Burstone Group Limited ($BTN)

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

Thank you, and welcome to this pre-close update for the year ending March '26. We'll run through it fairly quickly as always, and then like upfront, we'll have some Q&A at the end. So just running straight into the FY '26 highlights as we come into the close. We expect our distributable earnings to be up 2% to 3%, which is at the lower end of our full year guidance. We're also expecting to maintain our dividend payout ratio at 90%. And underpinning our results going into the close really is a story of consistent real estate performance underpinned by South Africa. We'll unpack that a little bit later on. An increase in our fee income from fund management activities, material decrease in our operating costs as we sought to gain traction with synergies across our international operating base, and this has been somewhat offset by the funding of CapEx across the different regions and timing differences on working capital across the various platforms. From a real estate perspective, South Africa, as I mentioned, strong performance going into the close. We expect base like-for-like NPI to be up 4% to 5%. And that really is off the back of strong underlying performance across the various sectors, and vacancies dropping to 3% to 4% from 6.7% at March '25. In Europe, we are expecting PEL to deliver just slightly lower like-for-like earnings really as a result of higher occupancy, offset by some of the indexation and positive reversions that we're still able to capture. And in Australia, we're expecting earnings to grow quite strongly off of what has been a fairly low base. From a fund and asset management perspective, significant amount of activity over the last 6 to 12 months and really coming through in the numbers this year, but we would expect more to come through in the next 12 months. Fee income is expected to come in at around 15% to 17% of the group earnings for the year. That's up from just under 11% in the prior year. That's off the back of a growing amount of equity under management as we deployed into Australia and Europe alongside third-party capital. So we're expecting EUM to be up 12%. Over the course of the last few months, we've secured ZAR 4.4 billion of third-party equity commitments to deploy into international opportunities. So that's a massive amount of firepower to go and deploy offshore, and we'll unpack that a little bit later on. In Europe, a few weeks ago, we announced the new light industrial platform, where we've secured around about EUR 130 million along with Hines to go and build that out. And that would lead, once fully deployed, to a 23% increase in EUM for the group. And in Australia, an additional $170 million. We did reference that in November last year, $170 million alongside TPG, which also reflects a 10% increase in EUM for the group once fully deployed. And in South Africa, Core Plus does remain under consideration. I think it's also important if we look at those results, let's go back one slide that -- or as we go into the close is the environment that we are operating within. Obviously, over the last few weeks, the Middle East conflict has become front of mind. But aside from that, South Africa is definitely enjoying stronger sentiment but really the rest of the world operating with significant volatility and a very cautious international capital market, and we see that playing out in Europe and Australia as we look to grow our international footprint there. Turning to underlying real estate and really South Africa, as I mentioned, a much stronger performance, and really, I think, supported by the sentiment in South Africa, a lot more business confidence. Office, certainly recovery is strengthening and gaining traction. Remains to be seen what the impact of the last few weeks in the Middle East will have. But as we're talking to this year-end, obviously, I don't think we'll have a significant impact going into those results. South Africa does, in terms of the overall contribution to group income, does make up 80% of the group's income in the P&L and has delivered a very strong set of numbers and strong performance going into the year-end. As I mentioned upfront, 4% to 5% NPI growth, vacancies down to 3% to 4%. We are still experiencing negative reversions across the office portfolio, really off the back of the longer-dated leases that are coming up for expiry and renegotiation. And those would have and have escalated above market rental levels. But we are seeing in the shorter-dated leases, the 3- to 5-year space, that we are able to either stay flat or in some regions or some markets grow the office rental base off the top of that. From a sector perspective, retail, which makes up 45% of our portfolio, the strongest performer, expecting to deliver 8% to 10% like-for-like growth for the period, really off the back of reduced vacancy and some strong underlying performance in the centers. Office, 35% of the portfolio, is expected to come in slightly positive relative to last year on a like-for-like basis. That vacancy number, we're expecting vacancy to come in below where it was last year. And in industrial, the smallest of our sectors, expecting like-for-like to be in line with prior year. Really, the biggest impact there has been the single tenant failure that we flagged during the course of our pre-close last year going into interims, we have seen a reduction in vacancy and some really strong rental growth coming through on the leasing side of that portfolio. Turning to Europe. Again, just from a context and environment perspective, the occupier market remains fairly challenging, definitely stabilizing, but certainly not what we would have seen or experienced 4 to 5 years ago across those markets. We are and have seen improved debt capital markets, but equity capital markets are still very, very cautious and slow to move on new opportunities. In terms of PEL, the platform itself, where we've got the 20% investment alongside Blackstone, performance there, as I mentioned, we're expecting to be slightly behind last year. So higher vacancy across the portfolio, offset by the positive indexation and rental reversions that we've captured. We've also benefited from surrender premiums on 2 or 3 of the leases -- 2 or 3 leases, and obviously, the lower base interest rates that have played out over the course of the last 9 to 12 months. We do think that PEL question of timing will at some point be aggregated into a larger platform within our partner platforms. And as soon as we got more clarity on that, we'll obviously let the market know. But that was always expected and certainly wanted from our side. In