Argosy Property Limited (ARG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Argosy Property Limited 1H ‘24 Interim Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Mence, CEO. Please go ahead.

Well, good morning, and thanks for joining us this morning. I do know that there are a couple of other things on today, and I appreciate you spending the time with us. We've got a result here that should be a few surprises, continued solid metrics, no dividend cuts. We're looking like we might be towards the top end of the interest rate cycle. Dave can give you some opinion on that. We're seeing activity returning to the real estate sector will be understandably, the property corporates remain somewhat larger [Audio Gap] and last photograph of the new lobby is going to be capable road of the developer. Turning to the strategy side, building a better future what we've seen during the year is the vast majority of our new lease inquiry is in that green face and interestingly, an increasing number of existing tenants wanting our assistance to help them through their own sustainability targets. We're also seeing rental pressures, but these are not unexpected. The business is pretty well placed with very low levels of arrears that's been maintained during the year. And there was lost tenants, principally in the retail space. We've been able to replace them reasonably quickly and easily. Turning to the markets. We think that there could be opportunity in the year ahead, but these would require a [Indiscernible]. You can see that we've had some reasonably solid results with PI growth principally driven through rental reviews and spine of the best efforts of both colors with government, we're anticipating maintaining the dividend. The NTA has had a reduction to see some cap rate easing, but it's been somewhat more modest than we had expected. The devaluations are offset by rental growth and by activity across the portfolio, and we end the year with gearing under control and some sales to come. The portfolio metrics, largely fully occupied which had very good tenant retention rates and the numbers are looking fairly solid for the year ahead. Turning to the next slide under the sector summary. The only one that popped out on that spreadsheet is the 2.6% the relatively short waives term in the retail sector. I should say that, that's not causing a set concern. We've got renewals and progress in that sector that was just the timing of getting those [Audio Gap]. With the portfolio targets, we are with everywhere except the sector band and offices. We have got a 25 to 35, and we're setting just marginally over there at 38%. So, outside the desired band, and that will remain so until we're able to increase the industrial weighting. The revaluation, as we test a slightly more modest than we had expected. We have done a deal with the sale of the [Indiscernible] property to an independent offshore buyer. So there's no special interest involved, 7.3% premium to month or pad. So, a pretty good result there for us was a specialized building. It was constructed distinguished panel, which you'll be aware gives some insurance concerns. There were some issues with maintenance costs in the future. The buildings and the plant were becoming somewhat dated. And of course, with refrigeration, we have to be focused on that because any loss of refrigerant has an impact on our carbon footprint. Looking at value-add green developments going forward as you expect someone less activity on the spreadsheet. The only one that is really of interest is the 224 Neilson Street, which we're looking to start this financial year. The total spend on that would be about $66 million, expected yield on costs 5.7% and the projected internal rate of return 8.42%. We are expecting to get a 10-year lease on that development. The residual of those assets sitting in that list are earning an income and there's no real urgency and pushing them forward. Looking at sustainability. For us, that argue this is not a separate department, not a silo at all rather than that. It's a whole of business, green lens. There's a lot of work for us to do, but it is one of those areas we never arrive at the destination, but quite a bit of time and resource to go into that, not just in terms of the reporting, but in terms of getting our own business and our tenant's business is positioned for the future. I'll hand over to David, who will take us through the financials.

