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. And on behalf of the Board, I'd like to thank you for attending the Special Shareholder Meeting, which I now declare open. I'm pleased to welcome you as online participants through our virtual meeting platform, which has been provided by our share registrar, Link Market Services. As a result of the short time frame within which we had to schedule this meeting, we are holding a virtual meeting only. However, we do look forward to seeing you all in person at our Annual Shareholder Meeting, which will be held later in the year. You'll still be able to vote and ask questions online. I'll provide you with further instructions in terms of how to do so as we progress through the meeting. If you encounter any issues, however, 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. I'd invite you to send through any questions you may have as soon as you can, and that will allow us to answer those questions at the appropriate time during the meeting. In terms of getting underway, I'd like to open by introducing my fellow directors who are present with us today. Firstly, Independent Director, Allen Bollard, Independent Director, Carol Campbell and our Non-Executive Director, Paul Duffy, who's with us. We have an apology, unfortunately, from John McBain, who many of you will know, is based in Sydney. And John has had another commitment today and sends his apologies. So, he is not able to be with us. We also have present with us today the management team from Centuria, including Mark Francis, the CEO of Centuria New Zealand; Simon Williams, the Chief Operating Officer of Centuria New Zealand; and Stephen Brown-Thomas, who is our Asset Plus Fund Manager who's joining us as well. Stephen, will be providing a presentation on the sale of 35 Graham Street following my opening remarks. The Centuria team will also be available to answer any questions you may have in the course of this meeting. To the formal matters and opening the meeting, I can confirm that our share registrar has confirmed that the Notice of Meeting was duly sent to all shareholders and persons entitled to receive notice of it via our share registrar link. I can confirm that a quorum for the meeting being at least 3 shareholders has been achieved, and I can also confirm, as of this morning, the proxies totaling 56.6% of the total votes have been received. Also, a copy of the presentation slides will be posted on the NZX website of the -- on the website of the company, sorry, I should say, and is also being released to the NZX at the start of the meeting so that all shareholders will have access to the information as presented today. Before we move to the formal agenda, I'd like to remind shareholders how they can participate in this meeting. In order to participate, you'll need to have inserted your shareholder number or an [ CS CIN ]. Once this has been done, you can click on the tab ask a question, and that will enable you to send your questions through. You can also select the tab, get a voting card in order to submit your vote. We will address all of the questions we receive once the presentations have been completed and prior to the vote and shareholders are free to submit their vote at any time up until the conclusion of the meeting. The agenda for the meeting will run as follows. Firstly, I will provide in the form of a Chairman's address, an overview of the sale of 35 Graham Street and why the Board is recommending that shareholders approve the sale. Then, Stephen Brown-Thomas, our asset manager from Centuria will provide further detail on the sale itself and we'll then open the floor to any questions on the presentations that you may have. And finally, the proposed resolution will be voted on and there'll be an opportunity for specific questions on the resolution to be raised at that point. The meeting will conclude following any general business. So, turning now to my address, the Chairman's address on behalf of the Board of Asset Plus. The Board is pleased to be given the opportunity to invite you to vote on the proposed sale of the property at 35 Graham Street, Auckland for a sale price of NZD 65 million. It is the Board's unanimous recommendation that shareholders vote in favor of the proposed resolution for the reasons set out in the Notice of Meeting, which was sent to shareholders on the 19th of May. Many of you will recall the property was acquired in mid-2019, with short-term holding income for a period of 2 years subsequent to settlement. The property had a number of redevelopment prospects, including a light refurbishment option or at the other extreme perhaps, an extensive redevelopment, which included adding 2 or 3 additional floors of office space. There was also the alternative to do something in between the 2. Design and consenting work streams for the preferred redevelopment option were taken promptly after we acquired the property, and resource consent for the proposed development was obtained in February 2021. We also commenced marketing activity at that time with a view to securing leasing commitments. At the time of the acquisition, the office market sector was quite buoyant and there are a range of -- there's a shortage of prime office space available, particularly in that corridor west of the city that made the acquisition and the development potential for Graham Street quite appealing at that time. Also appealing was the flexibility in the range of options, including the ability to reduce the scale of the development of market conditions changed. About the same time, many of you will recall that we also secured the Munroe Lane Development opportunity and launched a NZD 100 million capital raise to fund both projects. That capital raise was unfortunately withdrawn due to the turbulent conditions and uncertainty as COVID-19 arrived in our shores in March 2020. The reduced capital raise of NZD 60.2 million was then launched in September 2020 to enable Munroe Lane to proceed and for us to kick off that development activity. At the time, that was predicated on the basis that a further capital raise or further asset sales would need to occur in order to fund any development at 35 Graham Street. However, as we stand here today, we've not succeeded in generating any leasing pre-commitment for the Graham Street property. And at this point, with the company's current share price relative to NTA, the Board does not consider that a capital raise to fund the development of the property is a viable option at this point in time. Although the fundamentals of the property remain attractive, and while a number of prospective tenants indicated their interest in the property, our pre-leasing efforts have been unsuccessful. And some of the key factors behind that, obviously, the various lockdowns, the working from home mandates, which has meant people coming into the city has -- back into the city has happened more slowly than we anticipated. And significant sublease space becoming available as other tenants in the area have reacted to the market changes. Notwithstanding, there have been a number of significant lease transactions occurring during that period. Typically, for near-complete or complete new build construction projects with 6-star Green Star ratings. This highlights the benefits of having the financial capability to build on spec to respond to occupier demands and a balance sheet to facilitate such an approach. When these circumstances are placed alongside some of the more recent developments in the market, such as the now increasing interest rate environment, the supply chain impacts, resulting in increase in construction costs and the softening of the investment market, it becomes apparent that the best option for the company is to forgo this opportunity given our financial capability at this point in time. As you know, the company has received an unsolicited offer from Mansons that happened in April of this year. And following some negotiation between the 2 parties, that offer is before you now. Upon receiving the offer management, we were instructed to canvas, the -- what was probably a limited pool of potential other purchasers who could be in a position to acquire the property, but it quickly became clear that the offer from Mansons was considered by the Board to be the best available offer and that it was in the company's best interests that it be accepted. Accordingly, given the circumstances outlined above, the Board feels that this is a very good offer that should be accepted by shareholders. There is no question that there is increased delivery risk to deliver a redevelopment of 35 Graham Street in the current market. There's also no question that holding the property without any leasing commitment is a particularly ineffective use of capital for a company such as Asset Plus at the current time. And so sale of the property, albeit an opportunistic one is therefore, the best currently available option to preserve value for shareholders and to provide a stable platform from which to move forward. The NZD 65 million plus GST, if any, sale price for the property represents a premium to the 31st of March 2022 valuation. That was an independent valuation carried out by JLL and came in at NZD 56 million. And so the net present value of this transaction at NZD 59 million is also above the JLL valuation. The sale proceeds will be utilized to retire debt, which is anticipated to reduce the company's debt to approximately NZD 19 million or 10% on LVR upon settlement. The settlement date set, as you will know, if you read the papers for 1st of December 2023 at the earliest and a 10% deposit of NZD 6.5 million will be payable by Mansons once the shareholder approval that we're seeking today for the transaction is obtained. And once received, that deposit will be utilized to retire debt. Mansons of course, has demonstrated an enviable track record in the Auckland office market and so we consider the settlement risk to be low. The extended settlement date affords the company time to complete the Munroe Lane Development and consider how market conditions developed over the intervening period. And upon the settlement of the Graham Street transaction, the company will be well placed to consider further opportunities in this ever-changing market as they arise. And of course, we look forward to those discussions with you in due course. That completes the Chairman's review of the transaction and the question we are asking of you today, and I thank you very much for listening. I'd now like to introduce Stephen Brown-Thomas from Centuria, who will provide further detail on the sale of Graham Street. Stephen?

