Asset Plus Limited (APL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Bruce Cotterill, and I'm the Chairman of the Asset Plus Limited. On behalf of the Board, I'd like to thank you all for attending this 2021 Annual Meeting of Asset Plus, which I now declare open. Today, we're pleased to welcome you as online participants through our virtual meeting platform, which has been provided by our share registrar, Link Market Services. Due to COVID-19 and everything that goes with it, we now have a Level 4 lockdown, and we are, therefore, holding a virtual meeting only. In the circumstances, this is the best we can do to enable participation and engagement amongst our shareholders, and we trust that you'll be happy with that. You'll be able to vote and ask questions online. I'll provide you with further instructions on how to do so as we progress through the meeting. If you encounter any issues, please refer to the Virtual Annual Meeting online portal guide or you can phone the helpline on 0800-200-220, that's 0800-200-220. [Operator Instructions] In kicking things off, I'd like to introduce my fellow directors who are present today. Firstly, we have Allen Bollard, who's an Independent Director; secondly, we have Carol Campbell, who's an independent director; thirdly, we have Paul Duffy, who's a non-Executive Director; and finally, we have John McBain who's based in Sydney joining us from Sydney today, who's also a non-Executive Director. And John probably has more freedom than we do right now. You'll hear from Allen and John shortly as they are standing for reelection at this meeting today. We also have present with us today the management team from Centuria, including Mark Francis, the CEO of Centuria New Zealand; Simon Woollams, the Chief Operating Officer of Centuria and CFO for Asset Plus; and Stephen Brown-Thomas, who is the Asset Plus founder -- Asset Plus fund manager, my apologies. Stephen will be providing a presentation following my address on the company's performance for the 2021 financial year and on the strategic outlook for the company. The Centuria team will also be available to answer any questions you may have. Our auditors from Grant Thornton are also present today and will be available to answer any questions on the 2021 financial statements, if required. In opening the meeting, I can confirm the following: firstly, that our share registrar has confirmed that the notice of meeting was duly sent to all shareholders and persons entitled to receive notice via our share registrar link; secondly, that a quorum for the meeting being at least 3 shareholders has been achieved; and thirdly, the proxies totaling 33.7% of the total votes have been received in advance of the meeting. I'd also advise that a copy of our presentation slides will be posted on the website of the company and a copy has been released to the NZX at the start of the meeting so that all shareholders will have access to the presentation as delivered today. Before we move to the agenda, I'd like to remind shareholders on how you can participate in this virtual meeting. In order to do so, you'll need to have inserted your shareholder number or [ CSN ]. And once you've done that, you can click on the tab entitled Ask a Question to send your questions through. You can also see a tab there that refers to Get a Voting Card, and that card will enable you to submit your vote. We'll address all the questions once the presentations have been completed, and shareholders are then free to submit their votes at any time up until the conclusion of the resolutions. The agenda for the meeting is as follows: Firstly, there will be a Chairman's address, whereby I'll provide an overview of the company's performance for the year and some key highlights. I'll then pass on to Stephen Brown-Thomas from Centuria, and Stephen will provide further detail on the past year's performance and discuss the strategic outlook, including the Munroe Lane Development and our investment property at Graham Street. Stephen will also speak to the financial results outlined in the annual report for the year ended 31 March 2021. We'll then open the floor to any questions on the presentations that you may have. And finally, we'll move to the proposed resolutions, and they will be voted on and there'll be an opportunity for specific questions on each resolution. The meeting will conclude following any general business. So turning now to my address. The 12 months to March 2021 were unprecedented. With the arrival of COVID-19 and subsequent impacts on the people and businesses of New Zealand. At Asset Plus, we had a number of challenges arise for the company, including the need to actively manage the portfolio and tenants through the government-mandated lockdowns in a manner that enabled us to preserve cash flow and value for shareholders. We had to extend the funding and shareholder approval condition dates for the Munroe Lane development a number of times to enable the agreement to develop and lease with Auckland Council to be put in place. Furthermore, you'll recall that the arrival of COVID-19 clashed with the initial timing of our capital raise, which is intended to fund the Munroe Lane development. And so we had to abandon that and relaunch the fundraising in what was a very dynamic market environment at the time. The impact on -- of COVID-19 effectively paused many office leasing decisions for the best part of 12 months and a large quantum of sublease office space came on to the market as companies transitioned to having their people work from home. I'm pleased to report that the Centuria management team met all these challenges head on and managed to achieve a strong result in the circumstances, including successfully completing the equity raise and securing bank funding for the Munroe Lane Development. and confirming the unconditional agreement to develop and lease the Munroe Lane property in Albany with Auckland Council and thereafter, breaking ground on that development in October 2020 with our construction partner, Icon. Some of our other achievements included securing Taco Bell on a long-term lease for development at Eastgate in Christchurch, a project which has now been completed and the tenant is in there and trading. We also had to obtain a resource consent for our preferred development option 35 Graham Street, which was completed. We secured an unconditional sale and purchase agreement for the sale of Eastgate Mall in Christchurch and you'll hear more about that later in the meeting. And we completed the year with a profit of $15.95 million, up from the $14.69 million loss the previous year, with adjusted funds from operations of $5.82 million versus the prior year's $4.74 million. Collectively, we've continued to make progress in the transition towards a modern, quality, Auckland-centric diversified property portfolio, which also provides us with a great base from which to pursue further value-add opportunities in the future. The team is now focused primarily on the successful delivery of the Munroe Lane Development. The Board have visited the site on a number of occasions, both pre and post the commencement of the construction, and we'll continue to visit regularly during the construction period. In respect of 35 Graham Street, we're fortunate to have a range of development options available for that property, which can be adapted to suit potential occupier demands. It's pleasing to see that a number of material leasing transactions have occurred in the market in the last few months, including the recent announcement that Deloitte are taking a 20-year lease over a new CBD -- over their CBD office premises, confirming that well-located, modern, efficient and sustainable office premises remain in strong demand despite the trends towards working from home in the wake of the COVID-19 pandemic. The effect of pause in leasing activity has been frustrating. But we remain confident that the fundamental attractions of 35 Graham Street that appealed to us in the very first instance remain relevant, those being the CBD fringe location, the large floor plates, the extensive and largely uninterrupted views out over the harbor and the accessibility to public transport and the vast local amenities. These features will continue to appeal to a range of potential occupiers across the development options that we have available. The government mandated lockdowns over the last few days further confirms that COVID-19 remains very real presence in our lives and that it will continue to interrupt business and create ongoing uncertainty for us all. This is likely to have further impact on the business in the current period in the form of rental abatement and relief, potential delays to the delivery of the Munroe Lane Development and could even further impact the leasing time line for the balance of Munroe Lane and Graham Street. Our management team have excellent relationships with our tenants and partners and they are well placed to manage the ongoing impact of these issues. Finally, I'd like to extend my thanks to my fellow directors and to the Centuria management team. We also thank you, our shareholders, for your continued support, which we don't take for granted. And we look forward to updating you further as we continue to progress the strategic transformation of the company and to sharing with you the progress at our Munroe Lane Development and the leasing of Graham Street. Thank you. That concludes the Chairman's address. I'd now like to introduce Stephen Brown-Thomas from Centuria, who will provide further detail on the current portfolio and the strategic outlook. Stephen?

