Thank you for standing by and welcome to the Cromwell Property Group Half Year 2024 Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Dr. Gary Weiss, Chairman. Please go ahead.
Thank you very much, and welcome to those of you who have joined our call this morning. Firstly, I'd like to acknowledge the traditional custodians of the lands on which we meet and pay my regards to their elders, past, present, and emerging. Today I open this call from the Gadigal lands, the Eora Nation. We provide an update on the performance of Cromwell Property Group with insight into activities and operations for the six months ended 31 December 2023. The ongoing higher interest rate environment impacted our operations and valuations across the group globally. We maintain our focus on the ongoing simplification of the business, continuing to target non-core asset sales to reduce net debt. Notwithstanding the AUD 584 million of non-core asset sales completed or contracted since the commencement of our asset sale program in December 2021, gearing remains above our target range.
This is as a result of the significant decline in value of our investment portfolio. We anticipate that on completion of the transactions currently underway, that gearing will return to within our target range. We recognize that uncertainty in the current operating climate, coupled with expansion of cap rates, has impacted security holder value, with Cromwell securities trading at a significant discount to net tangible asset value. We are endeavoring to address this discount by simplifying our business and bringing the group's focus back to core real estate skills, together with exploring value accretive growth opportunities to provide long-term security holder value. Today you will hear from Jonathan, Cromwell CEO, who will provide an overview and strategic update. We also welcome Michelle Dance, appointed to the position of Chief Financial Officer this year, who will review the group's financial performance.
Then Rob Percy, Cromwell's Chief Investment Officer, will provide an overview of the performance of Cromwell's underlying investments. I now hand over to Jonathan.
Thank you, Gary. As we are all aware, the real estate sector globally has experienced significant pressure on valuations. Globally, our assets under management are down AUD 98.1 million from FY 2023 to AUD 11.4 billion in total. We maintain operations and offices in Australia, New Zealand, Singapore, and Europe, as outlined on slide four. Our asset management platform oversees 217 properties, housing more than 2,100 tenant customers globally. Turning to slide seven, Cromwell reports a statutory loss of AUD 271.4 million for the half year, attributed largely to the unrealized fair value adjustments of the Australian investment portfolio and an adjustment to the sale price of the CPRF sale portfolio. The underlying operating profit of the group was AUD 83.7 million for the half, equivalent to AUD 0.032 per security. Cromwell distributed AUD 0.0158 per security during the half year, which represents a payout ratio of 62.6% of adjusted funds from operations.
Importantly, Cromwell's net debt position was down AUD 90 million over the six months to 31 December 2023, which reduced our overall debt position to AUD 1.6 billion. This reduction in debt levels, however, was offset by negative valuation impacts, pushing Cromwell's gearing ratio up in the six months from 42.6% to 44.7%. Michelle will talk more on capital management in a few minutes. Across our platform, our Australian investment portfolio remains strong, valued at AUD 2.4 billion with an occupancy of 93.4% and like-for-like net operating income being up 1%. We had growth in mandates committed and deployed in Europe, increasing AUM assets under management from AUD 5.5 billion to AUD 5.9 billion. Valuation declines in our Australian retail funds partially offset that growth, ending 31 December 2023 AUD 100 million lower at AUD 2.4 billion in third-party AUM assets under management.
An important and ongoing focus for Cromwell is our environmental, social, and governance commitments, which underpin our day-to-day activities, as outlined on slide nine. We have internal goals to ensure an equal and diverse workforce with ambitious, though achievable, targets. We believe that our ESG considerations filter down through our business to future-proof our assets, relationships, and support our long-term security holder value. Some key points I'd like to note: the Australian investment portfolio tenant customer engagement score of 87%, 7% above our key benchmark, and is supporting ongoing leasing success. Solar panels are installed on 4 out of our 18 Australian properties, with a further 6 planned for the remainder of FY 2024, assisting us to manage ongoing costs associated with building operations. We announced global Scope 1 and 2 emissions, as well as a full Scope 3 emissions inventory for financial year FY 2023.
