Centuria Capital Group (CNI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Centuria Capital Group FY '21 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mr. John McBain, Joint CEO. Thank you. Please go ahead.

Good morning, and thank you for joining us. I'm John McBain, Joint Chief Executive of Centuria Capital. And together with my fellow joined Chief Executive, Jason Huljich; and our Chief Financial Officer, Simon Holt, will take you through Centuria's Half Year '21 Results Presentation. Starting on Slide 4. Our real estate portfolio significantly expanded. Group assets under management improved 16% to $10.2 billion through the half, underpinned by a record $1.5 billion worth of direct real estate transactions across both Australia and New Zealand, particularly within the industrial and health care sectors. Throughout the period, listed real estate AUM increased 16% to $4.8 billion, unlisted increasing 7% to $4.5 billion. Our joint CEO, Jason Huljich, will provide further detail regarding what's been a record year for his property and funds management teams. Moving to Slide 5. This larger platform generated stronger returns for security dollars. Along with growing AUM, we've delivered half year operating earnings security of $0.062. As the period unfolded, we experienced the impact of COVID beginning to unwind, allowing great uncertainty. Quarterly, we've upgraded FY '21 distribution guidance, $0.10 and reaffirm our FY '21 operating earnings guidance range of $0.115 to $0.125. Testament to the strength of the group performance, we're also pleased to report 12-month total security holder return of 22%, outperforming the S&P/ASX200 at 1.4% and the 200 AREIT accumulation index of negative 4.6%. I'm also pleased to report the strength in our development pipeline, which has $1.6 billion worth of property either under construction or to be developed. Turning to Slide 6. Centuria has delivered a strong performance despite the backdrop of global pandemic. We achieved this by delivering on our dual strategy of corporate acquisitions married with real estate transactions, with the former now actively providing additional performance. Operating business acquired over the past 3 years are contributing strongly, with AUM growth over the half as follows: Centuria Industrial REIT increasing by 50%, Centuria Healthcare by 29%, and New Zealand business increasing by 24%. Also pleased to announce that during the half Centuria had its GICS code reclassified to Diversified Real Estate. Slide 7 illustrates how our corporate dual strategy underpinned our 33% compound annual growth rate in AUM 2017 to 2020. This includes the corporate acquisition of 360 Capital's industrial platform, which we transformed in the ASX 200 listed Centuria Industrial REIT; the 63% Heathley Limited Investment transformed now into Centuria Healthcare. And the full acquisition of Augusta Capital, enabling Centuria to expand into New Zealand. Slide 8 elaborates how these 3 M&A deals performed through the half. CIP has $2.4 billion of assets across 5 industrial subsectors, totaling 59 high-quality assets. Centuria Healthcare value have increased to $0.9 billion, including several acquisitions for the newly launched open ended fund. Across the fund, New Zealand team secured several landmark assets for 2 new unlisted funds, including the ANZ $178 million Visy Glass manufacturing facility. Again, Jason will provide a detailed update on these funds. I will now hand you over to our Chief Financial Officer, Simon Holt, to present the financial results of the group.