Thank you, Bruce, and good afternoon, everyone. I'm Stephen Brown-Thomas, the Asset Plus Fund Manager from Centuria New Zealand, the external manager for Asset Plus. As Bruce has mentioned, we faced a number of challenges in the year and continue to face challenges as a result of COVID-19. However, we are progressing well with the delivery of our value-add strategy through current initiatives at both Munroe Lane and 35 Graham Street. Despite the impacts of COVID-19, we've delivered a strong result with total profit for the year of $15.95 million versus the prior year loss of $14.69 million, and adjusted funds from operations, or AFO, increasing from $4.74 million to $5.82 million for the period. Valuations did rebound back to prior levels, with fair values increasing 6.3% from March 2020 or $9.2 million. We have also secured a resource consent for the proposed preferred redevelopment option of 35 Graham Street during the year and are actively seeking tenants for that property in conjunction with our master leasing agent, Colliers. Munroe Lane Development is progressing within budget, but it is slightly delayed due to extension of time plans. We do retain a buffer period and are not currently anticipating any liquidated damages to be payable. And I'll speak to that further once we get to the Munroe Lane specific property update. The impact of current government mandated lockdowns are unable to be quantified at the present time. However, our delay of intent under the agreement to develop and lease with Auckland Council, and will definitely give rise to further extension of time claims. This will mean that the lease will start later, but will not give rise to payment of any liquidated damages. In October, we successfully completed the $60.2 million capital raise to fund the Munroe Lane Development, in conjunction with revised bank funding from BNZ. In addition, we've also secured an unconditional sale and purchase agreement to the Eastgate Shopping Center in Christchurch, with a deferred settlement between August 2021 and February '22. As noted, fair value of investment property rebounded back above prior levels. We've also acquired bare land in Kamo during the year, increasing the total number of properties from 4 to 5. However, after settlement of this place, this will revert back to 4 properties. The weighted average lease expiry, or WAM, has reduced from the prior year as a result of the shortening lease term at 35 Graham Street to Auckland Council which expires at the end of this calendar year. We are in a strong balance sheet position with a loan-to-value ratio, or LVR, of 5.4% as at 31 March 2021, on the back of the recent successful equity raise. That LVR is continually increasing as we continue to draw down funds for the Munroe Lane Development. We are expecting a look through LBR of circa 35% on completion, taking into account the divestment of the Eastgate. Occupancy remained strong at 98%, with historic vacancies at Eastgate still proving very difficult to lease. The NTA has also reduced over the period to $0.448 as a result of last year's capital raise. On to our strategic update. The current development at Munroe Lane is delivering on our strategic objective to increase the scale of the portfolio. This asset has an estimated complete valuation of $146.85 million, and that has increased since the equity raise in October last year from $142 million. That Munroe Lane Development, once complete, will provide a stable platform for sustainable growth moving forward, given the increased scale and quality of the portfolio. The impact of the WALE for the company, given the 15-year lease to Auckland Council, over 2/3 of that building does have a material impact for the company. The Munroe Lane Development is also anticipated to provide an attractive target yield on costs and development management, which is reflective of the tenant covenant of their anchor tenant, Auckland Council, on a 15-year term over, almost 2/3 of the building from completion. In driving our business transformation, we are significantly improving the quality and resilience of the portfolio whilst also reducing our retail weighting and increasing our exposure to the desirable Auckland market. We have successfully divested low-grade assets since taking over management in 2018, including Eastgate during the year. That divestment will provide balance sheet capacity once settled between now and August and February next year that we can utilize to reinvest into new assets and create a premium-grade asset with the proposed redevelopment of 35 Graham Street. Despite the retail exposure in the portfolio, we only granted $400,000 of rental abatement and relief during the Level 3 and Level 4 lockdown periods over the course of the year, which equated to only 3.3% of net rental for the calendar year. It is anticipated that similar receipting is received on the back of the current lockdowns, but it is too