Cromwell Group posts record half year earnings
20/02/2008
HIGHLIGHTS – SIX MONTHS TO 31 DECEMBER, 2007
- Record first half year net profit after tax (NPAT) of $79.5 million
- Record profit from operations of $41.8 million
- Total distributions for the half year of 5 cents per stapled security
- Completion of portfolio rebalance with gains on sale of $7.5 million
- Gearing reduced to 35% from 45% at 30 June, 2007
- Net debt 100% hedged with a weighted average hedge term of 3.7 years
- Strong funds management inflows and product performance
- Average increase in asset valuations of 8.6% with 40% of portfolio revalued
- NTA increased to $1.02, from $0.96 at 30 June, 2007
- Reaffirm full year guidance of 10 cps operating earnings/distributions
Property and funds manager Cromwell Group (ASX: CMW) today reported record operating earnings for the first half of the 2008 financial year, with the Group strongly positioned following a significant reduction in gearing and accumulation of a substantial cash surplus.
For the six months to 31 December, 2007, the Group reported profit from operations of $41.8 million with basic operating earnings of 6.0 cents per stapled security. Comparisons with results for the previous first half are not an accurate reflection of performance as the Group was created through the stapling of Cromwell Diversified Property Trust (“the Trust”) and Cromwell Corporation Limited (“the Company”) on 19 December 2006 and hence the previous first half results did not include a full six months results of the Trust.
The record operating profit reflected increases in both funds management and transactional income during the half, coupled with a significantly higher contribution from the Trust’s property portfolio reflecting a full six months income.
Cromwell Executive Chairman Paul Weightman said the Group had benefitted from its anticipation of the current volatility in markets with the strategic sale of a number of assets throughout the 2007 calendar year.
“These sales realised some significant profits which we believed were best utilised by reducing our gearing and building cash reserves, which were approximately $100 million at the end of the half.” he said. “We finished the half in a particularly strong financial position which has served us well given the recent market volatility.”
Net debt at the end of the half was approximately $416.2 million, representing gearing of 35%, down from 45% at 30 June, 2007.
PROPERTY INVESTMENT
The Group’s Property Investment operations, which include a $986 million portfolio of diversified property assets, are forecast to provide approximately 75% of Group EBITDA for FY08.
At the end of the half the Group’s property portfolio had an occupancy of 99.6% with a Weighted Average Lease Expiry of 5.3 years. Approximately 78% of income is sourced from Government, Government entities and blue-chip listed companies.
During the half the Group completed two asset sales as part of a portfolio rebalancing strategy, which realised a total gain of $7.5 million. Approximately 40% of the Group’s property portfolio was independently revalued as at the end of the half with an average increase in valuations of 8.6% and a total increase in fair value of $30.05 million.
Mr Weightman said Cromwell was one of the few listed property trusts in Australia that generated earnings predominantly from the domestic office market.
“Indications are that the Australian office market will continue to perform strongly and our portfolio is well positioned to take advantage of any rental growth,” he said.
“We have a well diversified portfolio which we believe will perform well in the current market,” he said. “Our strategy to manage the portfolio internally also provides us with the opportunity to move quickly and add value in changing conditions.”
FUNDS MANAGEMENT
The Group’s Fund Management operations are forecast to provide approximately 17% of the Group’s FY08 EBITDA. The FY08 forecast earnings are derived from ongoing management fees and transaction fees from the growing flagship unlisted Cromwell Property Fund (CPF). Recognition of fees on a number of acquisitions for the CPF during the first half has meant that the Group has already earned approximately 75% of forecast transaction income for the full year.
CPF inflows continued to average approximately $3 million per week during the first half with a total of approximately $70 million raised, including a $10 million co-investment from the Group. Mr Weightman said the CPF remained the Group’s core product as the unlisted Fund was particularly attractive in current volatile markets due to its stable income and lack of exposure to stock market volatility.
“The Funds Management operations provide the Group with the opportunity to grow EPS with a relatively low cost of capital,” he said. “The continued growth in funds under management through greater penetration and expansion of our retail distribution network will underpin the future growth in earnings from this part of the business.”
TRANSACTIONS/PROJECTS
The transaction and projects activities are forecast to contribute less than 10% of Group EBITDA for FY08. During the half the Group reported development earnings of $11.9 million from the sale of a site at Bundall, on the Gold Coast.
Mr Weightman said the Group would continue to pursue similar opportunities where it presented a sound risk-adjusted proposition, with a focus on generating opportunities from its own internally-managed portfolio.
“Where appropriate we will always take the opportunity to bring on a development partner where they add value and can assume project risk,” Mr Weightman said.
OUTLOOK
The Group maintains guidance for full-year operating earnings of 10 cents per security (excluding realised gains on sale) with minimal reliance on transactional income.
“Earnings expectations for the remainder of the year and into FY09 can be substantially achieved through organic growth from the established property investment portfolio and recurring funds management income,’ Mr Weightman said.
The Group’s property portfolio remains well placed in the current market with a strong Australian core property portfolio, 99.6% occupancy and a long lease profile. The portfolio has minimal expiries prior to the end of FY09.
“While we believe a number of opportunities to grow the portfolio will present themselves in the future our immediate focus has been on securing long-term income by retaining our strong occupancy levels,” Mr Weightman said.
The Funds Management operations will continue to focus on growing exposure and inflows for the Cromwell Property Fund (CPF) while diversifying the Group’s product offering.
The first new fund to be launched will be the Cromwell Phoenix Property Securities Fund (ARSN 129 580 267) which is expected to be launched publicly in March. The open-ended fund aims to deliver stable earnings with the potential for capital growth by building a diversified portfolio of predominantly ASX-listed property securities (A-REITs).
Cromwell has appointed boutique equity investment manager Phoenix Portfolios Pty Ltd to manage the fund, giving retail investors access to Phoenix’s established research and investment skills previously only accessible by institutional investors.
Mr Weightman said the new fund would complement Cromwell’s existing property funds management business. “As a specialist property funds manager, it is a logical progression for Cromwell to offer a property securities fund as part of its product offering,” Mr Weightman said.
“Both historically and on a net asset value basis we think selected companies within the A-REIT sector present significant value. The fund’s goal will be to find those companies which present the best opportunity for consistent returns and capital growth.”