Burstone Group Limited (BTN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Investec Property Fund Pre-close Trading Update. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Andrew Wooler. Please go ahead, sir.

Thanks, Katie. Good morning, everyone, and thank you for joining us for the brief trading update for the period to 30 September. I think just to quickly run through some of the highlights for the last 6 months. I think core for us and the focus for us has been the delivery against the strategy that we set out earlier this year and focusing on stabilizing the South African business, and we'll get into the details that are on rechecked with, how that has played out for us over the last 6 months and then to continue to focus on the growth coming out of our Western European logistics platform. Off the back of that, we're expecting our distributable income per share to be up anywhere between 10% to 12% year-over-year for the half year period, and we'll continue to look to pay out a consistent dividend pay-out policy or apply a consistent dividend policy of 90% to 95% as we've done in the past. The balance sheet remains well positioned and a nicely placed loan-to-value, the same as at March at 38%. Offshore exposure, the same as it was, 44%. Some strong activity on our empowerment side, and we've recently been rerated to a Level 1 BEE rating. That brings with it significant benefits to our client base, and we're in the process of working with them to help them better understand the impact for them of that rating. And then from an ESG perspective, we have been pretty loud about that over the last 6 months. There has been a lot of activity across the spectrum, both on the environmental and the social side and the governance side, I think, has always been there. So I'm glad to see that we benefited when we launched our sustainable bond earlier in the year, and we continue to see some significant capital rollout on both sides of the water as we continue to focus on the strategy. Stepping back, also, moving into detail in South Africa. Like-for-like NOI or NPI growth over the period, we're expecting around 9% to 11% on a like-for-like basis. We have stabilized the business after coming through the worst part of COVID. There has been a huge amount of activity, and our vacancy has reduced by around 200 basis points over the period. And we've, obviously, seen a material reduction in the amount of relief provided to tenants. And I think that standing over the 6 months at around ZAR 8 million as opposed to the same period last year, which is around ZAR 55 million. So our tenant base is performing or has also rebounded nicely over the period. In Europe, we continue to see a very strong performance from the underlying portfolio. At a distributable income per share level, that is 3% to 4% in euros. And when we convert that back into ZAR with the FECs and a little bit of spot, we're going to be seeing somewhere between 5% and 6% uplift in earnings on a like-for-like basis. That in terms of its total return or total uplift since we've invested in that business in 2018, we've seen a 55% uplift in capital value. It's not total return. That's just capital value. And total return would be significantly higher than that. So it continues to be a very strong performer for us. Underlying market rental growth is still there and forecast to grow. And I think we've got -- we have a shareholder event next week, where we'll be having some objective and independent views on the market. It'd be good to unpack that further when we meet next week. We are continuing to explore the introduction of third-party capital into the business to support both the growth of that platform, as well as to simplify the investment structure, and we think the business is well positioned to take advantage of the strong market conditions. I think just to recap on our strategic focus because the business has evolved quite significantly over the course of the last 4 to 5 years. And just to maybe reiterate what we said earlier in the year around where we are today. And we've come from a business that grew aggressively in South Africa and then look to pursue offshore businesses and platforms and created a lot of optionality, where we are today is a much more simplified business with a diversified portfolio here in South Africa and our sole focus from an offshore perspective in terms of the Western European logistics portfolio. In South Africa, the business or this environment requires a very hands-on active management approach. We are effectively in a stabilized mode, remaining opportunistic. The main focus for us is on the leasing front and tenant retention, as well as client experience. And we've said that for a number of years now, and we're really starting to see the benefits of that coming through in terms of, one, how we are working with our client base, as well as how we're positioning our assets to support our client base and how they run their businesses. From a retail perspective, we remain focused on market-dominant or niched assets with robust performance. They have rebounded very well post the initial COVID disruption. We'll get into some of the details later. The industrial portfolio, which is our smallest [ tier ], houses or warehouses, quality functional assets. And the office portfolio in a sector, that is probably the most suppressed across the board in SA does have a significant amount of defensive assets and relatively small pockets of vacancies in Sandton and Rosebank. So all in all, we're very happy with where we're positioned locally. We will continue to be opportunistic in terms of acquisitions. It's not a core focus for us in terms of where all of our time is being spent, as I said, in South Africa, it's around bundle on seats and clients' experience. But if deals do come up that look attractive in both the industrial logistics and retail space, and we