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Date : 02/03/2021

Cromwell Property Group

ASX :

CMW

Market Cap : $2.17 Billion

Dividend Per Share : $0.0375

Dividend Yield : 9.37 %

Buy

52 Week Range : $0.675 - $1.240

Share Price : $0.795

Cromwell is in the thick of a takeover bid and its share price has come under pressure. However, for the risk being taken, there is potential upside and a very high dividend yield on offer.

Company Analysis

Cromwell Property Group (ASX: CMW) is a Brisbane based real estate investment trust. They are well diversified investors and operate in Australia, New Zealand, and Europe. Cromwell’s portfolio is valued at over $3 billion and it has $11.6 billion in assets under management. Their assets are segmented across Office, Retail. Industrial, and property securities. 50% of the assets under management are coming from Australia, 42% from Europe, and 7% from New Zealand.

Cromwell generates revenues through:

  • Direct Property Investment
  • Indirect Property Investment
  • Funds and Asset Management

Recently, Cromwell has also started investing in parts of Asia and this looks to be the area where the firm is looking to continue investing for growth.

Direct Property Investments

  • Direct property investment segment profit of $77.1 million (HY20: $105.7 million)
  • Strong like-for-like Net Operating Income of 3.6%, above the rolling 3.0% target
  • Fair value gain in investment property of $37.6 million (HY20: $110.1 million)
  • Total book value of $3.0 billion across 18 Australian assets with vacancy of 4.2%
  • Line-of-sight to c.$1 billion pipeline of new value add development opportunities

The direct property investments division is invested across 16 properties in Australia. They have a total book value of $3 billion and an overall average occupancy of 95.6%. The weighted average lease expiry stands at 6.3 years – meaning that the assets are fairly safe from the threats Covid19 has brought on to the real estate industry.

Office properties is the largest exposure that this segment is exposed to. The Federal Government, Qantas, NSW State Government, and the QLD State Government make up 60.4% of the gross income in this division. Given the credit worthiness of these clients, the direct property segment is in no danger of going under due to the challenges posed by the pandemic.


Source: Cromwell

The vacancy by gross income is 4.2%. However, this is expected as office real estate is undergoing a bit of a cultural shift with work-from-home being pushed by several technology firms even after the lockdowns ended. Given Cromwell’s clients and lease expiry profile that can be seen in the chart below, the direct property investments segment is fairly stable.

Cromwell also has 3 new properties in its pipeline. ATC, Victoria, and NSW each have an upcoming project that is being constructed. The proposed timing is FY2021, FY22-24, and FY22-23, respectively. Cromwell is also known to be negotiating on redevelopment of existing assets and new tenants, but this pipeline is still deemed as confidential in the firm’s latest earnings report. It is sufficient to say that Cromwell is investing in this segment.


Source: Cromwell

Indirect Property Investment

  • Indirect property investment segment profit of $22.6 million (HY20: $25.5 million)
  • Equity accounted share of Cromwell European REITs (CEREIT) operating profit of $22.5 million (HY20 $22.8 million)
  • The redevelopment of LDK’s Greenway Views is progressing with solid sales being achieved
  • Cromwell Polish retail Fund (CPRF) and Cromwell Italy Urban Logistics Fund (CULF) portfolios to be offered to capital partners as soon as conditions allow.

The indirect property investment segment is where Cromwell partially owns 4 property funds. CEREIT is the largest with €2.2 billion in assets under management, 96 properties, and a book value of €399 million. Cromwell has a 30.7% interest in the fund, and this again consists mainly of office real estate. 60% Office, 34% Industrial, and 6% other properties. All the assets are located in Europe, with the majority of them in the Netherlands, Italy, and France. CEREIT has an occupancy rate of 95.1% and a weighted average lease expiry of 4.9 years.

Occupancy increased during the first half of the financial year from 93.2% in the pcp. The portfolio valuation also increased during the period from €2.1 billion to €2.2 billion. Cromwell announced that there are €113.2 million in acquisition in the pipeline. 11 assets in Czech Republic and Slovakia are being acquired in the first quarter of the calendar year 2021. This will also increase the weight of the portfolio of industrial assets from 34% to 40%. Opportunity exploration is also known to be underway in a post-Brexit UK.

The other large fund in the indirect property investment segment is CPRF. The portfolio contains 6 catchment dominating shopping or convenience centres. All the centres are anchored by significant hypermarkets. The French grocery giant Auchan provides 30% of the gross rent. The valuation of the fund comes in at €451.1 million with a weighted average lease expiry of 4.9 years. The occupancy rate is 94.8%. Cromwell has a 20% stake in the fund.

