Asset Plus Limited (APL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Asset Plus FY '23 Results Conference Call. All participants are in the listen-only mode. There will be a presentation followed by a question-and-answer section. [Operator Instructions] I'd now like to hand the conference over to Mr. Mark Francis, CEO of Centuria NZ, Manager of Asset Plus. Please go ahead.

Thank you. Good morning, everybody. Thanks for joining us. Welcome to the results presentation for 31 March '23 for Asset Plus. I'm going to walk through the first few slides, which will include a summary of key metrics activities to date, then Simon Woollams will walk you through the financial performance and a bit of a funding update, and then Stephen Brown-Thomas, Fund Manager will give you a portfolio update and then back to me to sort of round out with where to from here. So look, the results summary. Obviously, the company is reporting a total loss for the year of just over $13 million against an FY '22 profit of $2.93 million. That result really driven by $13 million of revaluation and disposal losses and of course, some reduced rental income due to divestments and Graham Street becoming vacant. At an AFFO level, loss of just $280,000 against an FY '22 profit of $4.2 million, net rental as a cost on really as per supposed $3.47 million, down significantly, $4.26 million from the prior year. Due to council building at Graham Street obviously becoming vacant and also the sale of Eastgate in August. On a positive note, Munroe Lane, obviously, being completed and council lease commencing in 17 May was a significant milestone for the year. The key metrics, these numbers obviously moved quite a bit year-on-year and have obviously moved quite materially even some balance date as well. Portfolio value at $216 million will reduce to $182 million once we get -- sorry, once [indiscernible] is set on an accounted for. Obviously, same for the next column there, reducing to 2 properties from 3 and occupancy with Graham Street -- sorry, with Munroe Lane lease coming in and Stoddard Road dropping out. You can see that increases back to 42% and same with the impact on WALE. And then similarly, with loan-to-value ratio with what we allow for the settlement of Stoddard Road and then we end up with an NTA at just over $0.40 a share. Despite the bottom-line result, there was actually quite a bit of activity during the year. Getting Munroe Lane finishes in this year was a significant milestone. And then from there, really, it was a story of successful asset sales, settlement of Eastgate and Kamo occurring, the unconditional sale of Graham Street. As you know, there's a deferred settlement could either be December of this year or December of next year, we can touch on that a little bit more later on. Stoddard Road, as I said, unconditionally solvent settled very quickly. And then we also extended loan facilities through to March 2025. I'll hand you over to Simon at that point to walk through the financial performance.