Thanks, John. Slide 10 shows our earnings and distribution for the period. And it's my pleasure to report the group has delivered a half year 2021 statutory net profit after tax to $41.4 million, with an operating net profit after tax of $34 million. Operating earnings of $0.062 per security was delivered along with distributions paid for the period of $0.045 per stapled security. Distributions were underpinned by recurring revenues accounting for 83% of total group revenues. As John mentioned earlier, we are very pleased to announce an upgraded distribution guidance of $0.10 for the year, up from the previously announced $0.09 and the initial FY '21 guidance in August 2020 of $0.085. We have also reaffirmed our operating earnings guidance of $0.115 to $0.125. This was also upgraded through the FY '21 period from the range of $0.105 to $0.115. It is important to note that our EPS over the last couple of years has remained consistent. This is in line with our expectations regarding the implementation of the then new revenue accounting standard, which has impacted the timing of performance fees. It's pleasing to note that the operating EPS, excluding performance fees, has continued to increase year-on-year over that period. This is as a result of a relentless focus by the business to grow revenue and improve margins. Moving to Slide 11, which outlines the key components of our earnings. During the half, a 17% increase in profits attributable to our Property Funds Management segment was underpinned by record real estate acquisitions as well as the increasing benefits of operating with a larger real estate funds management platform. As mentioned earlier, recurring revenues accounted for 83% of total revenues. The group's total revenue profile has continued to transition towards increased contributions from recurring revenues. However, our half year '21 performance fee income of $13.6 million was recognized during the period and was in line with expected fund expiry dates across the group's unlisted real estate division. It is also important to note that a further $22.3 million of unrecognized performance fees remains latent within our unlisted portfolio. As an external fund manager, Centuria maintains co-investment stakes in some of the funds it manages. This includes strong alignment with our listed REITs, CRP, the office fund and our New Zealand APL, or Asset Plus limited. And we are the largest unitholder of each of these trusts. During FY '21, the group's co-investment strategy has yielded $17.4 million in operating profit, up from $15.3 million in the previous corresponding period. The Investment Bond division reduced to $0.6 million and reflects lower prevailing interest rates, impacting capital guaranteed product returns. Our corporate expenses of $6.3 million increased in line with strong AUM growth. And on an annualized basis, these expenses are broadly in line with FY '20 corporate expenses of $12.2 million. As previously mentioned, operating EPS of $0.062 recorded for the half reflects lower performance fee contribution and a change in the group's weighted average number of securities. Both factors reflect the group's shift towards a larger mix of recurring revenue streams and growth initiatives undertaken across the platform to position CNI as a leading Australasian Real Estate fund manager. Moving to the balance sheet. We are pleased to report that the group has maintained a strong balance sheet position, which has CNI well-positioned to continue executing its growth strategy. The group's net asset value per security has continued to strengthen from $1.44 to $1.54 over the half. Along with cash reserves of $168 million, the group's net borrowings have further reduced with an operating gearing ratio of 2.4%. In addition, our interest cover ratio has increased to 7.5x as the group benefited from reducing or reduced net borrowings as well as the lower interest rate environment. The group is also being prudent with the composition of its debt portfolio with staggered maturities on its corporate bond over the next 4 years. Finally, to our continuing environmental, social and governance initiatives on Page 13. Centuria has made a concerted effort to monitor and improve our energy and water efficiencies across its real estate platform. This includes further rollout of solar panels across office and health care assets. In addition to our Hoepner Street Bundamba development within the CIP portfolio, it is on target to be certified as one of the first 5 Star, Green Star as-built industrial properties in Australia. Centuria has continued its commitment to the Sydney-based special need schools, St. Lucy's as well as the 10-year Dolton Foundation in New Zealand, raising more than $150,000. This was complemented by inclined support, including volunteering work by many of our staff. The group continues to enhance its corporate governance framework through greater diversity and independence across its responsible entity boards, CPFL and CPF2L. We'll also shortly be submitting our modern slavery statement to the federal government. Finally, I'm pleased to report that the integration of our New Zealand business is ahead of schedule with many of our back office and governance functions now embedded in our business. I'll now hand over to Jason, who will take you through CNI's divisional highlights.