Thanks, Peter. Hello, everyone. The first slide for me, as usual, is the gross property income [Indiscernible]. So gross property income was $65.8 million for the period compared to $60.4 million last year. Revenues contributed $3.3 million of the increase, and there's more detail on that in the appendix. The main drivers with some very solid market reviews in Auckland Industrial and Wellington office missing up to the Citi Bank building offsets and vacancy that was included at marketplace. There's a 200,000 contribution from the acquisition last year of the Maui Street in Hamilton, and there was a solid contribution this year when we complete development of 8-14 Willis Street [indiscernible] development was a bit of a drag. The sale of 25 [indiscernible] large year negatively impacted income by $500,000. So gross profit income was up by 8.9% on the prior period. So on to the next slide, the P&L. Net property income was up by $3.5 million or 6.3% on the prior period, largely driven by the increase on the gross property line, but offset to some extent by increased profit expenses at Willis` Street and higher nonrecoverable insurance and rates and line. Admin expenses were up by $300,000, mainly due to the interim debt cost performed this year as well as costs associated with the new climate change reporting regime and the sale of our new captive insurance company. The MR is 52 basis points in corporate expenses to net property income is 9.4%, which is consistent with the prior year. Net interest expense was up by $4.9 million. The rec variance was $3.5 million remanding $600,000 and there was lower capitalized interest this year to $900,000. Completely covered off the revaluation loss booked in the period, and we received $3 million last year for the first silent of the opening Lifestyle Center. So, recorded loss up tax a year of $19.8 million, largely driven by the revaluation loss noted earlier. Next slide covers net distributable income. So, after all the usual fair value adjustments. Gross distributable income was $31.7 million compared to $36.5 million last year. Net total income was $29.5 million compared to $32.9 million last year. So, if you adjust for the ASC received net result was essentially flat year-on-year. On a per share basis, net title income was $3.49 since per share compared to $3.88 per share last year. Next slide covers adjusted funds from operations or FA. Then for this period are reasonably consistent with the prior parable period. Maintenance capital was $0.9 million compared to $2 million last year. As we noted in [indiscernible] last projects associated in the latter part of FY '23. Be expenditure in the first half was 10 expenditure on Level 7, 8 and 9, Pacific Central Auckland. So FY was $3.48 per share compared to $3.79 per share last year, this is within MDI, essentially flat if you adjust for the ARC receipts. The next slide covers the group with an investment properties. [Indiscernible] properties fell by $33.6 million in the period, and this was primarily driven by the revaluation losses of $50.8 million. There no acquisition all divestments in the first half of this financial year. Of course, as previously announced, in transport placement unconditional after 30 September. For capitalized cost of $18 million, $6.8 million was spent towards on [Indiscernible] and $2.7 million was spent on preliminary development cost and demolition at [Indiscernible]. The portfolio after deducting the rights asset in respect of the ground lease in the marketplace was at $2.1 billion at December. Next slide is net tangible assets this year. As usual, the evacuation buses is the key driver in the movement in TA. The $50.8 million valuation loss translated to a $0.16 per share reduction to $1.52 towards September. The next slide looks at debt to total assets. The balance sheet in good shape, with its total assets of 36.3% compared to 35.1% in March. If we adjust for the net sale of 10 Transport Place comes down to about 35.2%, which is consistent March. Aside from [indiscernible], we have a further $83 million on the market at the moment. And we've been very close to including sales on 3 of the 5 assets we'd like to divest. -- aspect should be a further $57 million, and that's marginally over March book as [Audio Gap] The next slide covers interest rate management. Converted increased slightly during the period to decline 6% from 5.4% in March. The main reason was an increase in the 90-day base rate after period. Our interest rate cover remains solid 2.5x compared to 2.8x March and a bank covenant of 2x. The live fixed cave is unchanged from March [Indiscernible]. That was also $175 million in forward starts to September at an average rate of 3.9%. We provided more color on this, our weighted margins and our hedging profile in the appendix for the information. Next slide looks at our debt profile. And we refinanced our bank debt during the period, pushing our tenure. There was a $50 million increase in the bank facility, taking it to $525 million. Market and fees achieved were good and pretty consistent with the previous refinanced last year. In fact, the margin line is on the new tranche, which is 4.5 years to time, was 125 basis points. So pretty sharp actually. The nearest is for 25 and the weighted average debt duration is 2.8 years. Green bonds represent 30% of the total bid facilities through September, providing some solid diversification. And the final slide for me is on dividends. We announced our second quarter to earn this morning. It would be $1.665 per share with imputation credits of $1.298 per year attached record date 6 December and the payment dated 20 December. There's no change to our full year guidance of $6.65 this year, which is consistent with the prior year. I'll pass you now back to Peter for some leasing commentary.

