Asset Plus Limited (APL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Asset Plus annual financial results conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Stephen Brown-Thomas, Fund Manager. Please go ahead.

Thanks, Amanda, and good morning, everyone, and welcome to the annual results presentations for Asset Plus. I'm Stephen Brown-Thomas, the Fund Manager of Asset Plus from Centuria. I'm also with my colleague, Simon Woollams, the CFO, with me. Unfortunately, our CEO, Mark Francis sends his apologies. He's unable to join us today. Hopefully, you've all had a chance to download the presentation from the NZX and have them in front of you. I'd just like to call out some of the key updates for the financial year on Slide #1. So total profit for the year, $15.95 million versus the $14.69 million loss in FY '20. Simon will speak to the drivers for that through the financial section, but a turnaround in the valuations for the assets partly driving that. And the AFFO this year, $5.82 million versus $4.74 million in the prior year. Some of the key takeaways, the Munroe Lane Development that we completed the equity raise for last year is tracking well, and we're on target for completion in December '22. The NTA is now sitting at $0.448 versus the $0.567 per share last year. And that's predominantly on the back of the capital raise, and Simon will take you through the waterfall as to the changes there a little bit later on. And with that new funding package, the LVR currently sitting at 5.4% as at 31 March, that's obviously continuing to be drawn on as we fund development works at Munroe Lane. And that compares to 34.3% as at March 2020. The unrealized profit on the fair value of investment property of $9.2 million or a 6.3% increase on that property, and the weighted average lease term is reducing, down to 2.75 years from 3.16 years, and that's as a result of holding 35 Graham Street for future redevelopment and leasing. Portfolio occupancy is still sitting at 98%. And the resource consent for the preferred redevelopment option at Graham Street has now been secured earlier this year. As noted, we also completed our capital raise for $60.2 million. And along with that, we also had new banking facilities agreed to fund that Munroe Lane Development. Also pleased to report that the sale of Eastgate is now in the table, so like additional sale there as a deferred settlement, and we'll speak to that a bit further when we get to the property section. The key metrics there on the next slide. You can see the change in the portfolio value as a result of the revaluations, I guess, last year in the eye of the storm, so to speak. As a result of COVID-19, they're obviously run down with the uncertainty, the market has certainly rebounded now and those valuations have followed suite. Five properties during the year, you'll recall, we acquired some bare land at Kamo, which I'll speak to a little bit further when we get to the property section update. A number of tenants holding flat. We've spoken to the WALE and occupancy and the LVR and also the NTA. In terms of our strategic objectives, obviously, a key focus over the past year was really on lining up the funding for the Munroe Lane transaction. And that particular development is forecast to materially increase the portfolio size by circa $122 million on completion, which is obviously a material increase given the current portfolio value of $172.8 million. Also noting that the potential redevelopment of 35 Graham Street is obviously going to have a potentially material impact as well as that preferred development option obtained lease commitment, which will also increase the weighting and scale of the portfolio to Auckland. So successful delivery of that Munroe Lane Development is certainly expected to enhance the quality of the portfolio, given it's a brand-new asset with a 15-year lease to Auckland Council over 63% of the property, certainly going to increase the WALE for the portfolio. And as we say, re-weight to higher Auckland concentration, which are certainly going to provide a platform to leverage further opportunities in the future once that's complete. And that development is also expected to provide an attractive risk-adjusted returns, having regard to that high-quality tenant covenant and extended lease term of 15 years over 63% of the building. And we'll speak to those target returns a little bit later when we cover Munroe Lane in detail. So I'll just hand over to Simon now, who will run you through the financial sections, and then I'll pack back up and running through the portfolio and the property.

