Burstone Group Limited (BTN) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the trading update for the period ending 30 September. Just before we begin from a Q&A perspective, there is a questions tab on the left-hand side of your screen. So you can submit your questions at any point during the update, and we'll answer them at the end of the presentation. So maybe to kick off and really get into the highlights for the period ending 30 September, really summarized a strong outperformance from South Africa with a lot of our funds management activity really weighted towards the second half, and we'll unpack that over the course of the next few slides. South Africa, going into a little bit more detail, we're expecting like-for-like NPI growth to come in north of 7% for the period. There's been some strong performance from retail and office that has driven this performance. Vacancy has gone up slightly towards the end of the period just given the single industrial user that were vacant at the back end of the first half. But overall performance really tracking probably better than expected in South Africa. We've rolled out another 30% capacity in relation to the solar PV across the business. So that's also enhancing the returns coming through the P&L. But yes, a quick summary that South Africa is looking pretty solid. In Europe, we are expecting or experiencing near-term pressure, so a deterioration in the performance of the PEL portfolio driven by higher vacancies in France and Spain. And we've spoken previously about a softer occupier market and the various conditions, and we'll get on to some of that on the slide that follows. In Australia, the smallest contributor to our P&L, real estate earnings continue to improve, and we expect slightly better performance there in this first half as we've captured some of the rental reversions through the asset management initiatives rolled out in those various platforms. Turning to the fund and asset management side of our business, a 20% increase expected in our fee income for the period. There's been some good activity, most notably, obviously, the recent launch of our funds management platform here in South Africa alongside NPP. Again, we'll unpack that in a lot more detail later on, but a ZAR 5.4 billion portfolio is going to unlock significant capital for the group. It's increasing third-party AUM by almost 11% and AUM by almost 5%. So it's -- we're on the start there and really excited about what that is going to give to the group over the coming years. Turning to Europe, the light industrial ELI strategy alongside Hines. We put out the door in the first half approximately ZAR 300 million of third-party equity into ZAR 1 billion of acquisitions in the first half. We're sitting at ZAR 3 billion of assets under offer or in exclusivity under offer, and we're expecting that to come through in the second half. And that's why some of our full year earnings is weighted towards 2H '27. In relation to Blackstone, and again, we'll unpack this in more detail later on in the presentation, but we work towards greater certainty on the European transition. So, proposed framework with Blackstone already transition of that European partnership and certainly gives us far more clarity regarding PEL, the equity that we have in there, the first loss exposure and the management arrangements that we have in place. Just maybe taking a step back on the market and looking at the different areas in which we operate, certainly a time of significant uncertainty and volatility across pretty much every market in which we operate. The real estate fundamentals do appear to be resilient, but certainly not easy to navigate these environments. So from a macro perspective, geopolitics, energy prices, inflation, interest rate uncertainty, and that has an impact both on the occupier market as well as for our capital partners and potential capital partners as they think about long-term investment decisions based on the existing environment. And that is certainly leading to a higher return expectation as they look at deploying capital alongside us in the various markets. And that has got a timing on -- impact on timing of AUM growth, fee income growth rather than the underlying opportunities. In South Africa, certainly feel like the fundamentals are resilient, although we are in an environment where the consumer remains under significant pressure, rising fuel costs, interest rates and inflation. Retail has continued to benefit from essential spending. But I think we've all seen results coming out of the retailers around apparel and discretionary spend that is certainly under pressure. Industrial demand remains robust, and we are seeing an uptick in the office sector from a performance perspective. It's not right across that sector. It really is linked to good quality assets in good quality nodes, and we've been a benefactor of that in our portfolio. In Europe, mixed occupier conditions again, driven by very similar fundamentals or macro fundamentals that are playing out in every other market, the cost of energy and uncertainty in relation to policy certainly having an impact on decision-making. ERV growth has moderated and transactional activity, certainly logistics and industrial, has remained fairly muted, and there's still a fairly decent gap between where buyers and sellers are in that market today. Australia, probably some of the strongest industrial fundamentals, low vacancy in industrial, strengthening demand. Rental growth has moderated. And from a capital perspective, return requirements have gone up and that's linked to or caused by an evolving tax change in Australia, creating some uncertainty as well as broader global macros that are weighing on institutional capital as