Asset Plus Limited (APL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Asset Plus Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Francis, CEO of Centuria NZ and Manager of Asset Plus. Please go ahead.

Thank you. Good morning, everybody, and welcome to the half year results for Asset Plus to September 2022. You're going to hear from myself this morning. Also, Simon Woollams, our CFO; and Stephen Brown-Thomas, our Fund Manager. I'll take you through just a quick -- the first few slides, results summary, key metrics and then hand over to Simon for financial performance and a bit of a funding update. And then Stephen will walk through the portfolio update and then back to me for some comments on the outlook and then we will take questions. So to kick off, obviously, as you've now a chance to review the deck I'm sure, total profit down to $290,000 from $2.5 million in the prior period. Primarily driven, obviously, by the removal of that rent roll at 35 Graham Street and also a factor in there being the higher interest costs across our floating debt profile. FO breakeven down from just other $2.6 million in the prior period for the same reasons as above. And as you can see, the net rental down at $2.28 million from $4.4 million largely due to the vacancy at Graham Street and also factoring in the Eastgate divestment, which occurred in August as well. I mentioned interest rates, obviously, the company's debt position is fully floating, and we'll get to that a bit more detail shortly as well. But that clearly has had an impact. And we'll put the company in a tax loss position for year-end, which Simon will be able to drill down into a bit more detail on that shortly as well. The key metrics and look mindful of these numbers are not hugely helpful when viewed as at 30 September. Obviously, there's a lot of moving parts at the moment, and these numbers are changing fairly fluidly. So -- but look, as of 30th September, carrying value at Munroe gave us a portfolio of $212 million. On completion of Munroe, that gets up close a total of $40 million. As at 30 September, obviously, we hold 4 properties. By the end of tomorrow, we will only hold 3, and we'll talk more shortly about where that number comes to from there as well. Again, with occupancy in WALE, I sort of need to look through some of the moving parts here, and in particular, the sale and completion of the sale of Graham Street and obviously, the completion of Munroe Lane. And as you can see in those explanatory notes at the bottom there, on a look-through basis, the WALE's is more like 7.5 years. And we get up to 70% occupancy. Obviously, both those numbers exclude and ignore any potential additional leasing activity at Munroe Lane. Loan-to-value ratio of 23% and NTA [indiscernible] of $0.44 a share. There has been a bit going on in the period, as you can see there on Page 5. Obviously, uses settlement completed on 29 August. We repaid $40 million in debt following that. We've confirmed the sale obviously of the Graham Street asset. And as you know from previous advisers, there's a moving target, which is when settlement of that might occur, but either end of '23 or end of '24, depending on the purchase decision there. And obviously, if they do extend out to the '24 date, they pay an additional $3 million in purchase price and some additional deposits as well. Munroe Lane going really well, 8% complete on a cost basis and looking to have that finished by April of next year and with counsel moving in shortly thereafter. Caroline, as I alluded to a few months ago, we'll settle tomorrow. And the other key thing, I guess, for the period of those loan facilities all extended right out, I figure at most, '25. So taking us right through the completion obviously of Munroe and the settlement of Graham Street. So with that point, I'll hand over to Simon who will walk you through the financial performance in a bit more detail. And then, as I say, over to Stephen for a bit more detail on individual property in the portfolio and then back to me for where to next.

Good morning, everyone. So as I touch on AFFO's break in for the period, we did signal that when we made the decision to cease the dividend earlier this calendar year. That's probably that's not touched on by the Graham Street settlement of Eastgate late in the first half, which [indiscernible]. Management fees were higher this half that's primarily driven by the ongoing development at Munroe Lane, offset by the divestment of Eastgate late in the half. Finance costs are higher, and I'll touch on this in more details shortly, but that's primarily driven by the higher debt profile and higher interest costs incurred during the period relative to the September 21 period. There's a small fair value gain. That sets a small write down in Kamo to reflect the [indiscernible] deal, which settles tomorrow and offset by a small fair value in Graham Street. Mark touched on this, but we are in a tax loss position, and we are forecasting those tax losses to accumulate over time for 2 reasons: one is the -- I believe that, that will only cost at Munroe Lane and also once Munroe Lane is complete, we believe that for a new build that appreciation claim will be quite material. So in the half year, we've just reflected a deferred excess equivalent to deferred tax liability is no net tax admission. I think it is around the utilization of losses, and we've determined that in the near term, we are going to utilize those losses for the period I just outlined. There is also [indiscernible] a retention and we'll follow a few of this. Moving on to Slide 8. The net rental position is pretty straightforward. Eastgate also produce by just over $400,000 as the property settled on the 29th of August. Unfortunately, as we had challenges getting settled, the reimbursement was effective as those that we return cases of August just in almost 2 months in fact. Stoddard Road is broadly flat. And as I noted, perhaps it's fully vacant for the period. In terms of Slide 9, administration and funding costs, the key point here really is our treatment of funding costs. So our investment facility and working capital facility are essentially expense through the P&L and/or interest in line as the development capital line into that the invest subsidy was materially higher this half and so the Eastgate settlement which is material just a slight [indiscernible] I'll touch on shortly. In terms of the finance position on Slide 10, again, pretty straightforward here, and here is more detail on the movements for the period set out of the appendices. But essentially, the investment properties represent Stoddard Road and Munroe Lane in there cost $106.1 million. Both Graham Street and Kamo held for sale. In terms of the debt profile, it obviously increased during the period as we drew down the funds to progress some unrolling development but on 29th of August, a saw we repaid $40 million to [indiscernible] accordingly. Borrowings were classified as a current liability. That has been announced yesterday. They have formally been extended out to March 2025. The NTA is constant, and it's pretty self-explanatory. We undertook no external valuation today net primarily still up growth for the period and obviously, no dividend being paid, and we recognize a very small process in accounting level. Gearing at 23%. We're forecasting that on to basis prior to any settlement of Graham Street and/or exit to Stoddard Road once. Munroe Lane is complete, gearing will reach 34% and then reduced to 10% once Graham is settled. Noting that Stoddard Road was to be also sold that we would be in a cash position of circa $20 million. In terms of funding on Slide 12, we did provide a pretty comprehensive announcement yesterday. The funding is relatively unique. And since where the company is currently positioned. So the key quarter obviously extension out to March '25, still has been largely increased. We've removed the ICR covenant. In return, we're providing a lockbox of $5 million. So there's no formal reporting on ICR, but we do -- we'll be reporting the bank on leasing updates and also our unit for the relevant reporting periods. And those metrics will then assess the sizing of a lockbox thereafter. So complete obviously leasing a little over time, hopefully improve EBIT position and/or service sales of Stoddard Road, which may mean that over time we are able to release [indiscernible] and lockbox. It's been obviously a tough time. We are in a non-hedging position currently, primarily due to uncertainty around the Graham Street divestment and also with said intentions to make it still grow. So that's it for me. I'm happy to take on [indiscernible] then I'll hand over to Stephen to give you an update on the developments and with the portfolio.

