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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Cromwell Property Group 1H '19 Results Announcement. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 28th of February, 2019.I would now like to hand the conference over to your first speaker today, CEO of Cromwell, Paul Weightman. Thank you, please go ahead.
Thank you, Edward, and good morning and welcome to Cromwell Property Group's results presentation for the first half of the 2019 financial year. As Edward said, I'm Chief Executive Officer, Paul Weightman; and with me today is Chief Financial Officer, Michael Wilde.Today, Cromwell Property Group reported half year statutory profit of $111.1 million, with underlying operating profit of $82.6 million. Cromwell now has over 3,700 tenant customers in 15 countries, who lease over 3.8 million square meters of space. The value of total assets under management is $11.5 billion.The objectives of the investment management strategy we highlighted in August are to build enterprise value, add to medium-term earnings and to generate higher total securityholder return. This strategy will see Cromwell continue its successful value add of asset recycling initiatives, continue its existing investment capacity with proceeds from recycling and some cash from operating earnings to invest in opportunities that will create new, recurring revenue streams. Over the last 6 months, we've made progress on the value-add opportunities in our direct property portfolio. We've allocated additional capital to our indirect property portfolio, including the Cromwell European REIT or CEREIT, and worked with our institutional capital partners on funds and mandates that meet our investment criteria.We've launched an application for development approval for the expansion and repositioning of our buildings in Victoria Avenue, Chatswood, and we're making progress on enhancement initiatives on assets in Melbourne, Adelaide and Canberra.With the conversion of Tuggeranong Office Park to a 390-apartment, 500-resident Seniors Living village, our senior living joint venture LDK Healthcare is also progressing well, with the marketing suite expected to open in the coming weeks. And earlier this week, Cromwell and LDK announced its $60 million acquisition of a premium Seniors Living village, The Landings at Turramurra on the Upper North Shore in Sydney. The Landings provides LDK with an operational environment to roll out its unique membership model before residents start arriving at Tuggeranong at the end of the calendar year.Seniors living, particularly at the premium end of the market, is a theme which we believe has great potential, and further updates will be provided as we hit key milestones in the rollout of the LDK business plan.The group has a clear strategy, a strong value-add pipeline of domestic opportunities, a successful and growing business in Singapore, the largest wealth management center in Asia and an established platform in Europe. Having spent the last 6 months engaging with our capital partners, we are quietly confident about our current position and the opportunities that lie ahead.And now I'd like to turn to Michael, who will provide an update on our financial position and capital management initiatives during the half year. Michael?
Thank you, Paul. As Paul mentioned, statutory profit for the group was $111.1 million, up 37.5% on the prior corresponding period of $80.8 million. Half year operating profit was $82.6 million, up 7.6% on the prior corresponding period of $76.8 million. Distributions to securityholders rose by 2.7% to $76.4 million, and we are on track to meet full year distribution guidance of $0.0725 per security.Summarizing the results for our segments for the half year. Direct property investment profit was $62.7 million, a 1.6% increase on the prior period. Indirect property investment profit primarily represents Cromwell's 35% interest in CEREIT and increased $11.5 million to $19.4 million for the half year. Funds and asset management profit was $18.6 million, down from the prior period amount of $25.4 million. And management costs included the first full year of expenses relating to CEREIT, including the management team in Singapore.We ended the half year with net tangible assets up $0.03 to $0.99 per security. Total assets have increased by 6.3%, with borrowings reduced by 4.1% and cash and cash equivalents of $172.5 million. In December 2018, we completed a 2-for-13 non-renounceable rights offer, raising $228 million. Proceeds have been applied to the investment in CEREIT and to repay borrowings. This has reduced gearing to 33.7%, which was below the group's target range for this point in the cycle. Look-through gearing is 40.4%, and our weighted average debt expiry is 4.7 years. Borrowings are diversified across 10 domestic and international lenders and 2 convertible bond issues. 82.5% of borrowings are hedged with a blend of interest rate caps and swaps, with a weighted average hedged term of 3.3 years. And the group results remain underpinned by a direct property portfolio with its WALE of 7.2 years.
