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 event is being recorded. I'd now like to hand the conference over to Mr. Andrew Wooler. Please go ahead, sir.

Thank you, and good morning to everyone, and welcome to the pre-close update for the year ended March '25. There's obviously a presentation that is on screen and the broader detail that has been released live on [ SENS. ] We will run through the presentation and then look to take questions at the end. So I think just to kick off, I mean, it's obviously been a big year for us and really a huge amount of progress made in relation to our strategic initiatives. I think first and foremost, the focus for us has been on deleveraging the balance sheet, and we expect going into March that the LTV will sit somewhere between 34% to 36%. Obviously, the big lever or big mover there has been off the back of the transaction in Europe that saw that reduced together with sales in South Africa of around ZAR 900 million. And those sales were done at a discount to book of only around 2.5%. And then we put some further capital out the door into Australia, and we'll unpack that in a little bit. But a nice result as we get into the close in terms of balance sheet capacity and where leverage is sitting today. Obviously, a further focus and a massive amount of work done here over the course of the last 12 months in relation to expanding our fund and asset management strategy. We've seen the successful close of the Blackstone transaction in Europe as well as the launch of a new industrial joint venture in Australia alongside TPG Angelo Gordon, and we announced that a few weeks ago. Again, we'll unpack some of the detail in the coming slides. And we've seen third-party assets under management now growing from just short of ZAR 9 billion at the start of the year to around ZAR 25 billion as we go into March and fee revenue from those activities increasing from 7% to 11% for this year. And obviously, that only includes Blackstone for 3 or 4 months. So that number should significantly drive forward over the coming year and thereafter. Also in relation to balance sheet, a massive amount of work done on refinancing both in Europe and in South Africa. South Africa was opportunistic given the appetite from local banks. And so we've refinanced that during the course of the year. We improved our margins. We've extended the debt profile of South African borrowings and also put in place new debt in the European platform on very, very strong terms and pretty much similar margins to what we had before. So we've really removed any and all near-term refinancing risk. And so together with the low leverage in the business, the balance sheet is in a very strong position as we stand here today. Further focus really post the internalization, which is now almost 18 months down the line, but a lot of work done in optimizing operational costs looking at how we generate and create efficiencies, synergies across our international businesses. And you'll see that coming through as we look at our operating costs that have only gone up or expected to go up only 1% to 2% for the full year. And we're gaining a lot of traction in terms of how we integrate as an international business. And that doesn't just lead to hard cost synergies, but really starting to see traction on the potential revenue line and pipeline as we look at new opportunities, new strategies and capital partners across the globe. So really good to see some of that coming forward. Unpacking a little bit of the progress in each of the regions from a fund and asset management perspective, starting off in South Africa. We've spoken about the SA Core plus platform that we are looking to launch. We've made significant progress with Cornerstone investors over the course of the last 3 or 4 months since we last spoke in November. All material due diligence is now complete and subject to various internal investment committee approvals, that platform will see us seed it with circa ZAR 5 billion of South African retail and industrial assets that currently sit on the Burstone balance sheet. We will retain a significant equity interest in that platform and that equity proportion we would look to reduce over time as we scale that platform over the years to come. Target LTV range in that platform of around 40%, and Burstone will act as the fund and asset manager of the platform and hope to launch it before the end of this calendar year. So a tremendous amount of progress made there. And yes, I hope to have some real positive news on that in the not-too-distant future. In terms of Europe, we've obviously spoken a lot about the Blackstone transaction that closed in the middle of November 2024. As we've mentioned before, we expect it to be marginally accretive in the short term. We retained a 20% equity co-investment in that portfolio. And we look to build that in aggregate to scale alongside Blackstone and their funds over the coming years. In terms of Germany, we had spoken about a light industrial co-investment opportunity in November. And as a group, we decided not to pursue that for a number of different reasons, but really largely down to the fact that we want to prioritize the growth and investment into the European logistics platform alongside Blackstone. In Australia, a huge amount of activity undertaken by the Irongate team, significant growth in AUM. They now sit managing $625 million of equity across multiple platforms and with multiple partners, the likes of Phoenix, Ivanhoe Cambridge, TPG Angelo Gordon and Metrics. And that AUM now is up 28% year-over-year. So gaining some really strong traction in Australia. As I mentioned earlier, we've recently established an industrial platform alongside TPG Angelo Gordon. They've got around about $191 billion of AUM invested globally. So great to have them as a partner. And again, alongside the likes of Blackstone in Europe