Thanks Mark. Good morning, everyone. So in terms of the financial performance of the year, as Mark touched on. Net rental was down $4.36 million, there's more detail on the next slide around the breakdown, but primarily the sale of Eastgate as well as Graham Street been 100% vacant. In terms of management fees that were broadly flat, actually marginally up for the year driven by 2 things. Obviously, the ongoing development of Munroe Lane, offset by the Eastgate settlement in August of 2022. WALE's costs are also up. There's a bit more detail on the future slide, but primarily, and that's due to higher interest rates. On an average drawn debt basis at the drawn debt profile for the investment facility working facilities was marginally up year-on-year. In terms of the portfolio movement, obviously, Mark touched on this for a $13 million write-down for the year, that's driven by $7 million write-down at Munroe Lane, primarily driven by softening of the cap rate of 5.45% to 6%. And then also the Stoddard Road write-down of $7.2 million, obviously driven by the unconditional sale and the settlement of that property. That was offset by a small discount unwind in respect to the Graham Street property. Obviously, that's fair building on a DCF basis and increases over time due to the discount unwinding noting that we actually increased the discount rate materially during the year from 5.5% to 8.5% Tier 2 dramatically increased interest costs. In terms of -- from a tax perspective, the company has actually built up quite material losses. Obviously, essentially breakeven with a small loss at an operating level, but there are material tax reductions, ongoing depreciation, but most significant is the funding cost of Munroe Lane which are capitalized for accounting, but deductible for tax. And there's a bit more detail on the FA reconciliation and waterfall, which is appended. In terms of admin costs, as I said before, the management fees are fractionally up year-on-year. That's driven by, as I said, Munroe Lane expenditure to truly offset by this case. Finance cost is a little bit going on here. Primarily, the increase is driven by higher interest rates of [ $27.2 million ], but that is actually offset by a reduction in buying fees, it gets settled in August of '22, we reduced the facility levered by approximately $40 million. And this interest income is here sort of $30,000 -- sorry, sort of $40,000, but just driven by -- funds are in the lockbox as well as funds out of retention with respect to Munroe Lane. And just noting that from an accounting perspective, all interest on the development facility Munroe Lane capitalized whereas interest incurred and mines incurred all the interest investment facility in the working capital facility interest expense for the P&L. Moving on to the balance sheet. Reasonably straightforward here. So in terms of investment and development property of $118.6 million, that represents Munroe Lane in isolation. It has its complete valuation on a committed occupancy basis of $126 million, i.e., it only represents the -- obviously, the Auckland Council lease that has been adjusted for $7.4 million of cost to complete the project. In terms of properties held for sale, obviously, last year, it was both Eastgate and Kamo, they've been divested during the year, but Graham Street and Stoddard Road were both transferred to help us sell during the year. The Graham Street fair value was $61.7 million, as I touched on before, that represents the discounted cash flows with respect to the future settlement proceeds. And Stoddard Road at $36.3 million represents the sale price of $36.75 million of adjusted for disposal costs on the property set posted on the 1st of May. In terms of other assets, there's -- as I said, there's a small lockbox of $5 billion. That's in the total assets on of $8 million as well as some just over $10 million of funds had a retention in respect to the Munroe Lane development. We also received the deposit on the Graham Street property of $6.5 million. And as I noted before, $40 million of debt was repaid on the back of the escape settlement. NTA has reduced down just under $0.04 per share, which is primarily driven by those revaluation losses. And now we are, as at balance date is 31.5% notion post balance date that reduced to circa 20% and essentially all the net sale proceeds from a Stoddard Road divestment were repaid to the peak. In terms of a quick funding update, as you've noted, we announced 1.5 years as part of the half year result that the loan expiry has been extended out to March 2025. And with that refinance, the ICR covenant was removed in return, we've placed $5 million and essentially a lockbox controlled by the bank. And over time, funds can be released from there once successful leasing is concluded. Post balance date, we're forecasting it to be mid-June, so next month, when Munroe Lane reaches practical completion plus the working capital facility. And we -- the -- there is a portfolio LVR present under 50%, but step absolutely could bridge the LVR is under 45%. And in the Graham Street, settlement was to be fair noting the buyer has until 1 October to note away us if they wish to do so. They have to pay a further deposit of $7.1 million, which if received would be repaid to the bank. In post balance states, the facility deliveries reached to $52 million. We repaid all the sales proceeds of Stoddard Road but retained circa $3 million within a limit of future headroom. So that's it for me in respect of the financial update. I'm happy to take questions here, and I'll now hand over to Stephen to provide an update on Munroe Lane.

