Centuria Capital Group (CNI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Centuria Capital Group FY2022 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Mr. John McBain, joint CEO. Thank you, sir. Please go ahead.

Good morning, and thanks for joining us. I'm John McBain, joint Chief Executive of Centuria Capital Group; and together with my fellow joint CEO, Jason Huljich; and Chief Financial Officer, Simon Holt, we have the pleasure in presenting Centuria Capital's financial results for FY '22. I will present an overview of the group, our FY '22 highlights, and comment regarding strategy and outlook. Simon Holt will give an FY '22 financial update, and Jason Huljich will present the real estate and funds management divisional information. As always, Centuria pays its respects to the traditional owners of the land in Australia and New Zealand for their respective cultures and to the elders past, present and emerging. Turning on Slide 4. This slide provides an overview of the group and illustrates how Centuria has increased its scale and diversification throughout Australasia, with group assets under management increasing 18% to $20.6 million during the period. The slide also shows how corporate transactions in previous periods have not only accelerated AUM but just as importantly broadened our diversity of asset sector, geography and capital resources as we now have additional discrete investor bases in both Western Australia and New Zealand. Approximately 1/3 of the real estate -- approximately 2/3 of the real estate platform is weighted to unlisted funds, with the balance comprising of the 3 Centuria-listed REITs. This weighting towards unlisted real estate and our long-standing relationships with our now enlarged unlisted distribution network, coupled with our institutional investment partnership relationships is noteworthy and particularly defensive in times of equity capital market volatility. As we have grown, our balance sheet has expanded by taking key stakes in the Centuria REITs, our joint ventures and institutional mandates as well as our open-ended unlisted funds. This is set out to the right of the slide. Moving to Slide 5. Centuria experienced strong acquisition activity in FY '22. The $3.1 billion of gross real estate activity, a record for the group and a direct consequence of a disciplined acquisition strategy coupled with enhanced platform scale. This improved scale has acted very positively on revenues. CNI also delivered on its upgraded operating earnings per security guidance of $0.145 per security, a 20.8% increase from FY '21. The group declared a distribution per security of $0.11, a 10% increase in FY '21. Organic growth contributed to Centuria delivering on its upgraded operating earnings of $0.145, 20.8% above '21, as well as delivering on its distribution guidance of $0.11, increase of 10%. This was a record period of operating earnings distribution delivered by the group and a significant achievement, given the backdrop of rising inflation, domestic and global economic volatility, COVID-19 disruption and ongoing geopolitical events. Centuria's increased platform scale also continues to deliver high recurring revenues, 89% of total revenue, as well as continued access to embedded performance fees. Each of our 7 real estate verticals contributed to a collective $3.1 billion of activity across Australia and New Zealand. This is complemented by a $2.1 billion development pipeline and an FY '22 valuation uplift of $1 billion across the platform. Centuria retains a strong focus on capital management. During the period, the group entered into 2 revolving loan facilities totaling $150 million. And these undrawn facilities, together with group cash balances of $185 million, made a total of $339 million available for FY '22 year-end. The group deliberately structured its balance sheet strength to ensure the maximum flexibility. Together with the capacity to take opportunities, it believes will become available in the near term whilst maintaining strong financial covenant ratios. Simon Holt will expand on this aspect during his presentation. Looking to the year ahead, we're cognizant of market and interest rate fluctuations. However, we're confident that our experience [indiscernible] management team is well suited to [indiscernible] variable market conditions. And we expect that value opportunities will emerge across our asset sectors. Finally, we provide FY '23 operating EPS guidance, $0.145 per security; and DPS guidance of $11.6 per security, a 5.4% increase on FY '22. Turning to Slide 6. Of the real estate activities through FY '22, $2.6 billion is attributed to real estate acquisitions, $0.5 billion through our Centuria Bass real estate credit operation. As mentioned, organic growth was generated across all real estate sectors including industrial, healthcare, daily needs and large format retail, agriculture real estate, decentralized offices. Jason will elaborate on each of these verticals' growth later in the presentation. However, I'd like to highlight the alternative health care and agriculture sectors for a moment. These sectors have high global and domestic investor appeal and are relatively fragmented from a funds management perspective in Australia. With the launch of the Centuria Healthcare Property Fund and more recently the Centuria Agriculture Fund, we are building 3 diversified open-ended unlisted vehicles, which are backed by our specialist expertise in each sector, have access to a continuing pipeline of fresh opportunities and are well supported by our [ investor base ]. We expect these vehicles to continue to grow strongly in FY '23. Turning to Slide 7. Since FY '17, Centuria has generated a 40% compound annual growth rate. This result has been achieved by a focus on organic growth from real estate acquisitions, active real estate