Asset Plus Limited (APL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Asset Plus Interim Results Briefing 2023. [Operator Instructions] I would now like to hand the conference over to Mark Francis, CEO of Centuria New Zealand. Please go ahead.

Thanks very much. Welcome, everybody. Thanks for joining us this morning for the half year result for Asset Plus. I'll take you through a bit of a summary. I'll then hand over to Simon Woollams to drill into the financials a little deeper. And then Stephen Brown-Thomas will specifically on the property matters and then, of course, we'll take questions at the end. So look -- just to kick off with a summary. No doubt you will have a chance to digest this by now total loss of $4.7 million for the year against a $290,000 profit the prior period, obviously driven by asset devaluation, of $4.6 million across the portfolio. Of course, impact by vacancy as well at Graham Street, the sale of Stoddard Road offset by some new income obviously at Munroe Lane, but noting obviously that there's still 1/3 of that building to be leased, which we will know I'll talk about more in a second. At an AFFO level, a loss of $230,000 against pretty much breakeven in the prior period. Net rental income, down from $2.3 million to $1.7 million. Again, as I said, driven by a few factors, including the sale of assets, Stoddard Road and Eastgate, but with obviously some positive offset in terms of the Munroe rent and of course, I guess the other milestone was the completion of Munroe and the beginning of the Council lease back in May. To the next slide, the high-level metrics, 2 properties remaining. And obviously, that's essentially really 1 given where we're at with the on additional position on the sale of Graham Street devalued at $190 million currently. The occupancy, WALE and the LVR, these numbers are obviously going to jump around a bit over the next 12 months, but in an -- obviously impacted at the moment by carrying Graham Street vacant, NTA at $0.39, down from $0.44. But as I say, that those other metrics, occupancy, WALE and LVR will obviously improve once Graham Street settles next year. Activity during the period, as I said, the completion of Munroe Lane was obviously a key milestone in getting that Auckland lease underway. Graham Street, as you now know, has been extended or the settlement date has been extended out until 29 November next year. The buyer has paid an additional $7.1 million in further deposit and the purchase price was increased by $3 million from $65 million to $68 million. But that now locks in that settlement date with no further potential changes to that. And then, of course, the sale of Stoddard Road, the $36.35 million was -- those proceeds used to further reduce debt. So I'll come back at the end with the outlook, but I'll hand you over now to Simon just to drill into the financials a little deeper.

Thanks, Mark. Good morning, everyone. In terms of the financial performance, as Mark's touched on, the result was impacted by obviously the divestments during the period for the ongoing vacancies. So the impact of Eastgate and Stoddard Road divestments combined with $2.4 million, and that was offset by the commencement of rented Munroe Lane, we recognized $1.8 million of net revenue there. So overall, net revenue was down by $0.6 million for the half year. There is some more detail in the appendices with respect to the AFFO movements [indiscernible]. In terms of management fees, they are marginally lower as well, again the primary driver for that was the 2 divestments, offset against the completion works at Munroe Lane and there was also a very small performance fee recognized during the period, of $60,000. In terms of finance costs, they are also lower, again, driven by those divestments as we had lower average debt level across the half relative to the prior corresponding half. That was offset, however, by higher interest rates. And look -- due to the lockbox mechanism, we're obviously holding higher volume of cash. So we obviously derived a higher interest income as well for the half year. In terms of fair value revaluations, Munroe Lane was down $5.5 million, the primary driver for that was the cap rate softening from 6% to 6.25%. And the way we recognize a fair value of Graham Street it was actually a small gain, it was [indiscernible], and that's primarily driven by the impact of the discount unwinding at the time, noting there also, as Mark touched on, that the purchase price has increased to $68 million [indiscernible] this settlement has been pushed out to 29 November 2024. And finally, just in respect to tax, essentially, we have built up quite material tax losses and we're not forecasting them to be utilized in the near to medium term. Hence we're really recognizing the [ fintech's ] asset to extent of deferred tax liability, so essentially no deferred tax to show on the balance sheet. In terms of the net rental performance on Slide 8 there, you can just see the breakdown knowing the Eastgate and Stoddard Road divestments, Graham Street is neutral. There's a very small amount of carpark income being derived there and obviously Stoddard Road commencement of Munroe Lane income but the rents commenced there in May of 2023. In terms of administration and finance costs, as I touched on earlier management fees were slightly lower and lower finance cost as well. Again, driven by those lower average debt levels and higher interest income. And just noting here that the development facility converted into an investment facility when we achieved practical completion on 13th of July. So from the year on finance costs are essentially in respect to that facility are through booked through the P&L previously that were obviously capitalized. In terms of the Balance Sheet on Slide 10, pretty straightforward here. Again, recognizing the impact of Stoddard Road divestment. So probably it's held for sale [indiscernible] obviously driven by [indiscernible] recognized held for sale so the only remaining [indiscernible] properties is obviously Munroe Lane, which is recognized at $118 million, [indiscernible] independent valuation, which came in at $120 million, and that's just been adjusted in respect to, remaining cost to complete and some minor works there. And the customer [indiscernible] paid back quite a material amount of debt circa $40 million across the half year. Obviously, the back of the Stoddard Road divestment and receipt of the Graham Street or second Graham Street deposit, which was the same just before balance date. So that facility's [ amount ] has reduced to quite [indiscernible] and I'll touch on that in a second. So overall all NTA down to $0.391 from $0.404 at March and LVR now at 18%. Final slide for me just on the funding. The facility limit has now been reduced to $44.9 million. We're currently drilling at just under $35 million. So the remaining balance is sufficient funds to essentially a [indiscernible] capital buffer, but also to assist with [indiscernible] leasing at Munroe Lane and Stephen will touch on that shortly. One further point to note is just post balance date, we just reduced a lockbox down to $4 million from $5 million, there's a small change to how that is measured in terms of the ICR shortfall. And [indiscernible] facility runs through March 2025, but it's intended that all debt would be repaid on the settlement of Graham Street on the 29th of November 2024. That's it from my end. I'll pass over to Stephen. I'm happy to take any finance concerns at the end.