Leading the sector, and I'm happy to report, a 12% reduction was achieved in Australia and a 22% reduction in Europe compared to financial year 2022. Over the past two years, Cromwell has taken significant steps to reduce our gender pay gap, now 11%, which is below WGEA's industry benchmark, 16.7%. More key strategic achievements are outlined on slide nine for the half year results presentation, and our full 2023 ESG report is available on our website. Turning to financial performance, I echo Gary's sentiment in welcoming Michelle, Cromwell CFO, since 1 January 2024. Michelle is highly respected across the sector, and I'm sure known to most of you, with an impressive 30-year career in both real estate and finance. I hand to her to review the financial performance and capital management for the half year.
Thank you, Jonathan. Starting on slide 11, Cromwell reports a statutory loss of AUD 271.4 million for the half year. This is attributed to unrealized fair value adjustments to the Australian investment portfolio, with fair value reductions of AUD 195.7 million or AUD 185.5 million on a like-for-like basis, and downward adjustments of the sale price of CPRF sale portfolio of AUD 44.5 million. In the current high-interest rate environment, net financing costs were up AUD 6 million compared to HY 2023. We report operating profit of AUD 83.7 million (AUD 0.032 per security), which is 3.9% down on the prior corresponding period. This has been driven by non-recurring profit on asset sales during the last half year reporting period. Distributions paid of AUD 1.58 per security reflects a payout ratio of just under 63%, which is lower than our desired payout ratio that was prudent in the current uncertain environment and considering Cromwell's ongoing sale program.
Turning to the earnings overview now on slide 12, Australian funds and asset management earnings were lower at AUD 3.9 million, with a large variance to the prior corresponding period due to the profit received from the LDK sale in October 2022. Earnings in Europe were up 36%, which includes performance fees. Cromwell's Polish Retail Fund positively benefited from both increased rental income and positive foreign exchange moves during the six months, driving a 31.3% increase in EBIT from the prior corresponding period. CIULF income remained steady and unchanged, with the portfolio 100% leased to sole tenant DHL on a 7.3-year WALE. The 37.5% decline in earnings for the period reflects the 50% sale executed to Value Partners in July last year, that now only includes our 50% share of income. Cromwell's stake in CEREIT remains unchanged, with share of income up 1%.
During the period, Cromwell sold Campbell Park, which resulted in operating income of AUD 12.3 million. In Australia, the investment portfolio had like-for-like net operating income growth of 1%, and income overall was AUD 78 million for the six-month period. Headline portfolio EBIT down 3.1% compared to HY 2023, which reflects the sale of an asset in Penrith during the period. Corporate costs were down compared to the HY 2023 period. We continue to make considered effort keeping these lower, especially in the current environment where debt costs remain high. Net financing costs were up 17.8% on HY 2023, with higher floating interest rates offset somewhat by derivatives and lower drawn debt. Lowering net debt continues to be a significant focus for the group.
On slide 13, we show how the activities over the period have impacted the net tangible assets of the group, now AUD 0.72 per security, down from AUD 0.84 per security at 30 June 2023. The largest contributor to the decline was a AUD 0.09 per security negative move in asset valuations, with Australia and Poland down 7.5% and 8.1% respectively. 2-6 Station Street, Penrith and a 50% share of Cromwell Italy Urban Logistics Fund were sold during the period for a total of AUD 94 million. We've mentioned the asset sale program a few times, and I want to reiterate how important this step is in resetting Cromwell's strategy. On slide 14, you can see that since the end of 2021, Cromwell has made significant progress on the simplification of its business, aiming to concentrate on our core businesses of funds and asset management.