will have a look at it as long as it enhances our quality of assets, as well as returns to shareholders. From a redevelopment perspective, we have now committed ZAR 240 million of capital into the repositioning of Design Quarter, Balfour Mall and to a lesser extent, the Firs. That is going to be done on an initial yield. We're expecting an initial yield of around 8.3%, and we'll deliver that during the course of the next financial year, FY '23. In Europe, a business that is going from strength-to-strength, we'll continue to try and capitalize on that market. As I mentioned earlier, we are exploring strategic partnerships. We are close to putting the trigger on the development pipeline, that 2 out of the 3 are going to go into the ground towards the back end of this year with delivery during the course of the next calendar year. And we're in a position now to start pursuing accretive acquisition activity over the course of the next 6 to 9 months. From a balance sheet perspective, a continued focus on reducing the gearing. We'd like to target 30% to 35%. We've always said that. Continued asset recycling to support earnings and the quality of the portfolio, from an enhancement perspective, together with the expansion into Europe, while remaining opportunistic in South Africa. We've identified ZAR 500 million to ZAR 1 billion of local assets for potential sale, and we're working through that as we speak. We've got a couple of ideas in Europe in terms of some of the assets that we think are right to now trade out of or recycle, and we're exploring the best way to do that. And where we'd like to put that capital. And Izandla is also looking to simplify its capital structure through the disposal of the majority of its portfolio in the market over the next 6 to 9 months. Going into a little bit more detail in South Africa, which makes that 56% of our balance sheet. NOI growth is expected to be somewhere between 9% and 11%. That's off the back of very strong leasing, as well as the rebound on the expense line with much lower bad debt running through this 6 months as opposed to the previous year, as well as a much reduced COVID relief program. From a leasing perspective, our vacancy is going to be down at 9.9% -- 9.2%, and that is on track to deliver the single-digit vacancy target that we set at the FY '21 close. So we expect that by year-end. And we're tracking ahead of where our expectations were in around April this year. So nice to see that. I think it's been a really great performance out of the team from a letting success, 86% of the space expiring in the period we've already dealt with. The reversions are lower than they were last year. So we were at negative 9% as opposed to negative 17%, 18% last year. And we have a continued focus on a lower incentive level. So we're at around 2%. So the true net effective rental levels, I think, are very, very reasonable. From an office sector perspective, just to give you a sense of activity, we've closed 19 deals in the sector at 10,000 square meters, an average WALE of 4 years. We have a couple more that we'll hopefully be able to talk about when we put out full interim results in November, and there's some big numbers coming through there from a space perspective. So certainly, the strategies and on the ground focus has certainly worked for us. As I mentioned, COVID and the bad debt starting to back themselves out of our numbers, which is -- obviously, has a positive result on earnings. Civil unrest, as we put out a sense of -- a few weeks ago, only one -- really one building damaged in Riverhorse Valley, circa ZAR 50 million of damage. That's fully covered by insurance. Construction has commenced and the tenant will be reinstated by the end of the year. So the impact of that has been well controlled and isolated in the business. Turning into each of the sectors in South Africa, retail, obviously, you're seeing the greatest rebound, given that the majority of those bad debt and COVID relief was provided in that sector. So we're expecting that to deliver somewhere between 30% and 33% growth year-over-year. I mean on a positive, really looking at the underlying operations and performance of our shopping centers, you're seeing trading density growth coming back nicely. So that's increasing year-over-year at about 8.6%. There's a little bit of COVID in the previous 12 months relative to this 12 months, but good to see the growth coming through, and we're seeing foot count starting to recover nicely. So this time last year, the 12 months year-over-year was kind of down negative 19%. We're now down at negative 2%. So you're seeing really strong recovery in the foot counts across the centers. Vacancies being maintained at 4%. The majority of that sits in Balfour and Design Quarter, and we expect that to be either fully eliminated or significantly reduced on the back of the redevelopments in those 2 centers. Office NPI, we're expecting at around 7% to 10% year-over-year on a like-for-like basis. Although the vacancy has ticked up or will tick up to around 14%, it's purely based on the expiry of one single tenant at the end of August in a 15,000 square meter building. If you back that out, we would have seen a really nice result there, probably reducing, if not staying stable. But we are expecting that number to come down to around 11% by the end of the year. Just looking at the portfolio in a little bit of detail from an office perspective, 70% of that portfolio has a WALE of 5.6 years. And we've got no concerns there in terms of the underlying tenant base and the quality of the buildings. 