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Cromwell: Rising Bond Yields Add to Balance Sheet Stress; Uncertainty Is Extreme

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We reduce our fair value estimate for Cromwell CMW by 18% to AUD 0.70, down from 0.85, and our Uncertainty Rating worsens to Extreme from High. A rise in bond yields, and a slump in Cromwell’s stock price to AUD 0.35 per security, make it unlikely it can raise equity at our previously assumed AUD 0.50 per security. We now assume Cromwell raises AUD 510 million at AUD 0.30 per security.

Cromwell could try to wait out market concerns, given 70% of its debt is hedged to around early 2025, and it is endeavoring to sell assets and pay down debt. However, in our view, a meaningful capital raising is likely needed given asset quality is lower than average among our REIT coverage, financial leverage among the highest of our coverage, property prices under pressure, and direct property transactions are still rare. Some repayment of euro-denominated debt repayment might increase its level of interest rate hedging, a possibility if Cromwell sells its Polish retail assets, where a buyer’s offer is on the table subject to due diligence. Even so, compared with other REITs, Cromwell’s hedge duration is short and gearing is high at 47%, including debt in underlying funds. Last week’s resignation of Cromwell’s long-serving CFO, Michael Wilde, could add to market concerns. Rising interest rates are unhelpful, and even if the Polish assets are sold, we think further debt repayment would still be required.

Cromwell might hope that market conditions ease before it is exposed to market interest rates. However, if rates remain at current levels or higher, and/or Cromwell can’t sell assets at satisfactory prices, there’s potential for significant further dilution and downside to our fair value estimate. Once Cromwell repairs its balance sheet, the market can have some confidence in a valuation. The lower-quality asset portfolio relative to peers, financial leverage among the highest of our REIT coverage, and intensifying financial conditions, dictates an Extreme Uncertainty Rating.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Alexander Prineas

Equity Analyst
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Alex Prineas is an equity analyst for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual in client and advisor services, marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia.

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