Thank you, Bruce, and good afternoon, everyone. I'm Stephen Brown-Thomas, the Asset Plus Fund Manager from Centuria New Zealand, External Manager of Asset Plus. I'll now run through the Manager's presentation, which should hopefully address any queries you may have. However, as noted by Bruce, please ask any questions you may have, and we'll answer those at the conclusion of the presentation and prior to voting on the resolution. Firstly, I'd like to summarize the transaction for you. The purchaser as mentioned is TCLM Limited, who are very well regarded, well held private developer in Auckland. They are one of Auckland's largest developers of commercial office space over the past 15 years. The purchase price is NZD 65 million and settlement is to occur on 1 December 2023 with a deposit of NZD 6.5 million payable once the transaction becomes unconditional. Mansons do have a right to extend the settlement date out to 1 December 2024. And in exchange, the purchase price will increase to NZD 68 million and the deposit will increase to NZD 13.6 million. Mansons must confirm the settlement extension option to us by 1 October 2023, at which point the additional deposit becomes payable. An extended settlement date is not unusual for a transaction and property of this nature, given its vacant position and development potential. The transaction is completely unconditional from the purchaser side and is conditional only upon the Asset Plus shareholders approving the transaction today. That means that should Mansons fail to settle the property on the settlement date, they will forfeit their deposit in full. They'll also be liable to pay penalty interest and we could also sue them for any loss on a subsequent resale of the property. The key circumstance in which Mansons could terminate this agreement as if the property was so damaged or destroyed and such damage was not made good prior to the scheduled settlement date. The purchaser could elect to proceed with settlement at the purchase price, less any insurance monies receivable. The property is currently insured in excess of the purchase price of the property. The other circumstance that could give rise to termination by the purchaser is if Asset Plus does not complete settlement of the property on the settlement date. I'd also like to note that we do retain the ability to lease parts or all of the property up until the settlement date. So, long as at the settlement date, we deliver up vacant position. We are actively working on a number of leasing opportunities at the moment but predominantly car parking related. However, we do not expect to enter any material leases given the current status of the property with the internal fit-out partially demolished and the time frame that we have available through the settlement and the fact of the potential extension to the settlement date and the lack of certainty attached thereto. I now like to cover off the impacts of the transaction proceeding that were also set out in the Notice of Meeting. Firstly, it will eliminate all leasing and development risk on this property and what is obviously a very challenging environment at present. As you know, we've been actively trying to list this property under both redevelopment scenarios for the past 2 years with no tenant commitments secured to date. The construction industry and landscape has also significantly changed in the past 2 years as a result of supply chain constraints, escalation pressures, resource scarcity, labor scarcity and significant risk has materialized in construction delivery as a result of those factors at present. Post settlement, the company's debt is forecast to reduce to circa NZD 19 million or a 10% loan-to-value ratio, or LVR, that is low by sector averages, which are typically in the range of 30% to 35%. The company is currently constrained by a small balance sheet relative to the scale of developments we are trying to undertake and now the alleviated risk for delivery of those developments. Without securing significant leasing pre-commitment, the company is unfortunately not in a position to fund the redevelopment of the property on spec. The sale represents a premium to the 31 March valuation undertaken by JLL, which valued the property at NZD 56 million. The net present value or NPV of the transaction and future cash flows from the receipt of the deposit and the segment proceeds is NZD 59 million. And so that's based on the forecast cash flows up until the settlement date. NZD 59 million was also adopted as a fair value of the property for the year ending 31 March. Post settlement of the property, the forecast financial impact of the transaction is as follows. Given the property is currently vacant, there is no reduction in income. There will be, however, a saving of NZD 0.5 million per annum for operating expenses that are currently being incurred on the property that will no longer need to be funded by the company. Management fees for the company will also reduce as the assets under management reduce and that's a saving of NZD 0.3 million per year. Interest cost for the company will also reduce after settlement as the sale proceeds are used to retire debt. Those savings are estimated at NZD 3.7 million per annum and the assumptions around the interest rate is set out in the Notice of Meeting. The ability to claim depreciation on the property will be lost once the property settles. That's approximately NZD 0.7 million per annum, but that quantum would decline over time, reflecting the diminishing value of the asset. Now that we've covered off the impacts of the transaction, I'd like to set out the rationale for divesting this asset. Firstly, it will derisk the company by reducing the debt to a forecast 10% loan-to-value ratio and remove significant capital commitments to redevelop the property that could only be funded through equity or our debt facilities. The ability to fund those that redevelopment is wholly contingent on securing pre-leasing commitments if it was to be funded through our debt facilities. And as noted, we're yet to secure any leasing commitments for the property. As alluded to by Bruce, there has