Asset Plus Limited (APL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Bruce Cotterill, and I'm the Chairman of Asset Plus Limited, and it's my pleasure to welcome you all today to this rather unusual approach to communicating with our shareholders. I'd like to thank you for joining us for this special meeting of shareholders, and I'm pleased to welcome you as online participants through our virtual meeting platform, which has been provided for us today, courtesy of Link Market Services. As you know, we are holding a virtual meeting because of COVID-19 and all of the implications that flow from that. And I hope that most of you are getting used to these rather unusual times. But it is very important for us to provide you with a platform for participation and engagement as we seek to discuss the opportunity that's before the company today. Despite the virtual nature of the meeting, you will be able to ask questions, and you will be able to vote as if you are here with us today. We'll provide you with further information in terms of how we do that as we progress through the meeting. If you encounter any issues, please refer to the Virtual Annual Meeting online guide. Or you can phone a helpline, the number for which is 0800 200-220 that's 0800 200 2-2-0. I ask that you send through any questions that you may have. [Operator Instructions] So please feel free to send your questions through, and we will respond to those. So formally, on behalf of the Board, I would like to thank you for joining us. And I now declare the meeting open. I'd like to introduce my fellow directors who are here at the top table with me, namely Allen Bollard, on my right, your -- on my left, your right of the screen; Carol Campbell, on my right, your left; and Paul Duffy, on the far left, as you see. We also have John McBain joining us from Sydney, who I think has just popped up on your screen now. And John, of course, being the joint CEO of Centuria Capital. We've also got present with us today the management team from Augusta, including Mark Francis, who you can see to my right; Stephen Brown-Thomas, Asset Plus' Asset Manager, who's to my left; and in the room with us, Simon Woollams, our CFO; and Luke Fitzgibbon, the General Counsel. Our auditors, Grant Thornton and Bell Gully. And Bell Gully, our lawyers are also present with us today. In opening the meeting, I can confirm the following: our share registrar has confirmed the notice of the meeting was duly sent to all shareholders and persons entitled to receive it via the shared registrar link. A quorum for the meeting, being at least 3 shareholders, has been achieved and proxies totaling 62.6% of the votes have been received. A copy of the presentation slides that you'll see today will be available on the website of the company and have also been released to the NZX contemporaneously with the start of the meeting. So all shareholders will have access to the presentation materials that are delivered to you today. The agenda for the meeting is as follows: I will provide a Chairman's address shortly to present an overview of the company's strategy, and how the Munroe Lane Development sits as part of that. Stephen Brown-Thomas from Augusta will then provide further detail on the Munroe Lane Development, and we'll then open the floor to any questions from the presentations. And as I mentioned, the Board and the Augusta executives will be available to answer those questions as appropriate. Finally, the resolutions as proposed will be put to the meeting and voted on and the meeting will conclude following any general business. So turning now to the Chairman's comments. As you'll recall, on the 20th of December last year, Asset Plus announced the development of a new office building at Munroe Lane, to be backed by a 15-year lease to Auckland Council. On the 10th of September this year, we further announced that an equity raise of approximately $60.2 million was being undertaken to fund that Munroe Lane Development. In today's special shareholders meeting, in order to enable the company to fund that development, shareholders are asked to approve the Munroe Lane Development and to separately approve the issue of approximately 40.4 million shares as part of the equity raise. Detailed materials outlining the Munroe Lane Development and the equity raise have already been distributed to all shareholders along with the notice convening today's meeting. That presentation contains important information to assist you in determining whether to vote in favor of the resolutions, and includes details of the Munroe Lane Development, key risks associated with the development and a portfolio and trading update for Asset Plus. I don't propose to go through each page of the Investor Presentation. However, I will provide a short overview of the Munroe Lane Development and its strategic objectives. Stephen will then provide a more detailed presentation on the development itself. We're, of course, very happy to answer any questions that you may have in respect of Munroe Lane or in relation to the equity raise. But I do stress today's focus is on the Munroe Lane Development. Going back a few months, you'll recall that we announced $100 million equity raise in March of this year. But given the global volatility and uncertainty of that time, we reasonably quickly decided to withdraw that offer. And as a result, the shareholder meeting that had been anticipated to be held on the 31st of March was canceled. Since then we've had various discussions with Auckland Council, and they've reconfirmed their desire for the Asset Plus development at Munroe Lane to progress. And they've agreed to extend the funding and shareholder approval conditions