Great. Thanks, Stephen. Good morning, everyone. So Stephen outlined, obviously, recent positive results for us this year, just under $16 million, primarily driven by $9.2 million of fair value gains on the investment portfolio. In terms of financial performance on Slide 5, net rental revenue was down $0.5 million. When you look through the portfolio movement, it's pretty much flat year-on-year, as detailed in property level shortly. So obviously, we provided $400,000 of rental concessions. We've managed to get some clawback in the second half, which was a positive, but all-in-all for a heavily retail-based portfolio that's not a bad result. And we've seen our tenants perform pretty strongly in the second half. There has obviously been a little bit of growth in the underlying portfolio. Obviously, the new Bargain Chemist lease at Eastgate had some positive impacts there and there's been some minor rental growth across the portfolio. In terms of the administration expenses and corporate costs, they're pretty much flat year-on-year. Those finance costs have reduced as a result of the capital raise. As we signaled in the capital raise, we've secured a new funding packet with BNZ. So whilst our drawn debt figure reduced to 0 on the back of the capital raise, we're now progressively drawing that down to fund the development works. So a big chunk of finance costs this year actually are amortized establishment fees as well as line fees with respect to the undrawn working capital and investment facility, noting the development facility is obviously fully capitalized and won't be drawn until the latter part of the Munroe Lane Development. In terms of some other adjustments, we've got a small impairment in respect -- or same goes with respect to AA Centre. And from a tax perspective, we've unwound deferred tax liability with respect to Eastgate. As we've agreed, the purchase price allocation was with the buyer, which doesn't trigger any depreciation recovery as well as calling out the benefits of building depreciation this financial year, which is just over $300,000 from a tax benefit perspective. So all in all, AFFO up just over $1 million. And I'll talk to that shortly in terms of the key drivers for that. But on a cents per share basis, it's reduced, as we issued or raised $60 million during the year. So the shares on issue increased by approximately 200 million. On Slide 6. This is the -- quite hopefully core entity snapshot of the core part of the movements in the AFFO. Again, I've covered most of these, but you can see impact of -- a full year impact of Graham Street in the prior year, and you see a 9-month impact. And in the prior year, we sold the Heinz Watties property as well. In terms of some other minor adjustments called out, obviously, the full impact of COVID of $400,000, effectively what's the cash impact there; lower finance costs, as I said earlier, primarily driven by the capital raise or reduced draw on debt offset by some slight higher line fees. And as we signaled last year, we set some through the P&L and through AFFO, approximately $1 million of costs from some quite material transactions that unfortunately didn't proceed. As I said earlier, the tax benefit on building depreciation is one of the primary drivers of a lower cash tax expense for the year. So in terms of net rental on the next slide, Slide 7, pretty self-explanatory talk about the divestment of Heinz as well as the acquisition of Graham during the prior year. Stoddard and Eastgate were pretty much flat. The impacts of COVID were offset by a bit of rental growth in the new lease at Eastgate. That said, this is represented on an accounting basis. So abatement has been absorbed through the P&L, i.e., reduction in rental income, but any relief effectively is a lease modification and that relief tend to be spread over the term of the lease. So these numbers obviously reflect the relevant accounting treatment. And moving on to Slide 8. I pretty much covered this in terms of administration costs, again, pretty flat in transaction costs last year. We had absorbed those daily costs but also just under $800,000 of costs associated with the capital raise in March 2020, end of this year. I think I've covered finance costs and gave a bit more detail there around the breakdown year-on-year. In terms of the balance sheet, pretty self-explanatory. In terms of the investment portfolio so for the $130 million investment property, there is 2 -- there is obviously Munroe Lane and Kamo in there, another approximately $28 million combined. The balance of that is Stoddard Road and Graham Street. We've reclassified these as held for sale based on the unconditional agreement we secured with settlement -- a deferred settlement structure at the purchase option likely to happen between late August 2021 and February 2022. But we're hearing signals from the buyer that that's probably likely to happen at the tail end of that window. And drawn debt as at balance date, $9.4 million, reducing gearing down to 5.4%. In terms of NTA, that's set out on the following slide, Slide 10, then you can see we had some valuation gains, which we announced at half year as part the capital raise, which took the NTA up to just over $0.60. But then obviously, when we issued 200 million shares at $0.30 that reduced those quite materially. And in the second half, the fair value gains at both Graham Street and Stoddard Road have offset, we signaled when we announced the Eastgate deal effective offset the impact of selling Eastgate at a loss relative to [indiscernible]. So that's it from me. I'm going to hand back to Stephen now, but obviously, more than happy to take questions at the end. Thank you.

