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Edited Transcript of CMW.AX earnings conference call or presentation 29-Aug-19 12:00am GMT

Full Year 2019 Cromwell Property Group Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Cromwell Property Group earnings conference call or presentation Thursday, August 29, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Wilde

Cromwell Property Group - CFO

* Paul L. Weightman

Cromwell Property Group - MD, CEO & Director

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Conference Call Participants

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* Darren Leung

Macquarie Research - Analyst

* Fiona Buchanan

Morgans Financial Limited, Research Division - Director of Research and Senior Analyst

* Krzysztof Kaczmarek

JP Morgan Chase & Co, Research Division - Analyst

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Cromwell FY '19 Results Presentation. (Operator Instructions) I must advise you that this conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Paul Weightman. Thank you. Please go ahead.

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [2]

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Thank you, Amy. Good morning and welcome to Cromwell Property Group's results presentation for the 2019 financial year. I'm CEO Paul Weightman, and with me today is our Chief Financial Officer, Michael Wilde.

Today, Cromwell Property Group reports a statutory profit for the 2019 financial year of $159.9 million. Operating profit considered by our directors to best reflect the underlying earnings of Cromwell was up 11.1% from the prior year to $174.2 million. And notwithstanding Cromwell's institutional and retail capital raisings during the year, earnings of $0.0821 per security exceeded previous guidance and distributions met guidance of $0.0725 per security.

As at 30 June this year, Cromwell had more than 3,800 tenant customers in 15 countries, leasing over 3.7 million square meters of space. And the total value of our assets under management was $11.9 billion.

This time last year, we articulated our "Invest to Manage" strategy. Simply put, the strategy used to invest capital to acquire or improve assets to create new funds, to attract investment from capital partners. The initiatives identified as part of this strategy are directed to increase asset value, build enterprise value, add to medium-term earnings and generate higher total security holder returns.

For the last 12 months, we've been focused on execution of this strategy. This has included 2 large multi-country transactions on behalf of the Cromwell European REIT or CEREIT. The first transaction involved the acquisition of 23 assets in 5 countries. And the second, the acquisition of 6 assets in 2 countries for a combined value of EUR 471 million or AUD 775 million.

CEREIT's portfolio has grown by more than 50% in value since its IPO in November 2017 and now comprises 102 properties in 7 European countries. CEREIT is a great example of our strategy in action, and I think it's fair to say it's now an established and successful fund that underpins the future growth of our wider platform.

During the year, we sold $64 million of balance sheet assets and on 1 July 2019, exchanged contracts to sell our 50% interest in Northpoint Tower to Early Light International. The sale is expected to settle shortly and Cromwell will continue to manage the asset after settlement. The sale will take the total value of capital recycled from the start of the 2018 financial year-to-date to $520 million.

Last week, Cromwell announced the acquisition of 400 George Street in Brisbane for $524.75 million. The 35-level building in the prestigious North Quarter precinct has a total net lettable area of 43,978 square meters spread across office, retail and child care. A 4.9 year weighted average lease expiry and 99.8% occupancy rate are underpinned by blue-chip corporate and government tenants.

We continue to recycle capital from assets to which we've added significant value, as we've done with Northpoint Tower, to opportunities such as 400 George Street, where we can create new funds with capital partners.

Cromwell also has a pipeline of value-add development opportunities with a value of more than $1 billion, which includes the ongoing Seniors Living redevelopment at Greenway in the ACT, developments at Chatswood and 700 Collins Street in Melbourne and a number of other financial projects that we have in negotiation.

Last night, we exercised a preemptive right to acquire third-party investor interest in the Cromwell Polish Retail Fund. The fund contains 7 retail assets with a gross asset value of approximately EUR 600 million or AUD 1 billion. Our team in Poland has been managing and developing the assets for more than a decade, know the assets and markets intimately and have identified value enhancement initiatives that we expect will drive attractive returns.

Poland is Europe's success story. Gross domestic product has grown by 4.2% on average over the last 25 years. It has been Europe's fastest-growing economy over the last 5 years and has one of the highest expected rates of growth in disposable income, consumer spending and retail sales globally.