Since the end of 2021, we've undertaken AUD 584 million of sales, which includes AUD 73 million of assets sold or contracted for sale after 31 December 2023. Our sale program began prior to the increase in market capitalization rates and has mitigated the impact of adverse market movements on our balance sheet. On the completion of the sale of the Cromwell Polish Retail Fund, asset sales since the end of 2021 will total more than AUD 1.1 billion. I'd like to take this opportunity to provide a very brief update on the valuation of the CPRF portfolio, being the six assets for sale, currently bound by letter of intent and excluding Ursynów, which we hold with joint venture partner Unibail-Rodamco. Ursynów is currently in the process of settling, and we anticipate receiving sale proceeds shortly.
The CPRF sale portfolio is in the final stages of negotiations with the purchaser, who has signed a detailed letter of intent to purchase the assets, and this is backed by significant non-refundable deposits. This represents a positive step for a very complex transaction, which has been undertaken in a highly volatile macro environment. We will make a market announcement when this portfolio is formally contracted for sale, which we anticipate will be soon. On slide 15, we show that following the completion of the Polish and Australian asset sales that are currently underway, pro forma headline gearing is anticipated to fall to 34.1%, with liquidity refreshed at AUD 489 million. This will return leverage to well within our targeted range. On slide 16, you will note that currently, Cromwell has a weighted average cost of debt of 4.7%, up from 3.9% at 30 June 2023.
The weighted average debt maturity is 2.4 years, with the near-term European debt facilities to be retired from the proceeds of asset sales, and the Australian facilities are under negotiation for extension. Lastly, I'd like to turn to slide 17 to address covenants and hedging. Following the completion of the asset sales program, we will have the ability to simplify our balance sheet further by closing out three debt facilities associated with the Cromwell Polish retail portfolio. Following this, we will have one main senior secure facility and ample liquidity with which to manage any further valuation falls in the investment portfolio should the Australian office market deteriorate further. Cost of debt remains reasonably flat over the many-year term, again allowing us to focus on income security and strengthening the balance sheet.
I'll pass now to Rob, Cromwell's Chief Investment Officer, to review funds management, co-investment, and Australian investment portfolio operations.
Thanks, Michelle. Starting on slide 19, we maintain a good allocation of third-party assets under management across Australia, New Zealand, and Europe, totaling AUD 8.3 billion, up on 30 June 2023. Europe is facing similar valuation pressures as we are in Australia, also with slower capital market volumes impacting the pace at which mandate deployment is possible. Logistics continue to be favored in Europe, as indicated by CEREIT's continued pivot to logistics, a new mandate from a US-based partner to develop and manage logistics assets, as well as an agreement to asset manage a finished portfolio of EUR 142 million of logistics. In Australia, Cromwell's retail funds management platform remains robust at AUD 2.4 billion in assets under management across a number of products. Cromwell's flagship direct property fund has reported asset revaluations down 8.9% over the six months from 30 June 2023.
The fund's limited monthly withdrawal facility has temporarily ceased to be offered as it mitigates the downturn in the commercial property cycle. The fund remains focused on protecting capital and will continue prudent management of debt and capital for the long-term benefit of investors. Cromwell Funds Management won the 2023 Zenith Fund Award in the Australian Real Estate Investment Trust category for Cromwell Phoenix Property Securities Fund, following wins in 2022 and 2021. I will now briefly review the co-investment performance on slide 23. Due to valuation impacts in Cromwell Direct Property Fund, our 4.2% co-investment in the fund is down from AUD 16.5 million to AUD 13.6 million in the six-month period, with the unit price down 18% to AUD 0.9165 per unit. Cromwell maintains a 27.8% share of Cromwell European REIT listed on the Singapore Exchange, valued at AUD 535.2 million.