associated with that development through to the 30th of October of this year to enable us to get through the steps we're stepping through today. In addition, Asset Plus has maintained progress with the development timetable over the past 6 months. And so whilst we have been waiting to get to today's position, we've continued to use our existing facilities, our undrawn debt capacity to cover the initial development costs. And so we've been able to continue with the initial activities relating to the Munroe Lane Development without losing any time. The Auckland Council remain fully committed to the relocation of Albany, and this is evidenced with the 3 existing North Shore and West Auckland buildings being sold and their intention to amalgamate their staff into 1 location in Albany. Accordingly, if the shareholder resolution passes today, then the Auckland Council's lease and the development agreement that we're in the process of entering into will become unconditional for all parties. As you know, Asset Plus continues to explore the development opportunities relating to the asset at 35 Graham Street. It is uncertain at this stage which development option we will pursue. So we therefore consider it prudent to focus on Munroe Lane at this point, and hence, the revised capital raise of just $60.2 million versus the $100 million that was considered in March of this year. In addition to the equity raise, however, we've secured an increase in our bank debt facilities from the BNZ. Those facilities will increase from $75 million to $130 million, ensuring that we have sufficient funding to complete the Munroe Lane Development. The combination of the equity raise and the increased bank funding give us the financial capacity to continue to do the work that we need to do to progress our strategic initiatives at Graham Street and Kamo as well. And it also enables us to provide cover for forecast working capital and capital expenditure requirements across the portfolio. Accordingly, today is a very important day for this company. Many of you have been waiting a long time for us to step forward in the development of the company, and it's all about focusing on the capital raise to facilitate the Munroe Lane Development. In respect of the equity raise, the placement and institutional entitlement offer is complete. On the 16th of September, just a week or so ago, 95.6 million shares were allotted, which equates to 70 -- to $28.67 million of proceeds. The balance of the equity raised $31.57 million, being some deferred settlements to manage the 2 major shareholders under 20% and the retail entitlement offer. Those will settle this Friday, the 2nd of October. The Board intends to maintain a constant dividend throughout the development phase. We understand the importance of a dividend yield to many of our retail shareholders. And while the proposed annual cash dividend of $0.018 per share does exceed the near-term forecast operating earnings, we believe the use of capital to support the dividend will not materially affect the NTA. Of course, as previously communicated, that dividend does remain subject to a quarterly review by the Board. The Munroe Lane Development is in line with the core strategic objectives of the company. It increases the scale of our portfolio by $134.5 million based on and as of complete valuation of $142 million. We also believe that this transaction will resolve some legacy issues within the portfolio, being the facts that we were -- sometimes regarded as subscale and overweight in retail. The transaction also enhances the portfolio quality, underpinned by an Auckland Council tenant covenant and representing a compelling total return story for our shareholders. We have had a couple of questions since we've announced the capital raise in terms of why we included a placement in the capital raising structure. The capital raising that was pulled in March was something that we were conscious of, and we didn't want to risk that happening again. Funding is critical to satisfy the funding condition in the agreement with Auckland Council. And so in going down the route of putting the placement in place, we felt it derisked the offer by allowing a higher proportion of funds to be received upfront, and that is, in fact, what's happened over the last couple of weeks. Turning to the office market. Despite the onset of COVID-19, there remains a strong demand for well-located commercial property with long-lease terms and strong tenant covenants. The low interest rates outlook is having an impact on demand for property as investors pursue higher yields. And the office sector has been impacted by COVID-19 and the work-from-home trend. But Colliers International Research, set out in the investor presentation that you have, suggests that demand for commercial office space will not be materially impacted. As previously indicated, the Munroe Lane Development will be managed by the Augusta team. Shareholders should note that under the management contract, leasing and development management fees will be payable to the manager, Augusta, as part of this process. The Board is very confident in Augusta's ability to deliver their development, and we've assembled an expert team with very relevant experience to lead the project. The Augusta team has worked very hard to present this opportunity to shareholders and for us to vote on today. And on behalf of the Board, I thank them for their efforts to date and what is a very exciting opportunity in the company's future. On that note, I'd like to introduce you to Stephen Brown-Thomas, who's the Asset Manager responsible for the Asset Plus portfolio. And Stephen will share further detail on the Munroe Lane Development.

