Thank you for standing by, and welcome to the Cromwell Property Group Financial Year 2024 Results Briefing. 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 one on your telephone keypad. I would now like to turn the conference over to Dr. Gary Weiss, Cromwell Chair. Please go ahead.
Good morning to everyone who has dialed in to hear an update on Cromwell Property Group's financial year performance to 30 June 2024. I begin today by acknowledging the Gadigal people of the Eora Nation, the traditional custodians of the land from which this call is being hosted, and we pay our respects to their elders, past and present. To start off, I would like to highlight two key areas of achievement outlined on slide four, which reflect the ongoing commitment to the group's simplification strategy and transition to a capital-light fund manager, which we first discussed at the group's AGM in 2021. In May this year, Cromwell announced the sale of the European platform, which includes co-investment stakes in Cromwell European REIT and Cromwell Italy Urban Logistics Fund. This is a key step to simplify the business and reduce gearing.
The completion of this transaction will take Cromwell's non-core asset sale program to AUD 1.6 billion. This will provide capital flexibility to undertake strategic acquisitions to drive growth locally when the timing is right. Ongoing active asset management within the Australian investment portfolio has supported valuations and reduced the impact of capitalization rate expansion in the current environment. Early key lease renewals and strategic asset upgrades have maintained high occupancy and improved the environmental sustainability of the investment portfolio, while also growing net income. The quality of portfolio income is high, underpinned by significant government tenancies. The strength of the property team at Cromwell remains a key differentiator as we move into an Australian-focused funds management business with a strong track record in driving value from our portfolios of local core assets.
I will now pass to Jonathan Callaghan, Cromwell CEO, to discuss the performance of the group over the last financial year in more detail.
Thank you, Gary. Turning to slide six, I'd like to provide a bit more detail on the sale of the European platform. As Gary's mentioned, this is a key turning point for Cromwell. Following the completion of the sale, Cromwell will be in a position to strategically redeploy capital as we move through the next stage of the property cycle. This growth strategy will be underpinned by a conservative balance sheet, with gearing estimated to be 20%-28%, and a strong investment portfolio of stable core assets. Outlined on slide seven, after the completion of the sale, Cromwell will have assets under management of approximately AUD 4.5 billion. Importantly, we will be a local Australian business. In terms of progress of the sale, customary closing conditions are progressing, and completion is anticipated in Q1 FY 2025.
On Slide nine, we turn to our results for the year ended 30 June 2024. Cromwell reports a statutory loss of AUD 531.6 million, driven by valuation changes and asset sales, with an underlying operating profit of AUD 136.7 million. The group's FY 2024 NTA per unit is AUD 0.61 per security. Distributions to investors were paid of AUD 0.0308 per security, which represents a payout ratio of 81.8% of our adjusted funds from operations, or AFFO. Liquidity and gearing have improved in FY 2024 compared to FY 2023, particularly once the sale of the European platform completes. Cromwell has a sincere and continuing commitment to the achievement of key environmental, social, and governance goals. On Slide 10, we have outlined some key statistics.
Cromwell has taken material steps to improve the sustainability of the portfolio during FY 2024, with base building green power coverage at 97%, where Cromwell directly manages electricity contracts for the assets. We are also engaging with our tenants to do the same for those assets where electricity procurement is under tenant control. We will continue to reduce Scope 1, 2, and 3 emissions meaningfully. At an asset management level, we are very proud of our tenant satisfaction score of 88%, which is above the future former tenant survey index. At a group level, we have achieved 40/40/20 gender diversity targets in four out of our six business levels in Australia, and further reduced our gender pay gap year- on- year from 24% in FY 2023 to 19% in FY 2024, which includes the CEO.
Michelle will now talk through the financial results in more detail.
Thank you, Jonathan. Turning to slide 12, we'll review the financial performance of the group for the 2024 financial year. Cromwell today reports a statutory loss of AUD 351 million for the year ended 30 June 2024.
... Roughly half of the FY 2024 loss was driven by unrealized fair value losses of AUD 315.1 million on the Australian investment portfolio, which reflects a 5% decline from 31 December 2023 valuations. Also contributing to the FY 2024 loss was AUD 296.3 million value reductions associated with the sale of CPRF and the European platform, including a small reduction sell price to CIULF and a revaluation of our holding in CEREIT. Turning to slide 13, operating profit for the financial year was down 13.8%, with key contributors detailed in the waterfall here. While the investment portfolio saw like-for-like NOI growth of 0.3%, the headline operating income number is lower due to asset sales and portfolio valuation impacts on fees from funds management, as well as slightly higher financing costs.
Timing of one-off transactions, like the LDK and Campbell Park sales, also played a part. Turning to slide 14, group net tangible assets moved from AUD 0.84 per security to AUD 0.61 per security over the financial year, mainly again due to asset valuation impacts, down AUD 0.12 per security in Australia. Revaluations attributable to the sale of the European platform and CPRF were down AUD 0.11 per security. Positively, debt and gearing outlined on slide 15 have both reduced during the financial year. Drawn debt has reduced by AUD 665 million, or 38%, to AUD 1.07 billion at 30 June 2024, with further debt reduction to approximately AUD 670 million, expected upon the completion of the sale of the European platform.