Great. Thank you, Simon. So just on to Slide 11, the portfolio overview. Simon has obviously already kind of covered the valuation movements and called out some of the key comments for rental drivers. We're going to cover all these properties in detail in the following slides with the exception of Kamo, just to note that that was acquired July last year for $2.1 million, currently valued at $2.7 million, 38,000 square meters of land adjacent to State Highway 1, that we see a higher and better use for than its current industrial zoning. And we are in early phases of negotiations with a number of commercial tenants on that site and are working through the development opportunity there in the short to medium term. So Slide 12, portfolio movements. As noticed, we have covered the WALE and occupancy. Simon has called out the changes, I guess, with the acquisition of Graham Street and the sale of Eastgate there and the driver for that carrying value. And noting that both Stoddard and Graham Street has effectively rebounded to prior valuation levels after the material uncertainty as at March 2020 on the back of COVID-19. And just to note there that the Munroe Lane Developments is mostly held at land plus cost incurred to date. So on Slide 13, the impact of COVID-19. Obviously, that did have a material impact and created a great deal of uncertainty at that time. We obviously do have a heavy retail exposure within the portfolio. Fortunately, there were a number of central services tenants across the portfolio in terms of Countdown pharmacies, medical center, et cetera. That did insulate us somewhat from the impacts of that. As Simon noted, we have also subsequently got some clawbacks through a number of tenants in the second half of the year, which has also reduced the abatement that was initially provided. Simon has called out that abatement equivalent to $400,000, which is effectively 3% of the gross rental income for the financial year. And as noted previously by Simon, that's now been offset or clawed back by the reintroduction of building depreciation. So obviously, this time last year, there was quite a bit of uncertainty in the property market, but we can certainly see that the market is buoyant. And lower interest rate environment is fueling investment in the property sector. And we've worked hard over the course of the year to maintain tenants, maintain income and preserve long-term value for shareholders and the company. On to Slide 14 now, Eastgate. So the key takeaway for this property is it now has been unconditionally sold at a slight discount of 7% to 8% of previous carrying value. It does have a deferred settlement date between August '21 and February '22 at the purchaser's election. So the proceeds of that sale will initially be used to repay debt, which will create further balance sheet capability. Simon did note earlier that we did secure Bargain Chemist on a 6-year lease from May 2020. We combined a number of tenancies to create that space, and it has had a positive impact on the center, increased foot traffic and led to us securing other interest in the center and also a number of renewals as well, which has been positive. We also secured restaurant brand Taco Bell for a pad site on the exterior of the center for their first South Island store. And there is a 10-year lease from completion works are tracking really well and due for completion middle of this calendar year. So the metrics post COVID and the lockdown for the center have been really positive. Just the numbers of foot traffic are up on prior years, but the moving annual turnover has remained relatively flat for the year. And in passing, income has also remained flat. We have increased the gross income but OpEx has also gone up slightly, resulting in that flat number there. And as noted, we have just secured Caroline Eve or a number of the tenancies that have previously been vacant. And they've been vacant for an extended period of time. So it's very positive to get further leasing activity on the site there. As noted by a Simon there, carrying value represents a sale price, less the cost to complete for the Taco Bell works. On to Slide 15, Stoddard Road. So a really good little center here. Over the course of the year, we completed 6 renewals, which represented 22% of the total income for the center, which is obviously really positive on the back of COVID-19, and I guess the uncertainty that it created for a number of tenants. On the back of those renewals, we have increased the WALT slightly, which is great, and the valuation has rebounded as well from the impacts of COVID-19 in March last year. And the center is currently 100% occupied. So there's only one lease renewal due in '22, representing 5.9% of income. We're already in discussions with that tenant and the tenants as well with renewals due '23 and so our focus in the medium term is going to be discussions with the warehouse on potential lease extension given their renewal comes up in 2025 and that weighted average lease terms is going to continue to decline until that key anchor tenant is secured for a further term. On the 16 -- Graham Street, so as noted earlier this year, we have achieved a resource consent for the preferred redevelopment option, which is adding 3 additional stories on to the existing building. Colliers, as previously noted, have been engaged as the master leasing agent, and we are pursuing a number of target tenants with expiries or renewals within the forecast completion window. Obviously, the impacts of COVID-19 had a pretty severe impact on lease deals happening for large corporate occupiers in the city and basically decisions we've put on hold for the better part of 12 months. It is positive