Cromwell Property Group (CMW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cromwell Property Group FY '26 Financial Results Briefing. [Operator Instructions] I would now like to hand the conference over to Dr. Gary Weiss. Please go ahead.

Thank you, and good morning to everyone, and thank you for joining us today for Cromwell Property Group's results for the financial year ended 30 June 2026. 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. We pay our respects to their elders past and present. FY '26 was a year of disciplined execution against our strategic priorities. Despite a still volatile global environment, Cromwell strengthened its investment management platform, expanded institutional capital partnerships and maintained resilient portfolio performance. The Board and management team remains focused on prudent capital allocation, maintaining financial flexibility and supporting initiatives that enhance the quality and sustainability of earnings. Our progress during the year reflects the benefits of a diversified platform and the strength of relationships we have built with our capital partners, customers and broader stakeholders. While challenges remain across parts of the property market, we believe Cromwell is well positioned to capture opportunities that align with our strategic objectives and create long-term value for security holders. On behalf of the Board, I would like to thank our people, customers, capital partners and security holders for their continued support and commitment throughout FY '26. Cromwell's CEO, Jonathan Callaghan will now take you through the results.

Thank you, Gary. As Gary mentioned, FY '26 was a year of executing our strategy to grow our Australian investment management platform following the completion of the sale of the European platform. We continue to deliver on our objective of building a larger, more diversified investment management platform, expanding and strengthening our income streams while maintaining the strong earnings contribution of our investment portfolio. Highlights of the year are outlined on Slide 5. During the year, group funds under management grew by 11.4%, secured by $748 million from new institutional investors. Further broadening and diversifying our capital partner base. Importantly, this helped to drive improved financial outcomes with FFO increasing by 5%. Our investment portfolio remained resilient. With occupancy at 95.6% and no major vacancies until FY '28. The investment portfolio continues to provide the business a dependable and predictable income stream and underpins the financial performance of the group. Valuations are up 4.7% on FY '25. This is the first consecutive 6-month period of portfolio valuation increases. This performance reflects the quality of the underlying assets and the effectiveness of targeted asset management initiatives. A key milestone to the group was the acquisition of the industrial platform which expanded our capabilities and strengthened our position in the sector where we see attractive long-term opportunities and continued interest from capital partners. We continue to invest alongside our capital partners through targeted co-investments, including with Straits Real Estate in the Cromwell Industrial Partnership and through a new strategic venture with PAG, who have invested in a prominent office asset in Brisbane with us. These investments reinforce alignment with our capital partners and provide the opportunity for us to share in value creation with them. We are encouraged by the level of engagement. We continue to see from both existing and prospective capital partners across a range of investment strategies. I now turn to our operational performance highlights on Slide 6. FFO increased 5% and underpinned by 11.4% growth in assets under management, while NTA rose to 3.6%. Importantly, we maintained a strong balance sheet with conservative gearing and ample liquidity to support future growth. As you can see on Slide 7, Cromwell's platform operates only in Australia and New Zealand with a total of $4.7 billion of assets under management. Cromwell's investment management platform currently manages 5 direct property funds with capital sourced from retail, wholesale and institutional partners. In addition, we manage listed securities funds, have a 50% interest in the Oyster New Zealand funds management business and manage separate mandates for 2 industrial developments for offshore investors. Turning to Slide 8 of the results pack. During FY '26, we continue to strengthen our responsible investment credentials, improving our S&P Global Corporate Sustainability Assessment score and maintaining strong external recognition through GRESB and PRI. We also made further progress across our environmental metrics. Market-based Scope 1 and Scope 2 emissions have reduced by 96% from our FY '22 baseline. Solar PV capacity expanded substantially due to the new industrial partnership and we achieved improvements in both energy and water intensity. Overall, these outcomes reflect our ongoing commitment to responsible investment, operational excellence and sustainable long-term growth ultimately leading to increased attractiveness of our portfolio and security holder value. We have included some market data on Slide 9, which reflects our belief that while market sentiment towards commercial property remains cautious. Current conditions do not reflect the sector's medium-term fundamentals. Transaction volume across each of the traditional subsectors has been resilient over 2026 year-to-date despite elevated geopolitical disruption. As uncertainty stabilizes, we expect capital activity and investor appetite to improve. Demand across Australia's key markets remained resilient while supply constraints are becoming increasingly evident. Development feasibilities are very challenged and construction cost pressures and labor shortages are unlikely to abate in the near term. This supports a favorable outlook for occupancy levels and rental growth at high-quality existing assets where the competition for space is often greater than the broader market. Importantly, Cromwell's portfolio is concentrated in better-performing precincts. Positioning us to perform well through the near term, where we do have exposure to higher vacancy precincts, Cromwell assets typically outperform the market, reflecting the quality of the buildings and our active management capability. These fundamentals underpin our confidence in the long-term opportunity for both our investment portfolio and performance and our strategy to grow earnings through investment management. I now pass to Michelle Dance, Cromwell's Chief Financial Officer, to talk in more detail about the financial performance of the group during FY '26.

