Burstone Group Limited (BTN.JO) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Burstone Group Pre-close Trading Update [Operator Instructions] Please note that this event is being recorded. I would now like to hand over to Andrew Wooler. Please go ahead, sir.

Thank you, and good morning. Thank you for joining us in this relatively brief trading update for the period ending 30 September 2025. I think it's important that we also just consider the operating results or the forecast of those results in light of the broader environment across the regions in which we operate. So as we unpack it, it's important to consider the global economic volatility and significant level of uncertainty that is playing out, U.S. tariffs, the geopolitical environment across international markets. And certainly, that is playing a role in how we and some of our peer groups are seeing capital markets globally. So certainly a cautious outlook from that perspective. On the positive side, we're certainly starting to see moderating inflation pretty much across the globe, although it does seem to be sticking in some of the Western markets and a broader easing of interest rates, which is beneficial to us both from an overall income perspective, but also should support valuation upticks over the medium to longer term. From a group perspective, going into the close, we are guiding at the lower end of our guidance range, so at 2%. There has been a significant impact from a large business failure in South Africa. And we have seen, based on that broader cautious international capital market, a slower amount and level of capital deployment into and alongside our offshore capital partners. We certainly are still seeing and experiencing some strong underlying real estate performance, which we'll unpack in a little bit more detail. And we are set to see and benefit from significantly reduced funding costs in this period, really driven by the transaction activity completed towards the back end of the prior year. And from an overall balance sheet perspective, we're expecting LTV to settle around 38%, 38.5%. So a marginal uptick from year-end, and that has been driven by CapEx and deployment into Australia as well as a few other structural items like deferred consideration payable to Investec. From a real estate performance, again, like I said right upfront, we are seeing some really good growth. South Africa, the ZAR 13.6 billion of direct real estate investments that we have here delivering -- was set to deliver like-for-like NOI growth of between 4% and 5%. That will be offset at the bottom line by the dilutionary impact of funding of our CapEx as well as the dilutionary nature of some of the prior year disposals. In Europe, our ZAR 1.9 billion co-investment into PEL is expected to deliver on a like-for-like basis in line with prior year. And in Australia, our ZAR 700 million co-investments are expected to grow from a returns perspective as asset management initiatives across those various platforms take effect. In terms of our fund and asset management strategy, we certainly are building momentum and going into the second half as we expect a growing level of momentum and positivity. Leading the charge is Australia with the Irongate JV, where we've secured significant additional third-party capital commitments to support our future AUM growth ambitions. In Europe, the Blackstone transaction successfully or has successfully been implemented. We obviously signed that and closed that towards the back end of last calendar year, and there's been a significant amount of work done to implement and start to run that alongside Blackstone. We're also exploring several new strategies in the European industrial market. In South Africa, we remain committed to the SA Core+ platform alongside local institutional capital, and we're pending final approvals from them. In terms of our strategic progress, unpacking real estate investments in South Africa, as I mentioned, stable performance. And certainly, as we look at like-for-like NOI growth of 4% to 5%, we are certainly pleased with where that is heading. Continued capital recycling. So we have sold and have committed ZAR 400 million of disposals during the period. We had guided the market that for the full year, we would look to be selling somewhere between ZAR 600 million and ZAR 800 million in the 12 months. So good progress there. In Europe, as I mentioned, our investment into that PEL platform, we're expecting to see like-for-like earnings in line with the prior year. We'll unpack that in the slides that come. And in Australia, alongside Phoenix and TPG Angelo Gordon, where our income and capital growth is expected to really come through over the medium term as those asset management initiatives take effect. We have put some more dollars out the door during the first half into 2 acquisitions alongside TPG Angelo Gordon into both Hemmant and Glendenning. Those acquisitions had a total GAV of around $85 million, $86 million, and our co-investment into that is $5.7 million. From a funds management perspective, and again, slower momentum in the first half. It is a cautious environment that we're operating within, but Australia is certainly in the charge. From a group perspective, our third-party AUM is up 3% to around about ZAR 24 billion, and our total fee income as a percentage of earnings is expected to come in at around 14%, and that compares to the first half of '25 of 8.5%. Australia AUM is up or expected to be up by around 7% since March and certainly is for us demonstrating the framework of our broader funds management strategy that we're looking to roll out across the different regions in which we operate. Fee income, although small on a relative basis, is expected to grow by 70% to 90% for the period. And again, I highlight that, that is on a relative basis, significant, but in the overall context of the group still relatively small. But we continue to see strong appetite from existing capital partners to support that growth into Australia and alongside our management team on the ground in Irongate. In Europe, as I mentioned, the Blackstone transaction has taken a huge amount to implement, and we're in the early stages of that joint venture relationship, but we do have a growing pipeline of potential strategic platforms across the region. And in South Africa, as I said upfront, the SA Core+ platform remains a priority for us, looking to see that ZAR 5 billion of our own on-balance sheet assets. Nothing has changed in terms of that makeup since we communicated to the market in May. We'll certainly give further