they look to deploy into new opportunities. Turning to the performance for the first half. We've covered all South Africa right upfront. But again, it makes up 80% of our broader group income as we stand yesterday prior to the SA Core Plus transaction. And as I said, coming in -- likely to come in ahead of expectation with around 7% like-for-like NOI growth for the first half. Again, Europe, we've covered and Australia similarly upfront. So an overall real estate blend that really is summarized by strong South African performance that will be partially offset by some of the near-term pressure in PEL with Australia continuing to improve, albeit it's a relatively small contributor to the group's overall performance. In terms of growth, and here, we really talk about the funds management business. Again, the highlights growing fee income by 20% in the first half, the launch of the SA Core Plus platform in South Africa with a ZAR 5.4 billion portfolio from the group's balance sheet and ZAR 300 million of equity deployed into ZAR 1 billion of assets under ELI in Europe with a pipeline of ZAR 3 billion, which would equate to ZAR 1 billion worth of AUM flowing into that portfolio over the next half. So a relatively quiet first half from an asset or capital deployment perspective, and hence, why a lot of our guidance and underpinning that full year guidance number is really weighted to that second half. The strategic enablers in the business, and there we talk about our cost base, our balance sheet and sustainability. We've covered sustainability. A large amount of that obviously takes place in South Africa. So good to see an additional 30% capacity coming on stream in terms of solar PV. But from a cost base perspective, we're expecting cost to come in pretty flat on the prior year, and we continue to work on a fit-for-purpose cost base across the group and the regions. And we would expect further operating leverage into the group as we build our platforms to scale, and we'll start to see that come through in the second half and then into FY '28. From a balance sheet perspective, obviously, after the Core Plus transaction, reported LTV falls below 20%. There's a significant amount of capital released by that transaction, and that obviously enables us to derisk the European first loss exposure as well as consider growth opportunities across the different platforms in which we're currently invested and then potentially look at new opportunities over time. Net finance costs are expected to come in line broadly with 2H '26. And from a hedging perspective, the balance sheet is well looked after across both interest rate and FX in line with our standard treasury policy. Turning to strategic partner update, and I think this is probably the most critical part of the update, and we'll start with the SA Core Plus platform announcement that came out on Friday. As you know, we've been committed to launching the South African-focused fund management business for quite some time. So it's good to get that on the rails. We capitalized that through our first platform, the SA Core Plus platform in partnership with Nedbank Property Partners, 14-property portfolio, 5 retail, 9 industrial assets, gross asset value of ZAR 5.4 billion. The selling yield into that portfolio is at 8.4% and reflects a 5% discount to book value, which we've used to entice them into capitalizing the opportunity with us. Nedbank will acquire a 50% in the platform. And it's structured on a permanent capital basis with a management contract that is aligned to that. This is the first close in what will hopefully be a multi-close capital vehicle. And we've structured it in a way that provides significant flexibility for us to bring in both private and institutional capital into the future. So, this is certainly in our minds, not a one and done, and we look forward to growing that together with Nedbank and other capital partners over time. I think importantly, from a capital perspective, as we've mentioned, ZAR 4.5 billion is released and comes back to the group. It drops reported LTV to 19% or around 19% and look-through LTV to 41%. And that capital likely to be used in the short term as we look to solve or resolve the first loss asset obligation as well as in supporting future value-accretive transactional activity across the group. Importantly, from a fund and asset management perspective, quite a relatively simple transaction and very different to one that we had carried through with Blackstone a few years ago, significant influence in joint control sitting in an equity perspective. We run both the fund and asset management side of it and no first loss obligations. It really is as simple as it comes and this becomes a growth vehicle to work together and grow over time. From a management from an asset management mandate perspective, we would be entitled and are entitled to equity raising fees, fund and asset management fees, market standard acquisition, development management and performance fees over time. And again, given that this really is a growth vector for all of us, we're already starting to explore growth opportunities within that platform with NPP. Overall impact for the group is that on an earnings basis, it is set to be enhancing. It's marginally dilutive to NAV given the discount on the way, and Myles will unpack that shortly. And there is no significant impact on our REIT ratio from a perspective. So we are really excited about the launch. I think it's been fairly well received outside of this building and excited to see what the future holds for that platform as we look to grow. I hand over to Myles just to unpack some of the financial effects and run through that together with the residual portfolio that will sit on balance sheet.