20% as a shorter WALE, but really, really good assets. And the vacancy across that 20% or 48,000 square meters is only 1.3%. So certainly, for us, remains best-of-breed and what we would call not at risk. The remaining assets are where we are finding the challenges. And that's 33,000 square meters located across 3 assets, 2 in Sandton and 1 in Randburg. And that is where the focus -- the core focus for the team is in terms of leasing, repositioning and working with clients in terms of how we can get them into the space. Industrial, which only makes up 22% of the business in South Africa, expecting low-single-digit NPI growth. That is where the majority of our leasing activity has taken place. If you remember, at year-end, we had seen a spike. We said it was temporary. We had reported vacancy in that sector at 17%, that's come down to 10%, and we expect that to reduce further by year-end, as we've said when we reported our year-end results in May. So really good results coming through there, over 90,000 square meters of letting in the period, on a WALE of north of 4 years in this market, I think, is going to be relatively happy about. Turning to Europe, and we continue to see really strong fundamentals playing out there on the supply and demand side, rental growth coming through, and it's good to see us capturing that. And again, like I said earlier, I think we'll unpack this in a lot more detail next week, and hopefully, you'll all be able to make that. But it's really good to see what is happening on the ground. I was in France last week, meeting up with the team for the first time in the better part of 18 months. And Europe does feel like it's getting back to normal pretty quickly. And that is going to -- you're seeing that coming through in our activity. You're starting to see it with the tenant base. And again, I think it would be good to hear from some of the independent -- or some of the independent views next week. From a portfolio business perspective, we're expecting NPI growth, and this is all in euros, somewhere between 7% and 9%. We've improved on the operating cost line, so service charge recoveries. There has been a reduction in the bad debt. Obviously, there were 2 tenants that went bust last year that we provided against. We haven't had that this year. And we have seen continued positive reversions coming through the rental line. It has been offset by a slightly longer void periods due to the refurbishment works in both Hanover in Germany and Carpiano in Italy, and we'd expect to see that backing out in H2. At the earnings line, on a like-for-like or a DIPS basis, we're expecting 3% to 4% in euros. That's slightly down because of the timing of tax provisions in the prior year relative to this year, and it's translating into around 5% to 6% growth in ZAR when we bring those numbers into our P&L on a like-for-like basis. In terms of underlying performance, vacancy is pretty stable at around 4%. We expect that to reduce further as we move into H2. Significant activity on both the opening vacancy side, as well as space expiring in the year, capturing positive reversions at somewhere between 2% and 3% and our WALE to expiry remaining at around about 5 years, I'd expect that to grow [ assuming ] into H2. From an LTV perspective, we're sitting at anywhere between 55% and 60%. We are very happy there, as we said before, to utilize bank capital to fund that business given the lower operating risk environment over in Europe, the strong underlying cash flows coming through that business and the margin of safety that you have relative to the lower interest rates. We have significant headroom in our debt yields and LTV covenants. So very, very low-risk there and continued rental growth prospects across Europe, which will widen that gap between operating cash flow and where covenants would be set from a banking perspective. So when we look at that and we look at our funding strategy, we believe that it significantly enhances shareholder returns by funding the business the way that we are. As I mentioned earlier, the development pipeline, the work is expected to commence on 2 of those towards the back end of this calendar year at development costs of around EUR40 million and development yields will be accretive to the portfolio overall. And then the focus for us over the next 6 months, as well as delivering those developments is to start to explore acquisitions and the like as we bring in third-party capital. From a balance sheet perspective, as I mentioned earlier, gearing is still sitting around 38%. We have done a lot of work in terms of our interest rate swap base here in South Africa. That has resulted in a lower cost of debt and significant savings coming through the finance costs over the half year, but without risking the hedge profile. So we're still sitting at 84% hedged and an average swap maturity of pretty much where we were in March. So we've lost effectively 6 months. And on the swap book, we've only lost a month. So I think there has been some great activity there to keep that where it is. And at the same time, to bolster operating profit through active balance sheet management. Debt maturing over the next 12 months is ZAR 1.8 billion, that includes some offshore debt. We, obviously, expect to be able to refinance that. We're in conversations already with the banks. But as a fallback, we do have ZAR 2 billion of unutilized committed facilities sitting in the background. That should everything go against plan, will be covered in its entirety, which, obviously, we don't believe would be the case anywhere. So I guess, just to close it out, I mean, to summarize from a trading update perspective, DIPS of somewhere between 10% and 12% growth would translate into around ZAR 0.52 per share. We'd expect a payout ratio or we expect the payout ratio to remain similar to where we were last year, i.e., 90% to 95%. We've got -- all the SA business has certainly stabilized, and we're starting to see the benefits of our leasing strategies and client engagement strategies. And we continue to see strong performance coming out of Europe as we move into the second half. So with that, I think I'll keep quiet and maybe hand over for any Q&A.

[Operator Instructions] The first question comes from Mweisho Nene from SBG Securities.

So 2 questions, but still tight around valuations. Do you guys have an update on what's happened on your office cap rates? Or if there has been a change in your like-for-like valuations there? And similar for your standing portfolio on your European assets?

Yes, Mweisho, I think we're pretty comfortable with where we were at March. I can't recall exactly what the cap rates are. We're, obviously, going through that process now moving into this close. We've taken over the course of the previous 12 months to 18 months there have been significant write-downs across that portfolio. I mean my assumption would be -- there might be a little bit of downside in South Africa in terms of valuation. I don't think it's going to be material, although maybe your material, and mine material is a little bit different. But I think you're going to -- you should expect to see upside in Europe. But I think -- I don't think there's material or significant movements. We've been very measured over time in terms of what cap rates we were applying and to what levels of rental in South Africa. And so we would top slice everything. We would make sure that we were only capping like true market rental. We've made provision for void and centers and all that kind of thing. So yes, I think we're pretty comfortable with where things are standing at March.

The next question comes from Kundayi Munzara from Sesfikile Capital. The next question comes from Londiwe Buthelezi from Fin24.

Okay. Just of the 33,000 square meters that you said you consider it to be at risk. I just want to get a sense of how much of the SA office portfolio that represent percentage-wise? And then given the oversupply that you talk about in those nodes, what is Investec's [ proposition ] plan with those assets that are at risk? And then last question, you spoke about pockets of vacancies in Rosebank, too. Can you maybe just elaborate a bit more on that on just how empty are buildings like 30 Jellicoe? And I've even seen the first -- I've seen a few empty shops there. Now that's retail, but if maybe you can just elaborate a bit more?

Sure. So I think -- I mean, dealing with the first piece, the 33,000 square meters of office that we consider at risk and that sits across 3 assets. So of the total office portfolio, that is about 13% of the total office business. But in terms of our total South African portfolio, it's around 2% to 3%, right? So it's actually a very small part of our overall South African business at 2% to 3%. And if you then consider that South Africa makes up circa 56% of our total portfolio, the office -- that office vacancy of 33,000 squares equates to probably 1% of our total GLA under management. So I think that is the one thing that -- we obviously -- we don't ignore it. We don't manage this business based on the pie chart or where it kind of leaves the 1% and run away from it. We know that it has -- it can have a significant impact on earnings, if we get it right. And so we've seen significant and really good results, like I mentioned earlier, 19 -- of 19 deals in office, 10,000 square meters at kind of average lease [ stands ] of 4 years. And I think we've been really kind of blowing our own trumpet, I guess, we've been relatively smart in terms of how we've worked with our tenants and client base to either keep them or to bring in new tenants and new clients in this environment. So yes, that deals with the first piece. I think just in terms of Rosebank, yes, Rosebank and Sandton are stagnant. It has been a challenge in -- more so in Sandton than in Rosebank. We've actually seen some really nice recent activity at the Firs. The challenge for us at the Firs is linked to the Hyatt. The Hyatt is next door to us. They are closed. They've got barbed wire across the property. There are multiple management contracts and layers in place. We, obviously, don't own that property at a sessional title. And we're now in discussions with the Hyatt itself in the U.K. in terms of how to do that. But in the absence of knowing when and how the Hyatt is going to reopen, it's very difficult to then plan or very difficult for retail operators to make a living in the Firs. That said, the retail portion, I think, it's the red herring in terms of the overall valuation of that property. The value sits in the office. So the focus for us right now is getting the office space full. We've done really nicely there over the course of the last 3 months, filling that up. A couple of new tenants coming in. We've managed to kind of gain some market share out of places like Melrose Arch. And -- but that retail component isn't going to change until the Hyatt opens up. That is -- that we know. So it's a bit of a holding pattern until then.

The next question comes from [ Ridhwan Junaid ] from Nedbank.

Can you hear me?

Yes.

I have 2 questions. Just around introducing third-party capital into European [ equity ] business. Can you just talk to the value you're looking to raise, as well as [ whatever ] the third-party bringing in expertise or just capital? And then the second one will be around Izandla. You're looking to simplify the capital structure there. Can you just talk us through it and looking to sell the non-core? Is there a value that you're looking to sell?

Sure. Yes. So I think in terms of the European piece, it's still early days, lots of discussions. We're, obviously, assessing all our options. So it's hard to give you a view on value. What we do know is, we want to simplify the overall structure. We want to make sure that we create and -- or create space and make sure we bring in a partner that brings a significant amount of capital with them to partner up with us and to continue to expand that business. There's significant benefits from having a business of scale in Europe. Right now, it is still subscale at EUR1 billion. In rands, it's sizable, but across the regions, you're operating across 7 countries. You're not getting either the operational synergies nor the client-based synergies. We can't help our client base out, the likes of an [ ex BO ] or a DHL. We don't have enough space in each region to be able to really accommodate and work -- or accommodate their needs and work with them. So I can't give you a firm answer. Are we looking for -- what are we looking for in the partner? Yes. I think certainly, capital and people on the ground with access to opportunities. But we have, in terms of our team at Investec and in Europe, we have the asset management capabilities, fund management capabilities. I think we are looking for partners that potentially bring with them skill sets and that are complementary, right? In terms of Izandla, yes, the majority of that portfolio will likely be sold over the course of the next 6 to 9 months to trade it out of. I mean we've been selling them off piecemeal together with Izandla team over the course of the last 2 months. And nice bite-sized assets. We'd probably like to see the majority of our capital kind of being almost repaid or restructured. So -- but we're kind of preserving value there. I don't think we're going to be taking any book losses against our capital and likely to be earnings neutral.

Would there have any impact on your BEE score?

No. I mean I think there's an impact from a -- I think there are 3 points or 2 points that impacts from -- on the scorecard, but it doesn't have a significant impact on our overall rating.

[Operator Instructions] The next question comes from Paulo de Almeida from Clearance Cap.

Can you hear me?

Yes, we can.

Just 2 questions on my side. I think you mentioned on the office side that the vacancy as a result of the 15,000 square meter building in Senegal vacant in August. Could you give us just more detail on who their tenant is? And then my second question just relates to, obviously, Europe, you mentioned that you're looking at potential acquisitions there. I just wanted to get your thoughts in terms of specific the -- your thoughts around just drive acquisitions now or rather just somehow getting your hand on a land bank and starting to develop assets rather than acquire?

Yes. So maybe I've got Graham Hutchinson with us. He runs our South African business. So maybe he can pick up on the Randburg asset, and I'll pick up on Europe view.

Yes, sure, Paulo. So the Randburg expiry was the Innovation Group. I think the reason believing there was a significant downscaling in the size of their business. They moved from 15,500 with us, I think, down to approximately 6,000 or 7,000, and they elected to actually relocate into Sandton. I think just speaking to that asset, we're in advanced discussions with a number of prospective users. And it is a challenging node, Randburg, but I think it does serve a very relevant purpose specifically around call centers, given its access to transport and the like. So I think we're cautiously optimistic about the prospects of that asset, but it is, obviously, a substantial size building as a stand-alone.