Australia, the co-investment, we have experienced or the market has experienced strong industrial growth and demand, and that is playing out in the real estate returns that we're earning. There is increasingly strong acquisition competition coming through the market from capital being deployed from Asia Pacific investors. But there is also an increasing interest rate environment in Australia, which may ease some of that competition and make it slightly easier to get access to new opportunities. In terms of performance, like I mentioned, expected to grow very strongly off of a low base. We have almost $30 million invested into the industrial platforms in Australia. Those platforms in total have assets of around $440 million, ZAR 5 billion. And we started to really capture through asset management initiatives, the unlock of rental growth, which will impact positively our P&L as well as valuations. And our contractual rentals in those portfolios are still sitting at around 20% below market. So a significant amount of market rental growth to go and capture over the course of the next 12 and 24 months as we continue to asset manage those assets. And from an overall return to the group, from a yield on equity perspective, we expect that for the year to be at around 5% to 7% of the equity deployed into Australia. Turning to the fund and asset management side. As I mentioned upfront, ZAR 4.4 billion of third-party equity commitments secured in Australia and Europe. That's a significant amount of firepower to go and deploy alongside our partners overseas. To put that into context, when you bring in the leverage in those portfolios, that effectively gives us firepower to go and transact on the better part of ZAR 10 billion to ZAR 12 billion of real estate in those markets and add that to our assets under management, and that's where we earn our fee revenue. So that's an important -- a very important piece for us as we look to grow this business and really move it into something that is material to the group. In South Africa -- or maybe we start with Europe and Australia, which really is where our focus has been over the course of the last 3 to 4 months in securing the new light industrial or launching the new light industrial platform alongside Hines and obviously in Australia alongside TPG. So in Europe, partnering up with Hines, their new fund, HEREP III, effectively is EUR 1.6 billion of equity to go and deploy -- they've allocated about $130 million alongside us to deploy into this platform. Hines as a real estate investor looks after the better part of $93 billion of real estate globally, and that's a significant amount of rands, and it's great to have them partnering up with us as we look to build this platform out. We're effectively replicating what we did a few years ago with Paul and the team in building out the first light industrial platform that was hugely successful and also plays off the track record that Paul and the team in Europe built over the course of 10 to 12 years in the Hansteen table. So really, it's kind of back to the future for us. We're looking to aggregate light industrial assets across Germany and Netherlands, very liquid markets, very strong markets, and we've already secured the first tranche of acquisitions, EUR 40 million, strong near-term pipeline that is identified, and we're hoping to get further rands on the board in the very, very near term. And we'd expect the P&L impact of this platform to really roll out into FY '27 and '28, not much impact as we look at FY '26. In Australia, I mentioned TPG, great to have additional commitments from them. The challenge is the deployment of that equity into what is an increasingly competitive market in Australia with the capital flows coming through, but a good pipeline that the Australian team have got and have set up over the course of the last few months since the start of the year. In South Africa, the Core Plus platform remains under consideration. Obviously, our focus over the last 3 months really has been in securing and launching that European light industrial platform. And so South Africa has taken a bit of a back seat there, but we're looking to gain further traction as we go into the next quarter of this calendar year. So to close off, from an earnings perspective, looking to deliver full year DIPS in line with our guidance of 2% to 3%, really underpinned by South Africa, which makes up 80% of that group income. So we're really positive about the performance of that business and really happy with how that has played out over the last 12 months and have strong expectations from that portfolio as we look forward, a good underpin to the group earnings. In Europe, slightly lower year-over-year and Australia growing earnings, but off a relatively low base. In the funds and asset management side, we're really starting to see momentum underpinned by what we're doing internationally with fee income growing really nicely year-over-year. And as we mentioned, a really strong pipeline of committed third-party equity, which will underpin FY '27 and FY '28. So the hybrid model really starting to work for us, and great to see the guys getting hold of that equity and it's really a story now of how quickly we can deploy that alongside our partners. From a balance sheet perspective, our LTV is expected to come in at around the 40% level. We've recycled and sold ZAR 800 million of assets in South Africa that included the Balfour Mall. If you strip Balfour out, those sales would have -- are expected to achieve a premium to book of around 4% to 5%. So a really good result in terms of how we've been able to recycle capital on an NAV-enhancing basis. And then lastly, the integration synergies, again, material reduction in our cost base as we've continued to leverage the people and infrastructure across the group, and we'd expect that to continue going into the next 12 months. So as we close off, I think we're in a -- certainly feel we're in a good position, expecting a decent set of numbers here, but really looking forward to the next 12 and 24 months, which is where we really think the growth and opportunity will start to come through for the group. So that's where I'll leave it. And we'll open it up to the Q&A that's been posted. So if you want to run those or post your questions, and we'll try and deal with them. We do have Paul on the line as well as Myles. And so we'll try and bring them in where required. Okay. So I mean, I guess it's just a point of administration. The presentation will be made available as soon as this is completed. So it will be posted online. And if there are any issues, please just get in touch with us, and we'll make sure it's there.