Thank you, Simon. Let me start on Slide 15. As John mentioned, we significantly expanded our real estate platform over the period, growing assets under management to $9.3 billion across Australia and New Zealand. The platform was approximately split 80% in Australia with 20% across the Tasman in New Zealand. The combined Australia and New Zealand platform collectively has a 95% exposure to the industrial, healthcare and office real estate sectors. Decentralized office assets still compromise -- comprise the largest individual sector exposure. However, industrial and healthcare are expanding quickly. The other sector Centuria has a minor exposure too in New Zealand, our large-format retail, supermarket, shopping centers and tourism assets. The platform is almost evenly split between our listed and unlisted vehicles. On the listed front, our ASX pure-play REIT, Centuria Industrial REIT, CIP; and Centuria Office REIT, COF; and on ended exclusive Asset Plus Limited. On the unlisted side, we have a variety of fixed-term and open-ended funds in both countries. Centuria is proud of its steep network of loyal investors across our different vehicles. It is now a key focus to grow our unlisted institutional investor base in the near to medium term. On to Slide 16. It is our pleasure to report a record half in terms of asset acquisitions over the period. During HY '21, acquisition activity increased to a record $1.5 billion worth of real estate secured across 24 individual assets. This is a 25% increase above our full year results from last year, which in itself was a record. These are high-quality assets underpinned by strong tenant covenants. Close to half the transactions were secured on a sale and leaseback arrangement, which enables the tenant to free up capital for reinvestment into their businesses. Most of these agreements were secured on long-term leases, providing certainty of income for our vehicles. An impressive 50% -- 57% of assets were transacted with triple net leases, which are our preferred lease structure. Triple net leases significantly minimized CapEx and maintenance costs for our funds, as these expenditures are the responsibility of the tenant. CIP transacted a record number and value of transactions throughout the half year, with $693 million invested across 9 assets. This portfolio growth helped expand the REIT's wale to 9.8 years with an AUM of $2.4 billion. Also on the Industrial front, we're in the process of launching 2 unlisted industrial funds, one in Australia, one in New Zealand, which I will touch on a little later. Both Centuria Healthcare and the two unlisted funds in New Zealand, collectively acquired 8 health care assets worth $370 million. The New Zealand team is also busy progressing at $132 million development pipeline. We also divested 9 assets with $303 million throughout the period. Moving to Slide 17. As an external fund manager, Centuria is proud of its in-house asset management capabilities, which unlock value-add initiatives for our investors. Additionally, our in-house team is at the cold face of tenant relations, which has been critical throughout the COVID-impacted trading period. We now manage 948 tenant customers across 216 individual assets. Our strong tenant relationships and quality tenant covenants delivered an impressive 98% rent collection rate between July and December 2020. Over the period, we leased more than 273,000 square meters of space across 117 individual deals, which is a significant state in the current pandemic period and a sign of our deep tenant relationships and the quality of our properties. These leasing deals further supported our focus on quality, tenant covenants, which is shown by the large proportion of our tenant base which is state and federal government listed entities and multinational corporations. All sectors within our portfolio have healthy wale and occupancy metrics. Slide 18 highlights our significant development pipeline in both Australia and New Zealand, collectively worth $1.6 billion. Approximately half is already committed and the other half will be progressed over the short to medium term. In Australia, these projects range from value-add initiatives to improve in existing properties rental income and capital value, development of sustainable healthcare and industrial properties with both pre-let agreements as well as speculative opportunities; and finally, social infrastructure developments, such as affordable housing and specialized homes for those who living of dementia. Moving to unlisted fund on Slide 19. Collectively, Centuria has 63 unlisted single asset funds, 4 multi-asset open-ended funds and 5 institutional mandates across Australia and New Zealand. The brief of these unlisted funds generated $13.6 million in recognized performance fees throughout year '21 and with a further $22.3 million of latent underlying performance fees. As I alluded to earlier, Centuria launched 2 unlisted funds throughout the half, with a further 2 new funds currently raising capital. In Australia, the Centuria Healthcare property fund launched, which is an open-ended vehicle secured by private hospitals and medical center assets. In New Zealand, the multi-asset Augusta Property Fund launched with the NZD $55 million Anglesea Medical Center as a seed asset. This fund was oversubscribed within 9 days. We have recently launched the Visy Penrose Fund in New Zealand, anchored by the $178 million Visy Glass manufacturing facility as well as a fixed-term Centuria Industrial income fund number one, anchored by 3 high-quality industrial assets located in Adelaide and Brisbane. Slide 20 outlines our listed ASX and NZX vehicles. Last week, CIS delivered solid results highlighted by excellent leasing activity and rent collection, which averaged around 97%. The portfolio includes 23 high-quality assets valued at $2.1 million, with a market cap of approximately $1.1 billion. CIP also delivered its strong half year results last week with this whole portfolio expanded 59 assets, worth $2.4 billion. The ASX 200 REIT experienced a transformational period, not just through its acquisitions, but also a very strong leasing period. It has a current market cap of circa $1.7 billion. Lastly, Asset Plus continues to perform well. This really includes 5 assets valued at in $300 million. And this portfolio includes the development of the Munroe Lane office complex in Albany, Auckland, which is majority pre-let to the Auckland Council. I'd now like to pass back to John, who will talk through our corporate strategy and outlook.