to see that coming into calendar year 2021 that lease deals are now happening. And a lot of the sublease space that did come to the market immediately post COVID and the lockdowns is now predominantly being taken up, and there is a continued flight and trend towards the quality, and large floor plates and sustainable and efficient buildings continue to be in demand. We have spoken about the fundamental attraction of this asset previously in terms of its proximity to CBD location in the Victoria when you caught it there. And those large uninterrupted floor plates of circa 3,000 square meters that you just can't replicate and other properties with this proximity. So those fundamentals remain and we also concurrently are pursuing lower-level refurbishment options, as previously outlined. And we are also pursuing a number of tenants for basically a light refurbishment of the building without going down that full redevelopment and additional 3-floor preferred option. So we are running both options in tandem. And as noted, a final decision on the development of that property is yet to be made by the Asset Plus Board and is going to be entirely contingent on securing leasing commitment for that property. So you'll recall last year as well during the year, we secured Auckland Council for a 6-month extension over the basement and ground floors, which is providing a further $1 million of income over that period from the main lease expiry, which is 30 June this year. And as noted there, the leasing of this property is our absolute main focus at the moment, and we're working very hard to get a result under either scenario for the leasing of that property. On the Slide 17, an update on Munroe Lane. So obviously, we went through the equity raise last year and satisfied the funding condition under the agreement to development lease on the 30th of October on the back of that successful equity raise and the new banking facilities with BNZ. That development is certainly now well underway. We had our first basement slab pour earlier this week, and we are on track to finish at the end of calendar year 2022. So Icon, as previously noted, were the main contractors that have been appointed there, and the majority of the costs have been fixed under that contract but remain subject to the standard variations under a 3910 construction contract. At the moment, that project is progressing in line with budget, and our full contingency outlined at the capital raise still remains intact. And as previously noted, we think this development offers an attractive risk-adjusted rate of return given that extended lease term of 15 years over 63% of the building to Auckland Council, an excellent tenant covenant. On to Slide 18, just a bit more detail on Munroe Lane. Just reiterating, 6-level building with basement car parking. We've got circa 750 square meters of cafe, food and beverage, retail and office outlets on the ground floor. We're already in discussions, early stages, with a number of operators for the food and beverage spaces at the moment. And we've also got the Level 6, the top level of circa 2,700 square meters available for lease; and 2 office tenancies of circa 950 square meters or 1,800 meters combined on Level 2 available for lease as well. So again, in line with Graham Street, there was effectively a pause of almost 12 months on the ability to attract and commit corporate occupiers to large spaces, but things are now starting to happen again. And we expect that in the near term, we are going to be hopefully securing some commitment on part of that space. And again, that's going to be our key focus moving forward. One of the key benefits we can offer between the site at 35 Graham Street is a hub-and-spoke model for potential occupiers and giving potential corporate occupiers a solution there, which is, we understand, attractive to a number of potential tenants that we are speaking to and targeting. So the property was also registered with the New Zealand Green Building Council to obtain the Green Star, 5-star Green Star Design & As-Built rating. That's going through its due process at the moment. And as previously noted, the majority of the construction cost effects subject to the standard variation regime under 3910 construction contract. So we have had an uplift on the -- as of complete valuation, which moved from $142 million to $146.85 million. Our yield on cost is still expected to sit around 5.8%, but our development margin, we're reforecasting from the original 10% as at the capital raise up to 12% on the back of that increase in the asset complete valuation. So for the company moving forward and our outlook, our key focus really is the leasing of 35 Graham Street, and we are running very hard on that at the moment. And as noted, rather than pursuing the full redevelopments of adding 3 floors, we're also pursuing the basic as-is refurbishments and lease-up in tandem. And look, given what's happening with some of those corporate occupiers, that may well be a more than likely option than that full-scale redevelopment. As noted, we are also currently working through the leasing of the balance of that space at Munroe Lane and we are working towards getting commitment there as well. Just to note that the Board remain committed obviously securing further growth opportunities, and we're actively managing our portfolio to ensure we can get early renewals where possible and certainty. But certainly, our immediate focus is on the lease-up of both those spaces at 35 Graham Street and Munroe Lane. And the dividend remains subject to a quarterly review by the Board as we move forward. So I'll hand it back to the operator just to cover any Q&A. And thank you for attending.