Thank you, Simon, and good morning, everyone. Look, we're largely focused on Munroe Lane here given the status of the portfolio and the divestments that have been made through the year, as indicated by Mark. Munroe Lane is now effectively complete with the Auckland Council lease over 2/3 of their building commencing on the 17th of May. Physically on site, there is still some work to do with practical completion under the construction contract, not expected to occur until mid-June. That as a result of open councils fit out, taking longer than originally programmed for within the premise of the agreement to develop and lease and on track to happen. But June, Working Council are being going to occupy the building once off furnishing, furniture, et cetera, have been installed late July, early August. We did hand over the first level of council's floors back on the 23rd November last year and handed over subsequent levels monthly thereafter. As at 31 March, the development was 91% complete low cost and 94% complete by time. The costs are skewed downwards because of the incentive costs which are yet to be incurred for the vacant floors. As at today, the development is effectively 100% complete, excluding those commissioning tasks that cannot be done until that is finished anticipated to occur mid-June. Overall, the program has been delayed basically 5 months. The original target completion date was in December 2022. So the result of that being 5 months delay, all things being considered as pretty good considering the impacts of COVID over that period of time during construction and the number of both national and local lockdowns that were by the government through those COVID times. And completion of [indiscernible] and subject to leasing the balance of the space as intimated at the half year results, the company will be considering its position in relation to the probing and a potential sale. And has already touched on the value assessment as at 31 March, which led to the write-down of circa $7 million. We have changed the valuation methodology for this period compared to prior years because we can now reliably measure it on the committed occupancy and the valuation rather than at costs. It has led to about $7 million write-down based on the fair value committees on the committed occupancy basis. So once the balance of the space is leased, we expect to see value uplift from there. In terms of leasing of that balance for the development, we have signed a hidden agreement with a reputable cafe operator for a kiosk located in the heart of the brown floor lobby and the development has neared completion and rather than just being a construction site, we have gained increased interest with a number of potential tenants walking the site over the past 6 months. There are scarcity of floor plate of tiles in the market. The top floor in particular, has always been designed -- vision to be split into either 2 or 3 tenancies. However, our preference does remain trying to secure one of those full floor paid occupies. But we do have the availability to split that space up to meeting demand as required. We are continuing with direct marketing initiatives to target potential occupiers and getting in front of those potential tenants and giving them to site. Over the year, we have now also established that there is a mineral mandate to reduce Auckland Council's occupied footprint throughout Auckland by approximately 12,000 square meters. And they are now looking to potentially sublease Level 5. If they'll have a few challenges with that, given that it's effectively connected to the other 2 floor fleets through the central atrium of connecting stairs, et cetera, effectively means that potentially they can only sublease to other CCOs or someone they will be happy to effectively share space with. The space that we do have available has flexibility. It can be used in terms of food and beverage, retail service, retail office in terms of the ground floor and Level 1 space, is also connectivity options where they can connect them to space above on Level 2 and provide front of house and/or meeting spaces on ground or Level 1 connecting into effectively office space or engine room at higher levels. So there is quite a bit of flexibility there, and the space is very, very good space. When you walk through Level 6 that is brilliant space with excellent natural light. We're confident that the fundamentals of that space remain attractive. Moving forward, we will secure tenant equipment in due course. To Stoddard Road now, so that sale did settle on 1st of May post balance date following a sales campaign, which commenced in February of this year. As balance date the well was 2.9 years, and we retain 100% occupancy. We did secure a number of extensions and renewals throughout the year, including a 5-year lease extension with Coffee Club and a 3-year renewal agreed with ASP. And we also singled a market review with the warehouse. It's a very good result to get that one settled quickly post the -- post balance date. 35 Graham Street now. As you all know, that was agreed to be sold last year with a similar date on December 23 at the earliest, the purchaser does have a right to the first settlement of further 12 months. They need to make that election on or before the 1st of October, if they do wish to extend that settlement date. It is extended. The consideration increases by $3 million, a further positive 10% is payable, taking the total deposit up to 20%. And Simon has already spoken about the present value of that being $61.7 million. Just quickly touch on other divestments made during the year as well. Eastgate was sold and settled on 29th of August 2022 for $43.45 million. That did follow an interesting issue related to a title that was bound to another title that was rectified by management and settlement occurred and $40 million of the sale proceeds we used to repay debt. Kamo was also successfully settled on 30th May 2022 for $2.7 million. And the funds from that settlement were applied towards that cash lockbox of $5 million that Simon [indiscernible] and back to Mark to provide you a bit of an outlook moving forward before we move on to Q&A.

Thanks, Stephen. So you look to the outlook, obviously, the dividend remains suspended for the time being. Company will still be in an operating loss position absent any further leasing until that Graham Street settlement that is confirmed. And as you heard earlier, we will know that by 1 October of this year, so obviously, leasing remains the key focus at Munroe Lane. And look, that leasing could obviously well ideally comes from third parties. But as we look to contemplate sale of that asset, we wouldn't rule out some degree of vendor underwriting to facilitate that. And look, once that asset is sold, it puts the company in a pretty unique position. It will have 0 debt and let cash on balance sheet. And really, our guess has options in front of it at that point. Those options obviously include winding up the company and returning capital to shareholders or, of course, heading in a new direction. Obviously, the leasing of Munroe Lane and the timing of that and the state of the market at which time we could contemplate a sale, we'll obviously dictate the ultimate outcome. It is important to note, I guess, that subsequent to -- subsequently winding up and selling the asset. Both of those decisions would need to go to shareholders and we would expect to put both of those decisions at the same resolution to shareholders. So look, that's really, I think, where we sit, hopefully, that has given a bit more clarity to the way forward, but happy to throw over to questions from anybody now, for either myself, Simon or Stephen.