management and corporate positions more [indiscernible] Group and Primewest. FY '22, organic investments took center stage totaling 90 properties, 37 loans and has meant a record-breaking level of activity. [indiscernible] transactions include trophy assets in the $100 million to $300 million range, including a super prime distribution center at Fairfield, A-grade recently completed metro building in South Melbourne, a major New Zealand aged care portfolio and an agricultural asset, a seed asset, up at Centuria Agriculture Fund. Investments to our property acquisitions and our development pipeline also assisted with organic growth, providing fit-for-purpose modern, sustainable assets for our listed and unlisted funds. Again, Jason will offer more detail. On Slide 8, this highlights Centuria's diversification and scale as well as future growth potential, underpinned by our strong financial position. The Centuria platform offers unique characteristics as an external funds manager, a bias towards higher margin unlisted real estate business, its geographic reach, its Australasian focus, its extremely advanced on [ agitator composition ] with sufficient channels to weather volatility and last, of course, a very extensive and mature internal [ investor base ]. These attributes, coupled with our REIT management revenues, our JV interest, our institutional partnerships and our real estate credit business offers a strong recurring revenue base which differs from our peers. And we consider it to be extremely resilient, nimble and highly reactive to opportunities where we set price dislocation. Our operations are supported by 400 staff across 8 offices in 3 countries with a significant proportion of our workforce focused on the full spectrum of management. We [indiscernible] facility managers and asset managers, funds managers and treasury personnel, all dedicated to the life cycle of estate funds and trusts. This results in specifically curated funds and assets designed to optimize securityholders' returns. Turning to Slide 9. Centuria is focused on its commitment to ESG initiatives by providing a flexible relevant sustainability framework. This framework encompasses 3 broad areas: conscious climate change, our focus on environmental considerations; valued stakeholders, our social responsibilities; and responsible business principles, which delivers our governance directives. In late '21, we published our first sustainability report and our second will be provided to this year's AGM [indiscernible]. We've also provided disclosures and long-term global reporting initiatives, GRI, our sustainability reporting standards, and delivered Centuria's second modern slavery statement. Our social initiatives [indiscernible] regard Centuria's annual tenant satisfaction survey and an external employment engagement survey that both produced excellent results during the year. On the governance front, we've adopted the task force on climate-related financial disclosure recommendations. This means climate change is now a standard investment consideration, plans being developed across the Centuria portfolio. Specifically regarding our REITs, CIP became an industry participant in our NABERS Accelerate program for warehouse and cold stores, COF achieved an increased NABERS sustainability portfolio index, SPI, energy rating of 4.8 stars and a NABERS water rating of 3.9 stars. Thank you. And I'll now hand you over to our Chief Financial Officer, Simon Holt, who will walk you through our financial results.

Thanks, John. Slide 11 shows our operating earnings and distribution for the full year as well as guidance for the FY '23 financial year. And it's my pleasure to report that the group delivered FY '22 operating profit after tax of $114.5 million, which represents a 63% increase on FY '21. This increase in earnings translated to an operating EPS of $0.145 per security, which was delivered in line with our upgraded guidance and does represent an increase of 20.8% from FY '21. . The group's distribution of $0.11 per stapled security for the year also met guidance and importantly delivered a 10% increase from FY '21. As we discuss profitability, it's essential to note that the reconciliation of our operating profit to the group's FY '22 reported statutory loss of $37.4 million is outlined in the appendices to this presentation on Slide 38. This statutory loss is primarily the result of unrealized fair value movement on the group's listed co-investment stakes. Looking ahead, the FY '23 full year earnings guidance is $0.145 per stapled security and complemented with a distribution guidance of $0.116 per stapled security, which represents a 5.5% increase. The increase in our distribution guidance demonstrates our continued confidence in the cash-generating capability of the business, which continue to be underpinned by our sustained recurring revenues, accounting for 89% of total group revenues. Moving to Slide 12, which outlines the key components of our earnings. The merger with Primewest has proven to be another transformational milestone, improving margins for the group and, when combined with the transactional activity across the industrial and health care sectors, has delivered a 77% increase in profit for the property and funds management sector. It is also pleasing to note the continuing outperformance delivered across several of our unlisted funds, contributing to a record 84% increase in performance fees recognized by the group, $233 million. As previously envisaged, the group has seen significant increase in latent unrecognized performance fees which, at current valuations across the many underlying property funds, is $179 million. This increase reflects both the continued diversification of our platform across our 7 asset sectors as well as a significant increase in scale and the number of [ highly built ] unlisted property funds that came with the merger of Primewest. As an external fund manager, Centuria continues to co-invest in a large number of funds it operates alongside fund investors. This brings strong alignment with our listed REITs, CIP, COF and APL, in addition to providing the business with a continued source of recurring revenue. And I'm pleased to report that during FY '22, the group's co-investment segment delivered an operating profit of $48 million, up [ 33% ] from the prior period. Moving to the Development segment. It's pleasing to report the group is continuing to shift away from on-balance sheet development opportunities to more sustainable sources of earnings, such as development management fees. The operating profit from this segment increased to $6.5 million for the year, representing a 44% increase. The Development segment retained a $2.1 billion pipeline comprising of current and upcoming [ known ] projects, ensuring its continuing contribution as a source of future profitability and growth for the business. Property and Development Finance represent our 50% stake in Centuria Bass Credit, which in its first full year of operation as part of Centuria Group, contributed $4.1 million to our operating earnings. Pleasingly, Centuria Bass' performance has benefited from recent volatilities in the marketplace, with increasing cost of construction and eased restricted lending by traditional banks creating new opportunities for this new business segment. The investment bond segment also experienced a significant increase in profitability, contributing an operating profit of $4.6 million. Approximately $1.6 million of this increase was attributable to the recoupment of prior period fee rebates. The remainder of this increase is reflective of cost savings and incremental investment management services, which are of a more recurring nature and are expected to enhance future profitability for the business. Finally, the Corporate segment. For FY '22, corporate overheads were impacted by the group's voluntary decision to repay all Jobkeeper payments, resulting in a $3.5 million increase in net corporate costs compared to the prior year. Excluding the impact of Jobkeeper, corporate expenses as a percentage of operating profit before interest and tax have reduced from 17% in FY '21 to 12% this year. We have seen a significant increase in operating tax expense from $9.3 million to $22.9 million in the current year. And this is a reflection of the increased operating tactical profit generated by the business. The increase in effective operating tax for the group from 12% to 17% is reflective of the increase in the relative taxable earnings of the business compared with its passive untaxed earnings generated in our stapled structure. Moving to Slide 13. This outlines our revenue mix and how the business continues to generate its revenues from recurring sources. Transactional income comprising of acquisition, financing and underwriting and sales fees were up 162% for the financial year. And this has been a great result, underpinned by the $4.3 billion of property transactions and real estate finance activity taken during -- undertaken during FY '22. This includes $2.2 billion of property transactions, just over $0.5 billion of additional real estate finance loans as well as close to $900 million of strategic divestments. The graph on this slide shows how the group's revenue mix has evolved and how recurring revenues, in particular management fees, are now the primary contributor to total revenues of the group. Looking at Slide 17. Despite significant market volatility impacting our listed co-investments, the group's balance sheet continues to be a source of confidence for the business with a net asset value of $1.73 per security as at 30 June 2022. Although this represents a decline compared with prior year, the decrease is purely due to the unrealized fair value of the group's listed co-investment space. In managing our capital structure, the group recently established $100 million 3-year secured revolving facility and has now been complemented with a further $50 million 5-year revolving facility, adding further depth and capability to finance our short-term opportunities and initiatives. In summary, the group retains immediate access to available funding of $339 million, comprising $185 million of cash and $154 million of undrawn facilities earmarked to support future acquisitions and future growth. The group operating gearing ratio has increased from 3.9% at the end of FY '21 to 13.2%. This increase is almost entirely attributed to the unrealized fair valuation of the group's unlisted co-investment space and does not represent net incremental nor permanent borrowing undertaken to support operations. The group also generated a record $182 million of cash from its operating activities and enjoys a net operating interest cover ratio of 6.8x, which represents a significant buffer above its covenant requirements of 2x. Moving to Slide 15, which highlights key attributes and profile of debt achieved across our managed funds. We continue to diversify our lender pool with favorable outcomes for the financing of the funds and broader risk mitigations. With $7.5 billion of debt facilities across more than 150 funds, the platform has a weighted average debt duration of 2.5 years, which is representative of both the typical lending term of up to 5 years in Australia and up to 3 years in New Zealand, combined with the maturity of a number of our unlisted funds. The group is hedged across these funds at a weighted average of 56% at June 30, with a weighted average duration of 2.1 years which is broadly aligned with our debt duration and in line with our policy of not hedging beyond the debt duration of a fund. I'll now hand over to Jason who will take you through CNI's divisional highlights.