Nazeem, just some questions on the fund management side with Hines. What is the fee on AUM? How long it will take to be fully invested, yield on equity of the co-investment after taxes? How will you fund them? And is there capacity to manage the portfolio and the fee income drop to the bottom line or expected more costs to be added? So maybe let's deal with each of those in turn. The fee on AUM, obviously, that's a sensitive topic. I'm not saying that we put out to market as you would hopefully appreciate. I think in November, we did try and give the market a broad idea of where our fee structures typically are across the globe. And that's the kind of world -- that's the framework that we typically do operate within. So this light industrial platform would sit pretty well inside that fee structure that we communicated to the market in November. In terms of how long it will take to be fully invested and the kind of yield on equity, maybe, Paul, you want to talk to the deployment side and maybe just kind of where you're seeing market pricing for these kinds of assets. And from that, I guess, shareholders and investors can kind of work to an equity yield. So maybe just give a bit of color on capital deployment and pricing.

Yes. Thanks, Andrew, and good morning, everyone. Yes, look, I think the Hines opportunity is very exciting for us because, as Andrew mentioned, this is really going back to our sort of core sector and core submarket in the warehousing space. We're really focusing on Germany and the Netherlands as the key markets initially with Hines and the deployment period we're expecting to happen over the course of this year. So really, the idea is that we get to scale sort of EUR 400 million plus within the course of 2026. Obviously, the markets are slightly volatile at the moment, and we are being very disciplined in the asset selection and the location selection that we're going for. So [Audio Gap] to stick to our discipline when it's looking at the portfolio selection and makeup to really get the sort of best of that aggregation. In terms of pricing and values, we're really targeting value-add returns as a value-add fund with Hines, where they'll really be targeting that sort of 15% plus IRR, which we think is wholly achievable when you look at the end pricing of the real estate plus the added value that our teams in the countries can unlock in each of those submarkets. So we've got a very experienced team who have done this, as Andrew mentioned earlier, who have done this previously with Ares, but also in the Hansteen days together with Ian Watson and Morgan Jones where these teams have been very experienced and prolific at identifying, buying and sweating these assets. So we are hoping to do the same with Hines here and really focusing on the sort of value-add return play. In terms of pricing, it really depends where we're going in, but it looks like the sort of key target of 6.5% to 7.5% net initial as a starting point, but with reversionary rents, under-rented property, some vacancy, some perhaps CapEx starved or management starved assets where we can really add some value to sort of create that 8%, 9% plus net initial position or reversionary position, I should say. So yes, very much value add looking to deploy this year and going back to our core markets of light industrial in Netherlands and Germany.

Yes. And I guess just the follow-up there from Nazeem, maybe Myles, just in terms of how we look to fund our investments or our equity position in relation to using SA debt or cross currencies or euro-denominated debt.

Yes. Thanks, Andrew. So I think, Nazeem, just to close it off, I think it's similar to what we've seen before in terms of cross-currency interest rate swaps. So to fund that position firstly out of locally raised debt, but then to enter into swap arrangements in terms of that debt and to fix both the capital [Audio Gap].

Then I guess the final question, Nazeem, I guess you're asking around the operational leverage that maybe sits in that European business. So our ability to roll out, so deploy, execute and then manage the light industrial platform off of our existing infrastructure or whether we're going to have to ramp up the overhead base of the business. I mean, Paul, you can jump in here. But yes, we will have to add a few people into the business really from an acquisition perspective, but our ability to manage it on an ongoing basis is pretty much there. We've got the infrastructure. So the operating margin and the fee dropdown should be significant versus having -- if we didn't have it. So every mandate that we add, whether it's in Europe or Australia, you should see operating margin improvement from our management company or management businesses over there. Paul, do you want to add anything?

Yes. I mean, obviously, a lot depends on the type of real estate that we eventually buy because this is an aggregation strategy, the location of where the assets are and the makeup in terms of the tenant profile is quite important as to how you would manage that and what the cost would be. But I think, yes, Andrew, very much agree with what you're saying in terms of the existing infrastructure we have is not only deep in terms of experience, it has capacity there to take additional weight in terms of the Hines mandate. We will add a couple of new bodies in terms of headcount around acquisitions and portfolio management and maybe looking at the accounting side of the business, but it will really be marginal in terms of additional cost once we get to scale of the deployment. So yes, it's quite an exciting position. It should be pretty cost effective by the time we get up to that sort of EUR 400 million, EUR 500 million portfolio size.

Just staying on Europe, another question from Nazeem. PEL's lower like-for-like position and interest rate risk building, does it pose a risk to the PEL valuation and then would that have an impact on our fee income. Maybe if I deal with that, and Paul, you can chip in. Certainly, we go through the valuation process, obviously externally based. A lot of the lower NOI, which is driven by a higher vacancy level, has been an active decision taken by us and by Blackstone. So to sit out putting bums on seats and really look to capture the rental or the ERV that sits within that portfolio. That's still double-digit ERV potential across PEL. And so it's a short-term cash flow issue as opposed to a structural vacancy issue that you've got within the business. And so risk to valuation, I think from that perspective is pretty low. Interest rate risk is an interesting one. If you look at the curve, it's certainly been more of a short-term jump in the curve as opposed to long term. But Paul, maybe you want to jump in there. Certainly, I think the view is that there's limited risk at a total valuation level.

Yes. I mean whilst we've lost a bit of income on the occupancy side and the NOI side, I think it's fair to say that where we've lost there, we've made gains on the ERV and the rental growth side of the story. And actually, yields have remained fairly stable across the sort of mid-box logistics sector. So I think that it's been quite helpfully held up in terms of the valuation. So we're not expecting to see any material movements on valuation as a result of that NOI perspective. I mean, obviously, there's a lot of volatility in the world at the moment. The interest rate rises on the debt side, swap costs, et cetera, are pretty volatile, and we are sort of monitoring and watching that on a weekly basis. But no one is immune to that sort of external impact. And we -- yes, we've just got to stick to what we know best, which is managing the real estate and trying to work with our tenants to make sure that we are optimizing every square meter and every square foot of real estate in the portfolio.

Staying with Europe, just in terms -- so this is from Mweisho, just in terms of PEL and guiding to like-for-like. Your question, can you guide us on like-for-like or absolute growth expected DIPS from PEL? So just for clarity, I mean, Myles, maybe you can jump in. But when we reference that year-over-year expected performance, we are referring to earnings numbers there, not NOI. And so we're only reporting and talk to earnings -- the earnings level in PEL and Australia given that they are the investment or we account for them as equity investment. So what we've shown there is an earnings or DIPS number coming out of PEL.

Yes, that's right, Andrew. So it's earnings out of the platform and out of the investment and then the disclosure around the like-for-like performance is relative to that number.

Nazeem, you had a question around the EUR 20 million of cross-currency swaps expiring in 2026 at a swap rate of 0.2%. And what is our plan there? Are we going to renew it in euros and at what kind of rate are we going to convert that to ZAR? Maybe Myles, do you want to pick that up?

