ] was 39%, remains to be seen what the incentive will be on the -- and the reversion will be on the option extension from the other government tenant at 400 George Street, Brisbane through determination. That made up the bulk of the leasing over the last 6 months.

As a general comment, we haven't noticed any sort of improvement or deterioration of incentive levels.

That's fair. And final one on Victoria Avenue. I saw that, in this half, you've included that in your AUM for the funds platform. Just wondering how that's going? Is the intention no longer to sell these assets?

It's not included in our assets under management.

It's included in the investment management total AUM because we're continuing to collect management fees on that asset while the sale process continues. So we're still expecting that it will complete this financial year, and we're assisting the purchaser with the satisfaction of CPs for the financing.

[Operator Instructions] There are no further questions at this time. With that, we conclude our conference for today. Thank you for participating. You may now disconnect. Thank you.