Thank you, Jason. So some comments on markets and strategy. As Jason explained, Centuria is exposed to compelling industrial, healthcare and centralized office markets. The industrial and healthcare real estate sectors experienced strong tailwinds from the half, which we expect will continue into FY '21 and well beyond. Centuria's office portfolios are exposed, as I said, to decentralized markets. We have no exposure to Sydney CBD, which is experiencing high volatility during the COVID effective trading period. Cost portfolio is underpinned by strong tenant covenants, and we expect this rig to continue delivering very strong cash flows. The launch of our new funds is evidence of strong investor appetite for unlisted vehicles, and we see this appetite perhaps to continue unabated through FY '21 and beyond for those seeking relatively high returns. New Zealand, like Australia, has benefited from the [ go hard ] strategy, early strategy for managing COVID. Subsequently, we believe the key commercial, industrial and healthcare markets will also remain strong throughout FY '21. At the core of Centuria's outlook throughout the near term is our aspiration to increase funds under management by 50%. In terms of execution on our strategy on Slide 23. To summarize, we want to continue to deliver on our dual growth strategy across both Australia and New Zealand, within the industrial, healthcare and office Sectors. Our half year results illustrate a strong record for delivering on this strategy to date. With our strong balance sheet, strong distribution network, high recurring revenue, our expanded real estate platform, Centuria will continue to build out and grow our multiple fund verticals where we see attractively priced assets and ensure we take corporate acquisition opportunities, again, when these are sympathetic to our existing business lines or in an asset sector, we believe is sympathetic to our strategy. Before I open the door to questions, on behalf of Jason, Simon and our management team, I'd like to thank our investors for your continued support throughout this half and the preceding years. That concludes the formal presentation. I'll now hand back to the operator to commence the Q&A.

[Operator Instructions] Our first question is from Mr. James Druce from CLSA.

My first question is just around guidance, just the uptick, the DPS to $0.10. Is that just more confidence around the macro?

Yes. James, thanks for the question. You probably recall, and most of the listeners will recall, when we started giving guidance, we're probably at pains to make clear to the market, in particularly your section of the market, that it's pretty difficult in the middle of a COVID-affected period, particularly since a lot of nonexecutive directors to put a really bullish guidance figure out. In fact, a lot of our peers didn't put guidance across out. So we wanted to. It was the first time I think we've ever used a range, Simon. Is that correct? And we made it really clear that we were going to be conservative. And as the year progressed, we're going to flesh out where we thought we were. So we sort of tried to abide what we told the market.

Yes. That's clear. Just on the development pipeline on Page 18. Can you give a sense of the completion profile for those committed projects over the next 1 to 3 years?

