This article is from the Australian Property Journal archive
CROMWELL is looking to Europe for growth opportunities after conceding that a friendly takeover of Investa Office Fund is unlikely no matter what price it offers.
Cromwell has secured the green light from the Singapore Stock Exchange to list its $1.49 billion European REIT.
The global property investment manager returned a full year operating profit of $152.2 million, which was down on last year’s $164.5 million, but at 8.65 cents per security came in ahead of its 8.4cps guidance. Distributions were $146.7 million, at 8.34cps.
Its FY18 operating profit guidance is 8.25cps and distribution 8.34cps, intending to use reinvest some of its excess fair value capital gains into its portfolio and funds management platform.
But the group remains wary of a number of challenges, with chief executive officer Paul Weightman warning that global risks remain high.
“A Chinese economic slowdown and/or capital retreat, conflict over North Korea, and the outcome of Brexit negotiations are amongst a number of issues which could impact global real estate markets,” Weightman said.
“The global demand for yield, particularly from Asian investors is likely to continue for the foreseeable future,” he added.
Cromwell expects capital values to continue to compress in anticipation of rental growth in Sydney and Melbourne, and for moderate economic growth and inflation, and the potential slow-down in the residential construction market to keep interest rates relatively low for the next few years in Australia.
Weightman said that elsewhere within its funds management business, Cromwell is looking to take advantage of the emerging European economic recovery.
On Thursday it announced the receipt from the SGX-ST of eligibility to list its proposed diversified Cromwell European REIT, through which it is looking to invest in income-producing assets.
“Real Eurozone GDP growth has shown positive momentum over the past three fiscal years, reaching 2.2% (annualised) in three months to 30 June 2017,” Weightman said.
It expects an IPO of European assets to occur in Singapore towards the end of September. Cromwell’s 10% sponsor stake in the fund has been fully funded.
Weightman said the establishment of the European fund is part of the group’s goal of transitioning its European business from one with a predominantly transactional focus to one with a significant level of recurring income.
Its funds management division returned an operating profit of $27.7 million, down from $29.2 million, comprising 18% of total operating profit.
It sold €1 billion of property assets Europe and €0.7 billion were acquired on behalf of investors, reflecting a relatively quiet first half post-Brexit, particularly in the UK.
Weightman said activity on the continent remained strong throughout the year.
Cromwell had €3.4 billion in assets under management across Europe at the end of FY17.
Meanwhile, it appears to have softened its intentions of taking over the Investa Office Fund after a long-running saga, often played out via public announcements.
It remains the largest investor in Investa Office Fund following the purchase of a 9.83% stake in April 2016, but has remained unable to offer Investa a lucrative enough deal, despite upping its initial $2.7 billion bid to $3 billion earlier this year.
“It is obvious to us that a friendly transaction is unlikely to proceed, regardless of the price that we offer, and we continue to consider our options,” Weightman said.
Cromwell’s statutory profit for FY17 was down 16% to $277.5 million, at 15.78cps.
At the end of FY17, 51% of Cromwell’s total portfolio now comprised stabilised, low-risk assets with a WALE of 12.1 years, and low capex or incentives over the next five years.
Weightman said a further 41% of the assets in the portfolio have a high level of predictable income with short to medium term upside, and the remaining 8% of assets are marked for realisation or have strong potential for adaptive reuse.
Cromwell’s property portfolio’s operating profit of $124.7 million accounted for 82% of its FY17 operational earnings. Valuations increased by $108.7 million, taking net tangible assets up slightly to $0.89, and improving WACR by 0.49% to 6.56%.
Government and government-related tenants contribute 45.48% of gross lease income. Occupancy improved from 98.7% to 92.1%. WALE increased to 7.2 years taking in the new lease at Tuggeranong Office Park to the Department of Social Services (DSS), beginning next month.
Net like-for-like property earnings fell 4.8% due to vacancies that were only partially offset by rental increases elsewhere, although 8% of the portfolio is active and under redevelopment or refurbishment.
Future lease expiry profile is at 6.5%, 6.2%, 8.0% and 7.8% in the next four years. Cromwell secured new or renewed leases across more than 64,000 sqm an additional 6,300 sqm at 700 Collins Street in addition to the new Bureau of Meteorology’s 15,400 sqm, taking the asset to 100% occupancy with a WALE of 8.2 years.
It also secured 8,300 sqm of leases within Northpoint Tower despite ongoing development works, and a five-year renewal option for The Therapeutic Goods Administration (TGA) over 18,524 sqm in the ACT’s TGA Complex.
“With limited suitable acquisition opportunities available we are continuing to reinvest into our property portfolio which includes managing the $300 million investment we have made into Northpoint Tower in North Sydney and Tuggeranong. Both projects will complete in FY18 and contribute NTA and earnings growth to the group,” Weightman said. “We also have other opportunities which we are considering including potential activity at Victoria Avenue Chatswood, Centenary House, TGA and Campbell Park all in the ACT. All activity is fully funded and expected to be value accretive.”
Cash and cash equivalents were $86.9 million and group gearing was down slightly to 45.2%.
Australian Property Journal
