Cromwell Property Group: Everything spilled, now for the cleanup

19 November 2020

In a reminder to boards everywhere not to discount the ability of their major shareholders to cause trouble, Cromwell Property Group’s (ASX: CMW) board was spilled on 18 November 2020. The spill resolution was passed by a 60% majority after ARA Asset Management used its 29.8% ownership to block the board’s second attempt at passing its remuneration report.

The story of the fight between ARA Asset Management and Cromwell’s board is highly complicated, with many attacks launched by both sides. We can trace the start of the fight back to the company’s failed takeover bid for UK-listed RDI REIT, which inspired ARA to attempt to get more of its own board seats.

So, what does this mean for Cromwell Property Group? It seems likely this will result in victory for ARA over Cromwell’s board after the company holds the mandatory spill meeting, sometime in the next 90 days. After orchestrating this whole thing, with 60% voting for the spill resolution, it would be surprising if ARA did not already have most of the votes lined up needed to get their people the three seats on Cromwell’s board they don’t already control.

It remains to be seen if this will provide a boost to the company’s stock price. Shareholders are still heavily underwater compared to the company’s pre-COVID-19 Crash high of $1.27 and CWM shares closed 21% lower on Wednesday, 18 November 2020, at $1 per share. So far in November, though, the stock has rallied 14%. The market does hate uncertainty, so we believe it is within the realm of possibilities this highly public fight has depressed the stock price.

The market abhors instability and if management is able to retain the three board seats during the special election we believe this would cause the share price to either drop slightly or retain its current par with its Net Tangible Asset per share value (NTA per share: $0.99). Cromwell’s 7.5% dividend (0% franked) and solid property portfolio means we believe the trust should be trading at a premium to its NTA per share, similar to Waypoint REIT’s (ASX: WPR).

If management is able to keep its three remaining board seats it seems unlikely ARA will give up and the trust’s internal turmoil will continue, causing continued pressure on the share price. ARA has made it clear they would prefer if management cleaned up the balance sheet, but besides that have not given any detailed information as to what they would do differently. However, if ARA wins the remaining board seats this will remove the distraction and negative press and we believe this would be positive for the stock price. All-in-all, shareholders are certainly in for an exciting 90-days.

 

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