Argosy Property Limited (ARG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Jeff Morrison, and I'm currently the Chairman of Argosy Property. On behalf of my fellow directors and members of the management team, it's my pleasure to welcome you all to the 2022 Annual Meeting of Shareholders of Argosy. Before we get things underway, we have 2 housekeeping matters to attend to. The first is in the unlikely event of emergency, please evacuate the building using the blue doors at the eastern end -- sorry, the eastern exit behind you and assemble in the carpark. The bathrooms are located behind me next to the main reception area. This year's annual meeting is Argosy's third hybrid annual meeting. Shareholders who are not attending in-person can attend virtually and still ask questions and vote through the Computershare online virtual meeting platform and shareholders can also follow the proceedings via the live webcast. But before we get down to it, there are a few procedural matters we also need to run through for a hybrid meeting to run smoothly. Instructions for webcast participants. For shareholders participating through the live webcast, polling on the 3 resolutions has now opened. Votes can be cast by selecting the polling icon on the instruction screen and following the prompts. Votes can be amended up until the time the poll closes, which is at the conclusion of the meeting. Questions can also be submitted through the webcast portal. We have allocated time to address these at the relevant time of the meeting, but they can be submitted at any stage. If you experience any technical issues casting your vote or submitting questions, please refer to the instructions provided in the virtual annual meeting guide that accompany the Notice of Meeting or you can call Computershare on 0-800-650-034. Let's get things underway. I'd like to record that the Notice of Meeting was duly given on 19 May 2022. And as there are at least 5 shareholders here today, there is a quorum present. Accordingly, I declare the 2022 Annual Meeting of Argosy Property Limited open. I would now like to introduce your Board. There is detailed information about the Board in the annual report. However, I will briefly introduce them to you. To my right is Stuart McLauchlan. Stuart was appointed to the Board in August 2018. He is a prominent businessman and Company Director. He is Chairman of the NZ Sports Hall of Fame and SCOTT Technology and a Director of EBOS Group Limited and several other companies. Next, we have Chris Gudgeon, who joined the Board in 2018. He's been involved in property investment and development and construction in New Zealand for more than 25 years and is currently a Director of Crown Infrastructure Partners and Ngati Whatua Orakei Whai Rawa Limited. He is also previously Chief Executive of Kiwi Property Group, and Chris is up for reelection and we'll hear from him a bit later in the meeting. Next to Chris, we have Mike Pohio. Mike joined the Board in February 2019 and has over 25 years of corporate experience across a range of industries, including property investment, sports, logistics and dairy. Mike holds a number of directorships and is currently the Chairman of Ngai Tahu Holdings Corporation. Mike is also up for reelection and will also hear from him a bit later. Next to Mike, we have Rachel Winder. Rachel was first appointed to the Board in August 2019. Rachel has been involved in the property sector for over 20 years in a variety of roles, including strategy, portfolio management, facilities management and development. Next, we have Martin Stearne. Martin has over 20 years commercial and capital markets experience and currently holds appointments to the NZX Listing Subcommittee, the Takeovers Panel, and on the investment committee of the Impact Enterprise Fund. He is also a member of INFINZ and ICEAngels. Finally, I have been a director since 2013. I have 40 years experience as a property lawyer. And as well as Chairing the Board of Argosy, I also Chair the Remuneration Committee and sit on the committee's Audit and Risk Committee -- the company's Audit and Risk Committee. Seated next to the Board, Chief Executive Peter Mence and Chief Financial Officer Dave Fraser. We also have several other members of the management team here today. As you know, Argosy is reporting its results for a second COVID-disrupted year. And on behalf of your Board, I would like to extend to our collective appreciation to the management team for another job well done. I would also like to welcome our auditors, Deloitte; our solicitors, Harmos Horton Lusk; our registrar, Computershare; and our tax advisers, KPMG, to the meeting. The agenda for today. I will talk to Argosy's results strategy. This will be followed by a more detailed review of Argosy performance by Peter. Following Peter's review, we will take questions from shareholders. We will then move to the formal resolutions of the meeting. And finally, we