Sure. So it's Jason here, James. So just looking at them, industrial and commercial, that's 2 main projects, Albany, which is underway. And then the Auckland building, which they're just working through trying to secure a precommitment on at the moment. So that's probably closer to 3 years away. The social infrastructure and tourism, New Zealand development, that's a bit of a mix. Obviously, you got the 2 hotel assets on balance sheet. With what's happening, I think they will probably move a bit quicker than we might have thought 6 months ago. And a big chunk of that is the Augusta share of the Lake View project down in Queenstown, which is actually moving quite nicely through planning, but that is a long-term project. That will be completed in multiple stages over sort of 7 or 8 years. Our social structure developments, which is the 4 projects. The first 1 reached PC last month, with the next 3, all completing over the next 3 months. AU Healthcare, that's a couple of projects that we're in the middle of. So they will be set over the next 24 months. And in the future pipeline, the big chunk, which is the healthcare, they are projects that will be sort of 18 to 36 months out.

Okay. And on the healthcare one, what's the -- what happens -- what needs to happen to get that really maybe...

There's 2 main ones there where we are negotiations with basically an anchor tenant to take circa 30% of each. And those discussions are quite advanced.

Okay. That's very good. And then finally, just a question on sort of the launch of the fund, just on the funds that you have launched. When do you think that you'll close those? When will they close? And are there any launches that you're thinking about this next half or any other initiatives that you're close to executing?

So on -- so Visy is due to close basically at the end of this month. New Zealand, and that's all on track of the equity rate. Our industrial income fund #1, which we opened up 10 days ago, we also subscribed in terms of registrations of interest. Application forms are coming in thick and fast. So we'd expect to close that to the public offer very shortly. Probably the -- what we can see in the very near term would be the continued growth of our health care property fund. We have had 2 raises in the last 6 months in that fund. And I would say 3rd is not too far away. We've got some good pipeline, and we've secured some great assets to add to that portfolio as well.

Just adding to Jason. It's probably not lost, James, that the big acquisition in New Zealand to our knowledge is the largest single retail unlisted acquisition in Australasia that we know of. And the capital rising consequently of $108 million would be the largest single retailer on the stock we have undertaken. And the New Zealand guys are doing a fantastic job.

Yes, that sounds very good. And just one final question maybe for Simon. I think you had about $7 million of one-offs upfront from your equity raise price back in October. Just confirm that's come through this half? Or is it the next half?

No, the majority of that comes through next half. In relation to visitors, all come through this half, second half, I should say.

[Operator Instructions] Our next telephone question is from Richard Jones from JPMorgan.

Just a bit of an expansion, sorry, to James' question, just on the development. Can you say how much of the committed $833 million has been spent so far?

On the New Zealand commercial project, obviously, other than buying the land and the ex council building in Auckland, the construction is just actually commenced recently. On the Albany project, Lake View very little of that today. It's probably been less than $10 million. Social infrastructure. Those projects are finishing now in the next couple of months. And most of that has now been expense. Most of the other projects, they are sitting at either just -- all that's been expensed today as being the land or the existing asset that will be redeveloped.

And can you just tell us through how you recognize income of those projects?

Obviously, some will -- there'll be some development fees, no one has to be taken on the way through. In relation to balance sheet related developments, for example, social infrastructure, it's basically a time value recognition with an amount kept to the end to clean up any issues that may have occurred in terms of profit.

Okay. Perfect. And your target on assets under management growth of 50%. Have you got a time frame on when that might be met?

Yes. It's John. Thanks, Richard. Basically, we've been growing at a compound rate of over 30% for around 5 years. So what we're trying to do is now we've got 10 good verticals. Yes, we've got organic growth in 6 months of $1.5 billion. So that far exceeds what -- if you look at the presentation, we got 12 months at $1.2 billion, $1.3 billion is the closest. So it looks like provided the assets there, we can get pretty attractive organic asset growth. And we're going to stick to our dual strategy, trying to buy something. So it kind of depends the next thing -- the next time we get a platform that we think is the right, but it could easily done in 18 months. It provided the right platforms there. That's how we see it. And I think we're quite an attractive size. A lot of larger groups could contemplate that our own thing easily. But we have $10 billion, whilst it's the largest we've ever been, it's still a relatively low number. We'd like to do much better.

And can you kind of differentiate investor demand between healthcare, industrial and probably office?