It's a market we know well and one that we're very positive about. We have 34 professionals on the ground managing 21 assets with more than 660 tenant customers and over 750,000 square meters of space. The assets will cornerstone a new fund in which we intend to take a long-term co-investment stake. We are in advanced discussions with a capital partner and we expect to conclude the acquisition by the end of October. Further updates on the acquisition and the fund will be provided in due course.

I'd now like to hand over to Michael, who will provide an update on our financial position and capital management initiatives during the year. Michael?

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Michael Wilde, Cromwell Property Group - CFO [3]

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Thank you, Paul. In December 2018, we concluded a 2 for 13 accelerated nonrenounceable entitlement offer, which raised approximately $228 million. Following on from the December capital raising, new securities were also allotted last month from June's institutional placement, which raised $375 million, and the security purchase plan, which raised a further $32.5 million. The strong support from the market for these activities was very pleasing and shows they are firmly behind our "Invest to Manage" strategy and the asset recycling initiatives. Proceeds from both capital raisings have been used to pay down debt and will be deployed into Cromwell's pipeline of value-enhancing opportunities.

Pro forma gearing post both raisings is 24%. And a new 3-year EUR 225 million syndicated facility agreement was successfully executed at the end of June. We have a strong secure balance sheet with liquidity ready to be deployed. We expect gearing will fluctuate as we acquire warehouse and then sell down opportunities as per our "Invest to Manage" strategy. Through the cycle, our revised gearing target range is now 30% to 40%.

Full year operating profit was up 11.1% from the prior year to $174.2 million, and full year earnings per security were $0.0821. At balance date, net tangible assets were $0.97 per security, and gearing was 35%, which is right within the middle of the new revised through-the-cycle target range of 30% to 40%. Debt tender was 4.5 years, and cash and cash equivalents were $101.6 million.

I'll now hand back to you, Paul.

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [4]

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Thanks, Michael. Cromwell's direct property investment segment reported operating profit of $136.1 million, a 12.8% increase on the prior year. The portfolio had like-for-like net operating income growth of 5.5%, a WALE of 6.9 years and occupancy of 91.7%.

The portfolio consists of 21 assets valued at $2.5 billion and is divided into 3 components. The Core portfolio comprises 10 assets, representing 69% or $1.7 billion of the portfolio by value and has a WALE of more than 9.4 years. It has 99.2% occupancy and has recorded net operating income growth of 3.3%.

The Core+ portfolio comprises 6 assets, represents 28% or $700 million of the portfolio by value, has a WALE of 3.1 years and has recorded net operating income growth of 5.3%. It has occupancy of 95.4%.

Our Active portfolio consists of 5 assets, representing 3% of the portfolio valued at $81 million, and has a WALE of 0.6 years, occupancy of 52.7% and has shown net operating income growth of 120.1%.

56,000 square meters of new and renewed lease deals were struck during the year in 67 transactions. 240,800 (sic) [24,800] square meters of renewals were signed at HQ North with AECOM, TechnologyOne and Bechtel, taking occupancy of the building to 94% and its WALE to 5.7 years. Following its repositioning, HQ North has been included in our Core portfolio.

Elsewhere, 24 separate deals were concluded at Northpoint for 9,800 square meters, the majority of which was office at 8,200 square meters, with 1,600 square meters of retail. Our asset in Kent Street also benefited from strong demand in Sydney with 5,500 square meters of space signed to take occupancy to 99% with a WALE of 4.3 years.

We have just 3 lease expiries in the portfolio between now and 30 June 2020 that represent more than 1% of income. One of these is Wakefield in -- a street in Adelaide, an active asset we've earmarked for sale, and we're in continuing discussions with tenants for the other 2 assets.

Valuations for the direct portfolio increased by $74.9 million during the year net of property improvements, leasing incentives and lease costs. This was equivalent to an increase in value of approximately 3.1% or $0.033 per stapled security from our valuations at June 2018.

Our indirect property investment segment recognizes earnings from investments we make in assets, mandates or funds as part of our "Invest to Manage" strategy. Segment profit after finance costs was $45.4 million, up 95% from $23.3 million in the prior year. Nearly all of this was attributed to our 35.8% interest in CEREIT.

