Company Reports

As foreshadowed in our research report published on July 8, 2024, we cease coverage on Cromwell Property Group. We provide analyst research and ratings on more than 1,600 companies globally and periodically adjust our coverage according to client demand, investor interest, and staffing.

We will discontinue analyst coverage of Cromwell Property Group on or about July 29, 2024. Accordingly, we place Cromwell under review. We provide analyst research and ratings on over 1,600 companies globally and periodically adjust our coverage according to investor interest and staffing.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income.

Cromwell has contracted to sell its European funds management platform and its coinvestments in associated assets, including the Cromwell European REIT and the Italy Urban Logistics fund. This is unexpected, as we assumed the group’s desire for a capital-light business model would involve increasing funds management, including in Europe.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell is growing its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets, and build new funds management ventures. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra. Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas another big chunk. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.

We increase our fair value estimate for no-moat Cromwell by 7% to AUD 0.75 per share. It reflects favorable changes to our equity-raising assumptions following the sale of the Polish retail assets.

In our view, Cromwell’s balance sheet gearing of 45% and look-through gearing of 50% must be reduced. Reassuringly, at its December half-year results, management stated look-through gearing should reduce slightly via Australian assets contracted for sale in early 2024 and drop to 41.9% if a planned disposal of Polish assets proceeds. Headline gearing falls to a manageable 34% on these asset sales.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell is growing its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets, and build new funds management ventures. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra. Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas another big chunk. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell is growing its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets, and build new funds management ventures. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra, or Brisbane. Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas a big chunk of its Australian rent. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.

We reduce our fair value estimate for Cromwell by 18% to AUD 0.70, down from 0.85, and our Uncertainty Rating worsens to Extreme from High. A rise in bond yields, and a slump in Cromwell’s stock price to AUD 0.35 per security, make it unlikely it can raise equity at our previously assumed AUD 0.50 per security. We now assume Cromwell raises AUD 510 million at AUD 0.30 per security.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell is growing its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets, and build new funds management ventures. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra, or Brisbane. Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas a big chunk of its Australian rent. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell is growing its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets, and build new funds management ventures. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra, Adelaide, or Brisbane. Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas a big chunk of its Australian rent. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.

Cromwell delivered fiscal 2023 operating earnings of AUD 158.6 million (AUD 6.06 cents per security), down from 2022’s AUD 201 million. Disposals reduced revenue, and higher interest rates boosted debt costs. The result lagged our estimate of AUD 175 million due to lower performance and transaction fees, and higher than expected costs in its Polish retail portfolio. Distributions were AUD 5.5 cps, and management expects distributions for the September quarter of 0.83 cps. We assume a constant distribution rate, implying 2024 distributions totaling AUD 3.3 cps. We assume fiscal 2024 operating earnings of AUD 155 million, or AUD 5 cps.

We see risks to Australian office demand as widely overestimated, despite our expectation that work-from-home will endure post-pandemic. Several REITs remain modestly undervalued, particularly those focused on prime grade offices, with long leases, and solid balance sheets. We raise our fair value estimates for three particularly high-quality office-heavy REITs: Dexus, GPT, and Mirvac.

Cromwell is an Australian property company that generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income.

We make no changes to our fair value estimate of AUD 0.95 following Cromwell’s first-half results for fiscal 2021. Cromwell demonstrated resilience despite a turbulent period with an underlying operating profit of AUD 99.1 million, or AUD 3.79 cents per share, that is on track to meet our full-year forecast. We reduce our full-year distribution estimate to AUD 0.07, down from 0.075, in line with updated guidance provided by management. We make no change to our earnings forecasts. Cromwell has challenges in parts of its portfolio and high gearing is a risk, but we believe the sell-off in the securities is overdone and see Cromwell securities as undervalued.

Cromwell is an Australian property company that generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income.

We make no change to our AUD 0.95 fair value estimate for no-moat Cromwell Property Group. We continue to suggest investors do not accept the proportional off-market offer. ARA has extended its bid to Monday Nov. 30. Apart from adjusting the offer price downwards to account for a recent distribution payment, the offer price is unchanged at AUD 90.125 cents per stapled security, which we believe undervalues Cromwell.