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Cromwell Property Group Investing in property for tax effective monthly income 1
Investing in property for tax
effective monthly income
July 2013
Michael Blake
National Head of Sales, Marketing & Investment
Cromwell Property Group Investing in property for tax effective monthly income 2
Important Information & Disclaimer
Thispresentation andits appendices ("Presentation") aredated 20February2013and have been preparedby theCromwell PropertyGroup,which comprisesCromwellCorporation Limited(ACN 001056980)and CromwellDiversifiedPropertyTrust(ARSN102982598)ofwhichCromwellPropertySecuritiesLimited(ACN079 147809;AFSL238052) is theresponsible entity. Units inthe CromwellDiversifiedPropertyTrust are stapledto sharesin CromwellCorporationLimited.Thestapledsecuritiesarelisted onthe ASX(ASX Code:CMW).
CurrencyofInformation
This Presentation contains summary information about CromwellProp er t y Grou p a s a t 3 1 De ce mb e r 2 0 12 . Statu to ry f i na nc ialinformationhas beenreviewedby CromwellPropertyGroup's auditors.Operating financialinformationhasnot beensubjectedto auditreview.
All informationis in Australian dollarsand all statisticsare as at 31December2012 unlessotherwisestated.
NotanOffer
ThisPresentationisnotan offeror aninvitationtoacquiresecuritiesinCromwellProperty Groupor securities in Cromwell BoxHill Trust,CromwellRiverpark Trust, Cromwell IpswichCity Heart TrustandCromwellPhoenixProperty Securities Fundor any other financialproductsand isnot aprospectus,productdisclosurestatementor otherofferingdocumentunder Australianlaw or anyotherlaw. It is forinformationpurposesonly.
SummaryInformation
Theinformationin thisPresentationis subjectto changewithoutnoticeanddoesnotpurporttobe completeor comprehensive. Itdoesnotpurporttosummarise allinformation thataninvestor shouldconsiderwhenmakinganinvestmentdecision. Itshouldbe readinconjunctionwi th Cromwel l Prop er t y Grou p 's o the r p e riod ic a nd c o nt inu ou sdisclosure announcements lodged with the Australian SecuritiesExchange,which areavailableatwww.asx.com.au.
PastPerformance
CromwellProperty Group does notguaranteeany particular rateofreturnor theperformanceof CromwellProperty Group or anyotherfinancialproductnordo theyguaranteethe repaymentof capitalfromCromwellPropertyGroup, anyother financial productor anyparticular
taxtreatment. Pastperformanceinformationgiven inthis Presentationisgivenforillustrativepurposesonlyandshouldnot berelieduponas(and isnot)an indicationof futureperformance. Actualresultscoulddiffermateriallyfromthose referredtoin thisPresentation.
FuturePerformance
This Presentation contains certain "forward looking" statements.Forwardlookingstatements,opinions andestimates arebased onassumptions andcontingencieswhichare subjectto changewithoutnotice.Forward-lookingstatements,includingprojections,indicationsorguidance on future earningsor financial positionand estimatesareprovidedas a generalguideonlyandshouldnotbe relieduponasanindicationor guaranteeof futureperformance.
Th ere c an b e n o a s su ran c e th a ta c tu al o u tc o me s wi ll n ot d i ff er materiallyfromthesestatements. Tothe fullestextentpermittedby law,Cromwell Property Group and its directors, officers, employees,advisers, agents and intermediaries disclaim any obligation orundertakingto releaseany updatesor revisions tothe informationtoreflectanychangein expectationsor assumptions.
Reliance
Theinformationin thisPresentationhasbeenobtainedfromor basedonsourcesbelievedbyCromwellPropertyGroupto bereliable.To themaximum extent permitted by law,CromwellProperty Group, theirofficers,employees,agentsandadvisorsdo notmakeany warranty,
e xp res s o r impl ied a s to the c u rren cy , a cc ura cy , re li a bi l it y o r completenessof theinformationin thisPresentationand disclaimallresponsibilityandliabilityfor theinformation(includingwithoutlimitation,liabilityfornegligence).
