Burstone Group Limited (BTN) 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 call is being recorded. And I would like to hand the conference over to Andrew Wooler. Please go ahead.

Thank you very much, and good morning, everyone. I will run through quick trading updates for the period ended 30 September. We do have a full team here. So at the end of it, we'll take questions and open up to the floor. And hopefully, we can cover off whatever comes up. But if we run -- jump into it, I think if you really start off with our strategic initiatives and a lot of progress made over the course of the last 5.5 months. A lot of that was obviously in the making. It didn't just happen over the period. Obviously, the execution taking place, but a lot of that work having been done really over the last 12 months to get us where we are today. So front and foremost has been the acceleration of our expansion to the group fund and asset management strategy. We'll get into some of the details shortly, but obviously, the big particular item there being the strategic partnership in Europe. A core focus for us has been around the de-gearing of the balance sheet. That has gone hand in hand with that transaction as well as a huge amount of work done on the refinancing of debt more so locally given that we've done the transaction or about to do that transaction in Europe, which would have taken that out of the equation. And off back of the activity over the course of the last 6 months, we've said -- as part of that deal, we did announce to the market that we'll increase our dividend payout ratio to 85% or 90% from 75% level that we had earmarked in May. And so we expect a lot of this activity to really drive second half performance and beyond. And we've spoken about that previously when we announced the transactions, but a lot of this really does give us runway going into FY '26, '27. Unpacking some of the activity that has taken place. Obviously, the strategic partnership with Blackstone in Europe, 80-20 partnership there on the PEL portfolio. That really does launch our European funds and asset management strategy. We will retain the 20% co-investment in the PEL portfolio, and we'll retain management of that business or platform. The net proceeds to Burstone -- really just rehashing the key highlights of this transaction that we've been through previously, but net proceeds to Burstone of around EUR 250 million or ZAR 5 billion, marginal earnings accretive or accretive in the short term. We do expect that to increase more substantially over the medium term as a result of the lower leverage in the business and obviously the reduced impact of those funding costs coming through at a group level, potentially increased fee revenue and operational leverage that we get through scale as we start to deploy capital. And with the deployment of capital, we believe that will also be accretive to earnings over time. So we'll continue to look to aggregate similar quality kits across our core markets, and that is really Western Europe, and really look to build that business. We've got a strong pipeline of opportunities already identified, and we are already looking at that for kind of towards the end of this calendar year. From a key date perspective, shareholder approval remains really the only condition to formalize the transaction. The general meeting will be on or around the 28th of October. The shareholder circular should be posted very shortly. We're targeting the 30th of September. And we -- as we've mentioned upfront when that deal was announced, there's more than 50% of in-principle support already received for that transaction. So looking forward to closing that towards really the end of October, very early November. In addition to Blackstone, we've also got under exclusive negotiations a platform in Europe, EUR 170 million. Light industrial, we've been managing that for the first part of the last 12 to 18 months. And we had, as we mentioned previously, a co-investment right, which we are looking to now execute on. So we are well placed there. That strategy would replicate our previously successful light industrial track record in Europe. Some of you will recall our investments through the Pan-European light industrial strategy that we had built up and successfully sold on to Blackstone in 2021, '22. And ultimately, this would look to replicate that. We're far progressed in due diligence, and we'd expect a conclusion on that transaction within the next few months, certainly before the end of this calendar year. In South Africa, nice to see that we've really brought this forward in terms of our ability to raise or bring into the mix institutional capital at a platform level. So we are in exclusive negotiations with Cornerstone investors to seed and aggregate to scale an unlisted platform here in South Africa. We'd be utilizing a portion of our existing South African asset base to seed that platform. We'd expect to execute this over the next 6 to 12 months, and we would act as a fund and asset manager of the platform. And obviously, as we get closer to execution, there will be more details made available to the shareholder base in time. In Australia, Irongate continues to go from strength to strength. Again, we mentioned this a few weeks ago. We've concluded a new industrial joint venture, backed by one of the world's leading alternative asset management businesses. So nice to have them joining the ranks in Australia alongside the likes of Ivanhoe Cambridge and Phoenix obviously in Europe, where we've got Blackstone. That transaction will increase our equity AUM in Aussie up by kind of 32% since we bought into that business a few years ago. So we'll be managing AUD 600 million of equity. The new industrial JV will have a total commitment -- equity commitment from the parties of $200 million. That's not our equity commitment. We sit as a minority in that business in line with our various co-investments like you've seen in Europe and over time. So the total equity being made available between us to that JV is $200 million. We'd look to upsize that if we successfully deploy that relatively