Cromwell's share of CEREIT operating profit recorded for the year was $44.6 million, up from $23.2 million in the prior year. CEREIT's distribution per unit for the first half of 2019 was EUR 0.0204 per unit, which was 4.6% above its IPO forecasts. The segment also contains earnings from Cromwell's 50% interest in LDK Healthcare and Northpoint Tower. The latter showed an increase in operating profit from $5.4 million in the 2018 financial year to $7.1 million in FY '19 with contracts exchanged for sale on 1 July 2019.

The ongoing repositioning of Greenway, ACT into Seniors Living with LDK Healthcare is progressing well with residents due to move in next year. We see the premium end of the seniors living market as benefiting from strong demographics and growing demand. LDK will have 2 operational villages by next year, which is a great base from which to grow. We believe it's an opportunity that will attract substantial future investor interest.

The operating profit from our funds and asset management segment after finance costs was $28.5 million, down from $35 million the previous year. The difference reflects increased investment, including one-off costs in the platform, to facilitate further growth and in particular, an AIFM license and increased presence in Luxembourg to future proof the platform against any potential fallout from Brexit.

Total segment AUM increased 3.2% to $9 billion increase -- driven by an increase in retail AUM of $300 million to $2.3 billion. While wholesale AUM was unchanged at $6.7 billion versus the prior year. Importantly, the character of the funds that we manage in Europe has been steadily transitioned over the last couple of years. AUM within Europe was steady at $3.8 billion, with 698 -- sorry, with EUR 3.8 billion with EUR 668 million traded during the year. The level of trading was substantially less than the prior period in which EUR 2.1 billion of assets were traded.

On the successful completion of the acquisition and rollover of the Cromwell Polish Retail Fund, the value of assets under management in Europe underpinned by longer-term capital will increase from approximately 50% to 65%, providing a secure foundation of recurring fee income for the platform from which to grow.

Our local teams have done a great job of staying focused on the needs of our investors and tenant customers while transforming the platform and broadening our sources of capital. In addition to transacting on EUR 470 million of assets for CEREIT, Cromwell also acquired a 21,688 square meter Pirelli Tyre Research & Development Facility in Milan for EUR 88 million on behalf of a Korean partner.

Cromwell's Polish team this month completed the successful 21,000 (sic) [12,000] square meter redevelopment of the Centrum Janki shopping center in Warsaw for EUR 65 million. The center is a core asset in the Cromwell Polish Retail Fund.

The level of activity in Europe remains positive. During the year, we negotiated and completed 550 leasing transactions, over 437,000 square meters of space, representing more than 10 leases per week.

In Australia, earlier in the year, unitholders of the Cromwell Ipswich City Heart Trust voted to approve an extension of the initial term of the trust by 4.5 years to 2023. A $4.1 million performance fee was realized on the rollover.

Retail AUM increased by $300 million driven by growth at Oyster Group in New Zealand and the Cromwell Direct Property Fund, which successfully acquired 2 properties on behalf of unitholders. 420 Flinders Street in Townsville was acquired for $63.5 million in December 2018. And Altitude Corporate Centre in Mascot, Sydney was acquired for $113 million on 28 June 2019.

Overall, the DPF is well positioned to continue to deliver good returns for unitholders that provides monthly liquidity and has a WALE of 8.2 years. The distribution yield is 5.8% per annum, which is about 4% better than most retail

(technical difficulty)

expect to earn on cash bank.

In New Zealand, the value of AUM in Oyster Group reached NZD 1.7 billion with the settlement of the 6.2 hectare Central Park Corporate Center for NZD 209 million in July 2018 and the successful offer for 33 Corinthian Drive, Albany, Auckland, which settled in April 2019.

On to outlook and it is hard to ignore the noise in the market. The ripple effects of the U.S.-China trade war are being felt globally. Spiking economic policy uncertainty is leading to an increase in market volatility, but also opportunity around the world.

As an open economy, Australia is not immune despite being protected by increased demand for its mineral wealth. Exports continue to grow, although low domestic wage growth coupled with a soft residential housing market has prompted the Reserve Bank to reduce interest rates. While recession is not a likely scenario, we can't help but note that forecast GDP growth has been lowered to around 1.8%.