Thanks, Michael.Turning to direct property investment segment. The direct property portfolio is valued at $2.5 billion and has three components. The Core portfolio comprises 10 assets, representing 2/3 of the portfolio by value and has a WALE of 9.7 years. It has essentially full occupancy at 99%, and has generated net operating income growth of 4.2%, above our rolling target of 3%. The Core+ portfolio comprises 7 assets or 29% of the portfolio, and has 95% occupancy, a WALE of 3.6 years and has generated an operating income growth of 8.3%. And the Active portfolio consists of 3 assets, which represent 4.3% of the portfolio by value. The WALE is 2.4 years, and as might be expected for active assets, has occupancy of 62% and showed a decline in NOI growth of 3.6% as buildings identified for redevelopment become vacant.During the year, the weighted average cap rate for the portfolio tightened by 20 basis points to 5.84% with a fair value increase in investment property of $44.4 million net of property improvements, lease costs and incentives. The tenant customer profile remains weighted to the strongly performing New South Wales and Victorian markets, which provided nearly 63% of gross passing income. The weighted WALE was 7.2 years due to strong leasing outcomes with 45 transactions executed for more than 46,000 square meters, split between 15,000 square meters of new deals and 31,000 square meters of renewals.Our Core and Core+ portfolios are performing well. Combined, they are over 95% of the portfolio by value and generated 5.5% year-on-year NOI growth. In addition to the value-add opportunities I highlighted earlier in this presentation, there are a number of other opportunities in the pipeline, and I'll provide an update on them as they progress.Turning to the indirect property investment segment. The segment includes Cromwell's 35.3% interest in CEREIT; a 50% ownership in the Cromwell Partners Trust, which owns Northpoint; and a number of other smaller co-investments in Europe and Australia.CEREIT announced its maiden full year 2018 annual results to the Singapore Exchange Securities Trading Limited yesterday. Net property income was EUR 90.2 million, 3.7% higher than the IPO forecast, and an adjusted 13-month distributions per unit of EUR 4.70, above IPO forecast by 1.4%. CEREIT raised equity during the half year to acquire 23 properties in the Netherlands, Finland, Poland, Italy and France at a total purchase price of EUR 384 million.Cromwell took up its full entitlement under the rights issue as CEREIT's property portfolio increased to 97 assets and EUR 1.8 billion in value. As at 31 December 2018, CEREIT represented 45% of the total AUM managed by Cromwell in Europe.Our CEREIT investment is accretive to Cromwell, and to-date, CEREIT has exceeded its IPO forecast. It has a strong pipeline of potential opportunities, which should see it continue on its current growth trajectory.We're most excited about the value-add opportunities in the CEREIT portfolio and the potential for Cromwell as the sponsor of CEREIT to contribute to those opportunities and develop the portfolio. We're very pleased with our investment and the efforts of the manager and the CEREIT management team and all those in the Cromwell platform who have contributed to its success.Turning to our funds and asset management segment. That business deploys capital into commercial real estate opportunities sourced by local teams in Europe, Australia and New Zealand, and is responsible for the execution of asset management strategies for the funds and mandates that we manage.As mentioned, 45% of the $6 billion or EUR 3.7 billion of the value of assets we manage in Europe now represents permanent capital. Just 18 months ago, all of the assets we managed in Europe were managed under short-term funds and mandates. 2 years ago, we flagged an intention to execute a transition for that business which focused on short-term transactional revenues and longer-term recurring income. I'm pleased to say that our efforts have borne fruit, and we've a very stable base in Europe and now Singapore from which to grow. We expect that the transition of the business to one that has long-term demonstrable revenue will be reflected in time in Cromwell's security costs.Private equity will continue to be an important source of capital for us, and it's been for many years in the business in Europe. Nevertheless, we'll continue to look to recycle shorter-dated mandates into longer-term funds and to match the opportunities we identify in our unique platform with capital partners who are focused on long-term income to build those recurring revenue streams for Cromwell.As part of our strategy, we've just recently executed contracts on a EUR 90 million asset in Italy, which we'll manage on behalf of a new Korean capital partner. And this is of the first of what we anticipate will be a series of