Yes, perfect. So, I think in terms of the financial effects, what it obviously results in is about ZAR 4.5 billion worth of cash proceeds coming back into the group and back on to balance sheet for Burstone. But to simplify, I thought by breaking it up into the income statement or the earnings impact and balance sheet impact, we can just run through exactly what it means financially on a go-forward basis. Looking at balance sheet first, and I think this is where the most significant impact does happen just because of the release of capital and cash proceeds coming back through the door. There's obviously a significant reduction in asset base of ZAR 5.4 billion. That's the target for [ over 4-stage ] portfolio that will be seeded into Core Plus. We'll be receiving the ZAR 4.5 billion worth of cash that will go initially to settling debt. And as Andrew mentioned, that drives a significant reduction in LTV, but also look-through LTV dropping true LTV down to below 20% and look-through to around a 40% threshold. From a NAV dilution, we'll deal with it on the slides to come, but we can unpack that 1.7% NAV dilution impact. So relatively nominal in terms of the transaction and an overall NAV effect for the group and for the business. Then from an income statement perspective, and as Andrew has mentioned, it's obviously earnings enhancing or earnings accretive on a year-to-year. In terms of the different components, I think it's important just to understand that from a real estate standpoint, there will be a reduction in terms of real estate earnings or NOI, but that is immediately neutralized or offset by the significant savings in interest costs through the reduction of debt as well as the co-invest or the investment income earnings realized through our 50% stake, which we will hold to the vehicle. So when looking at the slide, the 3 blocks to the top left effectively gets you to a net neutral position. And that accretion or enhancement that we refer to effectively is driven by the fees which the platform will generate for the business going forward. And from an overall earnings standpoint for FY '27, as mentioned, we're obviously looking at keeping earnings and guidance intact for the full financial year. We're looking at the capital stack up or the NAV buildup of the platform. So this is specific to the Core Plus platform. And just working through the various pillars, as I mentioned, the book value of the portfolio that will be seeded into Core Plus sits at about ZAR 5.4 billion. There is a discount of 5% that is offered on book. That equates to about ZAR 250-odd million as a number, and that brings the deal book value or the transaction value down to closer to about ZAR 5.2 billion. What that means in terms of an implied yield is that we're selling this portfolio at an 8.4% disposal yield into that platform. And then when working through the capital stack that sits behind the transaction, it is a highly leveraged platform. So debt is sitting at an initial 70% LTV position. There is an intention that, that will drop down in the short term, albeit nominally. But that ZAR 3.8 billion worth of debt that is raised against the real estate is nonrecourse and ring-fenced specifically to this platform. What that means is that you're left with about a ZAR 1.3 billion to ZAR 1.4 billion equity or NAV position, and that is effectively split 50-50 between Burstone and NPP, talking to the 50-50 JV contract that we've entered into, which effectively reduces the true dilution to the business to about 1.7%. Then when looking at the impact of Core Plus, both pre and post transaction and what that means from a Burstone balance sheet perspective, I think what's important to look at here is that, yes, this is at point in time, yes, it builds sufficient and significant capacity for us. But anchoring to the year-end 31 March '26 numbers, Burstone had a total real estate investment base of about ZAR 16.3 billion. That's split effectively across 2 pillars or 2 components. Firstly, the direct real estate investment and exposure, which is our SA portfolio of about ZAR 13.9 billion or call it, ZAR 14 billion and the balance to our co-invest positions in Europe and in Australia of about ZAR 2.5 billion. Post transaction, we would have sold ZAR 5.4 billion worth of real estate into the platform. That drops our total direct real estate to ZAR 8.5 billion, of which office makes up about ZAR 5 billion and the balance is split between industrial and retail. And then with a slight uptick of about ZAR 700 million through our SA Core Plus co-invest, driving your co-invest overall position to just over ZAR 3 billion and a total investment or real estate asset base of about ZAR 11.6 billion. What isn't portrayed in the slide, and again, as mentioned, is that this money will go to settling debt on day 1, and there would be an equal opposite effect to our debt balance dropping that down to closer to about ZAR 3 billion loan or total debt exposure position. Then we're looking at the mix of the remaining SA portfolio and portrayed on the slide is just how that is split up in terms of office, retail and industrial with office making up the majority stake of it at about 58% or closer to a 60% value. What we have included on the slide here is just some operational metrics in terms of that remaining portfolio. So again, I think in terms of what's leftover real estate that we know, an office portfolio that we're extremely comfortable with and that is well settled and that has had a lot of work and effort going into it over the last 4, 5, 6 years. But what's also important to note and critical to see is the optionality that the remaining portfolio or that the residual portfolio offers to Burstone in terms of a look forward. There are effectively 3 options is to continue strategically recycling this asset base on a property-by-property ad hoc basis where we see value in each of those individual assets or to also contemplate seeding new platforms or even readying these assets that remain on balance sheet for the Core Plus platform as an exit opportunity.