will then attend to any general business. After the meeting has been formally closed, please stay for refreshments where the directors and executives will be available to discuss any queries you may have. Proxies. The proxies have been received in respect of 352,475,278 shares. There are 846,723,895 shares on issues, and proxies have been received for approximately 42%. I am pleased to now present to you a summary of the company's performance for the year ended 31 March. You will have received the annual report and financial statements either by post or electronically, depending on your preference. As you all be aware, this year has again presented challenges in the form of further lockdowns, supply chain disruption and construction delays, and we are very pleased with the way management has navigated Argosy through these challenges. We believe this year's results again reflect the business that continues to demonstrate its resilience. The company has delivered strongly on its sustainability and development strategy. And the recent handover of the now completed 8-14 Willis Street development is a great example of this. We are targeting a 6 Green Star built rating here which we -- which will certify that the building has been built to world-leading standards. As a corporate entity, we also achieved a certified net carbon zero rating from Toitu, it's a recognized rating agency, and we've initiated our emissions reduction plan. We also continued to build and maintain strong relationships with tenants, as evidenced by our tenant survey results and new leases entered into, particularly with government tenants. Peter will speak to the property and financial achievements in more detail in his presentation shortly. We are progressing planning and delivering -- delivery around our bigger long-term strategic growth drivers with our 2 large Auckland industrial estate opportunities and our rejuvenation of older office properties into modern, attractive green buildings, which will support our carbon reduction plan of 30% over the next 10 years. While there are still a few headwinds as we start into the 2023 financial year, such as inflation, interest rates and ongoing supply chain disruption which are impacting markets generally, we believe Argosy's sound financial and portfolio position sees the business well placed to manage any near-term volatility. Argosy's vision of building a better future will continue to be underpinned by the core pillars of being a green, resilient business owning a quality portfolio of properties diversified by sector, tenant and location. Argosy's long-term strategy remains focused on reducing our impact on the environment, focusing on our carbon reduction aspirations, developing more green buildings and providing attractive spaces for tenants and their people. It also includes engaging more deeply with and making a bigger difference in the communities we impact and maintaining the highest levels of corporate behavior and accountability. Argosy's future will be driven by maintaining our leading market position of rejuvenating and redeveloping existing buildings into green buildings and driving growth into the attractive Auckland industrial sector, particularly over the medium term. In summary, Argosy's strategy of creating a green, resilient and diversified business is about ensuring the company continues to produce measurable and sustainable dividend growth for its shareholders. For the year ending 31 March, Argosy implemented sustainability reporting in accordance with the Global Reporting Initiative, or GRI, reporting principles. To identify the material topics of importance to a wide range of investors, tenants, lenders and other stakeholders, we engaged EY who undertook interviews with them. We believe this to be a valuable and important exercise. As you can see from this slide, there are a range of environmental, social and governance areas, which were raised as being material topics for stakeholders. We have taken this feedback on board, and we continue to work with EY, and we'll report progress on these matters as we go forward. Dividend. We're all interested. And the Board was pleased to announce a full year cash dividend of $0.0655 per share, an increase of 1.5% on the prior year. Looking ahead, we have started this financial year with the portfolio in good shape and the business on a very sound capital position with solid foundations for the future. We do recognize that with rising interest rates, inflation concerns and the events in Europe, there's a lot of global market volatility that will impact on share prices. However, we remain very focused on delivering measured dividend growth to you, our shareholders. Accordingly, based on current projections for the portfolio and subject to market conditions, the Board is pleased to reaffirm our expectations of a full year dividend of $0.0655 per share for this financial year. I'll now ask Peter to address you.