Thank you, Bruce. Good afternoon, everyone, and thank you for joining us here today. Stephen Brown-Thomas from Augusta. And as noted, I am the Fund Manager for Asset Plus. I'm just going to quickly run through and give you an overview of the portfolio. We did obviously have the shareholder meeting at the end of July, but we have subsequently had the portfolio revalued. So a few key takeaways here from March this year to August 31. The value of the portfolio has increased from $142 million up to $153 million. Part of that increase driven by the new acquisition of bare land at Kamo for just over $2 million, which I'll speak to shortly. WALE has reduced slightly from 3.2 years down to 2.9, just through the inflection of time. And on the back of the revaluations and the subsequent acquisition of the Kamo land and also the continued drawdown to fund Munroe Lane project cost, the LVR has increased slightly to 35.6%. A key takeaway here is the NTA increasing from $0.57 up to $0.63 on the back of that portfolio revaluation. So as Bruce alluded to, obviously, COVID-19 has had an impact on most companies and Asset Plus was certainly not immune to that. There were a number of rental abatements and relief extended to tenants across the portfolio. We are obviously mindful that without tenants paying rent, the value and income stream for Asset Plus would be adversely impacted. So we've been very conscious of that and wanting to maintain tenants on an ongoing basis and paying rent and maintaining value for shareholders. The first half abatements equate to just under a $700,000. And the abatements are all now agreed with the exception of a couple of small tenants located in Auckland as a result of the August lockdown. So the impacts of that will be partially offset by the reintroduction of depreciation, which largely offsets the impacts of COVID-19, which is a good outcome. And obviously, the long-term repercussions of COVID-19 will not be known for some time. But as indicated, we are going to continue to maintain good working relationship with tenants and ensure the longevity of them in the building because there certainly isn't a plethora of tenants at the moment waiting to backfill space, particularly in retail assets. Just a quick overview on the individual properties. Again, we went through this at the shareholder meeting at the end of July, but Graham Street has increased substantially in terms of valuation from March to August 31, so moving from $50 million to $57.5 million. That's driven on the back of both a 6-month lease extension to Auckland Council from mid next year to the end of '21 for fixed consideration of $1 million. And also some of the assumptions in the March valuation not coming to fruition in terms of shifts in cap rates or yields in the commercial property market and lease-up assumptions as well. We've also now lodged the Resource Consent for the proposed full-scale redevelopments on that property, and we are now actively in the market engaging with tenants through our sole agent, Colliers. Eastgate in Christchurch, we have had an uplift in valuation there from March, which reflects the agreement to lease entered with Restaurant Brands. That is subject to Resource Consent application, which has been lodged, and we expect to receive that in the near-term and by the condition date of November. We also secured Bargain Chemist on a 6-year lease in the center, and that's been a positive for the center, driving increased foot traffic and sales and pedestrian counts have certainly been up year-on-year at Eastgate, and we are having a lot of positive activity there, which is great for that asset, and hopefully, a sign of things to come. Stoddard Road has also increased slightly in value. That's as a result of, again, some of the conservative assumptions adopted in March not coming to fruition. We do have the benefit there of all of the renewals through calendar year being renewed and yielding 6.9%. We think that is a very stable asset at the moment with some growth potential moving forward in terms of value. Munroe Lane is obviously the reason we're here today, and I'll speak to that shortly in more detail. And Kamo in Whangarei acquired their land at the end of July for $2.1 million, and it's subsequently been valued at $2.5 million. So again, we've bought very well there. And that is a long-term redevelopment opportunity into a higher and better commercial use. And it fits in nicely with the portfolio in terms of timing and scale. Just quickly moving on to the office sector outlook now. So we do believe that it remains attractive on a long-term basis despite short-term impacts of COVID-19 and a movement to working from home. We certainly saw, in Auckland, a resurgence prior to the recent August lockdown of moving back to the office, and we expect that to occur again as it is at the moment, and we'll do, moving forward. Globally as well, that is also happening with a number of global firms now mandating that staff head back to the office, which is going to be positive long-term. So on a local basis, there has been a short-term spike in vacancy levels. We are coming off a record low of vacancy at 4.4% in the Auckland CBD. At the moment, that's sitting