Notfinancialproductadvice
ThisPresentationis notfinancial productadviceor arecommendationtoacquiresecurities. Theinformationin thisPresentationdoesnot takeintoaccount yourindividualobjectives, financial situationor needs.Beforemakingan investmentdecision,Investorsshouldconsider, withor without a financial or taxationadviser, the relevantinformation(includingthe informationin thisPresentation)havingregard totheirownobjectives,financialsituation andneeds. Investors shouldalso
seek suchfinancial, legal or taxadviceas theydeemnecessaryorconsiderappropriatefor theirparticularjurisdiction.
Cromwell Corporation Limited is not licensed to provide financialproductadvicein respectof CromwellPropertyGroupsecurities. Totheextent thatgeneral financial productadvicein respectof CromwellPropertyGroupstapled securitiesis providedin thisPresentation. Itisprovidedby CromwellProperty SecuritiesLimited. CromwellPropertySecuritiesLimitedandits relatedbodiescorporate,andtheirassociates,willnot receiveany remunerationor benefitsin connectionwith thatadvice. Directorsandemployeesof CromwellPropertySecuritiesdonotreceivespecificpaymentsof commissionforthe authorisedservicesprovidedunder itsAustralianfinancialservices licence.Theydo notreceivesalariesandmayalso beentitledto receivebonuses,dependingupon performance. CromwellPropertySecuritiesLimitedis a whollyownedsubsidiaryofCromwellCorporationLimited.
NOTFOR DISTRIBUTIONOR RELEASEINTHE UNITEDSTATES
Cromwell Property Group Investing in property for tax effective monthly income 3
Who is Cromwell?
CromwellPropertyGroup
Market cap: $1.62 bn1
Security price: $0.951
Gearing: 43.3%2
Operating earnings: 8.30 cps3
Distributions: 7.50 cps3
Property Portfolio4
Portfolio value: $2.3 bnNumber of buildings: 33WALT: 6.7 yrs
Funds Management Business
Assets under management: $718 m5
Number of Funds: 46
1 ) A s at 2 4 J un e 2 01 3
2) Calculated asnetdebttototalassetslesscash, asat31 December2012adjustedfor subsequentsaleof 101GrenfellStreet,Adelaide andsettlement ofsecuritypurchaseplanannouncedin December 2012
andtheMay2013capital raising
3 ) FY14gu idance
4) Asat31 March2013adjustedfor purchaseof NSW Government Portfolio andexcludesHealth& ForestryHouse, Brisbane acquisition
5) Includes valueof IpswichCityHeartandBoxHillpropertiesasif complete
6 ) Asa t31December 2012
Cromwell commenced operations in 1998 and has evolved organically - it now has two distinct but
complementary parts of the business
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Property Portfolio
HQ North, QLD
475 VictoriaAvenue, NSW
Bundall, QLD Collins St, VIC
Qantas HQ, NSW
Synergy, QLD
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Investing in Direct Property
Cromwell Property Group Investing in property for tax effective monthly income 6
Why Invest Outside Of Residential
Higher yield
Most Australians are overweight residential property
Longer lease terms available of up to ten years or more which provides greater certainty of income
Better quality of tenants such as government and blue chip companies
Higher level of tax effectiveness due to depreciation allowances
Typically in the form of tax deferred income
Fixed annual rental increases built into most leases deliver a growing income stream.
Has a low correlation of returns to residential property, shares and bonds and therefore provides diversification
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Historic Income Returns Commercial Property
Commercial property incl udes offices, shopping centre's, industrial sheds and other types of non-residential property
Income return is very stable and consistent and much higher than residential property
Investment cycle is different to shares and residential property and less volatile. The GFC was an exception
Cromwell Property Group Investing in property for tax effective monthly income 8
Income returns across property sectors
Within each sector there is a range of yields. The lower risk assets have a lower yield, higher risk assets have a higher yield
Like bonds, yield and growth are inverse
Cromwell Property Group Investing in property for tax effective monthly income 9
Investing in Commercial Property?
An income of between 7 9%, with quality of assets determining the
income
A unit trust formed by a fund manager to invest in a single property,known as a syndicate or a pool of properties known as a diversified trust
Ideally the property will have a long lease to a high quality tenant, requireminimal capital expenditure and be w ell located
The trust will collect rent on a monthly basis and after paying interest and
operating costs the net amount will be paid to investors as distributionseither on a monthly or quarterly basis
Often a significant percentage of the income w ill be tax deferred
The fund manager will earn a management fee for managing the property
Allows investors to obtain exposure to direct property without outlaying asignificant % of investable funds into one i nvestment
Typically minimum investment of $10,000
Allows diversification across geographic regions
Allows diversification across fund managers
Artists impressionof the Cromwell BoxHill Trust asset, Victoria.