Thanks, Dave. You can see that program deal with the insight of seminar weekly building. You can see from the leasing outcomes that we've had a reasonably busy year and some good results and in that we expect us to be quieter than we've managed to achieve. As clients before the election, it was very little inquiry. At the moment, we're enjoying a bit of a pre-center a burst of inquiry, but it's fair to say that the length of time taken to convert an inquiry has more than doubled in the last 6 months. That's not really a surprise. Over the year ahead, we do expect to see more pressure with rentals. We expect to see affordability issues. But on the upside, for us, our tenant retention has been very strong. And looking ahead, we expect it to remain very strong. With the work that we've got for the next 3 years, we're not expecting F24 or F25 to give us any great surprises. We are expecting a flattening of the growth period for year '24. I think F24 will be an income focused year. And looking at the individual sectors, even in industrial, expecting F24 to be quiet from AR's perspective, we're already benefiting from this new development activity in the market. Inquiry levels are actually pretty good. Interestingly, land prices that have been maintained for well-located assets. And then some of the ice prices are wireless prime, but yet to see those show any reality. We're expecting to see a bit of a pickup again in the mid-F25 year. And importantly, for our delivery period for the Milton Street assets will be able to capitalize on that and what will be acquired a period up until that time. With the office sector, we have long said that we wanted to ensure that we could develop an expertise in co-working space. We have labeled our initiative their footprint that will be launched in the Citigroup building early in the new year. We've got a floor that's available to us with the fit-out fuses and got a team internally here that's been the last 3 years, ensuring they know everything they can know without actually starting it. But this is something that we expect to be a positive for our leasing not just in the filing, but in the portfolio. We've got a lot of tenants looking at taking less space than they otherwise would. And if we're able to offer the flexibility of co-working space, it means that we're a more attractive opportunity as result. As a retail center for us, obviously, largely, this is the elder mega center and the story over there is pretty good for us. We're retaining good level of demand from new and from existing tenants. The 2 tenants that we've lost or expect to lose over there, we've been able to replace very quickly and at slightly better rentals. So, whilst I'm still expecting that sector to decent challenges sitting reasonably comfortably with the assets that we have in that sector. Turning to the outlook. For the remainder of the F24 there are some headwinds. We do expect things to be quieter and just give us some challenges. We expect F24 to give us some income challenges as the economy remains soft, especially in the Auckland market. This is not unexpected to use the words about our newly minted deputy Prime Minister is not our first radio. We've been here before the business is well prepared and well placed in a good position to manage our way through that period. The demand that we're getting, and we expect to continue to see very, very strong demand for green building. And as I've highlighted earlier, on more tenants looking to the landlord to try and assist them through their own sustainability targets. So spending quite a bit of time working with our major tenants and helping with this. And as David has mentioned, we're focused on sustainable dividends and despite the net efforts to the government, not planning to cut for the dividend for the remainder of the year. That in terms of the presentation. Happy to take any questions.

[Operator Instructions] Your first question comes from Rohan Koreman-Smit with Forsyth Barr.

Congratulations on a solid first half result. One diss on maybe a new microphone in the conference room. It sounds like you're driving with the top-down.

I want to say... Yes, sorry about that. I was supposed to mention that at the beginning, we had a couple of technicalities but elected not to muck around trying to fix something the last second.

Good. I'll keep this hopefully, pretty brief. Can you just explain where the tax was a bit lower this year? And then maybe give us a quantum of the tax impact into '25?

Yes. It's mainly due to depreciation of completed events and also depreciation on R&E is higher than last year. The -- in terms of next year, obviously, booking depreciation net production will be removed from probably from [Indiscernible]. That hit us with about a $2.8 million tax effect. So roughly $10 million of depreciation billets. So obviously, that's going to increase our tax next year.

