Burstone Group Limited (BTN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Burstone Group Limited pre-close conference call. [Operator Instructions] Also note that this event is being recorded. I will now hand the conference over to Andrew Wooler. Please go ahead, sir.

Thanks, [ James ], and good morning to everyone. Thanks for joining us as we run into the pre-close. So we have a slightly longer than average trading update, just given a lot of activity over the course, really, over the last 6 to 9 months off the back of the internalization as well as the acquisition of that additional state in Europe [indiscernible] and Australia. So as we sit today, a business that we own or manage circa ZAR 40 billion of direct assets across South Africa, Europe and Australia with roughly ZAR 6 billion of third-party capital. Under management, the majority of that obviously in Australia. If we think about the strategic highlights coming into the year-end, we're certainly benefiting from the management internalization as well as the strategic repositioning of the group over the course of the last 6 to 9 months. Some of the key highlights from an annualized net management fee saving resulting from the internalization. We expect that to be ahead of targets. So when we announced the transaction last year, the annualized number was said to be around ZAR 74 million. We think we will come in ahead of that. We've obviously increased our international footprint through the JV in Australia and Irongate third-party capital under management is up 8% since that acquisition last year. We're supported thereby very, very strong capital partners in Ivanhoe Cambridge, Phoenix, Metrics and others, and we've got a strong pipeline of growth opportunities as well as capital partnership and relationships coming through. So we expect that to drive some nice growth going into next year. In terms of the focus on the transition towards capital-light initiatives, the group has been mandated to manage a light industrial portfolio in Germany. It's around about EUR 170 million as we stand today, and we've got the opportunity to co-invest in that business in the future. You would have seen an announcement in November last year, the acquisition of Australia, the Smithfield acquisition alongside Phoenix, where we put in 20% of the equity. And in South Africa, we've made significant progress in building the foundation for a third-party fund management platform to be anchored by local investors or pension funds and as I mentioned earlier, strong pipeline, but not just in Australia, across all 3 territories in terms of feeding these capitalized initiatives as we build that side of the business. From a synergy or synergies that we're experiencing on the internalization as well as the integration, I think, first and foremost, the delivery of the cost initiatives in Europe of around EUR 2 million. So as we said at the start, what back-end of our system, this year, we would love to deliver that. We have done that. We're probably ahead of target, and we see further synergies coming in FY '25. There's been a successful rebranding of the business across the globe as Burstone. And we're having discussions with global equity and debt investors across all geographies. And certainly, we're starting to see this unlocking distribution synergies and capabilities more so across Europe and Australia, but also with local investors and debt investors as we think about building the platforms offshore. De-gearing on the balance sheet remains probably our first and foremost or highest priority. And so we have sold across [indiscernible] Europe, ZAR 1.8 billion of assets over the course of the last 12 months, ZAR 1.2 billion here in South Africa, and we've achieved kind of price relative to book of a premium of 2%. And in Europe, the single asset [indiscernible] for EUR 33 million. I think the premium to book there was north of 50%, and that really was down to the sale of that data center [indiscernible]. We've got a further ZAR 1.3 billion of assets identified in South Africa and a pipeline of sales in Europe of around about -- in between EUR 150 million to EUR 200 million, and that will look to complete during the course of FY '25. In South Africa, on ZAR 1.3 billion, I think we're in legal discussions -- in discussions with legals on around ZAR 400 million out of the ZAR 1.3 billion and we are significantly progressed on around about EUR 100 million of assets in -- on the constant. Total performance, really strong second half as expected, and we are set to deliver somewhere between 6% and 8% DIPS growth for the second half of FY '24. We've benefited from the strong operational performances of the 2 platforms, namely, South Africa and Europe, where vacancy levels are still very low. So really we're seeing at 5% across the portfolio in Europe, somewhere between 1% and 2%. The European business is going to deliver somewhere around 20% earnings growth in the second half. And I just showed you the performance of that business with normalization of the interest rates coming through in H2 as well as the impact -- positive impacts of rental growth combined with the delivery of those EUR 2 million of cost initiatives that really run through the second half. So really strong performance there. Again, we mentioned the impact of the internalization, but we see that coming through our numbers. And the growth in our revenues as a result of some of the new business, namely, in relation to the [ German ] management contract that will come through in the second half. So as we look at it in totality for the full