Thanks, Simon. Good morning, everyone. So you obviously, key milestone achieved throughout the reporting period was practical completion of Munroe Lane which happened on the 13th of July, that was delayed. Obviously, we're originally intending completing the building back in December 2022, then it was delayed as a result of, a, COVID-19 related delays and then more recently through tenant fit-out delays. Council did commence rental payments from the 17th of May '23, which reflected those fit-out delays so that we weren't [indiscernible] terms of our income and we had a blessing and opening ceremony on the 26th of July prior to Council occupying the building. Obviously, a very significant milestone, a combination of 4 years' worth of work. All those projects from inception to completion and look at a very fantastic [indiscernible]. I'm sure you all agree, as you see in the photos throughout this presentation. As signaled previously, once further material leasing is achieved on the profit, we will consider sales of Munroe Lane at that appropriate time. Moving on to Slide 15 now. Simon has touched on the independent fair value assessment as at 30 September, which represents the market value on a committed occupancy basis, reflecting the Auckland Council lease, so that valuation was $120 million. And then as Simon indicated, there's some remaining costs to complete, which provides for fair value of $118 million as in the balance date. And that reflects a $12.5 million of unrealized development losses, probably original metrics associated with this project. There's also a table there just showcasing the movement in the valuation of the metrics from March through September. As Simon indicated, that was primarily driven by a 25 basis points movement and the capitalization loan to value is applied for the property. But in terms of leasing, this has obviously been our key focus for the property without a doubt, the impacts of COVID-19 have made it more challenging than when we embarked on this project in December 2019. We have lease the ground floor kiosk to Little Fields Café, and that lease has commenced in November. We continue to undertake direct marketing initiatives to potential office tenants and other tenants as well for our ground floor food and beverage retail office spaces are available. As the building has completed the inquiry and inspections have certainly increased, all the feedback has been extremely positive. Again, hopefully, the photos demonstrate the quality of the space, basically CBD grade office space located and Albany at a very attractive price point as well compared to comparable space. And also, obviously, as the 5-star Green Star rating and 5 Star names, right, which there is very limited competing stock offering that on the North Shore. But our full floor occupiers for our level 6 vacancy of just over 2,700 square meters they remain scarce. There obviously a limited a number of those occupiers on the North Shore. There is flexibility built into this [indiscernible]. The level 6 can be split to 2 or 3 tenancies. So there remains some flexibility and options there that continue to be looked at depending on occupier demand. We have come close with a couple of full floor occupiers. Unfortunately, we haven't quite [indiscernible] for Level 6, but we continue to remain confident that the [indiscernible] all of this space remain attractive in time, we will secure a commitment. Auckland Council as part of their recent cost-cutting measures have been looking to sublease approximately 11,000 to 12,000 square meters of space across their portfolio, which includes the CBD and also level 5 at Munroe Lane. We understand they have subleased the majority of their space in the CBD and Munroe Lane effectively remain the only space remaining available. There's potentially an opportunity that they may continue to relocate staff and potentially sublease more space to CBD and send more staff out of Munroe Lane effectively just reshaping the 2 tiers and staff between their premises, which would obviously be beneficial for us in terms of taking competitive space off the market and leased out level 6. And just moving on to Graham Street now. So as I already touched on obviously subject to their initial sale and purchase agreements. This has now confirmed the extension of the settlement date to 29 November 2024 and that additional deposit has been received and in [indiscernible] payment as noted by Simon. As also touched on the net present value has been adjusted to reflect that increased consideration the payment of the deposit and 9% discount rate has been applied to the calculation of the fair value. But that's all for me. I'll pass over to Mark to cover the outlook moving forward, and then we'll obviously wrap up some Q&A.