at 6.3% as at the last research report in June by Colliers. And that increase is largely driven by businesses directly impacted by COVID-19, i.e., media companies in New Zealand, et cetera. And the long-term vacancy rate in Auckland CBD is 10.4%. And Colliers forecasts that by the end of '23, we're going to be sitting at circa 8% vacancy. So still below that long-term average. As a result of that increase in vacancy, there is an expected increase in incentives as the supply-demand curve changes over the next couple of years, but not a material increase. We're only looking at circa 13% up to 18%. And look, the Auckland office sector long-term does remain attractive. Colliers are forecasting average rental growth on a year-on-year annualized basis of 2.2%. They certainly see that there is going to be a continued demand for core markets, and that doesn't necessarily mean CBD. We've, obviously, identified Albany as a key northern node for Auckland, which I'll speak to shortly. And obviously, with the continued growth of places like Auckland, North of Auckland, there is going to be a driver to locate businesses closer to their workforce. And I guess the recent illustration to that is the shutdown of Auckland Harbour Bridge and the chaos that can cause and the benefits of being located closer to your workforce. And Colliers are forecasting where markets have rental growth that there will be capital growth as well. And we're certainly seeing that at the moment with the low interest rate environment. So moving now to the Munroe Lane Development. As Bruce indicated, we announced the entry into that agreement to develop and lease back on the 20 of December 2019, pre-leased Auckland Council on 63% of the building by income on a 15-year term from completion. So we've subsequently achieved Resource Consent for that in May, and we did manage to achieve some additional area at that site, which has been beneficial. And as Bruce alluded to, given the excellent working relationship we have with Auckland Council, we're able to extend the landlord funding condition from April originally out to July and then subsequently out to 30 October. And as Bruce indicated as well, Auckland Council remained fully unconditional, and they have sold the other assets that they are relocating to and are fully committed to this site. The marketing process for the balance of the office space and retail and food and beverage units is going to commence after this meeting. And we've obviously got just over 2 years to lease-up that space before completion in December '22. As noted to the right here, the vacancy rate for prime space within Albany is currently 0, and there is no competing stock currently available or forecast to be available over the next 2-year period. And as noted, Albany has been identified by Auckland Council as a key growth area on the north of Auckland. And you can obviously see the huge residential growth out to the north there and, as just indicated, the issues with the Harbour Bridge and having proximity and a hub-and-spoke model close to your workforce does have benefits as illustrated by Auckland Council doing exactly that with a centralized office in the Northwest. So construction is going to commence in November subject to shareholder approval today, with a target completion date from Icon of the 14th of November '22, which gives us just over a month buffer from the required completion date under the agreement to develop and lease with Auckland Council. And it is going to be funded by way of this current equity raise and then a concurrent increase in the debt facilities of the company. So a few more specifics on the development here. Excellent sites. 3 street frontages and a laneway on the back, which gives us basically uninterrupted natural light. And we've also got large campus-style floor plates of circa 3,000 square meters, and a central atrium as well, providing additional light and a connection to the outside. So we do have some on-site amenity in terms of a cafe, kiosk and some potential retail or food and beverage space. And we've got costs estimated completion of just shy of $120 million over the next 2 years. So it has been valued by JLL as complete at $142 million. That represents a 5.3% passing yield, and provides for a development margin of 9.8%, assuming that the contingency is fully expended. That also provides a return on cost of 5.9%. And as Munroe Lane will be held as a long-term investment upon completion. So a little bit about the Albany basin and what's happening there. The site is very well-located with direct access off State Highway 1, adjacent to the Park & Ride, very close proximity to local amenity in terms of the mall, childcare, food and other amenity in terms of access to Albany Heights, the local sports grounds, the stadium, tennis courts, swimming pools, et cetera, and also retail nearby. There is continued growth in the Albany Basin. Risland apartments directly behind our site, currently under construction. The IAG has recently been finished, and BNZ's new office on Corinthian Drive is also getting the finishing touches on it at the moment. So a number of other corporate occupiers have identified Albany as a growth location as well