CEREIT was impacted by net property valuation declines in office markets, largely offset by the significant weighting to logistics, which had valuation increases over the period. Cromwell's share of operating profit is AUD 20.3 million, relatively even with the prior corresponding period. Cromwell Italy Urban Logistics Fund, which consists of seven assets tenanted by DHL in Italy, is now valued at AUD 23.7 million. This represents Cromwell's 50% ownership following the sale of half of the portfolio to Value Partners in July 2023. Operating profit remains stable, with Cromwell's share reflected at AUD 1 million for the six-month period. Lastly, Cromwell Polish Retail Fund, we hold the CPRF at AUD 531.8 million. The CPRF sale portfolio price is down 8.1% as a result of negotiations with the purchaser. Rental income improved over the period, resulting in Cromwell's share of operating profit before finance costs of AUD 19.3 million.
The portfolio remains anchored by Auchan, who represent approximately 30% of the portfolio income. In Australia, our investment portfolio occupancy remains strong and reported like-for-like net operating income growth of 1%, although ultimately this was impacted by valuation pressures, resulting in a 7.5% decline in portfolio valuation to AUD 2.4 billion. In line with our valuation policy and best practice, we rotated our valuers for the period ended 31 December 2023, which ensures a robust and independent valuation outcome. All assets, excluding those held for sale, were externally valued at the half year. Portfolio occupancy by NLA decreased slightly during the period from 94.6% to 93.4%. This was driven by the sale of 100% leased asset at 2-6 Station Street Penrith and increased vacancy at 207 Kent Street, Sydney, and 400 George Street, Brisbane.
Operational efficiencies through ESG upgrades continue to be a focus for Cromwell to reduce operational costs in the longer term, as well as ensuring tenants own assets that meet their employees' needs, companies' environmental goals, and price point. During the last six months, we have undertaken two key projects, being building electrification at McKell in Sydney and removal of the cogen plant at HQ North Tower in Fortitude Valley. We are partway through a major solar installation project at Collins Street, Melbourne, but we are very cognizant of prudent and measured capital expenditure in the current operating environment. More than 80% of the investment portfolio income comes from government and top ASX-listed tenants or subsidiaries, showing good quality tenants and income security. Leasing markets remain active, with approximately 12,000 square meters leased in the six-month period.
Positive rent reversion was noted in a number of leases, although overall was down 4.7% due to a material lease renewal, which removed some significant lease expiry risk in 2026. While we still have some occupancy to work on in our portfolio, we're happily well below average national vacancy rates and see ongoing positive activity in the markets in which we are leasing. Jonathan, I'll hand back to you.
Thanks, Rob. Our long-term strategic objectives remain focused on debt reduction through the completion of non-core asset sales and balance sheet security. We continue to bring gearing within our target range, which we anticipate will be 34.1% after the sale of the CPRF sale portfolio, which we anticipate completing before 30 June 2024. We will then be ready to take advantage of strategic growth opportunities in our fund management business, with well-considered and value-accretive redeployment of capital through partnerships and acquisitions where this makes sense over the medium term. We remain committed to ESG and ongoing emissions reductions and are on track to meet a net-zero target across Cromwell's entire portfolio for Scope 1, 2, and 3 emissions by 2045.
Our investment portfolio assets continue to perform well with active leasing and driving value through upgrades and repositioning to ensure those assets remain desirable and suited to our tenants and their employees. We will continue to provide distribution advice quarterly as we move through the final stages of the asset sale program. The board will continue to adopt a conservative distribution policy to protect balance sheet liquidity in the near term. A distribution of AUD 0.0075 per security is expected to be paid for the March 2024 quarter. I will now hand back to the call operator to open the line to questions.
Thank you.
Thank you for all joining.
If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are on a speakerphone, please pick up the handset to ask your question. The first question comes from Solomon Zhang of J.P. Morgan. Please go ahead.
Morning, Jonathan Callaghan. Just wanted to just clarify with the CPRF sale process. Because it's just a letter of intent, there's nothing stopping the buyer from walking away except for losing that deposit. Is that correct? And also, what's a rough percentage of the sale price? What does that deposit constitute? Thanks.