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

Look, first one is on the flexibility around Graham Street. You're talking about a dual-track process, but I just wonder if you've got decent interest in both the refurbishment and the full redevelopment, how flexible can you be around, I guess, having a go, no-go decision on the lower option if you think you could also execute on the higher option or vice versa?

Yes. Good question, Rohan. Okay, I guess, both options certainly being focused on tenant. There are a number of target tenants, probably 3 or 4 for the light-touch refurbishments. And the reality is that those tenants are likely to move quicker than the larger corporate occupiers for the preferred redevelopment option, which is circa 20,000 square meters. And it obviously comes with a lower risk profile as well. So I think the preference will be leaning towards what's going to provide income quicker with less capital expenditure if the ability is there and it makes financial sense compared to that full-scale preferred redevelopment option.

Just on -- sorry.

Sorry. Simon here. Just to conclude that and answer your question, we do believe we've got a great deal of flexibility, which we have said all along. There were 3 options. I think probably 2 are still in play. Obviously, the light touch refurb and the full-scale redevelopment. But I think the answer is we do have a lot of flexibility in that space.

Okay. Just on Stoddard Road valuations. What do you need to see -- or what do you think you need to see for that cap rate to come in a bit further just given some of the transactions we've seen in the market looks a bit wide.

Look, the key thing there is the warehouse expiry. So that next renewal coming up in 2025. So with the WALT at 4.18 years at the moment, that is the key driver. So we've secured all of the smaller tenants over the last couple of years, but the main driver is the warehouse.

Sorry, actually, going back to Graham Street, sorry for jumping all over the place. When do you have to proceed with one option or the other? Is it once the rent stops? Or are you able to take a bit of vacancy?

Simon here, Rohan. Look, that's a very good question. And I suppose we're just obviously still on the folks at the moment. I think latter part of this calendar year is probably the day, to be realistic. Obviously, we've got rent through to December. But -- and then obviously, a key driver is when some tenants could look to -- would need the space. So obviously, we can pretty closely call it around those tenants and their timings and the lease tails, et cetera. But that's probably the latter part of this calendar year as the critical time point.

And final one, for the uninitiated like myself, the 3910 construction contract standard variations, can you just give us some color around what sort of variations you can get around or could come along around construction costs or like a lack of availability of materials resulting in delays?