been a structural shift in sentiment over the past 2 years as a result of the COVID-19 pandemic. This has adversely impacted on our ability to secure tenant commitments under either redevelopment scenario. And given that lack of pre-leasing commitment, that means that we aren't able to unlock the debt facilities available to us and develop the property on spec. And as noted, we don't have the capital on balance sheet to do so either. And we also don't have the income profile to be able to hold this asset vacant for an extended period of time, given the size of the current portfolio. The forecast development margins and yield on cost for either development scenario on the property are also no longer sufficient relative to the risk associated with delivery from the current very challenging environment. And that's a reflection of the changing macroeconomic landscape and increasing interest rate environment as well as the delivery risk we've already spoken about in terms of construction costs, resource availability, et cetera. Given our inability to debt fund either redevelopment scenario without leasing pre-commitment, equity would be the only option to redevelop the property on spec. However, as noted by Bruce, we do not believe that raising capital at this time is feasible given the share price discount to NTA and the price that capital was raised at the September 2020 capital raise. The sale will also realize funds above the 31 March independent of JLL valuation of NZD 56 million. In terms of the proceeds of sale, they will be wholly used to repay part of the company's debt facilities. The initial deposit and any subsequent deposit of the extended settlement date option is exercised by Mansons will both be used to repay debt. On settlement, the remainder of proceeds will also be utilized to repay debt facilities and the company's debt facilities are forecast then to reduce to circa NZD 19 million or a 10% loan-to-value ratio. As noted, that is low by sector standards, which are typically 30% to 35%. BNZ, our funder remains supportive of the sale and our strategy to reduce the company's debt facilities. In terms of the investment strategy, the property was purchased pre the COVID-19 pandemic in mid-2019. As noted, the strategy was to redevelop the property under either a full redevelopment, adding multiple floors to the property or a partial redevelopment scenario or as Bruce stated, somewhere in between. Market conditions have drastically changed since acquisition with the onset of the COVID-19 pandemic and subsequent impacts, particularly anticipated on the office leasing market with the uncertainty associated and the working from home mandates. These changes certainly have adversely impacted on our ability to deliver on that intended strategy for the property that we set out at acquisition and the changes have been 3-fold. Firstly, the adverse change in the office leasing sentiment, and as noted by Bruce, significant sublease space coming to market, the impacts of the lockdowns and the subsequent sublease space becoming available. Secondly, the increased delivery risk driven by those supply chain constraints, labor scarcity and significant cost escalation. And thirdly, the increasing interest environment rate -- interest rate environment we now find ourselves in. All of which combined have impacted on our ability to deliver on the original business case and forecast metrics. I appreciate that we obviously set out to grow the company and portfolio through both this opportunity and the Munroe Lane Development. However, circumstances have changed and the divestment of this asset is the right decision given the constraints of the company and the current market conditions we are facing. Management remains committed to delivering the Munroe Lane Development, which will then provide a stable platform for the company to move forward from. If shareholders do not approve the transaction today, we will incur cost of approximately NZD 100,000 associated with the shareholder meeting and legal expenses associated with the Notice of Meeting. In addition, the forecast reduction in interest rates will be lost, and it may take a protracted period of time to secure leasing commitments for the property. As noted, it's already been circa 2 years with no commitments being able to be achieved. And we're unsure when those commitments could be obtained moving forward if the sale wasn't approved today. As noted, further equity is also going to be required to refurbish or redevelop the property and there could also potentially be an event of review under the existing BNZ banking facilities if leasing commitments weren't secured on this property by September 2022. In addition, we are strongly of the view that would be unlikely to secure any alternative purchase for the property, particularly at the currently contracted purchase price in the current market. I just now like to cover out the key risks of the transaction. Firstly, if Mansons fail to settle the property on the settlement date and secondly, if a damage or destruction event occurs results and Mansons terminating the purchase sale or purchase agreement. Firstly, we believe the risk of Mansons defaulting on settlement is low, given their track record of transactions of this nature, the fact that they would forfeit their deposits reliable for penalty interest and we would also retain the ability to sue them for any subsequent loss on resale of the property. Secondly, we deem the damage and destruction risk to be low given the property's seismic capacity, the low seismic activity in the Auckland region, the fact that the property has fire protection systems installed and the fact that management are on-site undertaking weekly inspections. We also hold replacement insurance in excess of the purchase price and we could potentially cash settling the insurance claim if Mansons did terminate the agreement if the building was destroyed and then we could sell via land. That now concludes the manager's presentation. I'll now pass back over to Bruce to facilitate responses to any questions that may have been asked during the presentation. Thank you.