year, we're still expecting to be in line with guidance of somewhere between 0% and 2% higher than FY '23. South Africa, stable performance. We're expecting like-for-like NOI with “NPI” to come in at between 1% and 2% up on the prior year. Retail and industrial performances are strong and will deliver positive NOI growth. Office remains under pressure, negative reversions certainly will offset any contractual income growth that we are seeing. I mentioned vacancies there that they're going to tick up slightly from around 4% in March '23 to around 5%. And really, that is just down to one single office asset that comes vacant at the end of March. I think it's actually on the [indiscernible] of March.Yes and Graeme and the team here are fully focused on recycling of capital. There's a lot of work being done to try and deliver that ZAR 1.3 billion that's been held for sale, and we'll use those proceeds to both delever the balance sheet as well as think about where best to recycle that into. From a European perspective, continued strong NOI growth. So for the full year, we're expecting that to be somewhere around 6% to 7%, driven by strong rental reversions of around 5%, indexation of 7% and really strong letting activity with north of 96% of the space expiring in reletting during the period. The bottom line earnings for the full year, obviously, gets impacted by funding costs that come through in H1 and normalize in H2, but you certainly see the benefit of that, as I mentioned earlier. Our funding costs going forward are effectively capital sold at the end of next year, and we are in discussions around refinancing as we suggest today. On the bottom line in Europe, we're expecting earnings to move by around 1% to 2% up on the prior year. In terms of valuation, I think we've all seen massive volatility across the European markets. We lowered transaction volumes, big movements in cap rates. And so we are expecting a short-term impairment to that platform, coming into March of somewhere between 2% and 5%. That would reflect the carrying yield of between 5.5% and 5.75%, but we certainly are seeing yields tighten and that's why we refer to this as a short-term impairment. As you think about [ drive ], important for us is not just thinking about operations, but really thinking about how we pivot the business and most of it, we're still taking advantage of opportunities. The key focus for us is how we think about capital [indiscernible] and funds management and so turning to South Africa, as mentioned earlier, we have built the foundation in terms of that platform into which institutional capital can invest. And so that will be our focus of FY '25. There was a notable acquisition announced a few weeks ago of The Neighborhood Square in Linksfield together with Flanagan & Gerard. So nice to see us moving forward and buying quality assets that will certainly outperform over time. In Europe, we've mentioned the management contract on the light industrial portfolio. We're exploring multiple sub-portfolio options, so i.e., where we think, we sell a portion of that portfolio but retain the management. And we are also exploring several value-adding core plus strategies where our management capabilities can be leveraged. We've seen that there's a real opportunity moving forward over the next 12 to 18 months. The PEL strategic partner. We talk about that a lot. And as we spoke in October, November, we have put the introduction of the strategic partner on whole, just given the local market conditions and how we think about maximizing shareholder value. And we certainly are aware of what that introduction could do to the short-term LTV of the business, but we also remain very focused on maximizing shareholder value. We still have a view that as we sit here today, we can certainly go and reduce that LTV through that introduction. But we do not believe that, that is extracting the best value for shareholders over the medium to longer term. So as market conditions improve in Europe, we think that we start to look at this again, towards the second half of the calendar year. Australia, I mentioned, and there is a strong pipeline of opportunities there, but both on the capital and on the asset side. In terms of our balance sheet, and again, this is a primary focus for us, not just in terms of LTV, but also managing liquidity risk, et cetera, across the group. We've got significant liquidity in terms of either cash and/or committed facilities that covers our near-term refinancing risk from an interest rate perspective in [indiscernible], there's very limited risk coming into the next 12 months as well as in Europe where we are capped at a platform level. As we've previously disclosed, the group net interest cost moving into FY '25 are expected to increase as a result of the roll-off of cross-currency hedges, and we roll-off into higher rates. But we've done a significant amount of work across the group in terms of revenue, balance sheet optimizations and cost savings that will look to materially offset that downside risk as we look -- as we move forward into FY '25. So we haven't been sitting idle and waiting for rates to hit us in tactful effect. In terms of loan-to-value, if we move -- go back 12 months, when we announced internalization as well as the acquisition of the additional 19% in our European platform, the LTV was set to increase to 42%, and we set ourselves a target of around 39.9%, so effectively 40% through the course of the 12 months. A lot of that would have been delivered through asset sales and the sale of the bridge loan that we have into Europe. We have