Absolutely. So most of the standard types of risk that you get is in ground risk that can't be foreseen or priced. We are now through all of that. So we're not subject to any variations there. Other standard variations that usually apply are things that aren't shown on the drawings when the contractor prices them and come out during construction on site. Those variations typically, yes, don't -- aren't material. In terms of supply of materials, there is a specific COVID provision within the 3910 contract that we have drafted here for Munroe Lane that the contractor must use all their reasonable endeavors to procure materials early to ensure that we don't have any variations or delay risk, and we are procuring things early to avoid that exact risk because we have seen global supply chains be disrupted on the back of COVID-19 and obviously the unprecedented demand for a number of products on the back of that. So we're avoiding that risk by procuring early.

[Operator Instructions] Our next question comes from Grant Lowe from Jarden.

Just a couple of brief questions from me. Rohan has covered off the main ones there. Just around -- you talked about on Munroe Lane, the majority of the costs have been fixed. What sort of percentage are we talking about when you say majority?

At the moment, we're sitting at just over 95%. And we do have some provisional sums for things that you just can't fix for things like a transformer supply where you don't get a fixed price until you finish the design and order it from the supplier. So...

Understood.

Relatively in the...

Yes, indeed. That's pretty normal. And in terms of, are there any sort of provisions in the contract for -- I mean, obviously, we're seeing massive inflation in input costs across the board. Are there any sort of provisions within that contract for sort of abnormal levels of inflation on the cost side? Or does that risk sit...

That risk sits with the contractor.

[Operator Instructions] Our next question comes from Craig Tyson from ANZ Investments.

Just a couple of quick questions from me. You mentioned an expense or a lease liability or something to do with AA Centre, can you just give us a bit more detail on that? And also just the land in Kamo, what's the plan for that land? Clearly, it's been a good investment, increased in value, but are there any development plans for the land?

Okay. Thanks, Craig. I'll answer the AA point, and then I'll hand over to Stephen to comment. So look, this is a bit of a legacy thing, Craig, and it's lingered. So as part of the deal when we studied AA, there was -- they were creating works that need to be completed. And the corporate in AA actually are on the top couple of floors, that's exactly 15% of it. So the way it had to be structured is that we then needed to collect via Sky City and, obviously, purchase probably the contribution to those costs. That project has lingered and lingered and lingered and it is now complete and we have receivable there. We haven't -- but I suppose, as a key judgment as part of the reporting process, we need to partially impair that. That hasn't prejudiced our position. We are still going hard for those -- recovery of those costs. But from a, I suppose, a key technical matter, we felt -- the Board felt that we needed to make a small impairment of about $200,000 there. There was also some additional costs with respect to the stairwell pressurization system of $100,000, which had to be incurred. We had provisioned [indiscernible] impairment, which we can refer to $175,000. So again, all terms of the sell and purchase agreement. So overall, a $300,000 impact this year. And I'll hand over to Stephen for Kamo.

Thanks, Simon. See, Craig, I think we have spoken about it for Kamo. But at the moment, we are in discussions with a supermarket operator, a fuel stock and some potential fast food operators to go onto that site. So yes, they're still early days, and we've got a bit of work to do to get to a position where that is, yes, ready to go for a future development for the company.

Right. And any sort of time frame? Is it going to be FY '21 -- sorry, FY '22? Or is it further -- do you think it's further out than that?

Yes, realistically, '22, '23 will be the earliest that that will start to move.

Your next question comes from [ James Bruce Kirsch ] from [ Cavalier Trust ].

Just a query about the dividend reinvestment plan you advised you were going to do. You've now stopped it. What was the reason for not going ahead with it, please?

Thanks, Bruce. The primary driver for that was primarily the sale of Eastgate. As part of our sufficiency analysis for the capital raise, that was, we thought, was a take up of circa 20% that was going to provide capital over that time. But now that we've obviously divested that property that's freed up some balance sheet capability. And the second point to that is the share price. Unfortunately, it still had a quite significant discount to NTA, and the Board did not feel comfortable to issue shares at that price point.

Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.