single-asset mandates for Asian investors who are keen to access our unique operating platform in Europe.Our retail funds and asset management platform in Australia continues to grow. Unitholders overwhelmingly voted in favor to extend the term of the Cromwell Ipswich City Heart Trust to June 2023. And that extension realized a performance fee of $4.1 million. This single-asset trust, leased to the Queensland State Government, has returned 13.7% per annum since the inception of the trust in December of 2011 and is a great example of Cromwell's original back-to-basics syndicated trusts.Also during the half year, the Cromwell Direct Property Fund or DPF purchased the Energy Queensland building in Townsville for $63.5 million. DPF has a highly recommended rating from independent research house Lonsec and annualized performance since inception in August 2013 of 10.5%. Direct gearing in the DPF is a very conservative 17%, and although the fund is ready for growth, given the prices paid for assets by others in the market, we continue to be cautious with the DPF.We also are continuing to contribute to the growth of Oyster Group in New Zealand, in which Cromwell has a 50% interest. At the half, Oyster's AUM was NZD 1.5 billion. The purchase of ASB Bank's Technology and Innovation Hub in Albany, Auckland, for NZD 50.5 million was the highlight of the period. That acquisition became unconditional in December 2018 and interests in the asset are currently being marketed to retail investors.Turning to outlook and guidance. Global trade tensions, Brexit and the possibility of slower economic growth in China, Europe and the U.S. have resulted in downward revisions to global growth forecasts. In Australia, uncertainty around the upcoming federal election and potential changes to taxation policies, the residential market downturn as well as implications for the financial services sector from the Hayne Royal Commission have contributed to significant falls in Australian consumer confidence and business conditions generally. As a result, we see downside risk in all markets in which we operate. But we've positioned Cromwell to be in a strong position to manage those risks and indeed, to be able to capitalize on opportunities that may arise should those risks eventuate.As previously mentioned by Michael, the 2-for-13 non-renounceable rights offer was completed in December, and the proceeds have been used to repay debt and increase liquidity. We are positive but cautious and have a strong balance sheet with liquidity and optionality. NTA is up, gearing is below our target range, our WALE is 7.2 years, and we have low upcoming incentives and maintenance CapEx requirements. Everything we've done so far is on strategy. We're ahead of run rate at the half year and with some strong transactional earnings booked in that period.We maintain the $0.08 per security full year earnings guidance previously provided to the market, and we will prudently deploy capital and execute transactions when and where we see opportunities to do so, with an eye to long-term value creation.Earnings guidance of $0.08 per security and distributions of no less than $0.0725 per security represent an operating profit per security and distributions per security yield of 7.31% and 6.62%, respectively, based on a closing cost of $1.095 per security on 27 February 2019.I'd now like to invite any questions that you have in relation to the presentation or our comments this morning.
[Operator Instructions] Your first question comes from Darren Leung from Macquarie.
Just looking at the accounts, there's the 2 wholesale mandates that are looking to be sold. Can you please provide an update as to the progress here? I think there's something about it not being [ important till ] next financial year.
Okay. So I think as an indication of some of the risk that exists in the world was mandates were originally scheduled to have been sold early in this financial year. I think it's fair to say that it is more likely that we will hold and manage those funds for longer, but I can't give you exact dates. It's fair to say the value-add funds are likely to be held into the next the financial year. The Polish fund, probably the same, although we don't have any direct line of visibility into timing [indiscernible] now what that means is that we'll get management fees for longer. It may defer some of the disposal fees and performance fees that we may have earned into the next financial year or beyond.
Given you are holding them for longer than you anticipated, is there a reason why you didn't upgrade your FY '19 earnings guidance today?
Well, I think as I just said, there is a trade-off between getting management fees for longer and deferring disposal and performance fees. At the moment, we're assuming that they are held on the same terms until 30 June.
Your next question comes from Sholto Maconochie from CLSA.