Funds & Asset Management

  • Funds and asset management segment profit of $22.3 million (HY20: $31.1 million)
  • Total funds under management (FUM) of $8.3 billion (FY20: $8.2 billion)
  • Retail funds under management amounted to $2.1 billion with the remainder being wholesale
  • Europe €3.7 billion FUM (FY20 $3.5 billion) with 78% underpinned by longer dated capital.


Source: Cromwell

This segment manages a total of $8.3 billion in funds under management. Retail makes up for $2.1 billion and Wholesale makes up for $6.1 billion. Cromwell said that there is significant opportunity to scale post the pandemic as 79% of the platform is underpinned by long term recurring capital. The Retail segment also has long-term recurring revenue that earns high margins.

The FUMs have slightly increased in the half year, however, the profitability has taken a hit due to reduced transaction and performance fee. The geographical segmentation of the fund can be seen in the picture above.

Company Updates

Cromwell Property Group has been involved in a hostile takeover battle with its largest shareholder – ARA Group. ARA believes that Cromwell management has not operated with a satisfactory efficiency and not delivered on shareholder expectations.

ARA Group has already forced out the CEO, Chairman, and a couple of other directors in December last year. ARA also mentioned that there is a lack of transparency concerning asset values as a result of Covid19 and antagonistic behaviour from the board members of Cromwell. The proposed takeover bid came in at $0.9 a share. This story has generated a lot of media attention and has also resulted in the stock price being unable to recover from its depths. Whatever the outcome maybe, it has been a dirty story so far!


Source: Tradingview.com

Investment Thesis

The office real estate segment is no longer a high growth segment. The Australian market, however, is poised to grow better than the European counterparts. Now that we have gone over the business model of Cromwell and its on-going battle with ARA, let’s have a look at how its assets have performed over time.

Cromwell had a good half year FY2021 performance amid all the challenges present in its operating environment due to the pandemic.

  • Statutory Profit was $146.8 million
  • Operating Profit was $99.1 million
  • 0.7% of rent waived and 6.1% deferred during the half year
  • Net Tangible Assets increased to $1 post the revaluation
  • Gearing increased to 42.5% – above its target of 30-40%
  • Distribution of 3.75 cents per security

Cromwell’s assets have proved to be resilient during the complexities that were posed in Australia, Asia, and Europe. Statutory profit declined 35.4% and operating profit declined 26.8% compared to the previous corresponding period. This was due to: lower fair value gain on investment properties and development fees from the sale of Northpoint Tower being recognised in the previous period.

The valuation of the assets on the balance sheet increased from $3.7 billion to $3.8 billion. The high gearing should not pose a problem for Cromwell as there is sufficient liquidity. Cromwell is reported to have $150 million in cash on its balance sheet. The debt is well diversified with no expiries until March 2022.

FY2021 will continue to be a year where the pandemic will impact Cromwell. Cromwell continues to progress its Board renewal and management transition activities. Cromwell Chair Jane Tongs and directors Tanya Cox and Lisa Scenna were successfully re-elected at the General Meeting held on 12 February 2021. Additional appointments to the Board are now expected as part of the Board’s renewal process. The executive search process for a permanent CEO, conducted by Egon Zehnder.

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.

This declining trend in EPS that can be seen in the above chart is concerning. This also looks to be why ARA Group has deemed Cromwell’s management as incapable. The narrative is that, if the takeover goes through, Cromwell’s EPS may start showing signs of a recovery, however, it will come at the cost of reduced profits (either due to restructuring or further investments) and possibly reduced dividends. If the deal does not go through, the further structural decline of Cromwell will in all probability continue and eventually pose a threat to the dividends.

Bottom Line?

Cromwell has 3 main streams of revenues. The value of its portfolio is $3 billion, and it has $11.6 billion in assets under management.

  • The risk in lease payments is offset by the most of their properties being leased out to government organisations, and Qantas – a firm we know very well that the government will back throughout any crisis.
  • While there may not be growth in office real-estate, Cromwell’s client list offers sustainability of revenues from its portfolio of assets.
  • The stock is trading at a 20% discount to its Net Tangible Asset Value

The takeover brings up a lot of noise, but that seems to be the very reason that Cromwell is undervalued.

Recommendation

Cromwell has a very high dividend yield, and it will likely remain the same for FY2021. Given everything surrounding the takeover bid, the share price has been under pressure for some time now, however, we believe there is potential upside. The takeover bid of 90 cents a share also reinforces our view on the potential upside that exists. The risks associated with Cromwell provides an opportunity. We recommend investors to “Buy”, keeping in mind the risks associated with the firm at this moment in time.

 

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