early to understand the full impact of those lockdowns given the unknown duration at present. On to 35 Graham Street. As noted, we did secure a resource consent for the preferred full-scale redevelopment option during the year. and we are working with Colliers, our master leasing agent, to secure tenants across either that preferred full-scale redevelopment or an alternative smaller-scale, light-touch refurbishment of the existing building. As noted by Bruce, COVID-19 obviously, had a short-term impact on the office sector. However, our view is that the office retains a very important role for all businesses moving forward, and we are looking through any short-term working from home impacts as a result of COVID-19. There remains a continued flight towards quality buildings with large floor plates and modern sustainable and efficient buildings from both corporate and government occupiers. As noted by Bruce, it's very positive to see the number of material leasing transactions have occurred during the year and some of those for extended Jules, including Deloitte for that 20-year lease term. The final decision hasn't been made by the Board as to the final development outcome, 45 Graham Street. However, any decision will be contingent on securing sufficient tenant leasing precommitment. As noted, the Auckland Council lease expires on the 31st of December this year, and we are actively working towards securing leasing commitment prior to that date. However, the further current lockdowns may adversely impact tenant decision-making and their processes, and the leasing of this property retain -- remains our primary focus in the near term given the impact on both the weighted average lease expiry and adjusted funds from operations as a result of the expiring lease and income. Eastgate in Christchurch. As previously noted, we've secured an unconditional sale and purchase agreement with this asset and settlement is to occur between now and February next year. This sale bolsters balance sheet capability to fund the 35 Graham Street development or other initiatives. The Bargain Chemist lease commenced during the year, and that was a combination of 5 tenancies, including a number that were vacant, merged together to create an 800 square meter tenancy at the entry to the center. And that has been a positive catalyst for further internal leasing activity subsequent with Caroline Eve secured post balance date across a number of tenancies that have been vacant for over 5 years down the walkway in the center. During the year, we also secured Taco Bell on a 10-year lease from completion for their first South Island store. That development was completed on time and under budget with opening occurring in June this year. Quite remarkably, it was the fifth-largest opening week for any Taco Bell globally and the largest training week ever for Taco Bell in Asia Pacific region. That's obviously going to have positive flow on impacts for the center, both in terms of patronage and spending. Stoddard Road continues to perform very well with all renewals exercised during the year, which did increase the WALE slightly on the prior period. The center remains 100% occupied, and the value has rebounded above pre-COVID levels as a result of strengthening yields in the large format sector. Over the medium term, securing a renewal with the Yankee anchor tenant at the warehouse remains our focus, although we do have plenty of time given that renewals won't churn until 2025. On to Munroe Lane, works are progressing well, with all foundation works now completed, the basin's floor slab port and precast beams and flooring progressing well sequentially across the site. The original target completion date of the 16th of December 2022 under the agreement to develop and lease with Auckland Council has been extended out to the 20th of January 2023 as a result of extension of time claims from delay events. Prior to the latest lockdown, completion was forecast to occur on the 22nd of December, so a buffer is maintained with no liquidated damages being anticipated. The impact of the current Level 4 lockdowns and any transition to Level 3 protocols cannot be assessed as yet. However, this will classify as a delay event under the ADR and the target completion date will be further extended with Auckland Council, again, mitigating any potential liquidated damages being payable by Asset Plus. The project is progressing within budget, and our contingency remains fully intact at the present time. Typical variations are expected moving forward. However, all in-ground risks or unforeseen ground conditions such as rock, soft spots and archeological discoveries have now materialized, and our external envelope package, being the roof, corner wall, facade system and external cladding is a fixed value package. These 2 areas are typically the largest risk areas on any vertical construction project. And we've mitigated that risk given