08 May 2020

Cromwell Direct Property Fund - Update

The COVID-19 crisis has impacted almost all asset classes negatively, and unlisted commercial property has not been immune to the fall-out, particularly in our capacity as landlords. In response to the crisis, on 7 April 2020, the National Cabinet issued a Mandatory Commercial Tenancy Code of Conduct. The Code is a set of principles to guide rent relief negotiations between landlords and tenants and is mandatory.

You can read more information on the National Cabinet’s Mandatory Code of Conduct for Commercial Leases referred to in the update via the following link:

National Code of Conduct - Commercial Leasing

Some of the Fund’s tenants have been and continue to be impacted by COVID-19, and therefore will be safe-guarded to an extent by the relief put in place by the Code. The potential impact of this on the Fund will be on both the income derived from its leases and on the value of the assets it holds.

In the short term, we have quantified the valuation impact on a tenant by tenant basis based off current information. As a result, as we communicated in early April, the valuations of directly held property assets within the Fund were reduced in an aggregate drop of 5.9%, as at 07 April 2020. Valuations of indirectly held assets also underwent a revaluation.

International Education Services (IES)

SPH

The Fund asset which is bearing the brunt of the crisis is foreign education services provider, IES, located at Spring Hill in Brisbane.

Fund continues to be placed well for market recovery

DPF Chart However, despite some inevitable COVID-19 impact, the Fund is in an excellent position overall to ride out the current volatility. Highlights include the current tenancy profile by income which is weighted to 43% government or government owned tenants. Combined with a Weighted Average Lease Expiry of 7.6 years, income security is promising over the longer term. With look though gearing currently at 24.6%4, high levels of cash as a buffer, a large undrawn debt facility with expiry not until July 2022, the outlook for the Fund is positive and it remains open for investment.

ChartThe Fund is currently paying a distribution yield of approximately 6%5, 6. The market outlook and future performance of the sector very much depends on the length of downtime that businesses are affected.

To this point, Australia has managed to successfully flatten the curve and both Federal and State governments have begun to talk about the easing of restrictions. We would expect this to fare well for commercial property markets, with increased economic activity of tenants, their employees and consumers hopefully lessening the reliance on stimulation packages and therefore shortening any downturn.

As we ride the fallout from the COVID-19 crisis, we will continue to monitor the property investment market closely to ensure the pricing of our unlisted assets remains appropriate and that all investors are treated equitably.

We will act in a responsible way that balances the interests of all stakeholders and to ensure that the impact of the pandemic is not borne unfairly by any one particular group.

The Fund is well positioned to take advantage of any opportunities that eventuate as a result of the crisis.

If you have any questions or would like to speak to someone about your investment, please contact Cromwell’s Investor Services Team on 1300 268 078 or email invest@cromwell.com.au.


Footnotes:
1. As at 31 March 2020.
2. Positions in the Fund are subject to change.
3. Calculated on a “look-through” gross passing income basis.
4. Calculated on a “look-through” basis; total debt divided by gross assets.
5. Capital growth and income distributions are not guaranteed and are subject to the assumptions and risks contained in the PDS.
6. Yield calculated on current distributions of 7.25 cents per unit p.a. and a current unit price of $1.1940 as at 7 April 2020.