Cromwell still looking to Europe for Growth

25 February 2021

The new look Cromwell Board are looking to grow its Australian Retail Funds Business but see the European investment management business as a significant opportunity to build scale as conditions normalise.

Announcing Cromwell’s half year results, Acting Cromwell CEO Michael Wilde said: “Cromwell has successfully navigated the global complexities of COVID-19 without significant disruption.

Having said that, Cromwell reported half-year Operating profit down -26.8% on the previous corresponding period to $99.1 million, equivalent to 3.79 cents per security.

The fall in profit was largely due to the development fees from the sale of Northpoint Tower being recognised in the prior comparable period.

Statutory profit for the period was $146.8 million, down -35.4% due to a lower fair value gain on investment properties versus the prior comparable period.

The total value of investment properties held on balance sheet was $3.8 billion as at 31 December 2020 an increase on the $3.7 billion as at 30 June 2020. As a result, Net Tangible Assets per security increased from $0.99 per security as at 30 June 2020 to $1.00 per security as at 31 December 2020.

Highlights

  • Statutory profit of $146.8 million, equivalent to 5.59 cents per security;
  • Operating profit of $99.1 million, equivalent to 3.79 cents per security;
  • HY21 distributions per security of 3.75 cents;
  • COVID-19 impact: 0.7% of rent was waived and 6.1% deferred during the half;
  • Net Tangible Assets increased to $1.00 post independent revaluation of balance sheet assets;
  • Total assets under management (AUM) of $11.6 billion up from $11.5 billion as at 30 June 2020;
  • Gearing of 42.5% (FY20 41.6%) marginally above the ‘through the cycle’ target of 30-40%; and
  • Substantial demonstrated investor support for Cromwell’s income producing retail fund products.

Gearing remains comparatively high at 42.5% and is above the ‘through the cycle’ target range of 30-40% however Cromwell maintains large headroom to bank covenants with a strong Interest Coverage Ratio (ICR) of 6.4x and no debt expiries until March 2022.

Direct property investment segment profit was $77.1 million, a -27.1% reduction from the prior corresponding period (HY20: $105.7 million) largely attributed to the Northpoint development fee.

Notwithstanding this amount, and despite COVID-19, rental income was equivalent to HY20 levels. Cromwell’s Australian property portfolio remained substantially unimpacted by COVID-19 with just 8.7% of gross passing income covered by the Commercial Code of Conduct with only 0.7% of rent required to be waived and 6.1% deferred during the half.

The portfolio benefitted from strong like-for-like Net Operating Income growth of 3.6%, with valuations also remaining robust. The portfolio had a fair value gain in investment property of $37.6 million with a slight tightening of the weighted average capitalisation rate (WACR) of 5.5% (FY20 5.6%).

CEREIT continues to be the largest contributor to the Indirect Property segment with Cromwell’s equity accounted share of operating profit, based on its 30.7% interest, equating to $22.5 million, essentially unchanged on the prior comparable period (HY20 $22.8 million).

CEREIT’s 96 properties, managed by Cromwell’s local teams in Europe, showed their resilience to COVID-19 impacts with a close to 100% cash collection rate for 2020. For a third consecutive year CEREIT recorded an uplift in valuations with the portfolio now valued at €2.2 billion (€2.1 billion FY20).

The redevelopment at LDK’s Greenway Views continues with Stage 1 complete and Stage 2 due in February 2022. 128 of the 210 Stage 1 apartments have been sold, up from 77 as at 30 June 2020. Upon completion Stage 2 will deliver a further 117 apartments. Discussions continue with capital partners to scale the business and two new greenfield village sites are currently in due diligence.

Poland, like most European countries, has seen further restrictions over the winter months. The shopping centres in CPRF have remained open throughout given their focus on grocery, pharmacy and other essentials. Footfall has been resilient reaching 86% of the 2019 position in September 2020 and 79% for the 2020 year overall. Anecdotal evidence has flagged that lower footfall has been offset by a higher average spend per person, when compared to pre-COVID levels.

