Cromwell Property Group (ASX:CMW)

Paul Weightman
CEO
Market Cap (AUD): 3.14B
Sector: Real Estate
Last Trade (AUD): 1.22 +0.01 (+0.83%)
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1. About

Cromwell Property Group is a Global Real Estate Investment Manager. The Group is included in the S&P/ASX 200. As at 30 June 2018, Cromwell had a market capitalisation of $2.2 billion, a direct property investment portfolio in Australia valued at $2.5 billion and total assets under management of $11.5 billion across Australia, New Zealand, and Europe.

Cromwell’s platform comprises 380+ staff in 30 offices in 15 countries across Australia, New Zealand, and Europe. Total Assets Under Management (AUM) are AUD $11.5 / €7.3 billion, diversely spread across a range of sectors including Office (54%), Retail (18%), Industrial/Logistics (13%), Property Securities (6%) and Other (9%). The portfolio comprises approximately 320+ assets let to more than 3,800 tenants.

2. Business model

 

The Group operates the following divisions:[1]

 

Divisions

Revenue  ($’M)

% of Revenue

% of Profit

Profit drivers[2]

Property
investment

$207

56.93%

73.34%

Cromwell recorded a profit of $204.1 M for the year ended 30 June 2018

The profit for the year includes a number of items which are non-cash in nature or occur infrequently and/or relate to realised or unrealised changes in the values of assets and liabilities and in the opinion of the Directors, need to be adjusted for in order to allow securityholders to gain a better understanding of Cromwell’s underlying operating profit. The most significant of these items impacting the profit of Cromwell for the year and not considered part of the underlying operating profit were:

  • An increase in the fair value of investment properties of $77.4 M (2017: increase of $125.0 M)
  • Gain on disposal of listed securities of $15.7 M (2017: $nil)
  • Decrease of $76.1 M in the recoverable amount of goodwill and other assets
  • Net non-operating gains in relation to equity accounted investments of $94.8 M.
  • Net non-operating finance costs of $21.2 M.

Cromwell recorded an operating profit of $156.8 M for the year ended 30 June 2018 compared with an operating profit of $152.2 M for the previous corresponding period

Asset
services

$15

4.13%

1.40%

Funds management – Internal

$42.3

11.63%

12.37%

Funds management – Retail

$10.5

2.89%

2.42%

Funds management – Wholesale

$88.8

24.42%

10.46%

3. Strategy

    

Key strategies include:[3]

 

  • Maintaining a strong, secure and resilient cash flow from the core portfolio of assets which have a WALE over 11 years and which should deliver year on year growth in net operating property income of 3%
  • Using the core + portfolio of assets to ensure Cromwell maximises returns in leasing markets and creates additional value
  • Leveraging our well-developed asset repositioning skills for value creation from the active portfolio
  • Maintaining our retail funds management platform by ensuring we only offer quality products to our retail investors based on a disciplined approach to asset acquisitions
  • Maximising our European platform at a time when certain European real estate markets are improving and attracting Asian capital. This may see Cromwell co-investing more into European funds and mandates

 

Cromwell aims to maintain a sustainable business model through investment and market cycles. This will be achieved by maintaining our capacity to derive transactional revenue where possible, growing funds management revenues in a sustainable way and continuously improving the capacity of our property portfolio to deliver above average returns over the medium and long-term from active management of our assets and our portfolio. We will continue to manage the risk and cost of our debt, maintaining appropriate protection to the downside with the opportunity to benefit from the trend of lower global interest rates.

4. Markets

 

The Group operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2018)

Growth Rate (Annual 13-18)

Office Property Operators

$43 billion

11.3%

Retail Property Operators

$23 billion

6.0%

Industrial and Other Property Operators

$17 billion

13.2%

5. Competition

    

Major competitors include:[5]

 

  • Charter Hall Retail REIT (ASX: CQR)
  • Shopping Centers Austral Property Gp Re Ltd (ASX: SCP.AX)   
  • Abacus Property Group (ASX: ABP)
  • BWP Trust (ASX: BWP)

6. History

 

1998[6]   

Westholme Limited, a property syndicator, is recapitalised resulting in a new Board of Directors and a name changed to Cromwell Corporation Limited. Cromwell, as we know it, has commenced

 

1998 – 2003   

Cromwell purchased 14 properties With a value of more than $300 million IN five different Australian states from 1998-2003, Of this, $58 million becomes part of the Cromwell Diversified Property Trust (CDPT)

 

2004   

CDPT purchased 11 properties for $152 million. The acquisition of the landmark 700 Collins Street, Melbourne completed at a cost of $133 million, forms the cornerstone investment in the CDPT

 

2006   

CDPT is merged with five smaller unlisted property trusts and stapled to Cromwell Corporation Limited creating Cromwell Property Group

 

2010   

Cromwell raised $75.4 million via a placement and rights issue and acquired the Qantas Global Headquarters in Mascot, NSW for $143 million.

