On the Friday before Christmas, the Directors of Cromwell Property Group received correspondence from Mr. John Lim, CEO of ARA Asset Management Limited. The correspondence asked 14 questions. Cromwell’s response to Mr. Lim is not considered material, nor price sensitive. However, to ensure all securityholders have equal access to the information, it has been reproduced below.
1. Please clarify the current gearing position on both a reported and look through basis in light of the research report published by JP Morgan on 13/11/19 on settlement of the acquisition of the Polish retail Portfolio.
- The calculations in the JP Morgan calculations are not correct. We advised JP Morgan of this fact, but JP Morgan did not retract the report.
- Cromwell’s pro forma gearing at 31 December is expected to be less than 42% on a reported basis. We have previously advised the market that gearing may oscillate around our preferred target gearing range of 30-40% during periods of time in which we are holding investments for sell down to investors as part of our ‘Invest to Manage’ strategy.
- We are presently in advanced discussions with investors to invest in funds or assets that would result in Cromwell returning to a normalised gearing range of 30-40% and details will be provided to the market at the appropriate time.
- We are not in a position to disclose look through gearing until valuations and audits have been completed in the entities in which we invest and their results announced, but it is not expected to be any higher than 45%, less than the figure of 49% reported by JP Morgan.
- All information relevant to the acquisition and funding of both the Polish portfolio and 400 George St have previously been released to the market, and we will continue to meet our continuous disclosure obligations and to report on a half-yearly basis.
- The Board, at all times, exercises care to ensure that decisions made in relation to sell downs and re-investment of capital are managed and coordinated to maximise earnings.
2. Has Cromwell adopted a strategy of selling Australian assets to invest in Polish shopping centres?
- No. Cromwell constantly reviews its Australian investment portfolio to ensure that capital is employed effectively for the benefit of securityholders.
- We recently received an unsolicited offer for 200 Mary Street, Brisbane, and decided to test the market with a short and limited process.
- Under our portfolio strategy, we rank properties according to our expectations of future return and their likelihood to meet return hurdles. We have derived an attractive total return from 200 Mary Street since its acquisition and we were prepared to consider an offer that exceeded our future return expectations, with an eye to redeployment of capital to opportunities in Australia and Europe that would provide better future returns.
- Based on the indicative offers received, we do not expect to sell the property in the short term.
3. Did Cromwell consider proposed changes to Polish retail trading laws before it acquired the Polish retail fund?
- We are, and have been, aware of all current and proposed Polish laws and factored proposed changes into our valuation of the assets.
- Changes to Sunday trading laws were introduced in March 2018 and are being progressively implemented over a three-year period.
- We have a large team on the ground in Poland with deep experience in the market and long-term experience in developing and managing the assets in the Portfolio.
4. What is the Board’s assessment of the relative prospects for the Polish retail assets and what capitalisation rate does the price reflect?
- The Board is positive on the prospects for Polish retail assets, and this is reflected in both the interest expressed for assets in the Portfolio and interest from investors in the Polish retail fund. The Board is of the view that retail rents in Poland are more affordable than in other markets (including Australia) and that Poland is relatively undersupplied given its strong demographic profile, consumer spending growth, rising middle class and economic growth.
- The Polish retail assets were acquired at an average capitalisation rate of 6% which were supported by third party offers for assets in the Portfolio and market evidence.
- Independent valuations were also obtained prior to acquisition which valued the portfolio at a figure higher than the gross purchase price paid by Cromwell.
- The highest bidder for the portfolio priced the assets at a higher gross price than the price paid by Cromwell. The highest bidder had carried out considerable and detailed due diligence to get to its pricing and to enable the correct analysis on the right pricing for the pre-emptive right. In addition, the highest bidder was willing to keep its offer open to see if Cromwell would complete on the transaction.
- With both a very strong bidder at or over the price paid, and with an independent valuation, the Board is of the view that the pricing point was fully market-tested.
5. What was the sale process for the Polish retail portfolio?
- The sale process started in January / February 2018.
- There was considerable interest from a mixture of buyers and after two rounds of bidding, the two preferred parties were brought forward in May 2018.
- The following 18 months, before Cromwell formally exercised its pre-emptive right, was taken up in negotiations with the highest bidder with the key issue being the completion of the second phase of the extension to Janki Centrum. There were too many open conditions to the bid before the development was completed, so all sides agreed to fix the price based on the completed scheme which opened at the end of August 2019. This created the delay, but also created better certainty of pricing for all sides, including the pricing point for the Cromwell pre-emptive right.
6. Were any incentives paid or payable to any employee of Cromwell or any of its associates for the acquisition of the Polish retail portfolio?
7. Please explain the recent movements in Cromwell’s NTA, in particular relative to the June 2019 equity raising pro forma.
- The pro-forma balance sheet used for the June 2019 equity raising contained pro forma adjustments (to our last announced results for 31 December 2018) for transactions that had been completed at the time and for the impact of the placement itself. Specifically, the pro forma adjustments for transactions were the DRPs that had occurred since 31 December 2018, Cromwell’s investment into the LDK joint venture, and the impact of the June 2019 property valuations.
- Not included was the sale of Cromwell’s 50% interest in Northpoint. Cromwell announced this transaction on 1 July 2019 which was after the announced equity raising. The sale was also subject to FIRB approval.
- The change in intended use of Cromwell’s 50% interest in Northpoint resulted in the investment being accounted for as held for sale at 30 June 2019, and also triggered the payment of a development fee between the Company and the Trust. Owing to the application of accounting standards and Cromwell’s accounting policies, the fee (approximated at $35.3m) had to be recognised by the Trust as an expense, and could only be recognised by the Company on actual settlement of the property, which occurred in FY20.
