Asset Plus Limited (APL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Asset Plus financial results conference call. On the call today, we have Mark Francis, Centuria New Zealand CEO; Simon Woollams, Centuria New Zealand COO and Asset Plus CFO; and Stephen Brown-Thomas, Asset Plus Manager. I would now like to hand the conference over to Mark Francis. Please go ahead.

Thank you. Welcome, everybody. Look, this morning, a brief summary from me. Then you'll hear from Simon Woollams, as usual, on the financial performance summary, and then Stephen Brown-Thomas out with a portfolio summary, which we obviously don't expect to take terribly long. Look, to kick things off and then sorry, then questions at the end as usual. Look, the summary result, which you've all no doubt seen, look, a profit of $2.32 million against a loss last year of $4.7 million, primarily driven, of course, by unrealized gain, which was majority of a discount unwind on 35 Graham Street. Munroe Lane was not revalued at the half year. The result also, of course, reflected the full half year's income from Munroe Lane, and slightly higher interest costs. AFFO of $350,000 versus $230,000 last year as a loss, sorry. Net rental income of $2.23 million, up from just over $0.5 million for the prior period, again, due to the impact of the Munroe Lane rental income for the full half year. The key metrics slide, noting these numbers obviously changed quite significantly on Friday with the settlement of 35 Graham Street. So you've seen we've given you both pictures there. But as at September, $183 million, that obviously drops to $116 million in terms of portfolio value on Friday. 2 assets becomes 1. Occupancy, obviously, 42% goes to 65%. WALE, 5.6% goes to just under 9 years. Debt drops to 0 and NTA relatively flat. I'm sure there'll be clear questions about the special dividend, which we'll get to later on. But financial performance, I'll hand over to Simon now. He can walk you through those next few slides.

Thanks, Mark. Good morning, everyone. As Mark touched on, the results is pretty straightforward. So in a nutshell, rental income, up just over $0.5 million there, driven by a full half impact of Munroe Lane. And obviously, offsetting that was the increased finance costs, noting that when it reached practical completion in July 2023, we started obviously the loan into that point of being capitalized. And then just a couple of other minor points there. Obviously, we're still -- we've seen quite significant tax loss being built up and obviously, reflecting our deferred tax asset to the extent of the deferred tax liability, which is essentially building depreciation claim. In terms of the AFFO reconciliation, Mark touched on that, it's pretty flat, just a slightly increased loss of $0.35 million this half, but there's more information on those in Appendix 1 and 2. In terms of just moving on to Slide 7, you can see the rental income movements, as I said earlier, primarily driven by the full half impact of Munroe Lane offset by the divestment of Stoddard Road at the end on the 1st of May 2023. In terms of admin costs, they're pretty flat there. Management fees is just a little bit down. We had a very, very small performance fee in the prior half of $60,000. And as I touched on earlier, the primary driver of the increase in the finance costs was the -- essentially, the fact that the interest costs have been capitalized on the development facility up until PC in July 2023. And we received slightly lower interest income as the lockbox sizing would suggest, there's slightly less cash on hand. In terms of the balance sheet, again, very, very straightforward. Mark noted that Munroe Lane was not revalued at the half year. So that's flat. It's a small balance of CapEx incurred, which essentially was the cost to complete, which is retained at March '24. There's a lock box there in the other asset side, so that's essentially released back to cash on hand immediately post settlement when all the debt is repaid. And obviously, we're holding a 20% deposit on Graham Street. So the settlement proceeds received on Friday is just over $54 million. So essentially repaying all that $33 million of bank debt with the balance held as cash reserves prior to the payment of the dividend, which we will formally announce in due course once Graham Street is settled. In terms of the tax losses, I touched on earlier, there is $11 million that aren't recognized on the balance sheet. As I said, we've only reflected the deferred tax asset to the extent of the deferred tax liability. So $11 million isn't recognized. And the [indiscernible] obviously drops down to 0 on Friday evening. In terms of the funding, well, again, whilst the facility went out to March '25, it's going to be fully repaid on Friday after post settlement and the lockbox released as well. So immediately post settlement, we're going to hold just over $27 million of cash reserves prior to any dividend payment. That's it from me. I'll be happy to obviously take questions at the end, and Steve will now give you a quick update at Munroe lane.

Great. Thanks, Simon. Good morning, everyone. As already touched on, there hasn't been an independent valuation obtained at the half year. In terms of leasing, we're continuing with all of those direct marketing initiatives and general marketing initiatives as well. There have been a number of inspections and lease proposals made to prospective tenants. However, commitment has been challenging. We haven't secured any further leasing commitment as yet despite these initiatives and efforts. It is still challenging out there in the leasing market. There is obviously a lot of competing office space available, and we are still contending with the aftermath of the impact of COVID on the way of working and the return to the office. So there is obviously still a very large impact in working from home and flexible working that is driving special requirements for occupiers. Positively, though, Auckland Council have now formally withdrawn their marketing attempts to sublease Level 5, which obviously eliminates the direct competition within the building, which is pretty helpful for us. And we've still got the flexibility across all of the remaining spaces to split into smaller tenancies to suit occupier demand. As we have previously noted, once we do secure some further leasing, the company will be considering the sale of the property. Until we do secure further leasing commitment, we don't believe that it will be worthwhile for the company to pursue a sale of the property as is with its current leasing configuration. Just moving on to Graham Street now. So as previously noted and well known, unconditionally sold with settlement scheduled for this Friday and the sale price of $68 million. Simon has already touched on the discounted NPV of that as at the half year. The 20% deposit has been paid with balance of $54.4 million due on Friday. And as noted from those sale proceeds, $33 million will be utilized to repay the bank debt, which will then leave us with 0 debt for the company. I'll just pass back to Mark now to look at -- recap the outlook.

Thanks, mate. Yes. So look, as you well know, settlement is scheduled for this Friday, at which time bank debt is reduced. And then obviously, we move from there to pay that special dividend, which will be declared on the 2nd of December, paid on the 18th of December. The focus remains the same as it has been, which is to get Munroe leased and then look to sell the asset. Obviously, the sequencing of that, as you know, is important to us for value. And look, any steps, as we have said previously, whether it's a sale of that asset or a wind up of the company, both decisions would require a vote and likely that we would seek to put both of those decisions to shareholders at once. As said $0.05 dividend to be paid on 18 December. The company then slips into a slightly cash operating positive position, and we will then look at the quarterly dividend position on a quarterly basis from there. So that's the summary from the 3 of us. Happy to take questions from anybody, if there are any.

[Operator Instructions] Your first question comes from Vishal Bhula with Jarden.

Just a couple of quick ones from me. So post payment of that special, you guys are going to retain about $10 million with cash or so. What kind of considerations went into sizing that special and how much cash you will retain going forward?

Yes. Look, it's really driven by the potential to have to write incentive checks to get them under leased essentially, and we didn't want to leave ourselves in a position where we had to borrow to do that. So that was the driver.

And I guess just going forward, I mean the OpEx is pretty light. But given you're going to have one asset and the focus will be on leasing, are there any kind of plans to kind of remain further or will it just kind of remain be going?

Sorry, it was a bit muffled line there. Could you just repeat the question? We didn't quite follow that.

Sorry, just on the OpEx going forward, given you're going to be getting rid of another asset, you've just got Munroe Lane. Is there any kind of cost out there? I know OpEx is pretty low, but is there any scope for any further improvement?

No, not really. No status quo.

And then just lastly, I mean, any insight to how Auckland Council's leasing did go? Did they get any inquiry at all? Were they found in the cost of marketing just was too much?

No. Look, I don't believe they had a huge amount of interest, but they also were quite restricted in who they could lease to. Stephen, maybe you want to just comment on that.

Yes. Look, given they had a dedicated lobby with a secure line at ground level interconnecting floor plates with the intra-atrium stair, it was very limited that effectively could only be leased to other CCOs or government departments that they were able to co-locate with, rather than third parties. So it definitely gave them a limited pull.

Your next question comes from Shane Solly with Harbour Asset.

A couple of quick questions, if I may. Firstly, on Auckland City Council space, are they actually occupying that space now? Or is it still vacant?

No, it's still fully vacant. In terms of the rest of the space, they are in and occupying and it's fitted out. It didn't apply if it is hard foot out, but no soft foot out and no one in there.

Right. Okay. Just can you expand a little bit on how you're approaching Munroe then? Mark, you mentioned incentives. What are we -- what should we think about face and net effectives at Munroe? What's the plan there to lease it up?

Yes. Look, your frustrations have shared, don't worry, Shane. We've been tantalizingly close with a number of significant tenants. For whatever reason, they haven't proceeded. Yes, this is one of those things that we can do is keep persevering. I mean every agent out there is aware of it. The pricing of what we're offering is extremely competitive. So we're not losing deals on price. It's sort of just been a case of around big square hole sort of thing. We just haven't quite landed the right match. So yes, we've retained a decent chunk of cash to be very competitive on what we can offer in terms of incentive packages. There's flexibility in terms of how we can slice and dice spaces. So we sort of just have to keep believing that it's a matter of -- it's just a matter of time before we do find the right tenant.

Okay. And just finally for me, in terms of valuing Munroe, I appreciate you didn't alter this round. Does that suggest you're happy with the valuation or just there was no new evidence to support a review?

Yes, probably the lack of evidence as much as anything. From a director's perspective, we felt it was still fair value.

Your next question comes from Rohan Koreman-Smit with Forsyth Barr.

Just on this cash retention, sorry to loop back on it, but $9 million seems like quite a bit to lease up the balance. I'm assuming you're not earmarking all of that for leasing.

No, look, we're not. And fair to say, it's probably a pretty conservative position we've taken. But it doesn't mean we can't give a chunk more of it back at some point. But that was just the decision at the moment is it's a decent war chest to make sure we can deliver on getting the thing leased and sold without having to require any further capital debt.

Yes. Perfect. And then how much leasing do you think needs to be done before this is marketable?

The number we've said in the past, has been 80%.

Okay. Perfect. And then I guess you've kind of stated that steady state from here, you're potentially paying dividends. I'm guessing they're going to be helped because you're probably not in a taxpaying position because the tax losses to work down. But can you give us an idea of broadly where you think AFFO would land on a steady-state basis annualized?

We haven't formally put out guidance, we probably work it out, obviously, with Munroe at 65% occupancy, the rental position is on that property. You know what our operating costs are. It's I would say a little bit of interest income. Look, it's probably between $0.08 to $0.09 per share.

And then just one final comment. I just noticed in the presso, you don't mention the strategic pivot anymore, but I read the Chairman's letter and it's still mentioning it there. Can you just give us some color on, I guess, the cognitive distance between what you guys have put out in your presentation and spoken to and I guess, the Chairman's letter around that as a potential option? Because it feels like everything you've said today says wind up, whereas he seems to still be talking strategic pivot.

Yes. Look, I think everybody includes the Board knows that the likely outcome is wind up, but we're all kind of have one eye open on an opportunity that may or may not present itself. Those opportunities still, I guess, today still exists, but there's certainly nothing that we're considering at the moment that would suggest an outcome other than a wind up.

Just seem to be inconsistencies between the different documents.

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

Yes. Look, that's really all from me and the team. Appreciate you all dialing in. Appreciate the questions. And obviously, you know where to find us if you have any further ones that you'd like to ask. So thanks for your time this morning and the team. That's it from us.