Great. Thank you, Simon, and good morning, everyone. To [indiscernible] to Munroe Lane, so there's like progresses going very well up there. We handed over Level 3 the first order Auckland Council last week and the for our contractors and the now complete the some vehicle. And we have known the subsequent floors on a monthly basis moving forward. And we anticipate that by the end of April next year, Auckland Council lease will commence, and we'll have paid in completion and start moving in shortly thereafter. All things being considered 4 months late through the last couple of years is really a direct correlation to the Auckland's [indiscernible]. So we think that's a pretty good result in the circumstances. So we are previously complete as at 31 October and [indiscernible] today and total cost completed $27.8 million. So the budgets, we are tracking in line with the recent budget that we restated and communicated at the AGM in August, which does take into account all those impacts of COVID-19 over the last couple of years and also the change of the market conditions in terms of lease incentives and promos which have been increased to reflect the change in the market. We are also progressively obtaining code compliance certificates as we complete various stages of development in terms of the [indiscernible] foundation structure in [indiscernible] as well as at 30 September, fair value represents cost, but probably will be redated come March, which will be effectively is complete. So the target margin is now 7.2% as communicated at the AGM in August, that is down from the original target of 9.8% and the target the year on cost now 5.5%, down from 5.8% from the original capital in 2020. And I say as noted to the year as well, following completion of construction, the commencement of Corporate Council released and once we've leased the balance of the space within the building as well. The company is going to consider its ownership of the property moving forward, subject to market conditions. With that does have -- and Mark is going to touch on that a little bit further in the outlook section. As we turn to the leasing now. So obviously, very front end buying for us and our key focus at the moment. We are working with a regional Auckland-wide F&B operators for the Kiosk. Part of the lobby on the ground floor. And we are also running through that bridge margin emission program at the moment with agencies. And we are now starting to get some contraction with that. Obviously, as doing some research, we've now got the building envelope complete window type and the floors are progressing to the point where they're fully walkable. They look pleased rather than just a construction zone as we take through now start to appreciate the positive benefits of the site. The ventral white can style for planes, the atrium and how efficient those floor plates are. So we are starting to get some traction, which is great and a number of walk throughs have been occurred. We're also working currently with government agency, government property group. We believe there's a number of synergies in colocation with local government for all counseled and obviously takes all of central government offices in terms of sustainability with the 5-star Green Star rating, 5-star neighbors reading in some of the other initiatives that we have committed in the design as well. So we're actively working and targeting government occupiers as well as corporate occupiers. We do have the ability to split the top level as well. It was always designed with that flexibility in mind. There are obviously a larger number of small accounts and that North Shore market compared to [ multiple day ] occupiers that remains an option moving forward if a fully day occupier can be secured fully. So moving to Stoddard Road. It continues to be a very pivotal asset well for the property about 3.1 years, and occupancy remains 100%. We have secured a number of our yields through the year -- so through the period, 5-year extensions secured with Coffee Club that represented 3.7% of the income and there was a refurbishment of that property done at the same time. It's come up very well. We've also been a lease renewal from early '23 with ASB, which again represents 3.7% of the center's income, and there's no other renewals due at the center until August 23, and we're already in discussions with our tenants as well. We also are interested with a rent review from February this year with WALE House. It's lower of market or CPI review, and we've now settled that at a 1.3% increase, which is the market rental. And look, the building remains 100% occupied, and we think it's a great strategic location and we've got continued strong interest in the property with a number of tenants catering to make direct inquiries as to availability through it and also through agents. We are going to market the property for some for the first quarter over the next calendar year. And we'll obviously update everyone of the outcome of that once complete. There is a right of first refusal of it. We do need the discharge with the warehouse as well as part of that marketing and potential divestment process. So Graham Street, Mark has covered a lot of this as well [indiscernible] to this year to divest asset to $65 million in December 2023. All of the purchases a lesion to be deferred for a further 12 months now to September '24 in consideration of an additional $3 million and increased the deposit up to a total 20%. Given that settlement is deferred, increase of value is $60.4 million based on discounted cash flow. And as some indicators, there's been a slight change in that discount rate as well, reflecting that calculation. And as [indiscernible] the settlement was made in front of shareholders, the ability to secure these commitments. And either development scenario like a refurbishment or a full redevelopment to the 3 floors. The link of balance sheet capacity and inability to hold that property on a vacant basis for an extended period of time when key drivers that divestment. And obviously, the continued change in deterioration of market conditions. Obviously, in the case that was absolutely the right decision to make at that point in time. And if forecast margins were not relative or sufficient relative to the risk profile that we're going to incur in relation to that. And the [indiscernible] by us in October '23 as to where we're going to settlements in December '23 or December '24. So we're in a little bit at limbo until we receive that notice in October next year. And in terms of other activities. So Eastgate [indiscernible] settled on 29th of August, sale price $43.45 million. We obviously had that title issue that we communicated pre and at the AGM that was resolved and still that occur out in the original contracts. So that was a bust and $40 million of the December proceeds were used to repay debt and the balance retained as working capital. And as also Kamo has been a unconditionally sold and to due to settlement tomorrow. And the funds from that divestment will be used towards the lockbox of $5 million that's been negotiated as part of the company's [indiscernible] facilities. So that covers all of our portfolio. I'll hand back to Mark to cover our outlook for '24.

