Business Strategy & Outlook
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 yearns to grow its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets. 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.
Financial Strengths
Cromwell targets gearing of 30%-40%. This is aggressive given Cromwell’s portfolio is largely in secondary locations. Group gearing (net debt/assets) as at June 2022 was in the mid-40s, and gearing on balance sheet was just below the top of the target range. Cromwell points out that gearing should reduce once various assets are sold, but this is subject to appropriate prices being achieved. Other assets up for sale include an Italian logistics portfolio and its LDK retirement living business. That makes us nervous given the group’s substantial investments in Europe. There’s a long-term cost of debt of 6.5%, significantly above current levels. Interest-rate risk is hedged but with a weighted average term of just 2.1 years. The group has a manageable AUD 200 million of debt expiries in fiscal 2023, but has AUD 800 million of expiries in 2024. Cromwell doesn’t have a large buffer to the 60% gearing limit specified in its banking covenants. The latter is boosted by the additional earnings from holding the Polish retail assets. Gearing ratios would rise if asset prices fell, which is possible given a spike in interest rates in early 2022, and the effects of hybrid-working yet to be fully felt in office markets. The group has a pipeline of developments, and may make further debt-funded acquisitions, which could also push up gearing. This can be offset by divestments and growing earnings from its funds management business. Cromwell reduced its targeted gearing ratio in 2019, having previously stated a target range of 35%-55%. Gearing needs to reduce meaningfully, likely through further asset sales.
Bulls Say
- Cromwell’s portfolio avoids highly priced office assets in core CBD markets, opting instead for cheaper assets in secondary locations that it views as having greater potential for price upside or development.
- Cromwell’s solid tenant profile means income on its directly held portfolio is more secure than most of its REIT rivals.
- A recovery in population growth could help shore up the value of Cromwell’s assets due to urban infill, with better quality sites achieving more rent bargaining power, and some low-quality sites potentially switching to higher value uses.
Company Description
Cromwell Property Group is an internally managed Australian real estate investment trust. It owns an Australian portfolio of (mostly office) properties and also develops and manages properties on behalf of third-party investors. The group is exploring opportunities to sell some assets, particularly in Europe, and to spin out its office portfolio into a separate REIT, leaving the Cromwell business to focus more on funds management. The timetable is uncertain given higher interest rates are a headwind for property sales.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy & Outlook
Charter Hall Long Wale REIT’s, or CLW’s, portfolio is high-quality. Liquor retailer and pub operator Endeavour Group is the largest tenant at 18% of passing income. At least four fifths of passing income comes from tenants as unlikely to miss a rent payment, including Endeavour Group, government agencies, Telstra, BP, Inghams, Coles, Metcash, Arnotts, Bunnings, Westpac, and Linfox. External fund manager Charter Hall has a strong track record and good relationships with tenants. But continued acquisitions may have diluted CLW’s portfolio, particularly as long-WALE assets have been in high demand, and thereby came with a hefty price tag. CLW has been acquisitive, buying properties and other REITs, using debt, and issuing new equity. It issued circa AUD 386 million of new equity in fiscal 2019 to fund acquisitions, including various offices, a bus terminal in Eagle Farm, Brisbane, and several agricultural logistics properties from Inghams on a sale-and-leaseback arrangement.
In fiscal 2020 it issued AUD 850 million of equity to purchase telco exchanges, a Brisbane office building, Telstra’s Melbourne headquarters, and BP service stations in Australia. In fiscal 2021 it issued AUD 626 million of equity, using the proceeds to purchase Telstra exchanges, a portfolio of offices, and BP sites in New Zealand, taking its BP portfolio to circa AUD 500 million in Australia and New Zealand. CLW has issued substantial new equity every year since its 2016 listing, with the number of securities on issue tripling from circa 208 million in June 2017 to 720 million at March 2022. Higher interest rates are likely to slow the group’s expansion and weigh on earnings, given the group’s relatively high gearing.
Financial Strengths
CLW is in reasonable financial health. Interest cover is a solid 5.4 times, compared with a covenant of two times. To breach that, earnings would have to fall by more than 60%, other things equal, unlikely given revenue is underpinned by long leases. A breach arising from increased finance costs is also unlikely, as it would require finance costs to roughly triple. That sounds like a massive increase, and while it can be viewed as extremely unlikely, it’s not impossible considering a low average cost of debt of 2.8% as at 30 June, 2022. However, under that scenario management would likely respond, for example, by selling assets. Admittedly though under that scenario, asset sales would probably be at much lower prices than present, given the higher property capitalization rates that would be implied by substantially higher interest rates. Reassuringly, CLW has debt locked in with an average maturity of 5.2 years, and maturities are well staggered, with no outsize expiries until fiscal 2027. About 75% of existing debt is fixed or hedged, which limits the impact of interest rate moves on finance costs, at least in the near term. The group has additional debt and covenants pertaining to underlying joint venture vehicles. Loan-to-valuation ratios there are reasonable, with the largest exposure being a debt facility that funds the BP Australia portfolio, with an LVR of 39%, versus a covenant of 60%. That implies the asset values would have to fall by one third for a breach. All that said, a rise in interest rates could increase finance costs, and pressure valuations on CLW’s long-lease assets. That means gearing could elevate at the same moment that buying opportunities might arise in property markets, limiting opportunity to buy assets during downturns, or limiting income growth.