Total invoice collection from 1 March 2020 through to the end of December 2020 was strong at 95% and while collections slowed in December due to the annual Christmas seasonal ‘lag’, they are expected to pick back up as outstanding invoices are pursued. Cromwell has however elected to take
a conservative credit loss provision of €1.4 million in relation to tenant-customer receivables.

In Italy, Cromwell, in partnership with IGIS Asset Management, acquired a portfolio of seven logistics assets fully let to global logistics giant DHL for €51 million. The assets have remained open and operational and, like most other assets in the sector, have seen increased business volumes.

Both portfolios were independently revalued as at 31 December 2020, with CULF showing a net fair value increase of €1.7 million or 3.0% and CPRF a marginal decrease of €1.1 million or 0.2%. The portfolios will be offered to capital partners as soon as conditions allow.

Cromwell’s funds and asset management segment delivered profit of $22.3 million, down -28.3% on the prior corresponding period largely due to the impact of COVID-19 on real estate markets in general and the subsequent reduction in transactional activity and performance fees in Europe.

Within the retail funds management segment Cromwell received significant investor support during the half. 83% of unitholders in the Cromwell Property Trust 12 voted to renew the trust for a further five years. The vote crystallised a performance fee of $9.7 million.

The first withdrawal window for the Cromwell Direct Property Fund also closed on 31 July 2020 with investors representing over 90% of issued capital electing to continue with their investment. The fund’s gearing is just 20.5% providing it with the opportunity to acquire additional assets.

“Ongoing interest in our retail funds is high, with the vast majority of unitholders in Cromwell Property Trust 12 and the Cromwell Direct Property Fund electing to continue their investments,” Mr Wilde said.

In New Zealand, AUM at Oyster Group (50% interest) remained relatively flat at NZ$1.9 billion (FY20: NZ$2.0 billion). Cromwell recognised a share of profit of $0.6 million (2019: $0.5 million) and received a dividend of $1.8 million during the half-year (2019: $nil).

During the half, Oyster Industrial Limited acquired three additional industrial properties and opened for a second equity raise in December 2020. Oyster has also exchanged contracts on the acquisition of the Albany Lifestyle Centre for NZ$87.5 million which will be the seed asset for a new unlisted large format retail fund with a particular focus on supermarkets, DIY/hardware and essential service stores.

Outlook

Cromwell provides updated FY21 forecast distribution guidance of 7.00 cps, 0.50 cps lower than before. HY21 distributions of 3.75 cps have been paid, meaning second half distributions are forecast to be 3.25 cps. Based on the new FY21 guidance of 7.00 cps, and a security-price of $0.82 cents as at
the close of business on 24 February 2021, this represents a future forecast distribution yield of 8.54%.

“We remain focused on executing our 2021 priorities, maintaining operational resilience and ensuring the business remains in a strong position when a new permanent CEO is appointed,” said Mr Wilde.

Our Views

Cromwell is a mixed bag of local and global real estate in a series of inconsistent sectors and funds and appears largely opportunistic as opposed to strategic. This may be fine in the right corporate environment, however Cromwell has had a very destabilising 2 years which has increased the pressure on all levels of management.

The forecast distribution yield of 8.4% is very high and will be seen by many to be a very attractive investment option.

The REIT is trading at a -16% discount to NTA with some expectations that values may still retreat further as conditions stabilise.

Cromwell Describes its business strategy in the following slide;

In Australia, the Group appears to be well suited to the Core and Core+ Direct Investment Strategies (though it should consider what sectors makes sense to operate in), however it is not clear whether those same strategies are applied to its Indirect Business. Likewise its Funds Management Business should also focus on managing funds better aligned to those investment strategies.

Cromwell would then be seen as Core & Core Plus Manager in Australia and Europe with a specific focus on Office & industrial real estate and able to invest directly or indirectly through REITs and wholesale funds which they manage. Now that I understand, but Cromwell has some work to do get my support.

Cromwell are not on our recommend list.

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