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

Congratulations on progress on, I guess, clearing out the balance sheet and kind of getting to a stage where we can move on to something new. But just a couple of quick questions for me. The one that I noticed you took the cost of incentives out of the Munroe Lane kind of all-in cost. Are you -- should we assume a similar amount for incentives and CapEx if you were to hit down this kind of smaller tenant-type route? I think it was about $4.5 million that dropped out.

Stephen, do you want to answer that one?

Yes, no problem. We think overall, this may increase slightly in, but the incentives are likely to reduce to reflect the smaller footprint and the availability of that space by demand in that space compared to the largest or by chances is a different dynamic. So overall, we're not anticipating any increase in cost if you go down that path, the split allocation between incentive and for their costs.

Perfect. That's very clear. And the second one, you talk about a possible wind up or a pivot in new direction. Can you just give us some color on potential new directions and also what sort of rates of return hurdle or IRRs, you'd be looking for to kind of to do such a pivot?

Yes. Look, I guess the first thing to understand the reason for keeping that door ajar is largely driven by the time frame around a potential wind up, which is obviously driven the turn by the potential delayed settlement on Graham Street, right? So however you look at it, we potentially can't do anything until the end of next year. And so we're really just saying it would probably be -- you'd be foolish to not at least leave the door open. Who knows what opportunities come along for a list of cash box over that time frame? And so I won't be drawn on sort of potential IRRs around at this point. But obviously, it would have to be pretty compelling and we're very mindful of the fact that whatever direction we might try to go would need shareholder support. So shareholders will obviously have plenty of opportunity to either endorse or otherwise a new direction. But I think we've been pretty clear here is that the more likely outcome is that we sell Munroe Lane and look to return capital.

Perfect. That last comment kind of caps out my next question, which was by the time of that, it was quite clear that the wind up is the preferred strategy, and that is probably the message that you're trying to get across both yourselves and the Board with that kind of answer to this question.

Yes. Look, I think you can take that from what we've presented. But also, as I said, it's the preferred today because there's nothing else on the table, right? But over the next 18 months, if something hugely compelling came along, then that might be a different ball gate but as I say, it would have to be very compelling, and we are very mindful that it would need shareholder support. So hence, I guess, why we think as we sit today, absolutely, the more likely outcome is the wind up.

Perfect. And then just on timing, is there anything that could possibly result in cash coming to shareholders earlier than the exit of Graham Street, given it's, I guess, conditionally sold? Is there any way that you could bring forward capital return timing through some sort of current company underwrite or the like? Or do we just need to kind of sit tight and wait?

Yes. Look, I suppose the first milestone is obviously just to find out what the purchase of Graham Street is going to do around that timing because that's obviously pretty significant. If they were to settle later this year, then I guess that presents opportunities for partial return of capital, but that's certainly not a decision that's been made up broadly or yet. So it's a bit of a wait and see at the moment.

Your next question comes from Vishal Bhula from Jarden.

Congrats on a great result. Just a couple of quick ones to me because Rohan was pretty comprehensive there. Just on Munroe Lane, I think there's a bunch of data and stuff floating around the presentation, but essentially, from 17 May, you're going to get the full rental from the Auckland Council and you have about $7 million of cash to complete. But I think the commitment on the back of the financials talk to about $4 million. So I'm just wondering how much is actually spent with cash?

I can probably answer that. So yes, at balance that $7.4 million was the balance to complete, excluding incentives, and I believe the written [indiscernible] referring to as the bills to go as it today, in terms of the cost to complete, excluding incentives.

Okay. Cool. No, that's fine. That clears that up also. And I guess just looking at the guidance you put out for '24, I mean, '23 was a great result. It was lastly breakeven. Can you provide us a bit more color on '24 absent the leasing? Is it going to be the similar loss position or materially larger?

Simon will take that one, too.

Look, the settlement timing of Graham Street is quite clear. Obviously, it's quite a material holding cost for the company if that was to be settle on 1 December this year 2023, then it's a better position for the company. If it's not as it's deferred, it obviously is additional holding costs. So that's quite a key factor and the other one is leasing. And look, that we obviously want to secure some leasing, so that obviously helps. So absent those 2 things, it's still in a loss position, unfortunately. That's probably all I can say at this moment, but leasing is pretty material as well as Graham Street cost of circa $5 million on an annualized basis to hold with interest rates knocking on 9% of the month is company is quite sizable.

[Operator Instructions] Next question comes from Blair Cooper from ACC.