and implementing that hub-and-spoke model. So in terms of progress on the construction front, developed design has been completed, and we're well underway with detailed design. Icon Construction were appointed as ECI contractor after competitive process earlier this year, and that will be converted to a fixed price construction contract on the standard NZS 3910 form, subject to achieving shareholder approval here today. So some of the key points in relation to that construction contract. We do have a parent company guarantee from Icon's ultimate Australian parent company at the same level of liability as Icon, being $50 million, plus 50% of the remaining contract value. We've also got a market standard on-demand 4% performance bond that we can call on if there is any default. And we've also got 2% retentions that are going to be withheld from progress payments, which is above the standard scale under 3910. In addition, there are liquidated damages or LDs payable by Icon, if they don't meet the target completion date of 14th December, that's on a tiered basis of $10,000 per day, which increases to $12,500 per day -- $20,500 per day, sorry. And liquidated damages are payable to Auckland Council if we don't achieve the target completion date of 16 December 2022. At the moment, we have a buffer period of 4 days -- 4 weeks and 4 days between Icon's target completion date and the required completion date under the agreement to develop and lease with Council. And we now, as of Friday afternoon, have an offer, representing 80% of the estimated construction costs that are provided on a fixed price basis. We are currently considering that offer and reviewing it and anticipate the construction contract being fixed at 80% by time it's entered in the next month or so. The balance 20% of costs will be tendered as packages become available over the balance of the calendar year. We intend that -- anticipate that there will be some competitive pricing from the subcontractor market given current supply-demand. And at the moment, we have a number of consents lodged and about to be lodged in accordance with our staged consenting strategy with Council. We also have some early exploratory and diversion works underway for Council Utilities in the road berm underway at the moment and construction proper will commence in early November. We are carrying contingency of $5.75 million or 6% of the estimated construction costs of $95 million. Just quickly run through some of the key terms of the agreement to develop on lease with Council. So there is a building performance specification, or BPS, which sets out the criteria that we need to meet. They align typically with an A grade office building or exceed them in some instances. We're also obligated to provide a 5-star Green Star design and Built Rating, and an obligation to use our best endeavors to provide a 5-star NABERSNZ New Zealand rating, but that is subject to the tenant's use of the building and operating within normal working hours. We also need to deliver in accordance with the milestone schedule. And as Bruce alluded to, we are currently meeting all of those requirements and provide platform completion by 16 December, '22, which we are on track to provide earlier. We also need to deliver that building within a prescribed area, which we're also on track with, and integrate Te Aranga design principles based on a cultural narrative that we have worked with our cultural advisers and [indiscernible]. There is also a sunset date, 18 months post completion, which can be extended by tenant variations or delays, and 15-year lease term from completion with 2 further rights of renewal of 6 years. Rental, subject to final measure and options adopted of $4.7 million per annum. And that is subject to fixed increases of 2.75% per annum from year 3, and then market reviews on the 10th anniversary and then on renewal. There is also a seismic warranty where we need to maintain the building for a minimum of 67% for any current or future corequirements. The building is obviously being built to 100% MBS, and we don't anticipate any issues there long-term given the deemed low seismic risk in Auckland. Just quickly going to run you through a timetable here. So assuming that we complete shareholder approval today, the agreement to develop and lease becomes fully unconditional. Once we get our banking facilities in order and confirm that back to Council in the course of the next couple of weeks, but certainly before 30th of October, construction commences in November and will be complete by December '22. And just quickly running through the financial impacts, which are fully set out to material sent to shareholders. But you can see in the table here today, the value of the investment property, the income and the weighted average lease expiry and the loan-to-value ratio. Immediately post the equity raise, the LVR drops to 0% as the equity proceeds used to repay existing debt facilities. And then those debt facilities are drawn on to fund the Munroe Lane Development and also some additional CapEx across the portfolio for the likes of the Restaurant Brands at Eastgate and also facilitating the Kamo and Graham Street transactions as well, but primarily