Thanks, Solomon. Thanks for the question. Yes, if the seller were to walk away, what they would lose would be the deposit that they've paid. The deposit that they've put down is a couple of percentage points of the sale price.
Gotcha. In terms of the material adverse change clause, is that related to their ability to get back the deposit? What would sort of trigger that? There's obviously a bit of geopolitical uncertainty in the area. Would it require a big escalation in that, or perhaps just talk to some of that risk there?
I won't go into all the math, but what I would say is that they are along the lines of substantial drops in income, substantial drops in occupancy, and the like. They have more to do with the underlying performance of the real estate than anything else.
Yep. Great. Just on slide 16, you sort of talk about early extension discussions of lenders. Maybe a question for Michelle, but could you just talk about where your incremental debt margins are expected to head? I think the group margins are around 200 basis points as of the last update six months ago.
Yeah. Look, we're not seeing any material change at this point. So yeah, there's been some shifts here and there between margins and utilisation fees, but all up, we're not seeing any material change.
Great. Maybe just final one, just on, I guess, growth opportunities following the simplification in the business and asset sales. Clearly, that's a focus right now, but could you perhaps just talk about some of those growth levers and priorities once you get through, if and when you get through, I guess, the sell-downs?
Yeah, sure. I mean, I think that there are multiple sort of growth levers that the group will have in front of them. I think at some stage, we'll come to the with a more considered board strategy in that regard. But the sorts of growth opportunities that are ahead of us are effectively the ability to seed new product, use the balance sheet to seed new product, particularly in the wholesale or institutional marketplace in mandates and joint ventures. There will also be the opportunities, we think, to recapitalise or purchase smaller fund management business to consolidate, to be a consolidation vehicle effectively for smaller unlisted and listed funds management platforms using the balance sheet gearing capacity and also the actual assets within the balance sheet to fund those sorts of acquisitions. And more broadly, just to seed new product through the retail funds management product as well.
Yep. That all makes sense. Thanks for your time.
The next question comes from Alex Prineas of Morningstar. Please go ahead.
Thank you. Thanks for the presentation. Good to see the analysis there on the pro forma gearing in the event that the CPRF sale goes through. Wondering if you've got similar analysis on what the interest coverage ratios would look like under those scenarios if the deal's going through?
Yeah, we haven't published those, but obviously, we've done the analysis, and we're very comfortable that there's significant headroom for our ICR covenants. As we said, our forecast weighted average cost of debt doesn't really move a great deal over the next few years. You can see from the chart, I think it's on slide 17, it drifts up slightly but not materially.
Thanks. And what about sort of longer term? It's good to have hedging. In the long run, hedges will expire. What's the longer-term strategy to address that?
Look, I agree. Certainly, prefer to have a weighted average hedge term longer than the one that we've got. I think the overall hedge ratios are actually pretty good, particularly once you take into consideration the amount of debt repayment that we're going to have over the next few months. So that's why we've shown both pro forma and the current hedging ratios on that chart. Over time, we will look to extend the maturity of that. We've undertaken a couple of trades over the last few months to keep it from shortening up. And so it has actually increased very slightly from the last reporting period. But yeah, we'll be looking to extend that over time.
Thank you. Just quickly on the deposit on that transaction, is that refundable if the financing condition is not met?
Yes, it is.
Okay. All right.
With every confidence that the financing is in place. But again, nothing is done until it's done. But we are confident that their financing is in place. It just needs to be finalized in terms of signing off final agreements and the like.
Got it. Okay. All right. That's it from me. Thanks for that.
Thanks, Alex.
There are no further questions at this time. I'll now hand the call back to Mr. Jonathan Callaghan for closing remarks.
Thank you. And thank you all for joining the call today. And as always, we welcome any questions or feedback outside of this forum. So please don't hesitate to get in touch should you like more information or anything we have on anything we have covered today. Thank you all for attending, and have a great day.
That does conclude our conference for today. Thank you for participating, and you may now disconnect.