Thank you, Jonathan. I'll briefly cover the summary of FY '26 financial results on Slide 11 before stepping through the key drivers in more detail. FY '26 was a solid year financially with growth in funds from operations of 5% to $110.3 million. FFO has been adopted as the primary earnings measure for FY '26, moving away from operating profit for ease of comparison with our peers. While deploying capital into accretive investments, we also maintained a strong balance sheet with gearing of 31.6% remaining towards the lower end of our target range and significant liquidity of $370.8 million. Together with our diversified debt funding and prudent hedging strategy, this positions the group well to prudently deploy capital into future growth initiatives. I'll now take you through the key components of the results, starting with earnings drivers during the period on Slide 12. Investment portfolio EBIT was marginally lower due largely to a temporary vacancy at 400 George Street in Brisbane, which has been leased from the first of July 2026, this was offset somewhat by strong growth across our Investment Management business and co-investments. Investment Management platform EBIT grew, including investment income reflecting contributions from our expanded industrial platform development activities and performance fees. Following the divestment of our European platform and continuing onshore efficiency initiatives, the group lowered corporate costs. Finance costs were also lower following the repayment of debt from proceeds of the transaction. Turning to the balance sheet on Slide 13 now. During the year, net assets increased to just over $1.5 billion, with NTA increasing to $0.575 per security from $0.56 per security at FY '25 this was driven by positive investment portfolio valuations. While gearing increased following our investment in the Cromwell Industrial Partnership and continued progress of the Barton1 development, it remains comfortably in our target range of 30% to 40%. And importantly, we retained substantial covenant headroom with an LVR of 36.8% against the covenant of 60% and interest cover of 4.3x against the covenant of 2x. Our debt profile remains well managed with 85.5% of debt hedged with a weighted average maturity of 2.3 years, reducing exposure to interest rate volatility. Overall, we believe that the balance sheet is in a strong position, providing both resilience and capacity to support the continued growth of the business. I'll now hand over to Rob, our Chief Investment Officer, who will cover our activities in our investment portfolio and investment management platform.