Thank you, Stephen. Very detailed. Thank you very much. And we now move to, to answer shareholder questions. Just a reminder before we move on to those questions in terms of how to submit questions, please ensure that you've inserted your shareholders or CSC number and click on the submit a question tab as indicated on the screen and you should be able to then ask your question. We have received a small number of questions in advance, so I will address those questions now while we're waiting for any others that may come through. The first question reads as follows. Will management in this company ever stop selling assets that bring in income? So, I'll address that now. Firstly, thank you for the question. And in this circumstances, I think it's a fair question. The assets we have sold, including the proposal to sell this asset, have all been challenging assets in difficult market conditions. As you'll recall, we've been trying to reposition a property investment company that did have 3 or 4 years ago, a rather undifferentiated portfolio of assets that was a bit of a mixture. And we've been trying to make those changes at the peak of the market. And that's a peak that's run for a long time. The most recent sale of Eastgate was our reaction to -- against the goal to exit a property that had many challenges and particularly during and after COVID, a constant battle to attract and retain tenants. So, it made good sense when a good offer came along for Eastgate for us to sell that what was a rather difficult asset in a rather difficult market. The proposal before you now is admittedly an opportunistic sale. It's an approach that came without us actively marketing the property. But 35 Graham Street has become an asset which we've found difficult to lease. And I guess it hits us at a time when our own capital constraints make progressing a business case difficult. So, there is logic to selling 35/35 Graham Street today and with an offer before us of the magnitude that is sitting there today. We, the Board are very, very unanimous and positive that, that is the right thing to do. In both cases, both Eastgate and Graham Street, the selling prices are above what we'd have anticipated for the assets in the current market. And so we do believe both transactions are in the best interest of shareholders. So, I hope that answers your question about our attitude to selling assets. It has been something that we -- as I say, we've been opportunistic about rather than proactively targeting, particularly in respect of the latest asset. I now have another question. We've had a question regarding Mansons having an option to acquire or not acquire the property and considering halving -- or considering having half of the deposit nonrefundable? Now, Stephen has already addressed that in his speech. Mansons don't have the option not to settle the sale unless there is significant damage or destruction to the property. If they fail to settle the entire deposit will be forfeited as per Stephen's response a few moments ago. So, I hope that answers that question. Are there any other questions? Team, have we received any other questions in?

