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

Thank you for standing by, and welcome to the Australian Unity Office Fund Half Year Results conference call. [Operator Instructions] I would now like to hand the conference over to Ms. Nikki Panagopoulos, Fund Manager. Go ahead. Thank you.

Good morning, Alice, thank you. Good morning, everyone. Thank you for joining us, and welcome to financial year 2024 half 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. Earlier today, we published various documents on the ASX, including the interim report for the half year ended 31 December 2023, Appendix 4D, AOF's property book and the investor presentation, which we'll go through this morning. Following the presentation, we will have time for Q&A. Turning 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 overview of the half year 2024 activities, including the financial results, and provide the outlook and guidance. I will also discuss the various alternate use strategies being investigated for all assets as a way to maximize value for unitholders. Turning to Slide 3. During the half year, AOF continued to deliver on its strategy. From a portfolio perspective, we sold 96 York Street, Beenleigh in January 2024, with settlement expected over the coming months. The settlement proceeds will continue to strengthen the balance sheet. We independently valued 4 remaining assets as at 31 December 2023, resulting in a weighted average capitalization rate of 7.13% and a net tangible asset of $1.72 per unit. From an asset perspective, at 10 Valentine Avenue, Parramatta, the refurbishment works are well underway, with completion anticipated this financial year. At 150 Charlotte Street, Brisbane, the refurbishment plans are finalized, with design documentation and early contractor engagement progressing. Distributions for the half year to December 2023 totaled $0.028 per unit, and distribution guidance of $0.015 per unit is provided for the March 2024 quarter. AOF's capital position remains robust, with $5 million of debt drawn against a debt facility limit of $81 million. The drawn debt is expected to be repaid from the settlement proceeds of 96 York Street, Beenleigh, and the debt facility limit is expected to reduce to $60 million from $81 million. Turning to Slide 4. Following the settlement of 96 York Street, Beenleigh, AOF's portfolio will consist of 4 assets. All 4 assets were valued at 31 December 2023 with the portfolio weighted average capitalization rate expanding to 7.13%, representing value of circa $5,800 per square meter. AOF's occupancy is 93% by net lettable area. This excludes 10 Valentine Avenue, Parramatta, which is undergoing refurbishments and is vacant. Portfolio occupancy inclusive of 10 Valentine Avenue, Parramatta is circa 60%. Turning to Slide 5. At 10 Valentine Avenue, Parramatta, the refurbishment works to upgrade the property and introduce a new state-of-the-art end-of-trip, lobby and enhanced new entry off Valentine Avenue are well underway, with 65% of the project completed. The on-floor work has been completed, and the end-of-trip, lobby works and new entry are anticipated to be finalized by April 2024, with the services upgrade and external works this financial year. At 2 Valentine Avenue, the adjoining car park, 113 car parking bays have been licensed to the New South Wales government, of which 94 bays are on a 5-year term and 19 bays are in monthly terms. The remaining car parking bays are rented to secure parking, with flexibility to take back the bays for 10 Valentine Avenue's future leasing requirements. The Parramatta office market vacancy rate remained high at circa 24%. However, positive net absorption was witnessed in the December 2023 quarter. Prime yields currently sit between 5.9% to 7.25%, with secondary yields between 6.5% to 7.5%. Turning to Slide 6. At 2 to 10 Valentine Avenue, various development approvals are in place to create a precinct, Valentine Place. These are: a development approval to build a 28,000 square meter office tower at 2 Valentine Avenue, which is currently a car park; a development approval to reclad and extend the existing office floor plates at 10 Valentine Avenue by a total of circa 5,000 square meters to a maximum of circa 20,000 square meters; and a development approval to integrate 2 and 10 Valentine Avenue with an enhanced ground floor lobby and podium. Amalgamated, the development approvals would create Valentine Place, a precinct of circa 48,000 square meters of net lettable area of A-grade office, cementing the southeast corridor of the Parramatta Central Business District. We have also considered alternate uses for 2 Valentine Avenue as a way to maximize value for unitholders. These include an opportunity to reposition 2 Valentine Avenue as a build-to-rent development via a design competition planning process with the government architect of New South Wales. The build-to-rent planning is being progressed, with the competition process expected to be included late April 2024. A State Significant Development Application will need to commence thereafter. The plan will consist of a maximum allowable gross floor area of circa 37,000 square meters on the southern end of the site and may elect to pursue the state's newly released affordable housing incentive. The affordable housing incentive consists of a 30% increase in the residential floor space ratio and height in exchange for a 15% affordable housing provision. Key features of the plan would include high-quality build-to-rent and co-living apartments, studios, 1, 2 and 3 bedrooms and associated communal areas; retail and lobby floor space in the lower levels; basement parking, which would also replace the existing car parking for 10 Valentine Avenue. Turning to Slide 7. At 150 Charlotte Street, Brisbane, concept plans for the refurbishment works enhancing the ground floor amenity, including the introduction of third space, podium level, end-of-trip facilities, meeting rooms and wellness center, have been finalized and detailed design is progressing. The tender process has concluded and early contractor involvement commenced. The refurbishment works have target completion dates of mid-2024 for the end-of-trip, wellness center and podium, and quarter 3 2024 for the lobby and external facade. The property is 97% (sic) [ 99.7% ] occupied and a new short-term lease over 2 floors has been agreed with Boeing Defence Australia. The lease commences 1 July 2024. Brisbane market fundamentals remain strong. The CBD total vacancy rate reduced to 11.1% as at December 2023, down from 13.9% as at December 2022, with circa 40,000 square meters of net absorption for the year. Prime yields currently sit between 5.5% and 7%. 150 Charlotte Street has potential alternate use opportunities. Subject to council approval, an opportunity exists for an office redevelopment which would increase the site area by 65%, with current planning regulations allowing for the height to be increased to approximately 170 meters. This would result in approximately 36,000 square meters of total net lettable area, an additional 25,000 square meters. Alternatively and concurrently with the refurbishment strategy, a concept design for up to 40,000 square meters build-to-rent development is being progressed, with the content design and feasibility analysis to be completed. Turning to Slide 8. At 468 St Kilda Road, Melbourne, concept plans to refurbish the entry, lobby, introduce a new third space, including meeting rooms and a repositioned and upgraded end-of-trip facility, are underway. Speculative fit-out concept designs to achieve enhanced leasing outcomes are also progressing. The property is currently 83.5% leased with a weighted average lease expiry of 3.6 years at 31 December 2023. The St Kilda Road vacancy rate was 18.4% as at December 2023 with negative net absorption of circa 24,000 square meters over the 6 months to December '23. 468 St Kilda Road has alternate use opportunities, with the concept design for build-to-rent proposal being progressed. Investigations are underway to both repurpose the existing concrete structure with additional levels and extended floor plates, in addition to a complete demolition and rebuild. The site would yield between 18,000 to 21,000 square meters of gross floor area, respectively, approximately 350 apartments with communal amenities. Concept design completion is anticipated in March 2024. Turning to Slide 9. 64 Northbourne Avenue, Canberra is located on a prominent corner in the Canberra CBD within the prime retail precinct and near the city bus interchange and the main station of the Canberra Light Rail Network. Concept plans are underway to refurbish the ground floor lobby, creating an integrated cafe and third space amenity. The property is currently 98.5% occupied. The Canberra CBD vacancy rate is the lowest nationally at 8.3% as at December 2023 and well below the 10-year average of 11.1%. The CBD market witnessed positive net absorption for the 12 months to December 2023. Prime office yields range from 6% to 7.5%. 64 Northbourne, Canberra has potential alternate use strategies, subject to council approval. The zoning within the city center allows for various uses, including build-to-rent, residential, retail and hotel, and an opportunity exists to introduce between 12,000 to 14,000 square meter mixed-use development. Feasibility analysis to determine the best and highest use for the site, likely being refurbishment of the existing office assets or build-to-rent, is progressing. Additionally, potential site amalgamation offers further redevelopment options. Turning to Slide 10. AOF's funds from operations was $0.04 per unit with ordinary distributions of $0.028 per unit. FFO reflects the refurbishment of 10 Valentine Avenue, which was vacant during the half year. Net tangible assets of $1.72 per unit reflects the independent valuations as at 31 December '23, with 96 York Street, Beenleigh carried at its sale price. $5 million of debt was drawn at 31 December 2023. The drawn debt is expected to be repaid from the settlement proceeds of 96 York Street, with the balance to be held as cash. Post settlement, the debt facility limit is expected to reduce to $60 million from $81 million. The debt facility expires in March 2025. AOF had 0.3% gearing as at 31 December 2023, with interest cover ratio of 9.2x against a minimum of 2x covenant and the loan-to-value ratio of 1.7% against the 50% maximum covenant. Turning to Slide 11. We remain focused on maximizing returns for investors, including being opportunistic with asset sales and delivering on refurbishment outcomes, leasing and occupancy. AOF provides distribution guidance of $0.015 per unit for the March 2024 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 formal part of our presentation. We'll now pass you back to the moderator for Q&A.