successfully concluded on pretty much all of those asset sales, including the bridge loan with the exception of ZAR 300 million worth of assets here in South Africa. And so the status quo basis, the LTV would be seeing at 40.8%, call it 41% relative to that 39.9% for the 40%. Going into March, this will be slightly higher. We'll be at between 42% and 43%. That's because of structural CapEx, the Smithfield acquisition, co-invest in Australia and settlement of some mark-to-market positions on [indiscernible] derivatives as we've rolled across currencies. The potential impairments in Europe could result in another 1% to 1.5% negative impact on LTV. We're still in the process of finalizing those valuations. And then offsetting that is the identified pipeline of disposals that I've mentioned earlier that would reduce LTV by between 3% and 5% in the short term. We've also got several other initiatives, including the strategic partner in Europe, the subportfolio sales as well as the fund management platform here in South Africa that will continue to de-gear the balance sheet to below 40% over time, but also doing it in a manner that maximizes shareholder value, so that the 2 are [ inextricably ] linked as opposed to de-capping them. So if we think about LTV, which remains a primary focus, we also think about how we fund our growth, given the opportunities that we're seeing, we are seeing multiple dislocation in relative markets, significant opportunities that I think position the group for future success and longer-term value for shareholders. And we need to think about how we access those because it cannot be systematic or sequential. We're in a market now where there are lot different lead times to delivering a lot of our strategic initiatives, including the LTV reduction. And so as you think about the balance sheet, the pipeline of growth opportunities across all of our platforms, the Board's reassessed the dividend payout ratio, which we kind of -- we've targeted between 90% and 95% over the last few years. And in order to support some of the growth in terms of these co-investors and others over the shorter term as well as the capital reinvestment into the business. We've decided to reduce that payout ratio to 75%. We think that we'll continue to be able to deleverage the balance sheet through the initiatives, as previously disclosed, it will take time. But at the same time, the ability to support some of these growth initiatives that will certainly enhance earnings or quality of earnings as we grow the business over the next 3 to 5 years. Through in closing, where we summarize where we are and where we're going to -- going into the close but also looking forward a little bit, there is a real balance between how we manage the balance sheet in LTV. How we think about operational efficiency and delivering that and the impact that, that can have on earnings relative to the higher cost of interest that will flow through the business. But also thinking about how we position the business for the future, as we think about growth as well as fund management opportunities and platforms. And as I mentioned earlier, it's not about being sequential. A lot of these -- all of this has different time lines to it, different success factors. And so we build a kind of a -- tool kit of different options. They are all equally as important as we look to create value for shareholders over time. And so if we think about it -- and again, summarizing the balance sheet position and what we're doing over the last 12 months, we've sold ZAR 1.8 billion of assets in South Africa and offshore. We've got another ZAR 1.3 billion held for sale here in South Africa and somewhere around EUR 150 million to EUR 200 million in Europe. If we're successful on that, that reduces LTV by a further 3% to 5% percent and the big levers over the kind of medium term would be the strategic part in Europe, together with any introduction of capital here in South Africa. Operational efficiency, I think we've delivered very, very strongly in Europe, EUR 2 million of savings this year with further opportunities in there by '25, successful internalization that will yield higher than the targeted debt management fee saving as disclosed when we announced the transaction and certainly benefits from international integration and some of the balance sheet optimization that we're running concurrently. And then thinking about growth as we think about the management contract opportunity in Germany, the ability to continue to grow our Australian capitalized strategy together with some of some internationally renowned capital partners, the funds management business here in South Africa and obviously, the [indiscernible] opportunities. In Europe, we are looking to make sure that we deliver against all of that as we build the business over the next 3 to 5 years. And so what it means for the business in the short term, looking at March '24, as I mentioned earlier, strong second half performance of 6% to 8% in terms of DIPS, which will deliver between 0% and 2% for the full year. And we've got a [indiscernible] FY '25 and beyond as we think about how we shelter or -- both shelter and grow earnings if we think about high interest rates, inflation, et cetera, et cetera. And so the focus is not just on the next kind of 3 to 6 months, but certainly, what this business can look like over the next 3 to 5 years. So that is that. We do have the entire management team here, so we've got Paul from Europe and obviously, the South African team as well as Jen on the finance side. So over to any questions, if there are any.