 

2013   

A portfolio of seven assets is acquired from the NSW State Government for $405 million and the landmark North Sydney building, Northpoint Tower, is acquired for $278 million. Cromwell enters the S&P/ASX 300 Index.

 

2015  

Expanded into Europe by acquiring Valad Europe, a pan-european commercial real estate platform for $208 million. Construction commenced on a new $172 million building to be leased by the Department of Social Services at Tuggeranong Office Park, ACT.

  

2016    

Launched Cromwell European Cities Income Fund with the purchase of a seed portfolio of three Dutch assets. Commenced work on the $130 million redevelopment of Northpoint Tower

 

2017    

Rebranded Valad Europe to Cromwell in order to create a consistent global brand and platform.

 

2018    

Cromwell successfully extends debt tenor to 5.2 Years

7. Team

 

Board of Directors[7]

 

Geoffrey Levy, AO – Independent Non-Executive Chairman

Paul Weightman – Managing Director / Chief Executive Officer

Michelle McKellar – Independent Non-Executive Director

Jane Tongs – Independent Non-Executive Director

Leon Blitz – Independent Non-Executive Director

David Blight – Non-Executive Director

Andrew Fay – Independent Non-Executive Director

 

Management Team

 

Paul Weightman – Managing Director / Chief Executive Officer

Michael Wilde – Chief Financial Officer

Jodie Clark – Chief Operations Officer

Mark McLaughlin – Managing Director, Europe

Bobby Binning – Head Of Property

Phil Cowling – Chief Sustainability Officer

Rob Percy – Chief Investment Officer


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8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/2018 (ended 30 June):[8]

 

Divisions

Revenue ($’M)

% Change

Profit/(Loss) ($’M)

% Change

Property Investment

$207

(5.95%)

$115

(7.78%)

Asset Services

$15

26.05%

$2.2

1200.00%

Funds management – Internal

$42.3

65.88%

$19.4

646.15%

Funds management – Retail

$10.5

(27.08%)

$3.8

(53.665%)

Funds management – wholesale

$88.8

4.35%

$16.4

(2.960%)

Total

$364

1.85%

$157

3.02%

9. Risk

 

Major risks include:[9]

 

Credit risk

Credit risk is the risk that a counterparty will default on its contractual obligations under a financial instrument and result in a financial loss to Cromwell. Cromwell has exposure to credit risk on all financial assets included in the balance sheet except investments at fair value through profit or loss. The maximum exposure to credit risk at balance date is the carrying amount of financial assets recognised in the balance sheet of Cromwell. Cromwell holds no significant collateral as security. Cash is held with Australian, New Zealand, United Kingdom, and European financial institutions. Interest rate derivative counterparties are all Australian financial institutions.

 

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash reserves and finance facilities to meet the ongoing operational requirements of the business. It is Cromwell’s policy to maintain sufficient funds in cash and cash equivalents to meet expected near term operational requirements. Cromwell prepares and monitors rolling forecasts of liquidity requirements on the basis of expected cash flow. Cromwell monitors the maturity profile of borrowings and puts in place strategies designed to ensure that all maturing borrowings are refinanced in the required timeframes.

 

Market risk

Market risk is the risk that the fair value or future cash flows of Cromwell’s financial instruments fluctuate due to market price changes.

Cromwell is exposed to the following market risks:

   

Price risk – Listed and unlisted equity securities:

Cromwell and the Trust are exposed to price risk in relation to its listed and unlisted equity securities. Cromwell and the Trust use the ASX closing price to determine the fair value of their listed securities. For unlisted securities Cromwell and the Trust use the fair value of the net assets of the unlisted entity to determine the fair value of their investments. The fair value of the net assets of unlisted entities is predominantly dependent on the market value of the investment properties they hold. Any movement in the market value of the investment properties will impact the fair value of Cromwell and the Trust’s investment.

 

Interest rate risk

Cromwell’s interest rate risk primarily arises from borrowings. Borrowings issued at variable rates expose Cromwell to cash flow interest rate risk. Borrowings issued at fixed rates expose Cromwell to fair value interest rate risk. Cromwell’s policy is to effectively maintain hedging arrangements on not less than 50% of its borrowings. At balance date 81% (2017: nil%) of Cromwell’s variable rate secured bank loan borrowings of $1,000 million (2017: $1,257 million) were effectively hedged through interest rate swap contracts. The convertible bonds carry a fixed interest rate. Therefore, interest on a total of 30% (2017: 15%) of Cromwell’s total borrowings is effectively fixed at balance date

 

Foreign exchange risk

Cromwell’s foreign exchange risk primarily arises from its investments in foreign subsidiaries. The functional currency of these subsidiaries is Euro. The acquisition of the foreign subsidiaries was financed through a convertible bond also denominated in Euro effectively providing a natural hedge against foreign exchange movements between the Australian Dollar and the Euro. No hedge accounting was applied in relation to the net investment in the foreign subsidiaries.

Cromwell’s and the Trust’s exposure to Euro foreign currency risk at the end of the year, expressed in Australian dollars.