to fund Munroe Lane. Assuming no other divestments and completion of Munroe Lane in December '22, you can see the portfolio value increases from $153 million to $295 million and an LVR of 43%. Key thing here is we're over doubling the weighted average lease expiry, which is a key measure of the certainty of your income stream. And the tenant covenant with the exposure to Auckland Council has greatly strengthened as well. And we've also put a potential outcome there of divesting Stoddard Road on completion as well, which brings us back into line with a long-term target LVR band of circa 35%. Just quickly run through some of the key risks attached to development as well. These are fully set out in the investor presentation previously distributed to shareholders. As a result of this transaction, we do increase our levels of debt and have a higher LVR, assuming that there isn't any divestments in the portfolio. So the debt facility increases from $75 million to $130 million through that restructured facility and, as indicated, that LVR, assuming status quo, will sit at about 43% on completion. Cost overruns, at the moment we have got 80% of -- an offer for 80% of the construction costs, which will be fixed prior to entering the construction contract. And as noted, the balance 20% of trades will be fixed by the end of the calendar year. There is standard carve-outs for variations within the 3910 construction contract relating to unknown and ground risks and other variations. So we're managing those in consultation with our project managers, ICP, and we're also carrying contingency of $5.75 million as well. And any savings will further bolster that contingency on the way through. So if there is a delay to completion beyond 16 December, '22, then liquidated damages are payable to Auckland Council, and there could be a risk that not all of that is recovered from Icon, if delays are caused by the principal, Asset Plus. We also need to lease the balance of the space. As noted prior, there is circa 37% of that by income currently unleased, but we do have just over 2 years before completion to lease-up that space. There's also a potential risk there that incentives may need to increase. Rent may reduce, which could adversely impact margin and forecast yields once complete. So our ability to maintain dividends as well through the development phase is predicated on, obviously, providing this development on budget and leasing up the balance of that space given the valuation and forecast assume it's fully leased at completion. And at the moment, we have a high retail weighting in the portfolio, which will obviously change as we develop out Munroe Lane, and the asset is complete. Across the portfolio, generally, the risks remain the same, obviously, potentially exacerbated by the impacts of COVID, but tenants may default on their obligations, and that could have a negative impact on forecast cash flows. There have been assumptions made on a forward-looking basis as well as the assumptions adopted and incurred for the half year-to-date. And as a result of COVID, there is also potential uncertainty in relation to valuations and values can move quickly. That may also impact our ability to divest assets at the assumed market value at any given time. And there is a general macroeconomic risk relating to the economy and COVID, which may impact on leasing demand, market rents and ability to lease up any residual space across the portfolio. So just also want to quickly touch on the implications of the Munroe Lane Development not proceeding. So if the resolution isn't approved today, there basically would need to be another agreement made with Auckland Council to further extend the funding condition. That's probably unlikely given where we are today and would likely lead to cancellation of that agreement. That would have a very adverse impact on the forward-looking projections for Asset Plus, in our view. We have, obviously, incurred material expenditure to date, acquiring land for $7.25 million and incurred circa $2 million of costs to date. And the pathway forward for Asset Plus through this development would be lost. We also have completed the placements, and we'd then become overcapitalized, which could also present some challenges for the company. And we need to consider alternative development options for Munroe Lane, and that could prove challenging given we've got an unconditional tenant sitting here in front of us today and our ability to transact on that land and across the portfolio in the future could be adversely impacted. So that is all for me in terms of the presentation, we will open up for question and answers from shareholders. Thank you.

Thank you, Stephen. So as Stephen mentioned, and as your screen will tell you, we just like to pause at this time to see if there are any questions from shareholders.

Thanks, Bruce. We've got 3 questions so far. The first one is, can you tell me what the NTA per share will be post the capital raise?

Post the capital raise, the NTA per share will be $0.44.

Thanks Bruce. The next question is split into 2, so we'll do it one by one. What else will you do in the next 12 to 24 months to improve the net profit and dividends?