updates as key milestones are achieved, but we are anticipating final approvals in the shorter term. Just unpacking each region on its own from a real estate investment perspective. South Africa, I've mentioned the headlines. But in terms of vacancies, we're expecting that to remain somewhere between the 6% to 7% and reversions, although still negative at a total portfolio level, expected to improve quite nicely. So somewhere between 2% to 4% negative versus March '25, where we reported an almost 5% negative reversion. And that is still being driven largely by the office portfolio. Breaking that down into the 3 sectors in which we operate, retail is still showing the highest like-for-like NOI growth, strong underlying performance from our centers and then the enhancement to NOI this year from Zevenwacht post its redevelopment in FY '25. And you recall that, that had a softening effect on our FY '25 NOI numbers. So getting the benefit of that coming back on stream during the course of this 6 months. The office portfolio, nice to see that like-for-like growth coming through again. So set to deliver around about a 3% like-for-like NOI growth. Vacancies are stable. And although that reversion number is still high at negative 15%, it's a significant improvement on the prior year, which reported negative 21%. And those negative reversions, as we've said before, will likely persist in the absence of real underlying market growth relative to the escalations or in-force escalations across longer-dated leases. Industrial, look, it's the smallest of our portfolio. 5% decline in NOI really impacted significantly, as I mentioned upfront in terms of the significant business failure. So that has had an impact on group distributions and forecast. But there are strong positive reversions coming through the leasing activity in that portfolio of somewhere between 4% to 5%. So positive momentum and 1 or 2 things can either push you significantly up or bring you significantly down based on the size of that portfolio. In Europe, I've mentioned the kind of softening of that market, but certainly, we've been flagging for a while that there is a softening in that occupier market, and we've seen a lot of volatility driven by the introduction of U.S. tariffs and the uncertainty surrounding that, and that has certainly played out in the tenant space. At a platform level, we are expecting like-for-like investment income to be flat year-over-year. We've had the benefit of continued indexation, although that is slowing off the back of the softening of inflation. We are still capturing positive rental reversions across the portfolio, and we have benefited our PEL level from lower base interest rates. And again, that flows to the group, but it has been offset by an increase in the vacancy in that portfolio resulting from that softening of the occupier market. We see that as a temporary position, and we would expect the vacancy or the occupancy in that portfolio to improve over the coming 12 to 18 months. In Australia, where we've got ZAR 700 million or ZAR 700 million deployed $55 million of capital invested alongside our 3 platforms. ITAP, where we've got $30 million deployed our development opportunities, and that is into longer-dated return profile assets. And then into 2 industrial platforms, firstly, alongside Phoenix, where we have almost $7 million invested in a single asset at the moment of $69 million. You'll recall at year-end that we reported an 11% uptick in the asset valuation of that property. Off the back of that, we successfully refinanced that asset, and we have benefited from unlocking effectively the trapped yield from that very low-yielding initial asset from a Burstone perspective. TPG Angelo Gordon, the second platform where we've bought alongside them the better part of $320 million over the course of the last 9 months, and we've invested $21 million off of our balance sheet, all recent and into low or initially low-yielding assets, but with significant reversionary potential over the medium term. So as we look at the broader industrial platform that we're invested in, certainly, we think that it will deliver meaningful contributions to earnings as a lot of those asset management and CapEx initiatives are put into effect and we start to unlock that reversionary potential that sits within those underlying assets. In closing, and we'll move on to Q&A. Certainly, we remain focused on delivering our funds and asset management strategy internationally as well as locally, but also at the same time, delivering stable real estate performance across all of our platforms. In South Africa, nice to see NOI growth becoming positive and the overall contribution to the group is certainly significant. That positive NOI growth, as we mentioned upfront, is offset by the funding of CapEx and the dilutionary nature of sales from the last year, and we've used the proceeds of those disposals to support growth into our international markets. In Europe, stable operations and certainly, the team on the ground is navigating that softening occupier market. It's a space that they've operated in for a long time and know how to certainly pull the different levers as we navigate a few headwinds. In Australia, -- our initially -- or our assets, investments there are initially lower yielding. But as I mentioned, we're starting to see returns come through as some of those initiatives are taking effect as planned. From an overall funds management strategy, we are still in that transition phase. We are making gains. It's at a different pace in each geography, looking to enhance returns with our model, generate additive fee income and ultimately expand and unlock shareholder value over time. And as I mentioned upfront, committed -- we remain committed to launching the SA Core+ platform, and we are just awaiting final approvals. Balance sheet certainly remains strong and is in a significantly improved position relative to this time last year. And that really is off the back of the Blackstone transaction in Europe, together with the continued asset disposals in South Africa. We continue to sell assets in SA to support platform growth, both locally and internationally. Our funding costs are improving. We benefited from the ZAR refinancing in South Africa that we undertook last year and obviously, deleveraging through that offshore transaction last year. And from an LTV perspective, marginal tick up, but we do anticipate that settling in the mid-30s as we continue to divest in the short to medium term. So that's the snapshot going into the close. We'll open it up to Q&A.