Yes. I think maybe just to add to that, I mean, this is a point in time. And so if we were to go back one slide and just think about the third wheel that would come after that this is a changing picture. And so yes, the exposure to office looks high on a status quo basis today. As Myles mentioned, we're actually very comfortable with that given the operating performance of that portfolio, vacancy only sitting at 3.5%, well set in terms of WALE and in-force escalation. But there's a fair amount of liquidity that sits within the residual retail and industrial portfolios. And you'd expect that to probably reduce over time through strategic sales or 1 or 2 of those assets, I think we'll be ready to go into Core Plus in the not-too-distant future and the optionality around office and what that may look like whether it's 12, 24, 36 months from now, but we're certainly happy with the earnings profile of that portfolio over the medium term. And as we look to build out and redeploy capital into various platforms over time, that diversification continues to expand. In wrapping up Core Plus from our perspective, really thinking about a derisked balance sheet in relation to the European obligations, but also capital for growth, a like-minded partner in terms of NPP, both how they think about real estate, how they think about opportunities, how they think about risk-adjusted returns and also the capital and distribution channels that they bring to the partnership to the platform alongside us. We do think that 1 plus 1 certainly equals 3 in that regard and a flexible structure that enables us to bring in further capital from 2 very different pots of capital to support the growth of that platform over time. When we look at the balance sheet, strategic focus, we really do think about the look-through position from a group perspective and monitor that as we look at growth and redeployment. And we really -- from a cost operating leverage perspective, scaling these platforms alongside like-minded partners like NPP or Hines in Europe is critical for us as we start to build off the proof of concept across each of the different regions. So as I mentioned earlier, very, very excited about what the future holds for the SA Core Plus. Moving on to Blackstone. And as I mentioned upfront, we have agreed a framework with them. It is nonbinding in nature and really set up to facilitate the transition of effectively that platform to Blackstone as they look to build out and consolidate into their Proxity structure, just recalling the existing position. In terms of equity, our 20% equity investment is carried at about EUR 85 million, EUR 86 million. We have a maximum first loss exposure of EUR 52 million, EUR 53 million, and that is against a set of assets of around EUR 220 million gross asset value. And we have a provision on balance sheet at 31 March '26 of EUR 29 million. So just over half of that potential obligation or potential liability and then that liability would come to fruition in November. We have 3 alternatives in terms of how we resolve that first loss exposure. One is that we sell assets and any price relative to that EUR 220 million would then have to be made good up to a maximum of EUR 52 million exposure. We could buy the assets on to balance sheet or we could just write out a check to Blackstone for EUR 52 million or ZAR 1 billion and leave the assets with Blackstone. And then there's the fourth, which is just a combination of all of the above. And then from a management termination perspective, Blackstone has a termination right after 2 years, which is December '26. And if they elected to trigger that right, there would be various exit payments and make-whole payments due to Burstone by Blackstone for a period of time, some of which would be performance linked, some of it is contractual. Where the proposed framework as it stands today with Blackstone and we're working towards before the end of the calendar year is that we will look to exit and sell the majority of our equity investment in PEL to them. From a first loss perspective, we will be taking some of those assets on to our balance sheet and leaving a single asset with Blackstone and settling the agreed first loss obligation under that individual asset. And we will look to fund that through the PEL equity proceeds, the capital release from Core Plus and then obviously, any debt headroom as and when required. From a management contract perspective, that is going to come to an end at the end of this calendar year and various make-wholes will be made or paid by Blackstone that ensures that we have from a management company perspective, kind of bottom line profit can be preserved. We are looking at the broader infrastructure base there, given that we are only managing a much smaller portfolio and building up a smaller portfolio alongside Hines. So there is a kind of change to the cost base that will also take place at the same time. But it does free us up to now go and redeploy both our capital and our people into growth opportunities. We'd hoped with Blackstone that this would be a growth vector with them. Unfortunately, it didn't pan out the way that we hoped didn't do what it said on the tin. But we've got a team there that is ready to go and ready to go at 2.0, which is important. And I think the ability to leverage off their track record and what we're doing across the broader European market is important. From an overall expected financial impact on the group, we're expecting the transaction to be concluded at or