that those packages are fixed, and we're already out of the ground, which is very positive. The project has also been registered with the New Zealand Green Building Council, with a 5-star target design rating expected to be issued shortly, and that's going to be followed up with an as-built rating on completion. From a leasing perspective, we have secured Auckland Council across 63% of the building on a 15-year lease from completion. We're in discussions with a number of cafe and food and beverage operators for ground floor tenancies and are positive on leasing prospects for these areas prior to completion. The office market on the North Shore has changed quite dramatically as a result of COVID-19. Prior to entering this agreement with Auckland Council, there's effectively no premium-grade vacancy at all on the North Shore. But as a result of COVID-19 and a number of tenants subleasing space on the back of that, there's now approximately 20,000 square meters of sublease space available on the North Shore as a result of companies, such as Vodafone in New Zealand, putting up space for sublease. As noted by Bruce, the location remains attractive in the long term and offers advantages that other North Shore locations cannot, and we remain positive on the leasing outcomes, particularly given the potential synergies of colocation with Auckland Council and with potential other government occupiers, the extensive sustainability benefits of the property, the large floor plates that have been designed for modern workplaces and also the other design nuances that take into account the impacts of COVID-19, such as this building, we've got 150% of the requirement for fresh year, providing a healthy and wellness environment. We can also offer occupiers a unique hub and spoke mall across both Albany and 35 Graham Street, which we understand holds appeal for a number of potential occupiers in the market. On the back of the increased as-of-complete valuation, which, as noted, went from $142 million to $146.85 million, the feasibility has also been reforecast with the lease incentives increased to reflect the change in the dynamics of that leasing market with the available space there. An update on Kamo. We secured this bare land in July last year and are currently progressing design and consenting for commercial development. The site was purchased well at $55 a square meter for industrial land and has already seen value increase $600,000 since acquisition. Moving ahead, the outlook for the company. Whilst it is obviously likely to provide ongoing uncertainty and challenges, as a result of COVID-19, we are well placed to navigate these, particularly with the boltered management capabilities of the wider Centuria Group. We have optionality on developments and leasing options at 35 Graham Street and can cater to most tenants within the market. As noted by Bruce, however, the current Level 4 lockdowns may impact our current tenant confidence that has been building over the course of the past year since prior lockdowns. Again, as Bruce noted, we remain very confident in the underlying fundamentals of the property and its appeal in the long term. Likewise, the impact of those lockdowns could also impact our ability and timeline to secure tenant commitment across the balance of the Munroe Lane Development. However, we still have approximately 16 months before forecast completion of that development to secure tenant commitment. We will be closely monitoring the financial impacts of abatement and relief claims as a result of the current Level 4 lockdowns and any reduction to Level 3 across the portfolio. We have great relationships with all of our tenants and a good understanding of the operations and impacts from previous lockdowns. We remain committed and focused on delivering on the current value-add initiatives across the portfolio and also regularly evaluating other opportunities in the market. The business is in a stable financial position with the implementation of the revised company strategy well underway. There has been increased uncertainty as a result of COVID-19, and it appears that this will continue to have an impact for us all. However, we are managing those as they arise. Our key focus remains securing leasing commitment across 35 Graham Street and the balance of Munroe Lane Development, which will unlock further value, increase adjusted funds from operation increased the portfolio WALE and provide increased certainty moving forward. I'd like to thank the Asset Plus Board and the Centuria team for their ongoing support and hard work over the course of the year. I, obviously, also extend our thanks to you, our shareholders, for your ongoing support and continued investment during the recent capital raise. We appreciate you joining us virtually here today and look forward to seeing you all in person in the future. Bruce, I'll hand back to you to take any shareholder questions.