The weighted average cost of debt was 4.8%, up from 3.9% in FY 2023, although overall costs are expected to be lower in FY 2025 as debt reduction continues. Gearing is down from 42.6% at 30 June 2023, to 38.9%, expected to move further to 28.8% after the sale of the European platform completes. Funding structures continue to be simplified, with no euro-denominated debt remaining following the completion of the sale of CPRF. Our Australian loan facilities were transitioned to a green and sustainability-linked loan, which combines green loan and sustainability principles like emission intensity and gender pay gap reductions. A key target is our reductions in greenhouse gas emissions, which aligns with our existing ambitious, yet achievable targets for Scope 1, 2, and 3.
We are targeting Scope 3 greenhouse gas emission reductions to equal or less than 30.16 kg of greenhouse gas emissions per square meter by 2028 against a 2023 baseline. For context, this is equal to eliminating emissions from 784 households. The average term of our hedging, outlined on slide 16, has increased to just over two years at 30 June 2024, and the proportion of our remaining Australian debt is expected to bump up after the sale of the European platform completes, and then settle back into our target hedge range during 2025. Proceeds of the sale of the European platform in euros are 93% hedged, using a deal contingent forward and an FX collar. I'll now hand over to Rob Percy, our Chief Investment Officer, to talk about the underlying investment performance.
Thanks, Michelle, and good morning, everyone. I'll start on slide 18 with the investment portfolio, which is a portfolio of eight core office assets located across Queensland, New South Wales, the ACT, and Victoria. During the financial year, all assets in the portfolio were revalued by external valuers, down 5% on valuations at 31 December 2023. The weighted average cap rate at 30 June 2024 was 6.6%. The investment portfolio maintains high occupancy of 94.1%, with 68.1% of income derived from government, Qantas, and Metro Trains, with the remaining rent roll being highly diversified. During the financial year, the weighted average lease expiry increased to 5.4 years, driven by proactive asset management and key leasing initiatives, including 40,000 square meters of leasing completed in the 12 months.
Tenant retention was supported by activations such as opening business hubs, tenant engagement activities to encourage tenants back into the office, and discussions on ESG targets to align firm and tenant goals. These activities helped drive lease renewals with three key tenants at two assets. At HQ North Tower in Fortitude Valley, Brisbane, major tenants AECOM and TechnologyOne renewed leases for more than 16,000 for seven years. In Collins Street, Melbourne, Metro Trains have signed a heads of agreement for 10,800 square meters for a five year term. As you can see from the chart on slide 20, this removes significant leasing risk across the next three financial years, and while our occupancy remains low, we continue to keenly focus on the reduction of expiries in the near to medium term.
Turning to slide 21, we highlight some of the key asset upgrades, which are helping us to attract new tenants and keep our existing tenants happy in their spaces, reflected in high satisfaction scores of 88%. These include updating HVAC systems for both cost and ESG benefits and strategic CapEx to improve shared spaces and end-of-trip facilities. Moving now to funds management. At 30 June 2024, Cromwell's unlisted funds management platform managed AUD 8.5 billion of assets in Europe, Australia, and New Zealand. In Australia and New Zealand, Cromwell's unlisted funds management platform manages AUD 2.3 billion of assets across nine funds. Cromwell's flagship direct property fund, a portfolio of six assets, is valued at AUD 541.5 million, down 2.4% in the six months from 31 December 2023.
Occupancy remains stable at 93.3%, with more than 12,000 sq m of new or renegotiated leases signed over the financial year. I'll hand back to Jonathan to talk more strategically about the path ahead.
Thanks, Rob. On slide 29, and the few slides following, we outlined who Cromwell will be following the completion of the sale of the European platform and the path ahead for growth. We will be a capital light funds manager serving retail, wholesale, and institutional investors through the investment in and management of traditional real estate assets. On slide 30, we outline how we will draw on the existing strength of our business to drive consolidation from fragmented markets. We will reposition and develop assets to drive meaningful unitholder value, a space we have always operated in and done very well in. We believe there is competitive opportunity to focus on the core plus and value-added sectors of the market. We can assess and drive value from well-located, hardworking assets that provide modern office spaces close to transport and other amenities at an affordable rental rate.
We will leverage cyclical drivers to focus our efforts and inform our investment approach, considering market timing, demographic demands, economic factors, and investor requirements. We will assist this growth by using our strengthened balance sheet in a disciplined way to recycle capital, investing alongside our capital partners to reflect our commitment to these strategies. Our capital partners will be focused in three main areas outlined on slide 31. Firstly, retail investors, who have been very strong supporters of both the listed Cromwell Property Group and our unlisted platform. This group will remain key to Cromwell's investor base. Secondly, we will grow the depth of our wholesale investor base, which will focus on self-managed super funds and high net worth groups, both looking for income and value-add opportunities across capital stack.