Bulls Say
- With markets pricing in substantial interest rate rises, listed long-duration assets are looking better value than in recent history.
- Long WALE REIT has very long leases to strong tenants.
- Charter Hall’s scale and track record of managing sale-and-leasebacks puts CLW in a strong position to acquire similar assets in future.
Company Description
Charter Hall Long WALE REIT is a diversified property trust, with assets in Australia and New Zealand. Occupancy is near 100%, and weighted average lease length is a long 12.0 years (as at June 30, 2022). More than half the REIT’s leases are triple-net, where tenants pay rates, maintenance and most outgoings. The REIT’s circa AUD 7 billion portfolio of 550 properties spans offices, industrial, retail, social infrastructure, and agricultural logistics assets, with more than three quarters of the portfolio on Australia’s eastern seaboard. Leases are evenly spread between CPI-linked (6.3% average rent increase expected in 2023) and fixed uplifts (average 3.1% uplift expected). The tenant profile is strong, with almost all occupiers being government, multinational or national businesses.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy & Outlook
Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading. Rent is the biggest revenue driver with the office and industrial divisions accounting for over 90% of funds from operations, or FFO. High-quality offices in Sydney dominate, with Dexus having interests in many trophy assets including Sydney’s Australia Square, 1 Farrer Place, and 1 Bligh Street. It also owns or manages a seasoned industrial portfolio, including the massive Dexus Industrial Estate in one of Australia’s fastest-growing industrial precincts, Truganina, Victoria. It also has a small retail portfolio, mostly retail sites attached to offices, and a small healthcare portfolio. Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages.
Funds management is the smallest but fastest-growing portion of revenue, and more developments are being rotated into funds management vehicles, adding capital efficiency and management fees. It accounted for about 6% of revenue in fiscal 2019, and the funds management grows by about a third by the end of the discrete 10-year forecast period. The high-quality portfolio should see Dexus perform better than most, with about 90% of its office portfolio either premium or A-grade by Property Council of Australia guidelines. Dexus’ portfolio has held up relatively well in major downturns compared with rivals with lower-quality portfolios. It’s hard to imagine a worse scenario for an office property than that experienced in 2020-21. In those years, Dexus reduced rents somewhat on the small portion of leases that expired, but occupancy remained high.
Financial Strengths
Dexus is in solid financial health, with look-through gearing of 26.9%, below the group’s targeted range of 30%-40%. The group has substantial buffers to its banking covenants. However, gearing is likely to rise as Dexus commences development projects. Gearing ratios are also likely to rise as asset prices fall, given remarkably low capitalization rates of 4%-5% being seen on CBD office transactions in fiscal 2022, and bond markets pricing in meaningfully higher interest rates. The group has a large pipeline of developments, and could make debt-funded acquisitions during the downturn, or a buyback, which could also push up gearing. This can be offset by divestments, including rotating some assets into its funds management vehicles, thereby taking them off the group balance sheet. On balance though, it still can be expected gearing to rise from current levels. Dexus’ reasonably conservative management team looks comfortable, and the health of other financial metrics. Interest cover is 6.0 times on a look-through basis, compared with covenant of 2 times. Interest rate sensitivity is modest, with about two thirds of debt being hedged, and debt maturities are staggered. If inflation intensifies, further rate rises could increase the cost of rolling over maturing debt facilities and put pressure on Dexus’ earnings and distributions in the near term. However, it can be consistently assumed a long-term cost of debt of 5.8%, significantly above current levels.
Bulls Say
- Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
- Population growth boosts Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low-quality sites potentially switching to higher-value uses.
- Lower credit spreads and improving rental collections as office precincts recover could offset potential interest-rate rises.
Company Description
Dexus is a major Australian property owner, developer, and manager. It owns a large, high-grade office portfolio and a smaller industrial portfolio in Australia. It also manages properties on behalf of third-party investors. Dexus was formed by the merger of Deutsche Office, Industrial and Diversified Trusts. Management is internal, as opposed to external, as it is for some peers.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