Thank you, Stephen, and thank you also for your efforts over the last year. We are -- we're indeed very fortunate to have somebody of Stephen's caliber running the portfolio on our behalf. So thank you, Stephen. Yes, we now move to answer any shareholder questions.

[Operator Instructions] We have received one question in advance of the meeting, and that question reads as follows: When is the Board going to stop selling off important assets? I'll address that question now before we move on to some of the others we've received. We've been very clear about our focus, really, from the time that we launched the revised strategy, and that focus was to gradually reposition the portfolio. I think we said at the time, it was difficult to do that in a property company at the top of the market, but nevertheless, that has been the focus. And we stated right at that outset that we will be focusing on assets that had added value opportunity. So part of that was a desire to increase our focus in the Auckland market. And so the activities that you've heard Stephen talking about Munroe Lane and Graham Street reflect that. We're also concerned, I think, at being overexposed to the retail sector. And that's a sector that continues to go through real substantial change, and Asset Plus was overexposed to it. So the asset sales that you've seen, particularly the major assets in Christchurch and before that, Hawkes Bay, reflect that position and that strategy. So I hope that answers your question, and I'll now move to whether there are any other questions.

Okay. So we do have a few that have come in. The first one is from [ Bruce Hurst ]. And Bruce has identified the lease renewal fees of $843,000, and he just wants to know -- he thought that they seem a little high and in light of the fact that gross retail income has come down, so he just wondered if we could address that point.

Yes, Bruce, thank you for your question. That $843,000 relates to the leasing fee for the Auckland Council lease at Munroe Lane, and that fee was payable to Augusta under the terms of our management agreement with them. Of course, Augusta, and now, Centuria, but that was the basis of that $843,000. Back to you, Matt.

Okay. And we have another question here at this time from Bruce Parks. Bruce is asking. So we're almost through August, have any indication from the acquirer Eastgate when they might settle?

Gosh, it's day for Bruces, isn't it? Thank you for your question. We are in discussions with the purchase of Eastgate. As you are probably aware, based on your question, the settlement date provided for a range. From our point of view, I guess, the longer or the later the settlement, the better in terms of cash flow. And so Stephen continues to be in discussions with the purchaser about a settlement date and that hasn't been finalized at this time, but we are expecting to finalize it shortly.

Another question from Bruce Parks. So Bruce is asking, can we give any guidance on adjusted funds from operations for the period until Munroe Lane and redeveloped Graham Street come online?

That's probably one that I'll pass to Simon, our CFO, Simon. Are you able to answer that?

Thanks, Bruce. Look, unfortunately, we cannot provide any guidance at this time. That said, there are a number of, I suppose, prices this company -- which may ultimately dictate what the end result could be. So that's the reason why we can't do that. Obviously, we are divesting the Eastgate, and as you well know, Graham Street becomes fully vacant at the end of the year. So some very topical matters to address, but at this point in time, we unfortunately cannot provide any guidance up until the commencement of the council lease at Munroe Lane. Thank you.

Thank you, Simon. Matt, back to you.

Yet another question here. This time from [ Lee Jin Wang ], who asks, what's the likelihood of a further capital raise to fund 35 Graham Street redevelopment?

That will depend on which redevelopment option we pursue. As was mentioned during Stephen's presentation, we have gone down the path of a couple of options, one of which is a major refurb of the entire building and the other one of which is a light touch refurb. Our preference at this point is to keep that flexibility and -- given the tenant market. And when we strike upon the right mix of tenants, we'll identify which of those options we'll pursue, and upon doing so, that will decide the extent of any capital raise. It's entirely possible, of course, that we could do a very light-touch refurb and not a require capital raise at all. But we're not really in a position to say, until such time, as we have some clarity around the tenant mix. Thanks, Matt.

Okay. So [ Lee Jin Wang ] has another question. What is the development plan for Kamo? And what sort of property and investments are required at what time frames?

We're looking at a number of options for Kamo. Stephen, do you want to elaborate on that?

Yes. Look, it is subject to securing a resource consent. And once we've got that, then we can provide more guidance on likely capital commitments required. At this stage, there isn't kind of any material commitment in the near term. It's going to be over an extended period of at least 12 months to secure a resource consent, if not longer.

Thank you, Stephen. Matt?

So we have one other thing here. I think it's partially been touched on, but it's just a question from Brook, and they want to know what preferred funding mechanism for Graham Street development is.

Again, I think I should pass over to Simon. But again, the funding is going to vary on the extent of the redevelopment or refurbishment that we end up doing, and that's going to be a function of where the tenancy interest lies. But Simon, do you want to add to that?