quickly. Our capital partner there has real growth ambitions. As I mentioned, we'll take a minority position through Irongate. And we, through Irongate, retain investment and asset management functions of that business and look to scale that over time. The initial portfolio that will seed this, I think, completes its certainly exchange -- the contracts have been exchanged but will complete in the next 2 or so weeks. Total purchase consideration of around about AUD 140 million, which is about $80 million of equity. And we've got a strong acquisition pipeline that we'll probably look to deploy the rest of the equity commitments within the next 2 to 6 months. So quite excited about what's playing out there and our ability to grow that business. Where does this leave us? And again, these are some of the key stats that we did highlight a few weeks ago, but to bring it back. This is taking a snapshot of the group on the completion of Europe, both Blackstone and the light industrial business as well as Australia. This does ignore what happens in South Africa because that is a longer-term execution program. But we ultimately would be massively increasing the size of our third-party business. So moving from ZAR 4.7 billion of third-party AUM and increasing that 5x to ZAR 23 billion. If you think about that in terms of total GAV, we'll be sitting with about ZAR 42 billion of direct and indirect assets or investments across the globe. 54% of that would be on a third-party basis. And almost all of our third-party AUM will be sitting offshore. So obviously, as we get South Africa moving, that number will change. Impact on P&L significantly shifts our fee revenue. So fund and asset management fees today make up around about 7% of earnings. We would expect the level of that to increase by more than 2x over the next 12 to 24 months. So a significant move in that regard and the ability to now scale and drive our high-margin business as well as take further reliance off the balance sheet, which is a key component of our overall strategy. From a de-gearing perspective, again, the Blackstone deal in Europe is a significant catalyst for this. And ultimately, it hasn't just been about de-gearing. It's been around how do we create balance sheet here to support our growth ambitions. So the Blackstone transaction will reduce our LTV down to around about that 33% mark. We've also made good progress on sales of assets here in South Africa. Roughly ZAR 300 million are already unconditional during this first kind of 6 months. We had another ZAR 800 million that are in final DD and subject to funding, and a lot of that will come forward pretty quickly over the course of the next 6 to 8 weeks to become unconditional. And total asset sales that we've earmarked for the next 12 months is looking forward of ZAR 1.6 billion to ZAR 1.8 billion. That includes the ZAR 1.1 billion above. So it's effectively another ZAR 500 million to ZAR 700 million of asset sales that we're working on in the background that we're looking to bring forward to create more capital to recycle into both local and offshore opportunities. And if we think about our LTV on a more medium-term outlook, we think about our different commitments to growing the different platforms, both locally and offshore. And again, this really does exclude what happens in SA that we think our medium-term LTV will be somewhere between the 34% to 36% level. So number one, nice and stabilized; but two, still gives us nice capacity going into the next cycle. From a debt refinancing perspective, if you recall, right upfront at the start of this financial year, we said that we needed to look at the refinancing in Europe together with an opportunistic refinancing here in South Africa. Obviously, Europe has fallen away off the back of the PEL transaction. I mean that was very close to completion when we started engagements with Blackstone. But in South Africa, we have refinanced ZAR 6.6 billion of our group-related ZAR and euro debt. We received strong support from our entire lender base. It obviously has reduced any near-term liquidity risk and also provided us with enhanced flexibility across our debt stack. We've achieved an annual margin saving equivalent to 20 basis points. So that's nice on a forward-looking basis. It's extended our debt expiry profile from just over 2 years to just over 3 years. And we obviously, as I mentioned upfront, created a lot of flexibility in how we settle facilities. We've achieved a more favorable covenant set, et cetera. So nice result here. And from -- if we look across the rest of our balance sheet metrics, we've got ZAR 1.2 billion of committed and undrawn available cash or facilities. Obviously, this also ignores the proceeds that are coming in from the different sales and transactions globally. From an interest rate hedge perspective, we're 95% hedged at rates below current market levels. Our investments into Europe or PEL is currently hedged from a capital perspective at 75%. As we mentioned in the deal update, that will increase to 100% but will come back and normalize to around 60% to 70% over time. And our investment into Irongate from a capital perspective is hedged at around 60%, again, through the use of cross currency swaps. If we just unpack performance and our expected performance for the first half. We are expecting to deliver in line with our full year guidance that we provided in May, which was just around the negative 2% to negative 4% year-over-year for the full financial year. So we're going to -- we expect it to come in that range for the first half. The South African business is performing as expected but is expected to come in at an NOI or like-for-like NOI level marginally below last year. We'll unpack that shortly. The European business is expected to deliver roughly 1% to 2% on the bottom line, a similar number NOI line in euros. And when we translate bottom line earnings into ZAR, we get a nice pickup because of where we've been able to strike historical foreign exchange contracts and ZAR earnings will be up kind of 9% to 10%. We are expecting group fee income as out of our fund and asset management