Investors in the Cromwell Property Trust 12 are being asked to extend the term of their Fund which reached the end of its initial seven-year term in October 2020.
The Trust has performed consistently for investors, returning 14.9% per annum annualised since its October 2013 inception to 31 October 2020. Over the same period, monthly distributions per unit have increased from 7.75 cents per unit p.a. to 9.25 cents per unit p.a.
Launched initially with three assets, the Trust now holds one key asset – the Australian Tax Office Building at 19 George Street in Dandenong, Victoria – following the successful sale of the South Melbourne property in 2015 and upcoming settlement of the Rand Distribution Centre in December 2020.
A great result so far, however Cromwell has proposed an outcome for the final asset which may leave many investors wondering whether their interests are being properly considered.
In the coming month, Cromwell will ask unitholders to vote on extending the Trust for a further five years to October 2025, or to terminate the Trust. A Notice of Meeting and Explanatory Memorandum (EM) was sent to Unitholders last week.
There are clearly arguments for and against this proposal.
The extension revolves around the treatment of the final asset at 19 George Street Dandenong. The property is 93% leased to the Australian Taxation Office until September 2030 and has a 5.5-Star NABERS Energy Rating, a 5.5-Star NABERS Water Rating, and a 6-Star Green Star Office As Built v3 rating.
The property would be highly sought after in the current market, despite COVID.
As of 31 October 2020, the asset was independently valued by Colliers at $107 million. Cromwell have not publicly released details of the valuation, however information in the Explanatory Memorandum indicates that Colliers have adopted a cap rate on the net passing income of 6% and also considered that the market yield on the market rent is closer to 5.5% and have therefore also assessed the value on that approach with an appropriate reversionary adjustment arising from the difference in rent. Their valuation equates to a capital value of $7,717 per m² of NLA.
The EM does not refer to Colliers’ market evidence, however the market is aware of the sale of the Wollongong Tax Office in September for $57.4m which reflected a 5.5% yield and a capital value of $8,490 per m² of NLA.
Could the a formal on market campaign achieve a price better than $107m ? We suspect it could.
Cromwell Funds Management Limited, as responsible entity of the Trust, have proposed a Matching Facility to provide Unitholders who wish to exit the Trust the opportunity to sell some, or all, of their units to Unitholders who wish to acquire more units in the Trust, at a Matching Price of $0.9349 per unit.
Cromwell’s Matching Price offer equates to the net asset position of the Fund based on the Colliers Valuation and less a number of adjustments including an effective Sales Cost of 1.15% which Cromwell will receive and the Fund’s full performance fee of $9.695m which would have been payable if the Fund had ended now.
Unfortunately for unitholders, the threshold for an extension of the Trust is just 50% and circumvents a market based outcome for investors who originally signed up for a fixed term. In my view, altered exit strategies should be supported by a much higher proportion of unit holders.
The outcome of the vote will be decided on Thursday, 17 December 2020.
Cromwell’s Head of Retail Funds Management, Hamish Wehl, encouraged Unitholders to vote saying, “Every vote counts in reaching a genuine outcome. The Trust has been a stellar investment for Unitholders, generating consistently high yields at a time when low interest rates have reduced the returns offered by cash and term deposits.” .
“The blue-chip tenant and lengthy lease term insulates the Trust’s income from COVID-19 induced market volatility, with the ATO not exposed to the same market conditions as a private enterprise.”
For Unitholders voting to remain in the single asset Trust, distributions are forecast to be 5.75 cents per unit p.a. from 1 July 2021, increasing at a rate of 0.25 cents per unit each July over the Further Term. This reflects a distribution yield of 6.2% on the Matching Price of $0.9349.
The Trust was the fourth of Cromwell’s ‘Back to Basic’ suite of trusts, which feature high quality assets underpinned by long-term quality leases. It was highly sought after by investors looking for reliable monthly income in a low interest rate environment.
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