[Operator Instructions] Our first question is from Mweishö Nene of SBG Securities.

So with regards to the PAT ratio that's obviously been implemented, I'm wondering, are you guys targeting a certain amount of cash to sort of generate before you look back to going back to sort of 90% to 95% payout ratio?

So I think the key -- and we always said it, right, our payout ratio has linked a lot of different things. One is obviously tax and certainly over the short to medium term, we don't see any tax leakage here for shareholders. Two is our own balance sheet. So where are we? If you are lowly geared, let's say you're in the 20s or early 30s, then you've got significant balance sheet capacity to support growth and CapEx. And that is the efficient use of capital. And so we balance. And then obviously the [indiscernible] cash coming out of the business relative to distribution. So we'd be looking at that over -- well, certainly over the last 5 or 6 years. Where we are today as we think about growth and the ability to support that, an efficient way of doing that is through the payout ratio. And we continue to assess it. So this isn't saying as setting stone as the balance sheet position shifts and markets change, we'll certainly revisit, so certainly it's a dynamic policy. But it's -- that capital is being used to build the business, build revenue streams, build returns. So obviously, isn't as appearing and is moving on to balance sheet and looking to support medium to longer term total return to shareholders.

Okay. Cool. And then I suppose you also consider just doing an [indiscernible] and chose this since then?

Sorry, I didn't catch that, Mweishö.

So I'm saying you guys obviously also consider doing a book build instead of this and maybe just weigh your options and decided that going with the PAT ratio a little bit more, suppose, predictable and maybe eased to manage?

Yes, look, I mean I think [indiscernible] is lots of different implications and challenges -- opportunities and challenges. So it wasn't given -- it's obviously considered but it wasn't given significant voice.

We have a question from Paulo de Almeida of Clearance Capital.

I don't know if you can hear me. Just one I wanted some clarity on is, you spoke about potentially selling some European assets. Could you give a quantum to how much that is? And just in terms of how far progressed you are, on those sort of sales?

Yes, sure. We disclosed a number of between EUR 150 million and EUR 200 million. Remember, we own 83% of that platform. We are fairly progressed on around about EUR 100 million. And certainly, what we've seen is a firming of pricing over the last quarter, and that continues to move in up. So in sort of our prepared markets getting firmer and equity starts to get a little bit more certainty. But [indiscernible], we feel pretty confident of delivering that broader number of EUR 150 million to EUR 200 million. It's also on assets where we have really converted them from value-add or core plus into much more core type of assets. And so yes, we're ready to train them, and we'd utilize that, probably wouldn't start having in terms of, first of all, reducing LTV, but also thinking about how we recycle that and put some of that capital to work in some of the co-investment opportunities that we've got across the international franchises. And in those co-investors, we're earning really attractive cash-on-cash model, the one already does, where we said it enhances over time, sitting hot the bottom line earnings number.

The next question is from Anthony Berman of Anchor Securities.

I'm not certain on your 75% ratio. Is this applicable for the whole year or just on the 6 months distribution that will take place in the next distribution? That's the first question.