business to increase quite nicely over the period linked to some of the activity in Europe and managing that German portfolio. Our cost base across the group has been well controlled. So we're expecting our total costs to come down over the period by 4% to 5%. And as we've flagged previously, we are expecting our net interest costs to be slightly higher year-over-year because of where rates have gone on that unhedged portion of the various debt elements in the business. So to recap, we are expecting our first half just to be in line with full year guidance, which is somewhere between the negative 2%, negative 4% mark. So no surprises there. In South Africa, just unpacking that a little bit. At a like-for-like level, we think will be somewhere between negative 1% and negative 2% year-over-year. Retail and industrial to continue to deliver positive NPI growth. Obviously, the overall business has been or continues to be hampered just by the office sector. Our vacancies in office still remain incredibly low at between 6% and 7%. That's a marginal uptick from the prior year but still sitting really nice and low at 6% to 7%. And there are still continued negative reversions because your market rental -- or underlying market rental growth just isn't keeping up at the in-force escalations. From an overall portfolio perspective, vacancies are pretty much flat since March, sitting around, we think, about 1.5%. Total reversions, we're expecting to come in at around the negative 10% mark. That's largely driven by reversions in the office portfolio, some of the longer-dated leases that are still running off. From a retail performance perspective, performing nice and strong, ZAR 2,900 a meter in terms of trading densities and still achieving turnover growth over the last 5 months. So portfolio there is in a good position. And we do have funding costs coming through in the South African business as we roll off some of the CapEx redevelopment spend. So you'd expect to see an increase in the funding costs in that portfolio or that platform over the last 6 months or so. In Europe, as I mentioned, like-for-like NOI growth will be up by around 1% to 2%. We've captured some nice positive reversions at around 5%, and indexation continues to flow through at around 3.5%. There have been marginally higher vacancy, and we are coming off a very low base. So we think we'll close out at around about 3%. There's certainly a little bit of softness in occupier market. We have continued to achieve cost savings in the business, so around about EUR 600,000 that will flow through to the bottom line through cost saving and streamlining efficiencies, offset by some marginally higher funding costs on the unhedged portion of our European platform debt. So at a net earnings level, as I mentioned upfront, we're expecting earnings of PEL to increase by roughly 1% to 2% in euros and translate into 9% to 10% in ZAR off the back of some nice EPCs that have been locked in a while ago. Australia, as I mentioned, some of the deal activity really moving forward nicely, significant growth in AUM and a strong pipeline. So I think well positioned to capitalize on the opportunities presenting themselves alongside the capital partners that we've got in the stable. So to close off and then we'll move to Q&A. I think it has been a really -- look, it's been a busy -- very busy first half. A lot of work done getting to that point and the ability to conclude on a lot of the transaction activity that is going to set this business up for the next kind of 3 to 5 years. From an operational performance, we're very happy with the underlying performance of the portfolios, trading in line with expectation. And that will deliver first half results in line with our full year guidance. Again, strategically, we're very pleased with the progress that we've made across different businesses. Most notably, I think the rollout of the international fund and asset management strategy with a lot of activity still to come in South Africa in the same regard, and it is bringing a significant amount of benefits to the group as we look to achieve our integrated real estate returns. So the hybrid model of your traditional real estate investment stapled with your management across the different platforms, risk-return profiles, et cetera, et cetera. And so we think we'll be able to generate significant enhancements in terms of returns over time. It will take time. It's not going to be overnight, but we partnered with some of the world's best. We've created upside from a balance sheet perspective. We've got capacity and certainly excited about where this goes to from here. So that is us for now. And the key dates. As I mentioned previously, from a European transaction perspective, posting of the circular will be during the course of next week, around the 30th, targeting the general meeting for that deal or that vote on the 28th of October. And we'll meet again on the 20th of November when we release our interim results. So that's it from us. We'll turn it over to questions. We'll start off by taking questions from the floor, and then Ursula is manning the inbound questions online. So let's go to the floor.

[Operator Instructions] It seems to have no questions on the conference call at the moment. And I would like to hand over to Ursula for any webcast questions.

I'll give another minute. I'm not seeing any questions coming through on the webcast yet.

Okay. Well, while we wait, I mean, the door is always open. So do feel free to reach out to the team here. They're all on standby. So if there are questions that come out once you've gone through the trading update presentation, we're more than happy to take questions and one-on-ones, whichever works best. So if there aren't any questions, Ursula, anything come through?

Nothing has come through.

Okay. So then we'll close it off. And again, thank you for your time. Again, feel free to reach out to the management team should you have any questions. Otherwise, we'll see you at the general meeting in a few weeks' time and interim results thereafter.

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