around our NAV, including that provision. LTV is expected to stabilize at our medium-term targeted range, which is around that kind of 35% level that's reported LTV. And as I mentioned, we believe that the PEL management company bottom line earnings will be preserved both through the termination fees and the fit-for-purpose cost base that we're working on as we speak. So still a long way to go. We wanted to get this out to the market, update the market. It certainly, I think there's been a big question mark and a lot of uncertainty around what may or may not happen here in relation to both management contract and first loss. But we've obviously got to go into formal legal agreements over the coming 3 months. And hopefully, when we meet again in November, end of November, we'll be able to give absolute certainty of those final agreements at that point in time. So then just wrapping up, just from an overall earnings perspective, as we said in the release earlier this morning, we do expect first half earnings to come in marginally below the full year guidance range. That has been underpinned by strong real estate earnings out of SA, offset partially by the deterioration or continued deterioration in PEL. And we do expect the second half to be -- or earnings to be further weighted towards the second half given the activity that we're seeing in ELI and the deployment into those various opportunities. So we certainly still standing behind the full year DIPS growth target of 4% to 6% and dividend growth of 7% to 9%. Asset management-wise, yes, some good traction really getting on stream. A lot of activity obviously taking place as we speak, exciting with SA Core Plus as well as the aggregation and the acceleration in ELI. Not much has happened in Australia in this first 6 months, but there's certainly more activity there as the team looks at new opportunities. And again, excited about what the next 6, 12 and 18 months is going to look like. And from that perspective, obviously, nice to -- not the best result having to wrap up a relationship and partnership, but certainly, the wrapping up Blackstone does give us a lot more certainty both from a capital and balance sheet perspective, but also from a people perspective in Europe and the ability to go and expand into new partnerships over time. So that is us from a pre-close perspective. We're going to go to Q&A. Unfortunately, there isn't a dial-in option. So there's just questions that have come online. So we'll run into that.

Okay. Mweishö has been beaten here for the first time, I think, in 5 years by Nazeem. So Nazeem, just in terms of your first question, can you provide an update in terms of trading at Newcastle and any impact from the mill closure? Yes. So I think importantly, we left Newcastle out of the Core Plus platform. We -- it's coming into a leasing cycle next year. And there is risk associated with the asset. I think putting it into the platform would have traded risk in a brand-new partnership with third-party equity. So we've elected to effectively hold on to exactly the same position that we have today. There is -- it's certainly not performing as one would have hoped. And we have seen marginal deterioration in some of those trading statistics during the first half of the year. I think a lot of the proof in the pudding will be next year as we go through the leasing cycle. But yes, continue to focus and a priority for us from an SA asset management perspective. Then on to your second question, just in terms of the SA funds management partner. The bank doesn't seem to like a long-term equity real estate partner. Is there a time line for their involvement in the deal? Is there any option pricing structure on their exit? So I think this came up in some of the conversations we had earlier in the week or earlier today. The structure of the Core Plus platform is a permanent capital vehicle. There's no definitive time line to the investment. There's no structures involved. There's no put options. There's no structured equity. There's no underpin to return. I can't speak on behalf of Nedbank, but certainly, they -- our view and working with them, they see this as a good opportunity to build access to a strong foundation and strong set of cash flows off of which to grow. And I think potential exit opportunities from their investment book, potential to access new opportunities to potential to bringing in and capitalizing additional equity alongside them and us over time. So yes, hopefully, that answers your question, but it really is a pretty vanilla permanent capital type of structure. Mweishö, your question in relation to solar. So in line with the questions around the remaining portfolio, was the additional solar PV commissioned on the portfolio that is going into the SA Core Plus portfolio, and I'm assuming you want to know how much sits outside. I mean the majority of that work has taken place on industrial and retail. And you could probably assume a relatively even split between the assets that went in to the assets that stay behind. But there's a fair amount of work that the South African team is doing in terms of new pilot projects, we're running at 2 battery projects at the moment. And so that expansion will continue to roll out and accelerate over the course of the next 6, 12, 18 months. [ Fayaz ] you questioned, how much of the 4% to 6% guidance already absorbs the Blackstone management agreement falling away from December? And what's that annualized fee income at stake? Myles do you want to pick that up?

