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

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

Thank you. Good morning, everyone. Thank you for joining us, and welcome to financial year 2023 full year results announcement of the Australian Unity Office Fund. My name Nikki Panagopoulos, and I'm the Fund Manager for AOF. I'm joined by Simon Beake, the Portfolio Manager. Earlier today, we published various documents on the ASX, including the annual financial report for the full year ended 30 June 2023: Appendix B, AOF's property book and the investor presentation, which we will go through this morning. Following the 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 that Aboriginal and Torres Strait Islander people have. Today, I will provide you with an update of the financial year 2023 activity, update you with the financial results and provide an update on outlook and guidance. Now let's turn to Slide 3. During the year, AOF continued to successfully execute on its strategy to maximize returns to unitholders. AOF sold 3 assets during financial year 2023, delivering approximately $220 million of proceeds at an average 3% premium to the independent valuation. The proceeds from the asset sales were used to repay all of AOF's drawn debt and fund the June 2023 ordinary and special distribution of $0.25 per unit. Total distributions for the year were $53.4 million or $0.325 per unit, comprising ordinary distribution of $0.10 per unit and a special distribution of $0.225 per unit. The refurbishments at 10 Valentine Avenue and 150 Charlotte Street are progressing and the capital position of the fund is solid, with no drawn debt and an $81 million debt facility available to fund the refurbishment works and advance potential leasing outcomes. Turning to Slide 4. In line with AOF's investment objective to maximize returns for unitholders, we successfully sold and settled approximately $220 million of assets at 3% premium to the 30 June 2022 independent valuation, a great result for unitholders. 30 Pirie Street, Adelaide was sold for $73 million, reflecting the independent valuation of the assets at 30 June 2022. 2 Eden Park Drive, Macquarie Park, was sold for $68.825 million, reflecting a 10% premium to the 30 June 2022 independent valuation. And 5 Eden Park Drive, Macquarie Park was sold for $80.75 million, reflecting approximately 1% to the 30 June 2022 independent valuation. Executing on these 3 sales and returning capital to unitholders through the special distribution has demonstrated our commitment to maximize returns for unitholders. Turning to Slide 5. AOF's 5 assets were revalued in the 6 months to 30 June 2023. The total portfolio value of approximately $310 million equates to $6,354 per square meter with a weighted average capitalization rate of 6.45%. The portfolio comprises 2 value-add opportunities valued at $171 million, complemented by 3 high-quality multi-tenanted properties. The multi-tenanted properties of 468 St Kilda Road, Melbourne; 96 York Street, Beenleigh; and 64 Northbourne Avenue, Canberra valued at approximately $139 million have a weighted average lease expiry of 4.2 years and an occupancy of approximately 90%. Turning to Slide 6. The value-add properties provide refurbishment and repositioning opportunities. At 10 Valentine Avenue, Parramatta, the tender process for on-floor and base building works has been completed. On-floor works have progressed with the first full upgrade completed. Works to upgrade the remaining floors, lobby end of trip and services had also advanced. Completion of the work is programmed for December 2023. The marketing and leasing campaign, showcasing the refurbishment works, has also commenced. At 150 Charlotte Street, Brisbane, the asset is currently 98% occupied with a 1.2 year weighted average lease expiry. Concept plans for the asset's repositioning are finalized with design documentation and costing progressing. The work to reposition the asset includes base building lift, a new end of trip and activated lobby upgrade. Let's turn to Slide 7. Funds from operations was $0.117 per unit with ordinary distributions of $0.10 per unit. Following the sale of the 3 assets with special distribution of $0.225 per unit was also paid. Net tangible assets of $1.91 per unit reflects the independent valuation and includes a $0.25 per unit provision for the June quarter ordinary and special distribution, which was paid in July 2023 from available cash. AOF has no drawn debt and an $81 million debt facility to fund the refurbishment, other capital works and progress potential leasing outcomes. The facility expires in March 2025. Now let's turn to Slide 8. We remain focused on maximizing returns for investors, including delivering on leasing, occupancy and refurbishment outcomes and being opportunistic with our portfolio construction, asset sales and active asset management. AOF provides distribution guidance of $0.013 per unit for the September 2023 quarter, and we'll continue to provide guidance on a quarterly basis. In closing, I thank you for your time today and 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 former part of our presentation, and I will now pass you back to the moderator for Q&A. Thank you.

[Operator Instructions] Your first question today comes from Murray Connellan from Moelis Australia.

Wondering whether you could just give us a bit of an update on -- I guess, is your expected outcomes around leasing for 10 Valentine, how long do you expect it to take to start signing new tenants in the context of where we are with those refurb works?

Thanks very much, Murray. It's Nikki speaking here. Yes. No, they're very good question. Thank you. As we presented today, we are currently working through the works. The program has the works completed by December 2023, and that is all on floor works, a new end of trip, lobby and some infrastructure works. We are marketing and leasing. We expect -- and it is fair to say it is a challenging leasing market, but we expect to have the asset fully complete and then prospective tenants being able to inspect without any sort of constraints. At the moment, it is construction site. So following some positive inspections, we would hope in the third quarter or by half year, we can get some positive leasing momentum. However, I must note that it is a bit of a challenging leasing market as we sit here today.

Sure. And are you able to share what's the total intended CapEx spend is on that site? And then also, I guess, what you're thinking around CapEx is for 150 Charlotte?

Yes. Murray, absolutely. Our tender, we went -- we undertook a tender process and 3 construction managers tendered and -- for the works that we sit here today, it's expected that the works will cost circa $20 million, and that's to do the full refurb of the floors, a new end of trip, a new lobby and services upgrade to that building, so repositioning and -- the asset to maintain and achieve sustainability initiatives. For 150 Charlotte Street, we -- our concept plans have just been finalized, and we are progressing design documentation and looking at costing to what you asked. It's similar sort of work that we're doing at 10 Valentine will undertake at 150 Charlotte, but we'll also activate the lobby with unique concierge. But it is anticipated as we sit here today, early stages, Murray, but the works will probably cost in the vicinity of $10 million.