Yes. Yes. I mean we've had multiple inquiries on it. And as Graham said, there's no, you can get a bit scared of it. But if you look at the access to transport, access to workforce and what's happening in the CBD, you do see some green shoots potentially coming through. Europe, yes. So great question. And again, I'd urge you to join us next week because we've got some really good insights into what's happening both from a rental perspective across the geographies, as well as where cap rates are. We've certainly seen a closing in the arbitrage between, say, value-add and core plus stock and core stock. So your big investors, big institutional investors are willing to pay up today for what they are -- what they believe the rental growth is going to be over time. So there have been some silly acquisitions recently, some with the 2 in front of it and others are the 3. But when you work out what that yield becomes on an ERV basis, it's not a space that we're going to play in. But the 2s going to the 4s and the 3s, obviously, going to the 5s. So that's where the market is playing out. I think big portfolio deals, very, very -- they're hugely expensive. So I don't think you're going to find us in a bidding war against Blackstone, for example. But there are often opportunities around where inside those bigger portfolios, there's some trickier assets, more complex assets that maybe the big institutions don't want, and we can help them sort out a broader package deal. And that is where we've made our money over time. So the vast majority of what we bought over the last 3 to 4 years has been just that. There was -- there were 2 [ seat ] portfolios. There was -- and that came with around 10% vacancy at the time of some capital to be spent. But pretty much everything we've picked up after that has been in the 1s and 2s, and that is where we've made a lot of our money. So we would expect to try and do the same even in a very, very competitive market. Your point on land banking is a good one. But there are challenges in that, right? We -- first of all, we've got 3 pockets of land that we are going to -- as I said, we're going to develop out. We'll start turning the ground later on this year. We've got another couple of auctions on some land, either inside or adjacent to the park that we own, and we're exploring those. So we'd like to -- if we're going to activate anything that we would like to play. But developers or land holders today across Europe do understand the strong position that they're in. And so it's not that simple to just go and get hold of it. Certainly, going through the whole planning process is convoluted and very difficult compared to, say, in South Africa. So you've got to have very specific skills on the ground and high-risk appetite for that. But there are developers out there, and we're not talking about the big development groups. But certainly, some smaller privates or some of the smaller companies across Europe where their balance sheets are getting a little bit stretched. They don't -- they need partners to come in alongside them and help them unlock their pipeline. They're willing to maybe take or let that partner have a little bit of the upside. We saw it in Australia when we're operating there in terms of some of the forward funding deals and how to structure that. So that is certainly an avenue that we are exploring at the moment. I don't think you get the full benefit of saying, doing the greenfield development on your own, but you're getting access to stock, I think, at a discount to what a fully completed, fully leased up building would be. And then you've got to decide where you put the handshake with the developer, right? So where does the risk sit? How much risk do we want to take on vis-a-vis the developer? But it's certainly a strategy, but I don't think you'll see us only focusing on that development side. It's just -- you've got to look at the return at the same time as the risk and balance the two. So -- but I'd anticipate us doing that and looking at some traditional non-vanilla acquisition activity over the course of the next 6 to 12 months.

Andrew, we have no further questions in the queue. Can I hand back to you for closing remarks?

Sure. Thanks, everyone. I mean it's -- we continue to try and keep our heads down on both sides of the water. It certainly does, like I mentioned earlier, it does feel like things are returning to normal in Europe, which is great to see. And hopefully, we start to see that filtering across. Yes, there's definitely more activity on the ground in South Africa than there was 6 months ago. We're seeing a little bit more business confidence coming through. We're seeing that in the activity that our team here is experiencing. And certainly, Europe remains very, very strong. We'll obviously talk more to that. And hopefully, you will all be able to join us next week. We've got some interesting panelists. We'll try not to bore you, but I'll give you some really good insights into what's happening on the ground there. And then at the appropriate time, we hope to get it together and go and see what we bought there because I'm very conscious of the shareholders and investment base or investor base is only seen videos and pictures and often good to walk the streets, get a feel, as well as meet the team that we have managing the business on the ground in Europe. But otherwise, yes, very confident [ in terms ] of -- with where we've landed going into the close. And we'd expect to -- expect that to continue as we move in. So yes, thanks for your time, and we'll see you next week.

Thank you very much, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.