Thanks, Jeff, and thanks to everybody for coming out on the shortest day, at least we got the weather right. I promise I'm not going to make up for the shortest day by giving the longest presentation. Thank you very much. And I'll take you through a few more slides, looking at the year of what we've seen, what's happening and what we're doing for the year ahead. The key highlights are shown on this slide. And you can see the net property income was quite pleasing in what's been a challenging year. A really good valuation increase for the second half of the year. Our net profit after tax was again really solid, with net tangible assets per share strongly up on that revaluation gain to $1.74. And finally, the dividend result, as Jeff has just mentioned. The portfolio remains almost 100% full. And given the environment over the last 2.5 years, that's a pleasing result. The weighted average lease term of 5.7 years excludes the recent Maui Street property acquired. So you could add about 0.2 years to that. So overall, the portfolio average lease term is looking pretty solid. Annualized rental growth was solid again. And we see some additional growth coming in the industrial sector, and I'll talk about that a bit more later, but solid in the industrial sector. And for us, the Albany Mega Centre looks like it might be able to provide some good rental growth over the year ahead as well. There are some changes in the sector weightings. We've seen industrial land prices driven up by scarcity of land and increased activity in the industrial sector where net absorption or the amount of new space the sector needs each year continuing to drive solidly. We've also got the potential to see a return of domestic manufacturing in the industrial sector. That's driving a bit of growth. And it's oft-said that just-in-time delivery has changed to just-in-case delivery. And just to put that in perspective, your average 5,000-meter warehouse is now, on average, 8,000-meter warehouse as businesses make sure they're holding more stock. In the office space, we've had good activity in Wellington, substantially completed the Willis Street new office building in Wellington. As Jeff mentioned, targeting 6 stars there and that's been handed over to statistics. We had a blessing there a couple of weeks ago at 6:00 on a cold wet morning. The Wellington office market continues to exhibit quite strong fundamentals. So long as you've got a seismically sound building, well located and good quality of green performance. Our ongoing exposure to government rental streams continues to provide good resilience for the business. 360 Lambton Quay is now 100% leased with the recent signing of a ground tenant. 105 Carlton Gore Road in Auckland is underway with good solid tenant inquiry, We're documenting 2 leases that would take 2.5 floors of that building. The retail sector for our portfolio has gone reasonably well with solid occupancy and reasonable rental growth across there. Moving to the next slide. The driver is strategic change to the weightings, which sees us increasing our industrial weighting with a commensurate reduction in the other 2. And as I mentioned, the industrial sector is performing well, particularly in the Auckland market. We expect that to continue to do so for the next 3 to 5 years. Our increase in the industrial weighting will not be occurring by virtue of acquiring assets in that sector. It will occur as we develop the existing assets that we have within that sector. Turning to the value-add properties. We've got a bit of activity going on. The Bell Avenue redevelopment is well underway. That's fully leased industrial. 5 Allens Road, we're planning that one at the moment. The Unity Drive development is now largely complete. Mt Richmond and Neilson Street are in the design phase. They're both large industrial existing site redevelopments and both targeting green product. We're getting really good tenant interest on those. And the fundamentals are quite strong for those in that sector. 101 Carlton Gore Road will follow on from 105, which is currently underway. And we're fielding the good tenant inquiry there. With any construction activity at the moment, supply chain issues need to be managed very carefully, and that sees us involved and making sure that we've got such things, major plant items as lifts and air conditioning ordered well in advance so that we don't hold the program up. Turning to the next slide. This is Mt Richmond. It's a value-add case study, and it's a really solid development opportunity. It's 2-street frontages with durable place is the principal access there. We're working on a completely green sustainable development for the site with a number of different buildings proposed. As I mentioned, tenant inquiry is really strong. And it really is the sort of project that we want to be seeing going ahead. Revaluations over the full year, as I mentioned, were quite encouraging. But the key drivers were really Auckland industrial, it got some good results, and Wellington offices. Our office stock in Wellington is nicely positioned, and the government sector reasonably resilient from an earthquake perspective. The Crown tenants are really looking to see that 80% type rating and nicely positioned as far as green credentials. So it's in a bit of a sweet spot. That's allowing us to secure some good long-term