- This created a mismatch in timing of entries between the Company and the Trust and resulted in Cromwell’s NTA at 30 June 2019 being less than as disclosed in the pro forma balance sheet used for the equity raising.
8. Please clarify the $35.3m of ‘costs in relation to assets classified as held for sale’ for the Northpoint investment.
- Following the sale of Redefine’s 50% interest in Northpoint to Early Light International, the focus of the Cromwell Partners Trust, which had become a joint venture between Cromwell and Early Light International, changed to one of single investment into the Northpoint property. Previously, the focus was on creating a wholesale fund with Redefine to potentially invest into multiple properties.
- As a consequence of this change in focus, Cromwell decided to divest its investment in the Cromwell Partners Trust. This triggered the recognition of fees between the Company and the Trust as outlined above.
9. Please comment on changes to the Operating EPS and DPS since 2016.
Cromwell has previously informed the market that 2016 was a year that saw significant one-off transactional earnings from the investment in Investa Office Fund (IOF). Specifically, Cromwell acquired its 9.83% stake in IOF on 12 April 2016, but received distribution income for the full six-month period from 1 January 2016 to 30 June 2016. This resulted in Cromwell’s eps for 2016 being 9.41 cps.
FY19 Operating Profit of 8.21 cps exceeded guidance of 8.00 cps. FY16 Operating Profit exceeded expectations because of transactional revenue as noted above. When these items are considered, Cromwell has sustained consistent earnings levels from FY15 to FY19, has always met or exceeded guidance, has invested into the European platform and has reduced gearing.
Cromwell announced its ‘Invest to Manage’ strategy in August 2018. Part of that strategy included an adjustment in Cromwell's distribution policy from 95% - 100% of Operating Profit to 85% - 95% to allow Cromwell to invest in the growth of our funds management business and in value-creating opportunities in our existing portfolio. The adjustment in Cromwell's distribution policy was fully and appropriately disclosed to the market and all securityholders. Prior to this change in policy, from 2015 to 2018, Cromwell’s distributions per security increased from 7.9 cps to 8.3 cps.
10. Please provide further detail on the increases in Corporate Costs in the footnote on slide 10 of the AGM presentation.
- Cromwell's European platform commenced in FY18 with 0% of FUM in long-term, stable funds. By the end of CY19, 64% of the FUM were in long-term stable funds, providing a sustainable, resilient business that will continue to contribute to the growth of Cromwell in future years.
- This was achieved via the listing in Singapore of the Cromwell European REIT, the securing of a mandate in Italy for Korean investors and the acquisition of the Cromwell Polish Retail Fund. All these events were significant achievements for Cromwell and they are reliant on Cromwell having licenced entities in both Singapore and Luxembourg. This has required a significant investment by the Group in ensuring it meets the strict governance and compliance requirements of both jurisdictions which comes as additional cost. The value now attributable to Cromwell's European platform outweighs these costs.
- The investment into the business has also created a more scalable platform to grow FUM in Europe going forward which will help to deliver increased earnings and distributions.
11. Please provide more detail on the recent meetings and events held in Japan in October/November.
- Cromwell was able to coordinate Cromwell and Cromwell Funds Management Board Meetings with our quarterly Group Leadership Team meeting and senior management presentations with investor presentations and marketing functions with key stakeholders around the 2019 Rugby World Cup. The key events for investors and other stakeholders were centred around semi-final and finals, as well as pre and post-match functions.
- There were 135 attendees to at least one function or game, of whom 33 were Cromwell Property Group Board members and management, and the remaining were split roughly evenly between investors, lenders and other key stakeholders.
- As an international business, and as part of its planned FY20 marketing activities, Cromwell has, or will, organise investor events in Australia, UK, Netherlands, France, Singapore, Germany and Japan this financial year.
- The events in Japan were well received and Cromwell is next expecting 150 guests to its popular opening day brunch at MIPIM 2020 in France. All of Cromwell’s events are included in its marketing budget, which is not material to earnings.
12. Can you explain the significant vote against the remuneration report and the award of performance rights to the CEO? Is the Board of the view that the CEO’s remuneration is fair and reasonable?
- The resolutions for the approval of the Remuneration report (Resolution 6) and the award of performance rights to the CEO (Resolution 9) were opposed by a small number of securityholders. 86% (Resolution 6) and 89% (Resolution 9) of the number of securities voted against those resolutions were held by ARA and the Tang group. As detailed in the Remuneration report, the CEO’s remuneration is benchmarked annually to market.
- The Remuneration report (Resolution 6) which focuses on the FY19 outcome, received the support of all but one of the proxy advisors and the overwhelming majority of securityholders by number. The only proxy advisor who advised against the approval of the Remuneration Report also indicated that “shareholders may wish to support the Remuneration Report based on multiple remuneration improvements made at Cromwell in the past 12 months including the material positive changes to the LTI plan which were outlined in Resolution 9.
- The Board endorsed FY20 scheme (Resolution 9), outlining the enhanced terms for the proposed award of performance rights to the CEO, was recommended by all Proxy houses and supported by the majority of shareholders by number, as detailed above. This is a clear indication that there was broad support for the proposed remuneration framework and that it was viewed as fair and reasonable.
13. Are distributions higher than the level of free cash flow?
14. Does the guidance provided on p17 the FY19 AGM Presentation relate to FY20?