Yes. So it will be turning on H2 and then looking forward.

Okay. The second is not really a question, although it's a request, and that is that the [ minute ] management and one understands the reason for dropping or increasing the ratio, no problem with that, other than asking management to alert the public the minute you get to that kind of decision. Those of us who invest for income going forward, it's vital. So we would like to know as soon as possible. Thank you.

Yes. No, I think, actually, we -- from a board perspective, that decision was really only what was discussed literally a few weeks ago and ratified as you went into this pre-close. So we -- as soon as anything material comes up, we do try to let the market now.

[Operator Instructions] We have a question from [indiscernible] of [indiscernible] Stock Brokers.

One question was the cost of debt in the SA portfolio. And also what's -- maybe more clarity on what yields on the disposals did you achieve in inhibition by [indiscernible], if possible.

Yes, the cost of data in SA, we've got [indiscernible] and then a margin. So we are at around ZAR 925 million.

Sure. And on the disposals, in terms of sectors of the 1.2 disposed, about 40% of that was office and the balance is industrial. They came out on an effective selling yield of between 8.5% and 9%.

We have a follow-up question from Paulo de Almeida.

Okay. Just maybe one from a higher level, just thoughts. Given the higher LTV in the business, you talk about short term being a little bit higher, lower PAT ratio given the leverage. How do you justify the acquisition of The Neighborhood market, given that it's earnings dilutive and obviously, just a [indiscernible] LTV. Could you have not pass on that asset?

Yes. I mean -- so part of the answer is yes. But there are 2 reasons for it, right. One, if you look at that asset, if you look at the fundamentals of that asset, probably the strongest performing retail center that we've seen in serving a very, very long time. I mean, the steps are out of the park. The relative check size on that day 1 was fairly small. So ZAR 180 million, ZAR 190 million didn't move either way from a true LTV perspective. But it got us real optionality on that asset alongside one of [indiscernible] retail investors and managers, which creates further opportunity as we think about what that might look like with the time line. So as I mentioned earlier, one of the challenges in running the business, any business, is that nothing is sequential. You got to get in the game. And as you're managing down your LTVs, you're also going to be thinking about positioning your balance sheet, positioning the business, strengthening your revenue line and that asset does a lot of that. Now there's some key initiatives in the background here, Paulo, that if we pull those off over the course of the next kind of 12 or so months, guarantee, you won't be having a conversation about LTV anymore, right? And then when you get to that position and you start looking around for acquisitions, assets like The Neighborhood Square on debt -- and so is it terrific timing, no, but we don't live in a perfect world. Since then, and I think about what Graeme has done here, and I was thinking about what Paul's doing in Europe, if we have coming through the pipeline in terms of sales and other opportunities, it will more than offset the kind of additional capital out the door on TNS. So yes, it's not -- it's very hard to get everything perfectly lined up. In a perfect world, we would like to have the LTV back down to [ 35% ] before we do anything, but we don't know if that will.

So we have no further questions in the queue. Would you like to make some closing remarks?

Yes. Thank you. I mean I think it has been a heck of a year, a lot of volatility, obviously, across the globe on a macro level. And certainly, from an internal perspective, as we thought about the generalization, the integration and definitely see a lot of those benefits coming through. A lot of that, as we get to May, and we have the full year results and really start to talk about the future 12 months, I think you start to see the benefits of it. But we do live in a world of higher rates and a huge amount of work has been going on behind the scenes in terms of managing the earnings base to compensate for that. But we are certainly active on a lot of different opportunities both on the balance sheet LTV side as well as how we think about growth and repositioning and strengthening the business going forward, but we look forward to results in around 6 to 7 weeks' time and getting on the road and getting in front of you guys. So there are any questions over the next few days, please feel free to drop us a line. We'll be very happy to fill them or have a follow-up conversation. So just a lot.

Thank you very much, sir. Ladies and gentlemen, that then concludes today's event, and you may now disconnect your lines.