The Eurozone economy also slowed with Brexit looming, and 2019 GDP growth is now forecast to be 1.2%. The overall slowdown across the wider Eurozone, they make sizable differences within Europe as Poland, Czech Republic, Netherlands and Sweden are all expected to outperform other European countries and I might say, Australia. Globally, commercial real estate markets remain highly liquid, boosted by lower bond rates. The hunt for yield continues, although at different degrees in different sectors. Office, logistics and specialist sectors continue to be popular, while e-commerce and changing consumer tastes are causing disruption in a number of retail markets. We remain focused on the continuing execution of our "Invest to Manage" strategy, capital recycling and value-add development opportunities.

The balance sheet is strong and we're well positioned to take advantage of the opportunities that we have in our pipeline and those that we identify in volatile markets. We have good capacity for growth. And since the gearing figure of 35% at 30 June and following the completion of our capital raisings, we have significant capacity and liquidity with a current gearing rate of under 25%. With a strong balance sheet, we're well positioned to take advantage of the opportunities we have in our pipeline and those that we identify in volatile markets.

In Australia, our Core and Core+ portfolios will continue to drive NOI and underpin earnings and distributions. Our $1 billion pipeline of development opportunities will provide upside in asset values and opportunities to attract new capital partners.

Europe remains the most liquid real estate market in the world for foreign capital, and one that is significantly larger than Australia. Total office stock, for example, is approximately 350 million square meters, more than 14x the size of the entire Australian office market. There are 34 discrete markets, which each have more than 2 million square meters of office space, and a number of countries like Poland, which offer better growth prospects than Australia.

With our local presence and expertise and the knowledge of where to go, when, why and how to get there, we can clearly demonstrate that we can identify and deliver value for our capital partners. We've demonstrated this capability with CEREIT. And with 200 professionals in 20 offices in 12 European countries, we believe that we're very well positioned for the future.

FY '20 operating profit guidance is affirmed at the upper end of the previous guidance range of not less than $0.083 per security, and we confirm distribution guidance of $0.075 per security, a 3.45% increase on FY '18. This represents an operating profit per security and distributions per security yield of 6.69% and 6.05%, respectively.

I'd now like to hand over to Amy for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Darren Leung.

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Darren Leung, Macquarie Research - Analyst [2]

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Just in terms of the guidance range affirmed to the upper end. Can I please get a bit of color as to what were the key drivers here? Is it simply just confirmation that the Polish Retail Fund has been executed in confirmation of 400 George or are there other factors at play?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [3]

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I think it's the successful deployment of the capital that we raised, Darren. That's a big driver, of course. I think we're also pretty confident about some of the other transactional income that we previously forecast given the level of interest in a number of the assets that are on the disposal list for the current financial year in Europe.

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Darren Leung, Macquarie Research - Analyst [4]

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How much transactional income are you forecasting in the $0.083 per share, please?

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Michael Wilde, Cromwell Property Group - CFO [5]

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I think that the -- at a minimum, it would be just one set at the moment, Darren. But there's the potential for that to increase as we go through the year.

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [6]

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I think as you'll probably appreciate, the transactional income is split between disposal fees and performance fees. Performance fees are highly sensitive to timing of disposals. So if we're able to accelerate some of the disposal program, we'd expect to book higher performance fees. But as you all know, real estate transactions tend to have a high degree of friction in terms of time, and that's certainly the case in a lot of European companies.

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Darren Leung, Macquarie Research - Analyst [7]

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Understand. And is the bulk of the performance fees associated with the European -- sorry, Pan-European fund?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [8]

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It's associated with the platform, yes, not any particular fund.

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Darren Leung, Macquarie Research - Analyst [9]

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Okay, understand. And then in the equity raising, it looked like $375 million. There was $0.5 billion of Australian opportunities, $0.5 billion of European opportunities. Can you confirm that the $0.5 billion is relating to 500 George (sic) [400 George] and the $0.5 billion European is completed now?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [10]

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Yes, well, the $0.5 billion is 400 George. The opportunities that we identified in Europe were more than $0.5 billion. Certainly, a big chunk of that was the CPRF. There are other opportunities that we're seeing with capital partners. They aren't, obviously, as advanced as those 2 opportunities.

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Darren Leung, Macquarie Research - Analyst [11]

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Can you give us an indication roughly of how big the opportunity pipeline is at the moment, particularly in European retailers?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [12]

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I think when we sat down with the team to look at the pipeline and forecasts last week, they had about EUR 1.5 billion in the pipeline. Now I can't predict how much of that will proceed. But certainly, we're looking at the vast majority of that being executed with capital partners.