Yes. There's one here, Bruce. It's actually a couple now. So, we've got the first one is from Duncan Johnson, who wants to know if the management company will receive a fee for the sale of Graham Street and if so, how much?

Simon, do you want to talk to that?

I can confirm there's no fee payable to the manager in respect to this transaction.

Thank you, Simon.

Okay. And Duncan has a follow-up question. He's just looking for some commentary around the recent performance of the share price.

And in relation to? Or is that the end of the question?

Just that. General, just looking for some color on our view on the performance of the share price.

Okay. Well, look, I'd invite the Centuria guys to contribute to that. But in the first instance, as people will know, property investment vehicles across the board have taken a bit of a pounding in terms of share prices in recent months. It's not specific to New Zealand, of course, global share markets have been through a difficult couple of months and we are no different. I think in respect of Asset Plus, our share price is a reflection of the fact that Munroe Lane is not completed. And I think as Munroe Lane gets closer to completion, the full market value of that asset will be recognized. This transaction, which does eliminate a lot of risk from the company is probably not fully priced in our shares. And then the Eastgate settlement has not yet taken place. And so that will be another thing or another matter affecting investor sentiment. But I think more broadly, it's the market as a whole that is suffering and property companies across the board are trading at a substantial discount to NTA now. Our NTA is about NZD0.44 a share. As of this morning, our share price is NZD0.26. So, we've been hit a little bit harder in percentage terms, and I think that's probably because of some of those uncertainties around the 3 properties that I've just mentioned. Mark, did you have anything to add to that or your team?