Yes. So I think with Blackstone specifically, it is obviously backdated to the end of this year in terms of execution. So the financial impact or the true effect of it won't be overly significant during this year. I think where we got to on the 4% to 6%, we look at it in conjunction with SA Core Plus as well in terms of what that deal brings to earnings and timing of execution. And I think that's where we feel quite comfortable to hold to the 4% to 6%. I think in terms of the actual fee itself and the income that it would normally generate on an annual basis. So it was a flat fee for the first year, there was a ratchet down in terms of the contract that would then last through to the full 4.5-year initial period that was entered into agreed with Blackstone. We were into that ratchet phase come November this year. And that fee is effectively what would fall away on a full year basis, and that's what you've seen in our European fee income historically and in prior periods. But I think this is where Andrew references termination fees and make-wholes in terms of that contract that we would be and should be more than safeguarded in terms of sufficient earnings for at least the next financial year and covering that cost base.

Yes. I mean just to add some color to that, there's some follow-on questions that probably are asking for a little bit more detail. So as Myles refers to the ratcheted basis. From November, that would have ratcheted down -- the fee would have ratcheted down to around about ZAR 80 million a year for the whole. So third party would have been 80% of that, so around about ZAR 64 million, ZAR 65 million. And obviously, from our perspective, when entering that transaction, we were happy to take a lower fee in time on the expectation of growth within that platform. So we would effectively be forgoing around ZAR 64 million a year. As Myles mentioned, obviously, these termination fees make whole payments that really give you runway for the next couple of years. And then combined with what you do with the infrastructure that supports that broader business across the group. And I think, Nazeem, you asked about the -- Nazeem, you've asked about what does the cost base look like? What does it look like post the Blackstone wrap-up? I mean it is obviously secular. We haven't got to the finishing line yet with Blackstone. There's a lot of handover and transitioning work that we need to deliver against and make sure we get to. And obviously, internal discussions around what that looks like. But as we look to build out our operating model going forward, as we looked at reaffirming guidance, that is all taken into account in getting there. And hopefully, that also covers off your question around what sits within that number going forward. Nazeem, you also asked a question around LTV post SA Core Plus, but also what the pro forma may look like post bringing the first loss back on to balance sheet. So those couple of assets that we spoke to. When we talk about a medium -- our medium-term kind of LTV outlook, that's effectively 35%, 36%, 37%. So you kind of back up to normalized midrange. And then from a look-through perspective, it adds a few hundred basis points to that look-through, but not significant because you've effectively brought it in your reported gearing number. Mweishö, I think you raised a question just in terms of the European acquisitions. Can you remind us if Burstone and Blackstone are targeting other third-party opportunities in 2H '27? Answer to that is no. But we do have obviously the partnership and platform alongside Hines in which we're aggregating out the industrial portfolio in Germany and Netherlands. And there, we've got ZAR 3 billion of opportunities under offer in exclusivity as we speak, looking to close those out within 2H '27. And that will put out about ZAR 1 billion of third-party equity over the course of the last 6 months of the financial year. A couple of others that are coming in, Mweishö, interest rate assumptions. So as we look to model out and reaffirm guidance, what have we assumed from what interest rates have we assumed in getting to that. Myles, maybe I think it's important just to talk about where our hedge position is and the impact that it may or may not have to the recent changes.