Got it. So, when I look at next year, and I know it's still 6 months away, and a lot can change. You've got a decent roll back in your hedging. And if I do the calculations on the current curve, it looks like it's about another $3 million or $4 million, which is $0.4 this year. Then you got tax, which you just gave us, which is about $0.3 this year. So, you go from $6.6, $6.7 since this year dividend and FO down to kind of 6s. Is that kind of the sort of quantum internally?

Well, I think we have one of the numbers but I think a tooth interest, well, what need to probably factor in is that the hit has run-off in March predominantly this in '24. So even though [Indiscernible]. And hopefully, we also seen some rate reductions coming through as well. What you'll pick of sustenance number, right?

I have no idea. But we have production for a while, personally from my mortgage, but that's a different story -- Street development, what sort of rental rates are you talking about for -- to achieve those metrics you gave us?

We're working -- obviously, it depends a bit on legal set based on the sector we're anticipating near amount.

Okay. And one final one. I just noticed on the back of your interims that you have incorporated Argosy Cover Limited and the Cook Islands to act as a captive insurer. Can you just take us through the benefits and risks of that and kind of when you expect that to flow through? And kind of any sort of issues that may crop up if you have to kind of call on your own internal insurance?

Yes. I will let to take you through the numbers, but it's something that's been on our agenda for some time as a means of dealing with the level of excess across the portfolio and reducing cost spreading risk. So I'll let Dave take you through the numbers and how that works. Positive for us.

Yes. The idea is, I mean, the biggest is capacity in New Zealand now it's not just sure of stress. So with your life, we're not going to need to go offshore. And what's the capital we can do that. So we've got about 42.5% of our insurance now offshore. And then there's a significant saving there. I'll just give you sort of rough on our retail premium here would have been around about $10.8 million, what we achieved through the capital gain on to marketing ourselves to $9.8 million. And so, there's a miss of production in our insurance by doing this. We are reaching the bottom line is Wellington and the increases in Wellington actually negligible. We've got -- we have got an increase for the semi increase in the sun amount, the right the state set. So that's a mess result for us in. So yes, so we got thing to do. I think we're not the only ones that are doing it, but as soon as there's a way of just building that capacity and also getting costs out.

What are the risks? It seems it can't be a free launch.

There's no risk just that we're doing. We're going off to. I mean, we've got the sales contract of ore. We're just -- we're doing it through our broker, but there are no risks. It's just we're exiting the offshore market rather than just the local market attractively low.

Okay, seems a little too good to be true, but we can take that offline.

[Operators Instructions] Your next question comes from Nicholas Hill with Craigs.

Just regarding 10 Transport Place and your wider industrial strategy, would it be fair to say you characterize your core industrial properties as more general 3PL manufacturing type of assets that have more potential tenants?

Yes, that's fair. And obviously, if you look at the way the risk profile of a specialized asset in the case where we own the base as well, and it's getting dosed. Obviously, that risk profile is higher. And as a result of this under make the cut.

Okay. Are you able to give some examples of other industrial assets for the noncore or for the similar profile of the 10 Transport Place?

We don't have anything else to refit the 10 Transport Place [Indiscernible]. The cost properties that we've had on the market for a while left open building but not near specialized. So, no regency with that. Other industrial assets that we would look to move would be ones where industrial is of use is no longer the highest and best use. So, where the gamification of the area and transport changes meaning that the use of the property is a higher indebted unit and it's a use that we wouldn't seek to realize then that might push them into the sale market.

Make sense. Just your comments on how the length of time to convert an inquiry has doubled. Would that mainly pertain to offers?

Yes, sorry, I was speaking specifically about the ops area.

Okay. Yes, the good old fateful question. Maintenance CapEx is a bit low in the first half. Do you have any guidance for the full year?

[Indiscernible]

There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.