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Why invest in direct property
Positives:
Investors seeking a higher level of tax deferred income
Investors seeking diversification from o ther asset classes such as shares, bonds
and residential property Investors with a longer investment timeframe
Negatives:
Typically illiquid although transfers can be processed at any time
Hit hard by the GFC
Like any investment, quality of the underlying asset is important
Dont trade quality for yield
Self Managed Super FundsSelf Funded Retirees
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Cromwell has run many syndicates, and open ended funds
An extensive acquisition and due diligence process allows Cromwell to find (or build) a high quality officebuilding, find a strong stable tenant and model the fund to pay investors an attractive monthly income
Direct Property Funds
Cromwell Riverpark TrustLaunch Feb 2009, closed Dec 2009
Cromwell Ipswich City Heart TrustLaunched Dec 2011, closed Sept 2012
Cromwell Box Hill TrustLaunched Dec 2012, closed April 2013
New funds targeted to be launched in the second half of 2013 subject to the successful completion ofthorough in house due diligence.
Direct Property Funds Options
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Secrets to A REIT Investing
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A-REIT Re-structure
An A-REIT is an entity listed on the ASX that invests into property
They can be a stapled A-REIT
OR an externally managed trust
Pre-GFC A-REITs traded at a very large premium to NTA. To generate profits high enough to sustain their prices managers
moved up the risk c urve to derive a greater percentage of income from development, mergers and acquisitions, increasedgearing and off shore ventures
Post GFC, many A-REITS are in a financially stronger position
Gearing is down
Offshore investing is down
Development is down
Funds management is down
Many A-REITs are now boring lowly geared rent collectors
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Prices up but Valuations Still Down
Sector NTA over time
Offering a yield of 5-6%
Tax effective income
AREIT sector finally trading back at NTA and
higher
The share market / A-REIT m arket always
anticipates what will happen in the future
Valuers on the other hand record history
NTA reflects property values which have not yetrecovered
Expect NTA to increase in line with valuations as
demand for property pushes up prices
Source: BAML
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Outlook for AREIT Sector
AREITs up strongly to March 2013. Then down 10% with the market correction. Is the overall market now a bear market
Stapled AREIT s with property fund manager models have outperformed and are over valued
Sector is finally back at NTA
What can drive the sector higher? Is now the time to take profits?
Bear Case:
Falling cash rates driving demand for yield based investments
Benefits of lower cost of debt yet to fully flow through, with further accretive acquisitions and deals likely
Investor appetite for real estate as a store of wealth is driving higher property values and lower yields
Great rotation / weight of m oney from fixed income and bond investors into equities could continue to see demand
for bond like equities including REITs. The bond out look i s bleak
Foreign demand for property significantly i ncreasing considering yields in Asia, Europe and USA
Bull Case:
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Doing it yourself what you need to model
FinancialsIncome Statement
Balance Sheet
Cash Flows Statement
TrustProperty ownership
DDM
Macro assumptionsInterest Rates, FX, mid-cycle rents, occupancy, sales growth
Micro assumptionsHedging, Payout Ratio,
Capex amount and return
Capital allocationMargins
CorporationFunds Management
Development
Property ServicesConstruction
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Portfolio Construction
Corporate
Activity
Portfolio
Valuation
DDM, SOTP
Portfolio
ConstructionGuidelines
Earnings
Revisions
StockSpecific Risk
Agency Score
Cromwell Property Group Investing in property for tax effective monthly income 18
Proprietary research: Company m eetings, Analysis of financials
Cromwell Property Group are active participants in the direct market regular dialogue, monthly ISG
Site visits, industry analysis
Stock broker research domestic and global
We do not use broker models
Real estate brokers strong relationship with Cromwell
Savills, Knight Frank, Ray White, CBRE, Colliers, JLL
Corporate membership of:
Property Council of Australia
Australian Direct Property Industry Association
Sources of research
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A-REIT issues - Index Concentration
The top ten A-REIT stocks represent over 90% of the
S&P/ASX 300 A-REIT Accumulation index (theBenchmark)
But there are ov er 50 listed A-REITs
Other property like stocks can be included for exampleinfrastructure
Many of the stocks outside the S&P/ASX 300 A-REITindex are not covered by brokers and are under valued
Finding a fund that is materially different from thebenchmark can provide real opportunities for out-performance with lower volatility
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A-REIT issues - funds under management
Your funds under management (FUM) determines the size of stocks you canbuy
Small funds can take relatively meaningf ul positions in small cap securities -small cap stocks are generally not well researched and often inefficientlypriced
Mr Big simply cant invest in small cap property stocks:
A manager with $1bn FUM who wants to trade 1% of their portfolio wouldrequire a trade value of $10m
For benchmark property stocks, only the top 20 have market caps greaterthan $200m
Therefore, the $1bn fund manager needs to trade 5% of the market cap ofthe 21st stock, in order to implement the insight
Starting from zero, Mr Big becomes a substantial shareholder, and must tellthe whole world about it.