Look, I think you've summed it up pretty well, Bruce. I mean look, we obviously can't control what the share price does. It's frustrating for us as a manager. It's very limiting for us as a manager and as a Board to have a share price trading at a big discount, it makes it hard to obviously to grow the company. And one of the challenges that this company has always faced is a lack of scale. It's one of the things that we've been hoping to address, but as said, very difficult to do that when you can't raise equity at an acceptable level. But you touched on NTA. I mean, shareholders' funds, that's what we can control, I guess, and can influence. And we certainly think that the Eastgate sale and this asset sale is at both at levels above asset backing is good business to be able to exit at above NTA and when your stock is trading at a big discount to NTA makes commercial sense. And you also mentioned derisking, this Graham Street sale is a massive derisking for this company. So look, we feel very, very comfortable with the position of the balance sheet post the sale. And as you said, markets are markets, we can't determine what the share price will be. But certainly, as a management team, and I'm sure as a Board, we feel very, very comfortable about the position of the company particularly as we enter a down cycle or already into the down cycle, who knows how long that may last, but it's a nice position to have the balance sheet very, very tidy going into a downturn, certainly gives us opportunities.

Thank you, Mark. Are there any other questions?

There's one more in here from [ Bruce Kertz ], who asks, as your approach to sell property, can you confirm no commissions are payable?

I can probably answer that too, Bruce, if you like. So look, we were approached via an agent, via Colliers, so the buyer requested that Colliers approach us, which is a pretty common practice, particularly for a transaction of this size. So, there is a 1% commission payable to Colliers for brokering the deal.

Thank you, Mark. Are there any other questions?

That's all we have Bruce, there's nothing else in there at the moment.

Okay. Thank you very much. So, we will now move to the resolutions to consider the formal resolution that's being put to the meeting. There's only one resolution, as you know, and it requires a simple majority of votes to be cast. And voting on this resolution, of course, will be way of a poll. So, the resolution will read as follows. And I think it's up on the screen for you all to see that the sale of the property at 35 Graham Street Auckland has been approved for NZD 65 million plus GST, if any, by Asset Plus Investments Limited to Mansons TCLM Limited on terms described in further detail in the explanatory notes within the Notice of Special Meeting dated 19th of May 2022, be approved for all purposes, including NZX Listing Rule 5.1.1(b). Are there any questions or comments from shareholders on the resolution? There being no questions, I now formally put to vote the resolution and invite you to vote on the resolution via the get the voting card tab, which in within the online meeting platform. You'll be asked to enter your shareholder or proxy number to validate your vote. Once you've voted, can you then mark your voting card in the way that you wish either voting for, against or abstaining and then click submit vote on the bottom of the card to lodge your vote. We'll just pause for a few moments. While you do that if there are any further questions or request for assistance, please refer to the online portal guide. For your information, voting will remain open for 5 minutes after the conclusion of the meeting, but we'll just pause for a moment now while some of you work your way through that. The results of the vote will be published on Asset Plus' website and will also be announced to the NZX this afternoon as soon as those results are available. That concludes the voting on the resolution. I did ask immediately prior to the meeting, if there were any items of general business that had been called for. To my knowledge, they haven't. Is that still the case, Luke?

That's correct, Bruce.

Thank you. In that case, I will move to close the meeting. I'd like to thank shareholders for attending. It's always a bit awkward having these meetings via Zoom calls. And so we certainly appreciate you making the effort to join us and we appreciate your ongoing support for the company, and we look forward to the results of the vote. And in the meantime, I thank you once again and formally declare the meeting closed. Thanks very much, and have a great long weekend, everybody. Bye-bye now.