Thanks, Stephen. So key takeaways, I guess, as far as outlook is concerned is dividend, as you can see, remains suspended for the time being subject to quarterly review. [indiscernible] further leasing and/or sale of Stoddard Road, the company will remain in an operating loss position. But on that note, as you now heard me say, we do intend to market Stoddard Road for sale very early in the new year. Harder focus, I guess, remains on completing Munroe Lane complete with construction and obviously completing the leasing. Once leased and finished, we will consider selling that asset as well. And I suppose, ultimately, if you get to a sale of Stoddard and Munroe that we put the company in a very unique position really of having 0 debt, significant cash reserves, and would put us in a position to consider a wide range of options at that point. And we certainly see to be in cash at that point in the property cycle, we think will be very advantageous. So that is the strategy from here, and that is the outlook and very happy to take questions for me, please.

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

Congratulations on getting a difficult 6 months under the belt. I guess my question is just on when you look forward with options, one, Asset Plus' key issues has been a lack of scale. And if you basically say you'll clear the assets and get back NTA $156 million. Even if you gear at 30, your $230 million just seems to be a little too small still. Can you maybe talk through whether you think the thing as a listed asset kind of should continue to struggle on?

We would be looking to continue to struggle on. But I take your point, Rohan, but I guess what we're trying to do here is get back to NTA. And as you appreciate it for you, our cash box sitting at NTA, we're not limited to just a sort of a 30%, 40% gearing level at that point, we could issue scrip and do all sorts of things potentially, right? So as I said, it just puts us in a position where there are a range of options in front of us. Whereas at the moment, obviously, those options, again, as you appreciate, I mean, your stock is traded in half, there's very few options. But the cash box in NTA, plenty of options.

Perfect. And you think having cash we'll see that kind of discount for scale and, I guess, recent execution close?

I would certainly hope that the market can discount cash by half. But yes your guess is probably better than mine what the market might do with that. But certainly, we would expect that the market seeing some cash would treat us a lot more better than currently, as you know.

And then just one on the losses for the next couple of years or next year or so, effectively, as just the holding cost of Graham Street that's the big [indiscernible] over, right? You've got no income and what was it $600,000 of OpEx a year to kind of cover? That's basically one of the key reasons and obviously, higher costs?

Yes, yes, it's great Graham Street obviously is $104 million retranche operating cost in notes. So that is the primary driver, noting that if we do get some leasing changes as we touched on still increase as well relative to where interest rates are right now.

Perfect. And then...

Sorry, just to touch on that, obviously, you've got here. From a tax position the holding costs being deductible and then once on remains to pay while we believe to be quite a significant depreciation shareholders' got.

Perfect. And in Graham Street, there is the potential for a deferral. If I was to be cynical, $3 million or 4.6% effective interest rate on that for Mansons doesn't seem like a high hurdle for them to kick the can down the road. Do you think -- or what are the soundings from the you think deferrals likely? Or are they working to December next year?

Look, we're assuming the deferral happens, right, from our perspective, but it will be determined by whether they want to push down on the project, and that will be some on whether the tenant used with a tenant, they want to get on it. If they don't, they'll defer it.

The next question comes from [ Blake Cooper ]from [ ACC ].

Obviously, well done on the sale and settlement of Eastgate, a tricky asset and a tricky sales process and settlement process. So the outcome there is, I think, a pretty good one for us. So well done on that front. Just picking up on Rohan's comment and the prospect of this essentially being a cash box at some point in the future. Has the -- I guess, my question is what are the tax consequences attached to any return of capital should the Board decide to go down that path? Are distributions and returns of capital, potentially the full $0.44? Would they be free of any tax implications?

Sort of as we haven't done enough work on it to give you a sensible answer to deal with. Simon will...

Yes. Certainly, [indiscernible] more announcements have been done, that obviously ends up high so you can't turn capital potential tax free. So I can answer that point, but the first question is a little bit more challenging to answer.

Yes. Look, I'll just make the point that I think that's pretty material information that I think shareholders would want to know. The prospect of some capital return in the future, being taxed or not being taxed is reasonably material sort of information in terms of a decision process when you're looking at this year. So I guess I'd urge the Board and the manager to have a close look at that and advise the market of exactly what the situation here is.