Cromwell Property Group Investing in property for tax effective monthly income 21
A-REIT Alternative
A larger universe of investment options provides more opportunities to addvalue
Investment universe includes:
Benchmark stocks
Non-benchmark stocks
Preference shares
Some infrastructure
Other?
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Managed Fund Options
Vanguard Cromwell Phoenix Other PSFs
Index Approach
Index unaware Index aware
Limited diversification -I ndex onlystocks (20)
Expanded universe 70+ Typically 20 - 30
Risk focus is Active
Total Risk is entirely determined byindex constituents
Risk focus is Total
Fundamental research helps identifyand manage risk
Various, typically active
Fundamental research, but still typicallyfocussed on active risk
Large Cap dominates Mid / small c ap exposure helpsdiversify risk and m ay add substantial
value
Various, typically large c ap focussed
Infinite capacity Limit on capacity allows formeaningful exposure to Best Ideas
Capacity constraints limit desiredexposures
Cromwell Property Group Investing in property for tax effective monthly income 23
Relative Performance
Source: Morningstar
1] Past performance is not a reliable indication of future performance.
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Results as at 31st March 2013
1 Year 2 Years 3 Years 4 Years Since Inception(16 April 2008)
Fund Performance(Before fees and costs)
35.4% 26.0% 22.7% 32.9% 5.4%
Fund Performance(After fees and costs)
34.2% 24.8% 21.5% 31.7% 4.4%
Benchmark(S&P/ASX 300 A-REIT
Accumulation Index)30.5% 15.2% 11.6% 18.5% -3.6%
Excess Return(After fees and costs) 3.6% 9.6% 9.9% 13.2% 8.0%
Important notes:
Past performance is not a reliable indication of future performance.
The Fund changed its investment strategy on 1 July 2009, so 4 Year and Since Inception figures show performanceunder both mandates.
Figures are annualised, with the exception of 1 Year figures.
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Consistency of Performance is important
1] Alpha shows the difference between the Fund performance and the Benchmark. Past performance is not a reliable indication offuture performance.
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Understanding Attribution Analysis
1] Past performance is not a reliable i ndication of future performance.
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Property Securities Learning Outcomes
The A-REIT sector is complex and picking stocks yourself is difficult
You need at least 15 stocks to avoid stock specific risk
Because the index is concentrated a benchmark unaware approach is less risky
and can offer higher returns. Therefore avoid index funds
Large funds will only ever provide index like returns at a higher cost
Smaller index unaware funds wil l give investors the best chance of out performing
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Summary
Direct property offers a high yield than listed
Direct property is m ore tax effective
Direct property provides monthly income
Direct property provides diversification from shares and bonds
BUT
Listed property provides daily liquidity
If you dont understand it dont buy it . Transparent investments are often the best
Do not focus purely on yield but rather consider the total return and quality of the assets
Dont become emotionally attached to your investment, your selling discipline is just as important as your buying
Always re-balance across asset classes as relative valuations move. If an asset class falls you should be buying more tore-balance and if an asset class rises you should be selling. Most amateur investors do the opposite.
Diversify, Diversify and Diversify
Cromwell Property Group Investing in property for tax effective monthly income 29
Thank you for your time