Thanks, Michelle. Good morning, everyone, and thank you for your time this morning. We'll start with the investment portfolio on Slide 15. The underlying fundamentals remain solid throughout FY '26. Our portfolio of 7 stabilized assets delivered a 4.7% increase in valuation. Occupancy remained high at 95.6%, while the portfolio generated strong leasing outcomes with more than 28,000 square meters of new or renegotiated leases completed during the year. Completion of the lobby upgrade at 400 George Street, Brisbane supported the Queensland State Government's exercise of its 3-year lease option, securing 20,800 square meters of FY '27 lease expiries through to FY '30. This contributed to the asset's improved valuation and highlights the value created through a targeted capital investment and active tenant engagement. While like-for-like income was modestly impacted by a temporary 7,000 square meter vacancy at 400 George Street in Brisbane. The portfolio remains well positioned to capture future rental growth opportunities through lease expiries and small amounts of remaining vacancy in active markets. The quality of the income stream continues to be supported by a diversified tenant base with strong government tenant exposure and a weighted average lease expiry of 4.6 years. Overall, these outcomes demonstrate that disciplined asset management continues to support portfolio performance, valuation resilience and long-term sustainable earnings. Turning to Cromwell's investment management platform, starting on Slide 18. I'll begin with an overview of our platform, which is the main focus of growth for the group. Today our platform spans funds management, development, property management and strategic joint ventures, providing multiple avenues for earnings generation and capital deployment. We have expanded both the scale and capability of our investment management platform, increasing the funds under management by 18% since FY '24 being the turning point of the business after exiting Europe and focusing on growth in Australia. Importantly, this growth has been achieved through targeted investments, new partnerships and the expansion of specialist capabilities, particularly in the industrial sector. Slide 19 outlines some key achievements in the investment management platform over the last financial year. We secured $748 million of new investment mandates through the establishment of the Cromwell Industrial Partnership completed in December 2025. And and the Brisbane office venture announced on the 1st of July 2026. We progressed 3 development projects during the year, including Barton1 in Canberra with completion expected in the final quarter of FY '27 on time and on budget. We are completing the final stage of the Kilsyth Connect redevelopment and commencing Stage 2 of Cavan Connect Logistics Park, both in Adelaide on behalf of offshore institutional investors. The expansion of our industrial capabilities, further outlined on Slide 20. Since 2018, the industrial platform has delivered or repositioned more than 140,000 square meters across more than 20 projects demonstrating the strength and depth of market expertise that came with the industrial platform. Slide 20 provides an overview of the Cromwell Industrial Partnership. The portfolio comprises 7 high-quality industrial assets valued at approximately $478 million. Occupancy remains strong at 98.6% supported by a diverse tenant base and a WALE of 4.7 years. We continue to see significant opportunity to create value through active leasing, capital investment and asset repositioning initiatives across the portfolio. Our objectives remain clear, to continue to grow a diversified investment management business that delivers attractive outcomes for capital partners while generating sustainable earnings growth for Cromwell security holders. I'll now hand back to Jonathan.

As we look ahead to FY '27 on Slide 24, our focus remains on disciplined execution across the business. We are well positioned to build on the momentum achieved during FY '26 by continuing to grow capital partnerships, progressing our development pipeline and actively managing our investment portfolio. Reflecting our confidence in the business and outlook, we are targeting an increased distribution of $0.031 per security for FY '27. Cromwell remains committed to delivering sustainable long-term returns for our security holders. Thank you for your continued support. I will now hand back to the call operator to open the Q&A portion of this call.

[Operator Instructions] The first question comes from the line of Connor Eldridge.

Just looking at the gap between the FFO and AFFO widened a fair bit from FY '25 FY '26. Can you just give us a bit more color on what drove that step up and if you expect that to normalize in FY '27.

FY '27, it's probably a bit of a tough year. So AFFO is likely to be. So if you have a look at the lease expiry profile that's probably your best guide to how the FFO is going to trend over the next few years. I will caveat that by -- it's very difficult to predict some of the key components of that in that trying to predict when tenants are actually going to perform is how they're going to call for them. So we might be budgeting for something to be upfront and then they changed their mind, it becomes an abatement that tracks over the lease term. And equally, we have some significant expiries coming up in '28 and in '32, and some of those leases are likely to be things that we engage with tenants on primarily.

So the FY '26 driver of AFFO deductions were effectively some repositioning of the assets that we've done at 400 George and 700 Collins, in particular. So there's quite a large whack of tenant incentives, but also life cycle CapEx that needs to be done in those buildings. We'll still see the echoes of those deals coming out next year, so FY '27, we still see a reasonably large CapEx load in the following year. And so similar sorts of amounts of what you're seeing in FY '26 and FY'27.

Some of those things were electrification of 700 Collins Street, which is part of the negotiations with the Bureau, which has helped to reset that asset. It's important to look at some of that CapEx in the scheme of what it does for those assets in the long term and enhancing sustainability, both from an income perspective, but also from an ESG perspective.

The other thing I'll add is that some of these life cycle works have been part of new lease deals, for example, in Collins Street where we got the extension for bond. Part of that was we do some upgrades and some other upgrades. So they're largely the expenditures related to leasing.