Yes. So look, we can look at that, I mean, the 30 days still right, so that's one of the options. But we take your point, but we just haven't had an opportunity to examine that any depth just yet.

The next question is from [ Vishal Bua ] from Jarden.

Just a quick one from me. Just on Stoddard Road over the next 6 to 12 months. Is there anything major coming up?

Not over the next 12 months. The next renewal is only about 1.5% to 2% of the income and income on August 23. Everything else through the debt has been reduced.

And then could you just give a bit more information on the warehouses right of refusal if you market the asset?

So it's supposed to typical first right refusal mechanism where we need to get notice to the warehouse of a price that we having to divest the asset, and we may have a period of time to accept that. If we then accept a lower price that exist to go and be offered back to the warehouse for a further period of time to successful decline.

The next question is from Shane Solly from Harbor Asset.

Just 3 questions, if I may, or 4 actually. Firstly, in 2s in Munroe leasing. Can you just talk about the opportunity around leasing up residual space there? What's your expectations?

Our expectation is that we're going to lease it.

Yes. Okay. When? What price? What risks? You talked about risk to leasing up and what that triggers your cash box. So actually, you want to know about actual detail.

Yes, sure. I understand. Look, the deal we did with Auckland council was $425 of square meter with no incentive. So we think that as the baseline in terms of what we should be achieving. In terms of timing, obviously, that's a great unknown. We can't force tenants and equipment. But our anticipation is that by the time we achieve completion at the end of April, we have at least some form of commitment over at least 1 of these 3 vacancies remain. And one of the things we can't necessarily control is the timing of the of those leases. We can't anticipate or expect that someone is walking the door 1st of May once we achieve completion and move straight in and paying rent. So there is going to be a disconnect in timing in terms of when we potentially commit to leases and we may start and reroll flows through. There's probably not much more I can add at the moment.

That's okay. Yes. So second question -- sorry?

Sorry, it's Mark, you might ask to say at the thing I would say the rent, as you will appreciate, the brand-new rental rate space. Our asking rents are certainly not prohibitive if -- we're certainly not losing tenants on rent, put it that way.

Okay. That's good to know. The second one, question on the warehouse market review, up 1.1%. Is that what you'd expect across the rest of the Stoddard assets going forward? Or is it something unique to the warehouse asset?

The review is definitely unique to the warehouse asset and typical entered form, they negotiated a relatively freely lease for them in terms of the review means as I said in the presentation was the lower CPI. CPI was obviously running much hotter. And look, our view is still rental growth on that asset as the settle rent represents $196 a square meter for bulk retail space. At the moment, you're seeing industrial machineries north of $200 a square meter. So we think it is cheap and there is room for growth moving forward there. The rest of the CSA has a range of review mechanisms in terms of market and fixed and CPI. But yes, we anticipate more growth than 1.3% that we got with the warehouse.

Okay. So you -- sorry, just on valuations for Stoddard, you haven't reviewed that material. So clearly, this is not rent to evidence that would change the valuation?

Right.

Just building on a question about go forward. What is the opportunity to actually put capital to work? Where would you do that if you were going to do it?

Shane, this is too early to speculate. All I can say is, as you will appreciate it, what it does is just give us a ton of options, right, if we take this path. At the moment, we've got very few options. This opens up all sorts. So that's as much as I can say at the moment.

[Operator Instructions] Your next question is a follow-up from Rohan Koreman-Smit.

Sorry, just one more. Just on management fees. Are we paying management fees on Graham Street currently given its position is going to be sold asset and kind of no income from it? And also, can you just clarify, are the management fees on the cash balance? Are we only talking asset property, asset value?

Yes. So first answer is yes, you are paying measurement fees on Graham Street, but you will not pay venue fees on cash.

There are no further questions at this time. I'll now hand back for closing remarks.

Thanks, everybody. Look, appreciate you dialing in. I appreciate the questions. And hopefully, the direction we've been able to give you today, I know it probably feels overdue. So we're happy to be able to give you a bit more clarity about where we see things moving from here. And you know how to find us if you have any follow-up questions. Thanks very much.

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