Yes. So I think, looking at where things are at the moment, we've been quite active on the cross currency swap and looking at all the short-dated numbers, I think it's also the right point in time in terms of when we restructure or restrike swaps. And we have done a lot of work around everything that is short-dated around potential forward positions, so entering into forward swap arrangements that pick up off the back of those expiries. So I think in terms of the cross-currency swap positions, definitely looking to extend our position there where we've potentially entered into new forward positions as well.

Nazeem, your question around SA Core Plus, so a mention was made of the platform remains under consideration, but is this realistic? Are we still negotiating with the same potential partner or partners, and what's the key stumbling block to finalize the deal? So the answer is yes, it is realistic. We obviously can't give more information than that. It has been slower than we would have liked. There have been challenges on the other side. Just from an internal perspective, there's no issues with the deal itself or the mechanics. So it's largely an administrative position that we need to resolve with the partners. We have also got a few other irons in the fire either for the first close or the second. And yes, I think we'll have a lot more information to share with the shareholders over the course of the next few months. Again, I guess, Myles, this is for you from Mweisho in terms of our cost of debt in South Africa for Burstone and where that's sitting as we sit today? And then do we have any views on where we expect rates to move in South Africa and Europe?

So I think, firstly, taking a step back just in terms of SA debt and in terms of that exposure, the consideration there has always been around benefiting on a rate dropping environment. Policy predicates that we sit at about a 75% interest rate swap hedge ratio across the board and across the group, albeit that we are obviously comfortably north of that minimum threshold requirement. When looking at SA, we're down to below 8% in terms of an overall cost of funding, which obviously includes our swap arrangements or what we've got in place on the SA debt. I think where we were getting to in context of the sales that have been made and then what has been earmarked for sale into the next financial year is that we were comfortable to float on an element of that book, and looking at that, again, in conjunction with where rates were headed, we were quite comfortable taking, I think, a slightly more bullish exposure to the total interest rate risk. That's obviously changed recently. So now the curve obviously not dropping off and effectively, like Andrew said, having a bit of a blip in the short term, but then flattening out of the back end. So the way that we positioned it is that in terms of any sort of swap arrangements holding firm with where we're at the moment, we've still got sales -- a few sales which will come off and I suppose, increase that hedging ratio in any sort of local currency interest rate risk there. I think in Europe, and again, I suppose to Aussie to an extent is that just volatility in the market does make it a little bit more tricky in terms of projecting where rates might go. There was a recent rate increase that we saw at the earlier stages of this year. And I think when looking at the European market, we'll also just be cautious around where we expect to anticipate rates to go there. But coming back to our hedging position is that we are obviously appropriately hedged in terms of any sort of interest rate exposure when it comes to those markets.

Yes, I think it's important. I mean we don't take -- we don't speculate over both interest rate and FX. So we try and float as little as possible where there is the opportunity, like Myles said, where we saw the ability to maybe float a little bit more in the short term in terms of where rates are going, we do take that opportunity, but we certainly remain well hedged within policy and if anything, more on the prudent side as we think about ensuring that, that interest rate line doesn't go up unnecessarily. There's one last question here that's been posted. So [ Andrew Moses ], if you deploy into or deploy the European capital or equity into the asset base, how would that change your DIPS growth trajectory? So I think whether it's Europe and/or Australia and/or South Africa in terms of the fund management platform or the platforms, it should be additive to overall earnings. We earn fee income from the equity that we deploy. We obviously earn a real estate return. And so that fee income and real estate return relative to our cost of funding should be strongly positive for us. Obviously, the more we get out the door alongside our partners, the better, but it's not growth for growth's sake. We're very focused around buying the right real estate at the right time and making money not just for ourselves, but for our partners, very difficult to recover from losing money. So we're in a difficult or challenging volatile global environment. And I think the discipline of the team, combined with the ambition to deploy that as quickly as possible, it's a good tension, but we certainly expect positive impacts on our numbers over the next 12 to 24 months as we get that equity out of the door. I think that it looks like that is it from a Q&A perspective. I guess it's thank you for joining us. We'll be catching up again with full year results. I think it's towards the mid or end of May. Obviously, if there are any questions or you'd like to give us a shout or set up a meeting, please feel free to do that. We are available and very happy to meet or have a cup of coffee or take a phone call. Otherwise, we will see you in May. Enjoy the April break. And yes, we'll see you in a few weeks. Thank you.