Lastly, we will provide targeted opportunities for strategic institutional investors who are looking for an experienced partner in the local market with balance sheet capacity. Turning to slide 32. We've had great success in operating in traditional local sectors over the years. We have an incredibly strong team who drive core returns from our investment portfolio through active asset management. We will continue to focus on this space. We may also invest in office products that may vary from the existing office assets we hold. For example, they could be located on the immediate fringe, of course, CBD markets, considering users have marginally different needs to those central CBD occupants. In the Australian health sector, we see opportunity to invest in office-style medical facilities, which are used as support services for nearby hospitals, community essential services, and medical offices.
The retail sector has long been a key market in Australia, and we believe there continues to be an opportunity in neighborhood convenience real estate, often anchored by key supermarket chains servicing a captive neighborhood market. We also see opportunity in large format, retail real estate, often tenanted by hardware or unit furniture retailers. In the industrial space, we'll focus on the smaller lot and value-add assets, where location is key and the assets may be unloved and mismanaged. Finally, just as a wrap-up, we will continue to leverage the highly skilled, exceptional team we have locally to drive value from assets in the investment portfolio, and funds management business. This will support asset valuations and unitholder value through the next part of the cycle.
Following the sale of the European platform, lower debt and better access to flexible capital options will provide us the opportunity to move forward in a clear and value-accretive way. We are committed to the growth of Cromwell and building value for unitholders in an orderly and strategic fashion. We hope we have provided some clarity on our path forward today. I will now hand back to Orient Capital to open the lines to questions.
Thank you. If you wish to ask a question, please press star 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. Your first question today will come from Solomon Zhang of JP Morgan. Please go ahead.
Morning, Jonathan and team. Maybe just a first question for to Michelle. Just looking at the AUD 296.2 million sort of impairment of the EU platform. A little bit larger than expected, I guess, just given the book value of CEREIT was around AUD 535 million, and the sale price is AUD 457 million. Could you just maybe just bridge that or maybe break that AUD 296.2 million figure down?
Yeah, sure. So, yeah, part of that was writing down the holding in CEREIT itself to the contracted sale price. There was some of the purchase price that was allocated to the platform itself, and then some to CIULF, where there was a small write-down in that. I can provide a more detailed bridge offline, if you like?
Yep, that sounds good. And just on the corporate cost run rate, is there a cost out in that line following the platform sale? I guess, you know, what's that AUD 38.5 million number look like as a run rate once you've settled?
Yeah. So what we had to do, we had to break out both CPRF and all of the European sales into discontinued operations. So it does make that a little bit hard for you to see on the face of the P&L a like to like. Going forward, yeah, we think that there's initial savings of a few million AUD. There will be further savings going forward. A lot of the costs in Australia to holding the European platform is in finance and tax. It'll take us a good year to wind up some of those SPVs and complete tax returns and all that sort of thing. So there'll be a little bit more going forward.
Yep. So just in terms of a like for like, would you expect that 38.5 maybe to be a little bit lower in 2025? I guess-
Yeah.
and most of the cost out the... Yep.
That's right, and we're expecting a few million.
Maybe just a question for Jonathan. Could you just maybe comment on monthly retail inflows or gross and net inflows across ANZ? And I think you had sort of gated CDPF. Is that still continuing at this moment?
Yes. Yes, it is. That's obviously impacting inflows. There are actually inflows at the moment, but they're very moderate, and we don't expect that to change much until the fund is actually open again to redemptions.
Yep. Thanks for that.
Again, if you would like to ask a question, please press star and then one. The next question is from Fiona Buchanan of Morgans. Please go ahead.
Oh, hi, Jonathan. Just, wouldn't mind some commentary around the distribution. Obviously, you've given next quarter, just, I guess, the thinking, you know, obviously post the sale of European platform, you know, will there be sort of more longer-term guidance, you know, provided to the market? Thank you.
Yeah. Thanks, Fiona. I think it's something that we'll assess on a year-by-year basis. I think this year, because of the movements that still need to happen, we still need to complete the European platform sale, and there will be some redeployment of capital in that period. Providing guidance is a little problem. We just find it a little difficult to do in a meaningful way because quite frankly, I think we'll be guessing a little bit. That may not always be the case, and we'll assess that again, I think, you know, on a quarterly basis with the board about the extent to which we can provide guidance or not. But that's our sort of position at the moment, Fiona.
Thanks, Jonathan.
Once again, it is star and then one to ask a question. At this time, we will conclude the question and answer session. Showing no further questions, I would like to turn the conference back over to Mr. Callaghan for closing remarks.
Thank you, everyone, for dialing in. As always, if you have any questions, please reach out to us. We're happy to answer any questions offline. Thank you very much.
The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.