[Operator Instructions] Your first question is from Leanne Truong from Ord Minnett.

First question, just with 96 York Street, is that unconditional now? Or are you still waiting for [ commune ] there?

We're still waiting for the minister's consent for the contract to go unconditional, essentially. And that's underway. So the minister and the purchaser are discussing that.

And what's the likelihood of that being approved?

Look, it's just a matter of process, Leanne. It is just a process aspect as part of a Queensland transaction. So we don't expect it not being approved. It's just about timing. It needs to work in within the timing of the minister's approval process.

And then obviously, when that settles, can you just run through what, I guess, your cash flows will be? I mean obviously, you've still got some refurbishments to go on 10 Valentine Avenue and then also maybe leasing CapEx expectations for that asset.

Yes. I'll pass over to -- I was going to pass over to Simon just to bring him in, but I'll just say that we're expecting net proceeds of roughly $28 million. We will use those proceeds to repay the debt, which will be 10 Valentine, the remainder of the 10 Valentine refurbishment. So we assume that roughly $20 million will be repaid, which probably will leave us with the remaining $8 million in cash. We then have roughly $20 million for leasing incentives at 10 Valentine Avenue, refurbishment and leasing at 150 Charlotte of another roughly $20 million and just other general CapEx for refurbishments at 64 Northbourne and 468, and that will all be covered under the debt facility.