and the Cornerstone investor that we're working with in South Africa, we really are working alongside some of the best of the best. In Australia, specifically and alongside Angelo Gordon, that industrial platform has already acquired just shy of $300 million of industrial logistics assets in New South Wales and Queensland. We've deployed just north of AUD 130 of equity into those assets. We've got another under offer at the moment that we look to bring in to bolster that portfolio. And as Burstone, we sit for 15% of the equity alongside TPG Angelo Gordon. So to date, we have committed circa $20 million into that platform as we look to grow that out. So really good to see momentum building in Australia. And the culmination of what we've done in Europe and Australia really is set out here where we've grown the AUM, third-party AUM from [ ZAR 8.9 ] billion to [ ZAR 25 ] billion over the course of the last 12 months. So just short of a 3x increase. As I mentioned, our products, our fee revenue now expected to comprise circa 11% of our earnings, up from 7% last year. And if you annualize that with Blackstone and the TPG transactions, over a full 12 months, you'd expect or will see that number being significantly higher. So as we sit today, the total amount of real estate or gross asset value that we look after and manage as Burstone is around ZAR 42 billion. 61% of that is managed on behalf of third party, and all of that third-party AUM sits offshore as we hopefully launch the SA Core plus platform, that number and percentage will shift. But it's really good to see the traction that we're gaining on pretty much all fronts across the 3 legs of our business. In terms of the balance sheet, and again, as I mentioned earlier, a core focus for the business over the course of the last year. We started the year with a reported LTV of 44%, and we expect that to come in between 34% and 36% at year-end. Obviously, the major movements were in relation to the sale of our stake in the European platform as well as the asset sales here in South Africa that on a combined basis saw us reduce leverage by around 12% to 13% and marginal uptick or reinvestment through investment into CapEx as well as our investments into Australia, together with the structural changes linked to the consideration -- the deferred consideration for the management company and amortization of intangibles. But to step back and look at that today and the amount of balance sheet capacity that we have together with what we expect to create over the course of the next 12 months through continuous recycling of capital, the group is certainly in a very strong position to capitalize on the pipeline that we are generating globally at the moment. If we now just move to group performance for FY '25, we're expecting to deliver the full year results in line with the previous guidance given in November. So that was between negative 2% and negative 4% on FY '24. And that would generate a distributable income per share number of around ZAR 1.014 and ZAR 1.035 per share. We expect to maintain a dividend payout ratio in line with that of the interim period, and that would result in an expected increase in dividends per share of between 2% and 4% when compared to FY '24. Underpinning the results in South Africa, we're expecting like-for-like net property income to remain in line with the prior year. In Europe, we're expecting a marginal uptick in like-for-like NPI. As I mentioned already, our group fee income from fund and asset management activity is expected to increase to around about 11% and cost optimization initiatives have resulted in us being able to deliver total operating costs of only 1% to 2%, up on the prior year. So a huge amount of work done there to ensure we maintain margin. And in terms of group net interest costs, these are expected to reduce significantly over the 12 months, obviously, impacted by the proceeds from the Blackstone transaction together with the proactive refinancing efforts that have reduced the all-in cost of debt, partially offset by the further investment in our Australian platform and maintenance capital expenditure in South Africa and then the impact of the South African asset sales of ZAR 900 million that will lead to a reduced interest cost for the group and significantly contributed to the lower LTV ratio. I think it is important to note that from an overall earnings perspective, those transactions, even though we're only at a circa 2.5% discount to book, they were dilutive to overall earnings, but we decided to recycle that capital specifically to create leverage headroom and the ability to grow our various management platforms. And as I mentioned earlier, the Blackstone transaction, it was effective 12 November, and we expect that to be marginally accretive in the results to FY '25. Unpacking South Africa in a little bit more detail. As I mentioned upfront, like-for-like base NPI is expected to be in line with the prior year. Our average vacancies are expected to tick up marginally through the course of the year and closed at around 5%, 5.5%. That's roughly an 80 basis point tick up. So still low and really driven by one large industrial site that has become vacant in the second half of the year. Total reversions are expected to improve quite significantly. So we're expecting to come in at negative 5%. That compares to negative 9.3% in the prior year. And then from a sectoral perspective, retail continues to perform well, expected to deliver positive NOI growth. Our results, as I mentioned in November, will be slightly negatively impacted by our redevelopment in Zewenwacht. There's still some downtime over roughly 20% of that center. But as we look to bring in our second anchor and they started trading and they're trading well. So short-term impact, but longer-term value creation there. The office sector. We continue to experience negative reversions, but