Thanks, [ mate ]. A look to the outlook, as you can see there, obviously, that modest operating loss position will remain until either Graham Street has settled or some further leasing at Munroe Lane. Obviously, that is the focus to lease the balance of Munroe Lane that is giving a heap of attention from our team. And as we say here, the leasing of that will then dictate the next steps, which obviously will include the sale of that asset and then that will flow through to the decisions to be made from them as to the future direction of the company. At that point, obviously, we have 0 debt and cash reserves, and it would be likely -- well, not likely we would definitely be putting a scenario or scenarios to shareholders at that point to determine where we go next. Noting that, as we've said previously, the most likely outcome obviously is a wind-up and in the meantime, the dividend remains suspended and probably we'll do so until the future direction of the company has determined. So that really is as far as outlook goes, I guess, open to the floor now for any questions from anybody.

[Operator Instructions] Our first question will come from Rohan Koreman Smit with Forsyth Barr.

Congratulations on getting through another 6 months. Just hopefully, some quick questions. The first one, on the leasing, when you say you got closed with a couple of tenants -- can you give us some color on kind of why the deals fell over? Was it incentives, the rent wasn't low enough. What's the kind of impediments been to filling the space?

Look, the financials have been attractive for the prospective tenants. Ultimately, it's a combination of the ability by decisions and commitments at stay put being, I guess, the easiest scenario for those tenants at the current point in time, given the bank or economic environment, capital costs associated with [indiscernible] et cetera. It's just easier for a lot of tenants to stay put at this point in time and defer the decisions to a few years down the track.

Have you lifted incentives through the process in terms of what you're prepared to offer them to see if you can get them to move? I noticed your cost numbers don't have incentives included. Can you give us some idea of the incentive or potential incentive payments to lease it up? In terms of [indiscernible].

[indiscernible] Yes. Well, we're targeting minimum 10-year initial lease terms, market incentives at the moment range 1 to 2 months per year at least, and we're obviously happy to beat the market.

Perfect. And then I guess on this asset, it's quite well known that you're willing to sell it. Have you had any unsolicited offers on it?

Not at this point in time, Rohan.

I think we've also been pretty clear that we're -- we'll sell it once there's some additional leasing done.

Okay. I guess the share price gives you a bit of a leeway in terms of the potential realized value you can kind of get to. Have you put some thought to providing some rental guarantees around the vacancy and to bring forward the sale? Or is it kind of given you've got settlement of Graham Street end of next year, you're kind of sitting on the sidelines and waiting for time and then that might be an option kind of later next year to kind of wind it up at the same time as Graham Street.

Yes. I think that's probably a fair assumption. I mean given we now have a line in sand in terms of when Graham Street settles. So sort of 12 months to try to [indiscernible] up. But we have considered the point you've made around end of lease -- say endorsed subsidy type structure on the right type of structure. So we are open-minded to that. But bear in mind too, it was only very recently, really at the last lease deal flamed out that was -- we were on that -- same was on there for a long time, and it's only pretty recent, but that 1 has fallen over. So...

[Operator Instructions] It appears there are no further questions. I'll now hand it back to Mark Francis for closing remarks.

Thanks, everybody. Thanks for joining, Rohan. Thanks for your questions. And obviously, you know where to find us if you'd like, for any follow up. We are here. I appreciate your time.

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