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Darren Leung, Macquarie Research - Analyst [13]

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Understand. And of that EUR 1.5 billion, obviously, you've managed the European assets before. But how much of that EUR 1.5 billion is existing assets or geographies in the platform? And how much of it is in new markets?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [14]

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Look, apart from CPRF, none of that are existing assets. I think we've made comments in the Directors' Report that of the 2 remaining large funds and mandates that we manage, we expect the CPRF to roll over, but the other we expect to be realized over the course of the balance of the financial year. I don't think of the balance of the assets in the platform. We'd expect to see many others rolled into existing funds or new funds.

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Darren Leung, Macquarie Research - Analyst [15]

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Understand. And perhaps just a final one for me. Can you please give us an indication as to what you believe your competitive edge is in this market, particularly for these retail assets?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [16]

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I think having managed the assets with the current team for more than a decade, I think we know them well, we understand and have identified the asset enhancement initiatives that we can execute to add additional value. We know the tenants well. I think it's fair to say that they are assets that we have a high degree of familiarity with and certainly a greater degree of familiarity than any third-party purchaser would have.

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Operator [17]

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Your next question comes from the line of Krzysztof Kaczmarek.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division - Analyst [18]

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Just on the development pipeline on Slide 22. Would you be able just to talk through your yield on cost expectations for those projects, please?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [19]

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Sure. Look, I think, generally, we have a targeted yield on cost of 10%. When we do these transactions, I think that was certainly the target that we had with Northpoint, which we met.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division - Analyst [20]

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Okay, great. And in terms of the Brisbane acquisition, would you tell me what the passing yield is, please, on that?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [21]

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It sits around 6%. I think it's 5.9% something recurring.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division - Analyst [22]

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5.9%. Okay. Great.

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Operator [23]

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Your next question comes from the line of Richard Jones.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [24]

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Paul, just wondering if you can give us any update just on, I guess, your relationship with ARA, noting, obviously, they didn't participate in the capital raising and David Blight resigned from the Board sort of straight after. Just give us an insight as to how that working relationship is at the moment.

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [25]

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I think it's fair to say they are a large and valued shareholder. We do compete with them actively in virtually all of the markets in which we operate. So I think David clearly found the position to be difficult because of the level of competition and conflict that, that created. You would see, and I think it's pretty standard now, that it's very difficult for a shareholder, who has a Director on the Board to participate in a placement. Certainly, our advice was they couldn't. And I think we've seen a similar situation. In Abacus, for example. So I think it's pretty well established that it's a very difficult situation for an investor with a Director on the Board, and that might have played a part in David's decision to stand down as well.

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Operator [26]

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(Operator Instructions) We have a question from Fiona Buchanan.

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Fiona Buchanan, Morgans Financial Limited, Research Division - Director of Research and Senior Analyst [27]

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Sorry if I missed it, but just on 400 George, obviously, initially, you'll take 100% stake there. But I noticed this is potentially moving to 50%. Just wondering, just any comments around that.

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [28]

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No. Thanks, Fiona. So I think as we called out, the strategy is to invest and then to bring partners in. So we like the asset. We think there's opportunity to enhance value. But as part of the strategy, we -- we'll intend to bring in a capital partner for up to half and potentially more if we can find opportunities to recycle the capital.

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Fiona Buchanan, Morgans Financial Limited, Research Division - Director of Research and Senior Analyst [29]

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So initially, just assume it's a fully owned asset is probably the way to go?

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [30]

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Yes, I think that's a fair assumption. And clearly, one of the things that we have to maximize is the effective utilization of our capital. So we kind of -- we can't really afford to be sitting on a lot of cash for a long period of time. So we would look to time the sell-down of interests in 400 George Street and other assets and opportunities that we identify in such a way that we can recycle our capital efficiently into some other opportunities.

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Operator [31]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Paul L. Weightman, Cromwell Property Group - MD, CEO & Director [32]

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Thank you, Amy. Well, thanks to all of you for participating on the call this morning. We look forward to meeting with you in the next couple of weeks. Please reach out to me or to Ross McGlade if you'd like to catch up with us or if you have any questions that have come from this morning's call. Thanks very much, and good day.

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Operator [33]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.