those seem to be slowing. We're expecting to come in at negative 20% for the year. That compares very favorably to last year, where we were negative 31% and average vacancies throughout the period have been hovering at around 8%. In '24, that was somewhere between 6% and 7%. So positive result coming out of office, and we continue to see really good activity in that sector. We've definitely seen a pickup in the first quarter of this year, specifically in and around Sandton and Rosebank as some of our core nodes. In industrial, I mean, that is a small component of our overall portfolio. We have seen strong letting activity. Overall reversions are expected to come in at negative 5%, and that's really driven by some very long-dated leases that have expired and have reverted and those have gone backwards by 17%. But overall, a good performance coming in from the industrial portfolio. Europe, as we unpack the European business, the PEL platform, as I mentioned, expected to deliver positive NPI growth, and that has been underpinned by positive rental reversions of around 13% and indexation of 4% running through the portfolio, but has been partially offset by the higher average vacancies in the portfolio coming off a very low base of 1% in FY '24, and we're expecting that to be on an average side, closer to 4% for the last 12 months. And that is a result of a slowing occupier market, a lot of uncertainty flowing through that European market, as we all know. And we'd expect that number to stabilize as we go into next year. And as I mentioned earlier, the German light industrial platform that we decided not to pursue in terms of the co-investment ongoing management. Australia, I think I've spoken to a lot of that performance and what they've done in terms of the deal and joint venture platform with Angelo Gordon, but we're definitely very well positioned as we look at the pipeline of both opportunities and partners. And really good to see we put our first bit of capital out the door in December 2023, so just over 12 months ago, alongside Phoenix property investors in a site in New South Wales, just outside Sydney. And the last valuation on that property that came through the other day and the asset has been revalued upwards by 11%. So underpinned by positive rental reversions. We've done some CapEx work on that property. It's now fully let, and we're starting to benefit from those asset management initiatives. So really, as we continue to deploy capital into similar types of opportunities, we would expect similar results to come through. As we close off, yes, I think obviously, very good to see the real estate portfolios across the different markets performing in line with our expectations. Strategically, we're obviously very happy with the progress that we've made across the business in relation to de-gearing the balance sheet. It's created a significant amount of capital availability for us as we're starting to see pipeline and opportunities open up for us across the globe, driving for the funds management business and an important milestone this year, obviously, in launching that in Europe and continued performance and growth in AUM in Australia. And you put that alongside what we're doing in South Africa and advancing the exclusive negotiations on the fund and the SA Core plus platform that we're looking to launch here, it really has been a good year. And really, I think we're starting to see the benefits of how we've capitalized on the skills, on the experience on the people that sit within the business post the internalization. So a lot of that benefit is starting to really flow through. So I think where we sit today and looking forward, really good space for the group, lots of opportunities opening up, a lot of volatility. And certainly, it's not a bed of roses anywhere in the world right now. I think we just got to open the papers to see what happens on a daily basis. But it is [ head ] down, working with our teams on the ground, working with world-class capital partners as we look to grow the business over the course of the next few years. And maybe we just close off looking at the broader model, and I know we spoke to this a little bit in November, and we continue to focus in rolling this out. But as we think about our funds management strategy, the near-term focus will be on recycling the -- sorry, the direct on-balance sheet investments that we have here in South Africa, utilizing that capital and the proceeds from that to co-invest into platforms that we manage. It obviously gives us multiple benefits in relation to fee income, operating leverage and also allows us to further diversify our investment base across the globe and ultimately will drive, we believe, enhanced returns on our capital deployed across the world. And that's when we start to talk about this integrated real estate return model that we're starting to really see the benefit of as we look to enhance those returns, the standard real estate returns combined with our management model and crystallizing some of that operating leverage that does in the business today. And we certainly think that we've got the ability to grow that and extract further value from the operations over the course of the next little while. So a fairly high-margin business for us. So it's still early days, but as we look at what we're trying to do in South Africa, which is really the last proof of concept, combined with what we're looking to recycle over the course of the next 12 to 24 months, we really -- we see good option value, and we're starting to see really good opportunities in all the markets in which we're operating. So a good place to be. So I'm going to leave it there and open it up to questions. I think maybe if we start by opening it up to the floor, we'll take questions from those that have dialed in, and then we'll go to questions that have come through on the screen.