We've got the questions that are coming through. And so we'll just deal with each of those in turn. So [indiscernible] from Nazeem, the question -- I think it's in reference to Europe and strategic platforms. Can you provide more color on the growing pipeline of strategic platforms across Europe, potential size and third-party AUM? And what would co-investment be, how would you fund the latter? So I think it's too early to give you real color over size, quantum, who, where, what, certainly active across a multitude of opportunities. And at the right time, we would certainly highlight that to the market. You've seen the track record in terms of where we've operated as Burstone and the old IPF with the management team that we've been -- that we brought in to this table. So we certainly look to leverage that capability. From an overall co-investment perspective, our strategy remains, if you look at Australia, we're somewhere between 15% to 20% co-invest similarly alongside Blackstone. So we don't think there'll be a significant change to that in terms of above or below. And funding of that ultimately will come through our ability to recycle capital out of the fairly liquid South African asset base that we have on balance sheet. From Mweishö, in the SA office portfolio, are you able to secure new lands without significant tenant incentives? Or is the upside on offices somewhat limited now? So I think Mweishö from an incentive perspective, if you look at where we have been offering incentives into the market, we've been more focused on headline gross rental. It's potentially why our reversion numbers seem relatively high, but our historical incentive levels have been low. That vacancy level that we are holding at kind of 6% to 7% is certainly not structural, but it's not easy space to move and typically is in the less high demand areas around South Africa. So if we look at Nodal vacancy across markets like Rosebank and Sandton, where we've got a strong presence, that is very, very limited. The vacancy does sit in Sandton where there is kind of, I think, broader structural challenges, certainly getting better. And the ability to attract or fill that space, I think, not limited, but certainly is almost a demand-driven factor as opposed to where we can place incentives or rental value. Naeem question around the steel plant shutdown in Newcastle and the impact that it could have on the mall. That's certainly something we've been watching closely for the last kind of 12 to 24 months. There's been a lot of noise around that. One thing that certainly plays into our favor is that a large amount of the income that is spent or effectively creates the disposable income for the consumers around that area is not necessarily all generated through local employment. So we've done a lot of work around trying to understand where that cash comes from. So obviously, Newcastle and the steel industry is a big employer and provider of employment into the local economy, but a significant amount of earnings comes from other aspects, i.e., family members that live in, say, Gauteng and are sending money back home, social grants, et cetera, et cetera. So it doesn't mean that we are seeing stable performance out of that asset. It is -- we have seen a reduction in foot count. Certainly turnovers are lower, but not to a level that causes any sort of significant concern. I'll pause there and just let see if there are any additional questions coming in. Lawrence from [indiscernible] asking about the industrial tenants affected by the business failures. I mean that is -- I mean difficult for us to give you that level of information just from a pure confidentiality perspective. We're working with them from a business rescue perspective. And we're seeking a positive outcome there. But there's obviously a long way to go with them, their bankers and the Board of shareholders of that business. So we've been working with them for a while. There's -- there's potential for recovery, and we'll continue to play our part where possible in being able to secure the future of the business. But ultimately, we need to make sure that we get that asset back if we're unable to progress the business rescue process with the tenant. We sure your question on plans to ramp up the solar PV rollout on retail is seen by many peers, what can we expect in FY '26 and '27? So there is. I mean, we've done a lot of -- I think we mentioned that in May. We've done a lot of work in rolling out as much as possible from a rooftop perspective. The guys are actively looking at different options around batteries and how we better enhance our overall return and ability to roll out further -- further solar with new technology, that is something that is in the pipeline. We don't think it's going to hit the FY '26 numbers. We are investing ahead of the curve, but we would expect potential additional returns to really come through in FY '27 and '28. But I think we've done -- we credit a significant amount of that solar upside and capacity in our base. So what we do from now is really incremental and technology driven as opposed to some of the low-hanging fruit of just putting solar PV on the rooftops. So yes, a lot of interesting opportunities out there and options to consider. Each of them have pros and cons. Some are CapEx heavy, some are CapEx light. So there are a lot of different options that we're considering. But we're working with 2 or 3 different providers as we look at the solutions that benefit not just ourselves, our tenants, but also work with the broader industry from a power supply perspective. Okay. I'll pause there one last time just to see if there are any additional questions. I mean if there aren't, we always remain open to e-mails and calls. So if there's anything that springs to mind, please feel free to give us a call or touch base with Myles, who joins us for the first time. So welcome, Myles. And obviously, if you want further details, please get in touch and chat to either myself, Myles or Kulani, who is looking after the IR side of the business. I don't think there are any more questions coming through. So I guess with that, it's thank you for your time. We'll go into the close and then look forward to unpacking the detailed interim results with you in November. So thank you.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect.