Australian Unity Office Fund (AOF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Australian Unity Office Fund Full Year 2022 Results Call. [Operator Instructions] I would now like to hand over the conference Ms. Nikki Panagopoulos.

Thank you, Lachlan. Good morning, everyone. Thank you for joining us, and welcome to Financial Year 2022 Full Year Results Announcement for the Australian Unity Office Fund. My name is Nikki Panagopoulos, and I'm the Fund Manager for AOF. I am joined by Simon Beake, the Portfolio Manager for AOF. Earlier today, we published various documents on the ASX, including the final report for the full year ended 30 June '22, Appendix 4E, AOS property book and the investor presentation, which we will go through this morning. Following this presentation, we will have time for Q&A. Let's turn to Slide 2. Before we start, I would like to take this opportunity to acknowledge the traditional owners of the lands and waters within Australia and recognize the important connection to country and aboriginal and Torres Strait Islander people have and pay my respects to elders past, present, and emerging. I come to you today from the Wurundjeri here in Melbourne. Now let's turn to Slide 3. Today, I will provide you with a portfolio highlights for the 2022 financial year, update you with financial results, provide a portfolio overview and provide guidance and outlook. Now let's turn to Slide 4. It is pleasing to advise that AOS had a successful year with funds from operations above guidance of $0.18 to $0.185 per unit at $0.188 per unit, driven by active management with strong leasing outcomes and a number of properties. Over 14,000 square meters of new leasing was completed for the full year, representing 15.4% of the portfolio's net lettable area and was largely driven by small to medium enterprise tenants looking for affordable accommodation with good amenity and easily accessible by car and public transport for staff convenience. Occupancy at 30 June '22 was 84.4% as a result of the main tenant at 10 Valentine Avenue, Parramatta, vacating the majority of the property at lease expiry on 30 June 2022. The Total distributions of $0.152 per unit were declared for the full year at '22, equating to an 81% payout ratio. We successfully sold and settled 32 Phillip Street Parramatta in December 2021 for $66 million, approximately 5% above the prior independent valuation. The fund investigated a number of strategic initiatives during the year, which has resulted in the refined strategy and reshaping the portfolio to continue to drive active management and deliver value outcomes for unitholders. I will provide further information on AOF's continued focus in the coming slides. Let's now turn to Slide 5. The fund's refined strategy provides an opportunity to deliver value for investors. The fund will focus on owning Australian real estate assets in metropolitan and CBD markets, generating income by delivering and maintaining sustainable occupancy levels, divesting assets to make capital available. As appropriate, recycle available capital to refurbish and reposition assets and exploring other value maximization initiatives. The fund has initiated an expression of the interest campaign to divest 3 assets. These are 150 Charlotte Street, Brisbane; 64 Northbourne Avenue, Canberra; and 96 York Street Beenleigh. Proceeds from the sale will initially be used to repay debt and as appropriate, recycled into the repositioning and refurbishment strategies of 10 Valentine Avenue, Parramatta and 30 Pirie Street, Adelaide. Let's now turn to Slide 7. AOF reported FFO of $0.188 per unit, well above guidance of $0.18 to $0.185 per unit, driven by fixed rent reviews and successful leasing at a number of assets. Distributions of $0.152 per unit were in line with full year guidance. The profit for the year was impacted due to the revaluation of 3 investment properties, resulting in a loss of circa $48 million, which I will discuss further shortly. The fund's NTA is $2.26 per unit. Turning to Slide 8. All assets were independently valued with an overall decrease of $69.8 million. The portfolio capitalization rate firmed to 5.69%. 5 Eden Park Drive in Macquarie Park and 468 St Kilda Road, Melbourne, witnessed valuation growth, driven by strong leasing outcomes, improved occupancy and capitalization rate compression. Evaluation of 150 Charlotte Street, Brisbane, decreased as the major tenant, Boeing Defence Australia advised that they will be vacating the property at lease expiry on 30 June 2024. The valuation reflects increased letting up and capital expenditure allowances. The capitalization rate also softened by 25 basis points to 6.25%. At 30 Pirie Street, Adelaide, the independent valuation reflects increased capital expenditure allowances required to refurbish the building post Telstra vacating at lease expiry in February 2023. 2-10 Valentine Avenue, Parramatta, is a single allotment comprising a 14-level office building at 10 Valentine Avenue and an adjoining 6-level car park at 2 Valentine Avenue. 2 Valentine Avenue currently has a development approval for circa 28,000 square meter office tower. The independent valuation of 10 Valentine Avenue was impacted by property New South Wales, not renewing at lease expiry on 30 June 2022. At 2 Valentine Avenue, the valuation methodology also changed. The previous independent valuation valued 2 Valentine as a development site. Given current market conditions, the current independent valuation values the site as a car park with development approval. Turning to Slide 9. The capital structure of AOF remains robust. Gearing at 30 June '22 was 30.4%, withdrawn debt of $170.3 million against $250 million of debt facilities. We refinanced $150 million of debt through the year with all tranches of the fund's $250 million facility now expiring on March 17, 2025. At 30 June '22, the fund had a weighted average debt expiry of 2.7 years and a cost of debt of 2.9%. The fund was 76% hedged with a weighted average hedge maturity of 2.3 years, and there remains significant headroom to the debt covenants. Let's turn to Slide 11. Active management continues to drive leasing success. Occupancy increased to 100% at 5 Eden Park, Macquarie Park with an independent valuation increasing by $6.5 million to $80 million, and the capitalization rate firming 25 basis points to 5.25%. At 2 Eden Park, Macquarie Park, witnessed 1,885 square meters of successful leasing outcomes with occupancy at 97%. And at 468 St Kilda Road, Melbourne, occupancy remained strong at 94% with leasing outcomes delivering a strong 4.4 year WALE and a valuation growth of $4.2 million to $83.2 million. Let's turn to Slide 12. Sites constructed in the late '80s are exceptionally well located, offering good amenity and accessibility within metropolitan and major CBDs. The assets are of a good natural life and sweeping views with transport and infrastructure at their doorstep. Both assets sit on either side. At 10 Valentine Avenue, our refurbishment is underway to refresh the lobby with third space, create new wellness and end of trip, improve the services and refurbish the tenancy amenity for enhanced tenant experience. At 30 Pirie Street, our development application has been approved by the City of Adelaide, providing the opportunity to reposition the asset by creating a new canopy at the main entry, refurbish the lobby with a new cafe, third space and refurbished amphitheater, creating a workplace in the heart of the Adelaide CBD that is attractive to tenants while delivering flexible workspace solutions and sustainability initiatives. Let's now turn to Slide 13. As mentioned earlier, an expressions of the interest campaign is underway to sell 3 assets with the proceeds initially used to repay debt and as appropriate, redeployed to refurbishment initiatives. 150 Charlotte Street, Brisbane, 64 Northbourne Avenue, Canberra, and 96 York Street Beenleigh have been assessed as the most appropriate assets to bring to market due to their attributes. All 3 assets currently benefit from high occupancy with strong tenant covenants, good amenity and are exceptionally well located, which should appeal to a wide range of potential buyers. The asset sales provide the optimum solution to reshape the portfolio. Let's turn to Slide 15. Distribution guidance will be provided on a quarterly basis with guidance being $0.025 per unit for the September 2022 quarter. Our near-term priorities are to maintain active management to deliver leasing and occupancy outcomes to progress refurbishments and repositioning opportunities and to divest assets to make capital available for recycling or other value maximization initiative. In closing, I thank you for your time today, and thank you for your investment in AOF. We look forward to continuing to advance the priorities listed and providing an update to investors in due course with a focus on maximizing unitholder returns. This concludes the formal part of our presentation. I will now pass you back to the moderator for Q&A. Thank you.

[Operator Instructions] Our first question comes from [ Marlow Paris from OID Minute ].

Just looking for a little bit of color as to why you haven't provided full year guidance?