[Operator Instructions] At this we, stage have no questions from the telephone lines. I will now hand over to management for written questions submitted via the webcast.

Okay. So we have first question up here from Mweishö just in relation to the SA Core plus platform in South Africa, we're seeding it with ZAR 5 billion of our assets, how large is total AUM of the SA Core plus platform expected to be? Just trying to get a sense of updated scale. So I think obviously, day 1, we're looking to see that with ZAR 5 billion of our own assets, where it gets to over time becomes a function of opportunities and also capital availability. And I guess from our perspective, scale and size is important, but it's not everything. We want to make sure that we -- as we grow that business, as we grow that platform, we're delivering the right assets, right returns over time. And so it's not a race to scale. From our perspective, we will keep a significant amount of equity in that business alongside the capital as we grow it. And it will be -- I guess, it's how long is a piece of string. But we are seeing a lot of opportunities in that space, not just in retail and in industrial. We're seeing a lot of other segments of the market open up. We're talking to capital about where they are seeing opportunities, and we're thinking about where our management capabilities. So it's not -- it wouldn't be right to us to put a target on the table now. But certainly, we would like to see that platform growing significantly over the next 5 or so years. So Mweishö, I hope that answers your question. If not, just feel free to have a follow-up or drop us a line after. I think a separate question, obviously, this has started to come through as a hot topic in the sector. But again, from Mweishö, during peak load shedding, you opted not to become an energy producer and let that state to fix. While Eskom has largely fixed that, does Burstone plan to start an aggressive solar PV rollout given the potential operational cost savings? So I'm going to hand that one over to Graham Hutchinson.

Yes, sure. So I think important to consider 2 aspects to that. There's obviously energy optimization and greening versus actually just energy security. So at the peak of load shedding, we didn't elect to install significant amounts of additional solar and/or batteries. But I think the important note there is we had already commenced an aggressive solar rollout probably 5 years ago already and have installed already 15 megawatts of solar actually almost before the peak of load shedding. So we already had a big alternative energy supply. And would we consider it? I think we're certainly assessing all options in terms of how we optimize the portfolio, both drive bottom line returns and a specific focus on reduction of cost of occupation for our clients. So nothing is off the table. We continue to evaluate all various options. It is obviously a complex space with multiple alternatives. So yes, I think we would consider more options. But regarding the question in the context of load shedding, as I said, I think it's important to note that we had already put a significant amount into sustainable infrastructure then. And on the focus of energy security, almost all of our properties were fully backed up by generators to make sure that our clients can still operate.

Okay. There's a question from [indiscernible]. So how sustainable are the fees on the funds management business as the funds management business has a set line unless the intent is to introduce new funds regularly, just worried that the 11% exposure might not be sustainable. So I think -- I mean, it's a great question. And as we thought about it, this does come down to how we build the funds management business out. I think part of that question is exactly how we're thinking about it, i.e., is the intention to introduce new funds on a regular basis? And that is. So if we look at Australia as an example, where we bought into that business just under 2 years ago, and they had $450 million of equity under management. They had one true fund in there was the ITAP fund. The rest is almost on segregated mandates alongside the likes of Ivanhoe Cambridge. And today, that business is north of $600-odd million under management, and we've introduced Phoenix Real Estate Partners and Angelo Gordon into separate strategies. And so you'd expect us as we think about rolling this out, look at what we're doing in South Africa, SA Core plus, potential seed portfolio there at $5 billion. As we think about how we grow that business over time, not just with retail and industrial, but there's lots of different things that we believe we can do and we're set up to do. Equally, as we look at the European market, our guys on the ground there are certainly not one-trick ponies. They've got a lot of experience and track record across the broader industrial logistics market, and it's deep. So as much as we will focus our time and effort in building out the platform alongside Blackstone, we'll also consider different parts of the market to go into over time. And then also looking at different geographies and management teams that we've worked with previously know from our broader networks. So I think life doesn't stop with where we are today. So we'd like to find a mix of almost permanent capital type of vehicles mixed with our ability to recycle and almost have the [ closed-ended ] or finite life cycle platforms. I mean it's not a bad thing, constantly recycling of capital, capturing profits, driving -- potentially driving crystallizing, carry and promote. So that model with scale becomes a really, really strong one for us. And it's also important that we recycle the capital recycle platforms. But ultimately, it will be driven by the management teams on the ground and the opportunities that we find. But we think it's -- there's a long way to go here in that business model and has a very good -- we're on a very good path, very strong pipeline across all the markets in which we operate. So certainly very excited about what the next few years holds for us there. I guess this is another one for Graham. So from catalyst and fancy, what is your outlook for office reversions going into FY '26? Can we expect an improvement?

Sure. So I suppose let's just unpack the current numbers that Andrew spoke to earlier. So current negative reversions in FY '25 at circa 20% negative. I think important to unpack that if you strip out the long-dated stuff, which is the longer than 5-year leases, but really predominantly driven by the expiry of a single 10-year lease in Rosebank, the negative reversions across the shorter-dated leases in that portfolio are only negative 4%. So I think very happy with where things are trending. But I think it's an important point that we've made a few times is in the isolation of underlying rental growth that keeps pace with contractual escalations, you are going to remain in a negative reversionary cycle. We are starting to see underlying rental growth in certain sub nodes. I certainly don't think it's a broad brush across the office sector. And I think it is -- even within subnodes, it is building specific in terms of amenitization, et cetera, where you can really capture the underlying rental growth. So would we hope to see an improvement on the 20%? Yes. I think we would like to see an improvement on that and anticipate seeing an improvement on that. Are we going to get back into positive reversionary territory anytime soon? No, we don't believe we will. If you look at a snapshot across our office portfolio and sort of line in the sand today, you probably remain 10% to 15% over-rented. But again, on the point on underlying rental growth, even leases that you signed today at what is market within 12 months' time, you're already over-rented by probably 3% to 4%. So yes, I think we would hope to continue to see the trend of improvement, which we have seen across the sector over the last number of years, but a bit of a way to go until you start getting into positive territory.

Okay. There's a question from Greg, just in relation to FY '25 and do we believe that the [indiscernible] space is now reset? And would we expect growth of this space? Greg, I hope you understand that I can't give you a firm answer there. Obviously, we'll talk to the growth and what next year looks like when we meet in May. But I think if we unpack what's happened in FY '25, a huge amount of the pain that we would have taken in '25 is really linked to interest rates. And we've done a huge amount of work in relation to deleveraging the balance sheet, the Blackstone deal, SA asset sales that has now taken that out of the system. So that single biggest risk to short-term earnings is certainly being dealt with. But yes, we hope to give you a little bit more -- not just a little bit more, but real color when we talk again in May and unpack what forward-looking earnings may look like. Look, you had a question in terms of our like-for-like NPI. So you say your like-for-like NPIs continue to lag peers. Are you expecting this to significantly improve over the next 12 months? Again, I'll hand it over to Graham because that's really focused on South Africa.

Yes, sure. So I think important to understand the like-for-like. I think one thing about our portfolio over the last few years that it has been a very stable portfolio. We've never had significant spikes in vacancy. And as a result of that, we have not had many levers to pull on a continual basis. Obviously, when you've got big vacancy, you can quite easily drive underlying growth by just pulling that up. If you look at where we've maintained all of our sectors and specifically the office sector in the mid-single digits, we just haven't had that lever. I do think an important factor that you also need to look at when analyzing our results versus potentially some of our peers is the fact that was to my earlier response to the solar question is we had installed a significant amount of solar about 5 years ago, and -- which did give us a significant kick in the earnings base at that point in time, but now is obviously baked into the base and you just get more normalized growth on that and not any one-off kicks. So look, we still think it's a very stable portfolio. I think everything is trending in the right direction. Retail this year has been marginally below where it would normally be based on the Zevenwacht redevelopment. So you would expect a strong bounce back in the retail portfolio. And the other 2 portfolios remain very stable. I trust that answers it.

I think there's one other point to make. Obviously, as we think about the earnings line, but we also think about capital value and what's sitting on balance sheet. So you've got a business that, like Graham said, we've managed very tightly over the last 4 years in terms of vacancy, in terms of solar generation, et cetera, et cetera. But certainly, as we look at capital value and what's sitting on balance sheet, and I think we've proven value again this year in the sales of $900 million. And not all of those are what we would call our kind of core assets or trophy assets. We've managed to sell those and create liquidity pretty much at book, right? So within a 2%, 2.5% delta to book value. So certainly good to see the balance sheet side of the equation also holding out. I think there was a follow-up from you just in terms of how analysts -- or can you give us a sense of how analysts of the market value a hybrid asset management and directly owned property company offshore? I mean, I guess it's dangerous for me to go into that territory in detail. I think certainly, what we have seen and what we -- how we think about it is you've got -- you do have 2 businesses, but they are integrated in the people. And ultimately, we've got a real estate underpin. We've got circa ZAR 16 billion, ZAR 17 billion of capital deployed into real estate, whether that's direct or indirect through our co-invests. And then separately, we have a fund management business, which ultimately sits off balance sheet from a value perspective. And so there are 2 components as we drive forward the recycling of capital from direct to the co-invest side that enables us to significantly increase AUM and third-party AUM. Obviously, we've got to go and find the assets. We've got to find the opportunities, create the strategies, create the platforms. But there's a significant multiplier effect that you get by recycling capital from direct -- to co-invest into positions and platforms that we manage. And ultimately, that should drive the fee income side of our business. And then for us it's very, very high margin. So we start to think about the operational leverage that we have in the business and integrated approach. So we're very much aligned with our capital partners because we've got a significant amount of skin in the game alongside them. And equally, we're putting and leveraging our people and not just the balance sheet. And so the 2 do work in tandem, but they ultimately can grow at different rates. And we would expect the funds management side of our business, the fee revenue side of our business to accelerate much stronger and much faster than what you'd expect your standard real estate-linked returns to do over the near term. And so one is, if we think about real estate, that is going to be a lot more predictable, a lot more stable and behave as you would expect. But the real alpha for us over the near term is going to be how we can recycle that capital and drive third-party AUM and the fee side of our business, which also has a very, very high margin component to it. So how to value that, I've obviously got an idea of how I would do it. If you look globally at some of the guys that have been very successful with that rollout, you do see the real estate side of the business being valued kind of NAV or yield and then kind of multiples applied to the funds business. But it does come down to track record. It comes down to how much of the earnings base is coming from that and how much of your capital is deployed into the co-invest side or the indirect side vis-a-vis the direct. So yes. I think we've got -- I think that's all the questions on screen. As always, we are open to questions, just give us a call or drop us an e-mail. Very happy to field questions outside of this forum. And yes, I think as we wrap up and look forward to going into the close and talking again in May, we certainly are excited about what the next 12 months hold. Obviously, as I mentioned earlier, quite a lot of uncertainty and volatility going on around the world right now. And certainly, we can't control that. But what we can control is what we do with our time, what we do with our capital and remaining disciplined in our approach to investing and managing the underlying real estate. So thank you for your time. And yes, I look forward to seeing you all in May. Thank you.

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