Just following up on Darren, I think that FY '18, you talked about you'd be essentially recycling EUR 1.1 billion of [ funds ]. Obviously, looking at the accounts, you've maintained this thing broadly flat, only down about [ EUR 100 million ] in Europe. Is that mainly to do with what you just talked about then, the Polish and value-add fund being sort of held for the remainder of the year into next year? Is that the main driver of that and retaining some of the stuff in CEREIT?
Yes. In part, we have -- we're trying to evolve some into CEREIT, clearly. And that formed part of the basis for the offer that was made in CEREIT towards the end of last year. The other two funds -- I think of the balanced fund that we have in Europe, part could potentially be rolled over into CEREIT and part could be rolled into other mandates. But we have no immediate line of sight to those at the moment. I think, clearly, with what's happening in Brexit and given that value-add fund has a significant exposure to Brexit. There are a lot of people sitting on their hands until 29th of March, before they make any decisions. And the Polish fund has been subject to a long drawn-out process that hasn't reached a conclusion at this stage. So we still think a reduced proportion of the fund in Europe can be rolled over. But it is the place that we continue to buy and sell a lot of assets in the platform every year. So we shouldn't assume that the only movements within the fund in the platform are related to those specific funds and/or funds that roll into CEREIT.
Yes. And then just on Darren's question too, it says in the guide that you're ahead of the run rate, it was a good first half. I'm surprised you didn't upgrade guidance. What are the swing factors for the second half that could see you achieve a better -- above your guidance?
So I think we are in front at the half year and effectively we've capitalized -- maintaining the guidance effectively represented an upgrade, I think as most people commented. What we're focused on in the back year really relates to transactional income. And given some of the risks relating to the markets in which we're operating, some of those outcomes are truly difficult to predict, and particularly in relation to time. So we're cautious in relation to any assumptions that we're making on the timing of transactions over the next 4 months, until we get a little more clarity on particularly Brexit, but also the Brexit implications for the rest of Europe.
All right. And then on the Turramurra acquisition, how much did you contribute of the $60 million? I couldn't see it in the post-balance [ side events ]. Was it half of that or...
So we've effectively funded that with cash on the basis that we'll be refinancing a significant proportion of that investment post-completion.
So you funded the whole $60 million with cash, your cash?
We just got a check for the acquisition, and then we are effectively refinancing that. So it will be circa 50% of the acquisition cost that we'll be refinancing at some time in the coming years.
Okay. So you'll have $30 million of debt on that acquisition and $30 million of cash?
Correct.
Okay, sweet. And then just an update on Keltie Street and Wakefield, what are the sort of plans for those two assets in the sort of value-add portfolio?
So the options for us to develop or sell. Both options are in fairly advanced stages at the moment. So we expect to be able to make an announcement on that in the coming months.
All right. Thanks for the new disclosure on a segmental [indiscernible].
Thanks, Sholto. We took a long feedback on this. And hopefully, it does present a little bit better and it's a little bit clearer for everybody to understand.
Your next question comes from Ben Brayshaw of JPMorgan.
Just further to the last question on Calvary hospital. Could I just clarify, you're saying that you hope to be able to update on that in the next sort of few months. Has the tenant got an option there? Or do they not have an option, and in the event that they need an extension, that would need to be worked through with Cromwell?
Yes, they had an option. If there was to be an extension, that would be a discussion with Cromwell. But there are a range of potential outcomes there. And if they are willing to disclose anything that's commercial in profits, there are a number of potential outcomes that [ binds off ] from that asset.
Yes, okay. And just on collaboration opportunities with ARA, I think when they bought the stake from Redefine, yourself and Simon Garing mentioned that there may be opportunities for both businesses to work together, in particular, in Europe. Are you able to give an update on whether there has been activity to date in Europe between both businesses? Or just interested in how you see opportunities to work together going forward.
I'm ensured, there's been a lot of discussion, and we've looked at a lot of things. At this stage, we don't have anything that has been executed, but there's a lot of ongoing collaboration.
[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to Paul. Please continue.
Thank you, Edward, and thanks to all -- everybody for the participation in the call this morning. We very much appreciate the fact that you've dialed in. Ross and Michael and I will be available for any further questions. And we hope to see you on our results roadshow in the coming weeks. Thanks very much, and we wish you a good day.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.