leases. The new building that I mentioned at Willis Street, for statistics, is 130% of the NBS code. By location, Auckland was the strongest performer for the valuation round. And as I said, that's driven principally by the industrial sector. Turning to distributable income. After adjustments, the gross distributable income was $67.7 million compared to $71.6 million last year. Net distributable income was $64.7 million compared to $67.7 million last year. And distributable income per share was $0.0768 per share. Just the difference or the drop between last year and this one was largely accounted for by the forfeited deposit with the sale of the Albany Lifestyle Centre. You might recall, last year, we'd sold the Albany Lifestyle Centre. It was held for sale. It didn't settle, the deposit was forfeited as a result of that, and we sold it again in the following year. Adjusted funds from operations, or what the industry calls AFFO, was $48.3 million for the year. Capitalized leasing costs were lower than last year, which included the leasing costs for 7WQ, used to be known as New Zealand Post Building, and 107 Carlton Gore Road. Maintenance CapEx was slightly higher due to the 7 Waterloo Quay facade, which is now largely complete, and reduced the AFFO by $10 million net of tax. Our audited payout ratio under AFFO for the year was 114%. But if you take the extraneous item of the 7 Waterloo Quay facade out, the net of tax result was 94% which I thought was a pretty good result. The debt profile slide shows our debt profile, including bonds. We've refinanced $455 million of the facility during the year, pushing out the tenor and improving the margins. We'll be looking to extend the $80 million tranche, which needs to be refinanced by the end of September, and Dave is busy working on that at the moment. You can see the benefit in this slide of the green bonds and what that provides in terms of the business diversification and tenor. Obviously, they went out at a better result than we'd achieved in today's market. This slide shows our debt to total assets over the last 5 years, and you can see that's been broadly stable and reflects the timing of asset sales, acquisitions and development. The weighted average duration of the debt is 3.5 years. Here, you can see the leasing during the year was quite positive and better than you would have expected in a COVID-impacted year. And if we turn to the next slide, the leasing expiries for the year ahead is about 10%, which is pretty much average for us. That's normal. The largest expiry of those is the parliamentary services at 147 Lambton Quay. And we're already working with them on some options. And really, if you look at the vacancy projections, the large expiries we've got for the year ahead are either already well under control or we're in a very good position with the market, and we don't expect that to cause any issues for us. It is interesting that in a market where we're seeing good rental growth, particularly in that industrial sector and in commercial offices in Wellington, we're actually in a position where we're achieving stronger rental growth on new leases than we can achieve by rent reviews of existing assets. So outlook, challenges, the year ahead. Well, I'm sure that we'll still be working with pandemic results for the year ahead. The local and the global economy, both experiencing rising interest rates and from inflation headwinds. This construction cost tension together with ongoing global supply chain pressure, geopolitical challenges are adding to global economic and market volatility. And we've all seen the benefit of that when filling up the car if we're still using petrol. Key focus areas for us remain the same. It's about delivering strong operational results, keeping well in touch with our tenants, delivering on our key lease expiries, leasing up remaining vacancies, completion of green developments and commencing new ones when appropriate and as planned. Master planning across key green value-add developments at Mt Richmond and Neilson Street will continue. And there's healthy market interest, as I mentioned, for those sites. Attractive property market fundamentals in the key markets from a bottom-up perspective still look pretty solid. We've still got relatively low supply in the industrial sector and in the commercial office sector in Wellington. And good demand in both of those locations, steady rental growth and the -- an end to the cap rate firming cycle is actually a positive for rental growth as we see the new stock being delivered necessarily at higher prices than existing stock in the market. Structural changes in the way property is used, and that's reflective of the changes we're seeing both in the commercial office sector in terms of encouraging workers back into the office, co-working and environmental, bits and pieces in the building. The way we're using the trip facilities and the provision of those services, they are all changes in the structural side of how we use an office. Equally in the industrial sector, we're seeing more moving to computerization, dark stores, gray stores, mechanization. So there are structural changes coming through in the property market. That will continue to provide us with challenges and, more importantly, opportunities. I'll now hand you back to our Chairman. Thank you very much.

Thank you, Peter. I will now open the meeting for questions about the company's performance generally. Other issues can be addressed as general business later in the meeting. I would like to remind you that only shareholders, proxy holders or shareholder company representatives may speak. In addressing the Chair with questions, would you please clearly state your name, advise whether you are a shareholder, a proxy holder or a company representative. If you have a question, there are people here with cordless microphones, so please use those so we can all hear your question. Do I have any questions from the floor, please or from the virtual audience? Sir?

Thank you. My name is [ Dena Scott Shack ], I'm a shareholder. I have 3 questions for you. One of your representatives said the growth was 3.1% of rental in the past year. If the dividend increase projected for this year is only 1.5% and it's 1.5% based on the dividends not on the total income of the company, would you care to comment? The second question I have is that the dividend is only a 5.6% yield. And with the increase in income, we should be able to do better than that. Obviously, that's reflected in the share price, which has fallen to $1.18, whereas the net asset value is just north of $1.74, which is a 33% discount on net asset value, which is quite severe and historically is quite bad. While the management has done a good job in getting the increases in rental, I think that the directors have failed to go out and promote the company's values. Please comment.

Thank you for the question. Yes, there's no doubt that Argosy's share price is being moved around as many companies' share prices in the market today. We are very conscious of that. We are equally conscious or we have also been very careful to review the value of the assets in the portfolio and consider how that might be affected going forward and how potential changes in the way in which properties are valued may also be compensated by increases in rental. Your question about dividend growth, though, is probably more easily addressed by our Chief Financial Officer. So I'll ask Dave to comment on that.

There's a slide. That's a very good question about -- thanks a lot, Peter. No, it's a very good question. We've had rental increases of 3%. There's a couple of points there. One is that that's an annualized number. So it all depends on the timing of the increase as to how much is driven through into your numbers for the year. And the other thing, too, is that these rent annualized rental increases are just one part of the top line. It also includes things such as vacancy, makeup income. There's a number of other things included not just rental increases. So as a result, sometimes you can get a 3% increase, but it's not going to translate right through to the bottom in our dividends.

Thanks, Dave. Further questions, please?

We have one virtual question, Jeff, from Graham Ronald Wakefield asking, "Given the yield on the recent Prolife Foods acquisition was 4.5% and the greater yield available currently via on-market buyback of shares, will the Board be considering such actions as PFI did, for example?"

The short answer is, yes, the Board does consider these things and there are many factors to take into account. Peter or Dave, do you want to add anything to the answer? I mean one thing the Board needs to be conscious of is our debt-to-asset ratio. We have a reasonably significant development pipeline, and we need to be conscious about where we apply funds given that we want to maintain our strategy. So Pete or Dave, anything to add?

Yes, Jeff, you just covered the ground fine.

Thank you. Okay. If there are no further questions at this time, we will now consider the formal resolutions of the meeting. Voting on -- I may have the wrong page -- the resolutions for consideration today, sorry to repeat myself, may only be voted on by shareholders, either in-person or virtually or by proxy and proxy holders and shareholder company representatives present. As noted earlier, I've been provided with a record of the valid proxies received and proxies have been received in respect of 352,475,278 shares of the 846,723,895 shares on issue. I will now put the resolutions. Resolution 1 proposes that Chris Gudgeon be elected as a director. Pursuant to Clause 24.6 of the company's constitution and NZX Main Board Listing Rule 3.3.11, Chris retires by rotation. The Board confirms that Chris is an independent director, and Chris has confirmed that he is available for election. The Board supports Chris' election and believes Argosy benefits from his extensive property expertise and experience. I'll now ask Chris to say a few words.

Thanks, Jeff, and good afternoon, everyone. As Jeff mentioned, I joined the Board November '18, 3.5-odd years ago. And I'm happy to be standing for reelection here today. What do I try and do as a director? Obviously, I try and bring to the Board the benefit of my experience in the property sector, over 30-odd years. I've had the good fortune to work for some very good organizations and work with some very good people. Like all of us, I've had my shares of ups and downs, successes and failures. I've been through a few economic cycles. But I guess there's a few things I have learned. One is that my crystal ball, I don't know about how yours works, but my crystal ball has proven unreliable. However, there are a few things that I think you can get right with a property investment company like Argosy, and these are the sorts of things that I focus on as a director. They are things like establishing the right culture within the organization, supporting that with a good governance regime; always working to a disciplined investment strategy, being very careful about our capital allocation decisions because they really do drive investment performance; always looking to maintain a strong financial position so we can get through the rough patches, the ups and downs of the economic cycles; and lastly and most importantly, probably, is always looking to meet the expectations of shareholders in terms of risk and reward. So if reelected, it would be my privilege to serve another term. And those sorts of things I've just covered now would be the sorts of things that I'll be focusing on around the Board table. Thank you.

Thank you, Chris. Are there any questions on this resolution? There being no questions, I now put to the vote the resolution that Chris Gudgeon is elected as a director of the company. Voting on this resolution will be by poll. For those shareholders and proxy holders physically in attendance here, please tick the relevant box on your voting form. For those shareholders and proxy holders attending virtually, please simply select your voting choice from the options shown on your screen. [Voting]

If people have had enough time to make their decision, I'll move forward. Thank you. I'll now move to the next resolution. Resolution 2 proposes that Mike Pohio be elected as a director. Pursuant to Clause 24.6 of the company's constitution and the NZX Main Board Listing Rule 3.3.11, Mike retires by rotation. The Board confirms that Mike is an independent director, and Mike has confirmed that he is available for election. The Board supports Mike's election and believes Argosy benefits from his extensive property, infrastructure and governance expertise and the experience he brings to the company. I'll now ask Mike to say a few words.

Chairman Jeff, ladies and gentlemen, thank you for this opportunity to address you. It is indeed a privilege to have served on the Argosy Board for the last 3 years. I acknowledge the full extent of responsibilities that the role demands and continue to draw on a vast -- a wide range of experiences to discharge those responsibilities. Having been Chief Executive of New Zealand's largest diversified Kiwi investment companies, I understand the challenges of management and the role the board plays in that relationship to deliver target outcomes. Having managed and governed companies with large property interests equips me with experience that is directly applicable in decision-making by the Argosy Board. My contribution to governance at the Board table and on the ESG Committee draws on over a decade of experience as a director of companies across a range of industries. I'm very positive about Argosy's future and commit to discharging my responsibilities as a director in the interest of all stakeholders, especially shareholders. Thank you.

Thank you, Mike. Are there any questions on this resolution? I now put to vote the resolution that Mike Pohio is elected as a director of the company. Voting on this resolution will be by poll. For those shareholders and proxy holders physically in attendance here, please tick the relevant box on your voting form. For those shareholders and proxy holders attending virtually, please simply select your voting choice from the options shown on your screen. Please now make your decision. [Voting]

I'll move to the next resolution. Resolution 3 seeks to authorize the Board to fix the auditor's fee and expenses. Is there any discussion on this resolution? Voting on this resolution will also be by poll. For those shareholders and proxy holders physically in attendance here, please tick the relevant box on your voting form. For those shareholders and proxy holders attending virtually, please simply select your voting choice from the options shown on your screen. As this is the final resolution, the online voting system will close in approximately 30 seconds. Please ensure that you have cast a vote on all resolutions. [Voting]

Does anybody require any more time? Thank you. That completes voting on all resolutions. Online voting will now be closed. And I will now ask for the voting papers to be collected in the boxes being circulated. Thank you. It looks like we have collected. So due to the number of votes to be counted, the votes collected at this meeting and online will be added to the proxies already received, and the results will be compiled by the registrar and scrutinized by the auditor. The results, once available, will be published on the Argosy website and provided to the NZX. I now move to the general business of the meeting and open up the floor for questions or comments. Again, I ask that in addressing the Chair, would you please clearly state your name and advise whether you're a shareholder, a proxy holder or a shareholder company representative. For those shareholders online, if you wish to ask a question, select the question icon button on your computer, tablet or mobile phone and then type and submit your question. Questions will then be sent to the Board to answer. As I noted at the beginning of the meeting, we will try to get as many of the questions addressed as possible, but it may not be possible for them all to be answered at the meeting. In this case, questions will be followed up via e-mail after the meeting.

Are there any questions?

[ Neil ], a small shareholder. I was just wondering how many people were online. And also, I'd like to know how much of the New Zealand Post building in Lambton Quay is occupied? Or is it still occupied by New Zealand Post? Thank you.

If I can preempt our Chief Executive and ask -- answer the last question first. I'm sure he'll correct me if I'm wrong, it's 100% occupied by a range of tenants, some government and some private. How many, Steve?

33.

And there are 33 shareholders online. Thank you. Are there any other?

One other small point, how much of the building is New Zealand occupied? They occupy just one floor of building with some common area in addition to that.

I missed that, my apologies.

One online question. "If New Zealand did head into a recession, how would this impact on the company's performance?"

Obviously, there will be a potential adjustment to the underlying value of the portfolio. But as we've stated previously in the meeting, we've analyzed that in some depth, we believe that even with a modest correction in the multiple by which revenue is valued, the increase in rental we can expect across the portfolio will see us in good stead, and so we're not expecting any significant impact. Are there any more questions? If there are none, that completes the formal business of the meeting. I'd like to thank you all for your attendance and participation, and I'd like to invite you to join us for refreshments. Thank you very much.