Thank you, Simon. I'll start on Slide 17, which illustrates our $19.8 billion real estate platform, diversified by geography, asset sector, fund type and capital source. Since FY '21, this platform has increased by more than 20%. As John touched on earlier, during past reporting seasons, we announced several mergers and acquisitions which provided a gateway into the new sectors of healthcare, agriculture, large format retail, daily needs retail and real estate finance as well as bolstered our office and industrial platforms. These new real estate verticals provide securityholders with access to often hard-to-access alternative asset classes. Centuria continues to manage Australia's largest ASX-listed pure-play office and industrial REIT and over 150 unlisted funds. Each fund provides a highly curated real estate portfolio that is actively managed by our in-house team. Our business has access to a variety of investor profiles, including listed, unlisted retail, unlisted wholesale and institutional, with a suite of investment opportunities that suit different risk/reward appetites. Slide 18 is a closer examination of our 7 real estate verticals. Centuria focuses its office investment within metropolitan and near-city markets that provide affordable rent and excellent connectivity via public transport and road arterials. This is a modern office portfolio that provides strong sustainability credentials. Our industrial portfolio is concentrated with an urban and full supply-constrained market in close proximity to large populations, which means we can take advantage of the expanding e-commerce sector as well as onshoring supply chain operators. Our industrial assets provide opportunities to deliver strong returns and attractive rental reversion. The Industrial portfolio expanded 25% during FY '22. The daily needs retail and large format retail portfolio has expanded by 38% and 23%, respectively. These assets focus on nondiscretionary convenience-based retail or trends in line with household needs backed by deep capital sources, particularly institutional mandates and wholesale investors. The healthcare portfolio focus on cost-effective solutions that deliver better patient care through customized real estate. These include institutional grade, short stay and day hospitals, mental health facilities, medical centers and specialist centers. The healthcare platform increased 55% during the period. Our unlisted real estate finance funds increased 167% during FY '22 to $800 million. These funds provide nonbanking finance to the property sector through predominantly first mortgage loans. The credit is largely used for construction funding, land settlement, bridging finance and residual stock solution. And finally, our agriculture portfolio increased by 300% during the 12-month period. We are executing on opportunities to deliver sale and leaseback solutions to enable farmers to expand their operations, which are underpinned by long-term lease covenants and triple net lease terms. On to Slide 19, which illustrates our range of investment options and multiple fund structures, each providing different risk returns and different investor profiles. It also shows we have room to grow with the white boxes representing future potential opportunities. A key takeaway from this slide is the diversification and access to capital sources and deep investor network. We have broadened our range of assets by sector, asset size, geographic markets and strategies for investment. The group has also benefited from the aggregation of investor distribution networks following the integration of recently merged entity. On the unlisted front, we've meaningfully expanded our investor base from retail investors, high net worth and ultra-high net worth individuals, advisers, family offices, wholesale and institutional capital sources. Slide 20 details our record period of organic growth from real estate transactions across all verticals in the group. Collectively, the value of transactions increased 24% year-on-year. Centuria is one of the larger transactional teams within Australia with [ investments ] in each real estate sector. The team achieved considerable success via off-market and select sale campaign. This volume of transactional activity demonstrates the level of growth opportunities available for a diversified platform. Across the asset classes, I'd like to highlight our real estate finance team secured 67 property deals during the year and accounted for more than $0.5 billion. This is the first full year reporting period the group has benefited from a Centuria Bass investment. Moving to Slide 21, which outlines Centuria's ability to effectively manage assets within our portfolio, thanks to our integrated management capabilities. The group manages 419 assets leased to approximately 2,500 tenant customers. Average rent collections totaled a healthy 98% plus during the period. This impressive result was complemented by more than 0.5 million square meters of leasing terms agreed across an impressive 469 individual deals. This represents 12.6% of the group's total NLA. The group has a wide variety of tenant customers, and we partner with Australia and New Zealand's biggest corporates to provide effective real estate solutions to such household names as Woolworths, Telstra, Coles, Wesfarmers, Arnotts, Visy and Healius. Additionally, our largest tenant customer by some way are the federal, state and local governments with exposure of [ 6% to 12% ] of the portfolio. Collectively, our Australasian platform provides a high average occupancy exceeding 97% and an average WALE of 6.7 years. The group's high occupancy and stated expiry profiles provide opportunities to deliver income predictably as well as capturing rental uplift upon expiry. Turning to development on Slide 22. Centuria's development team delivered a number of projects throughout the period, and the group continues to progress a $2.1 billion development pipeline. These projects include opportunities to upgrade, refurbish and redevelop property as well as provide new assets for our listed and unlisted funds. In particular, close to $1 billion of Centuria's committed pipeline is focused on new healthcare properties. Additionally, more than 15% of our pipeline is dedicated to industrial real estate where within Australia the sector has less than 1% vacancy, resulting in significant rental growth and opportunity to take advantage of these very tight supply-demand fundamentals. Our development division generate strong recurring development management fees and in some instances, development profits on completion. Projects are dispersed predominantly toward health care, industrial, large-format retail and the office sectors. Now let's take a closer look at our unlisted real estate platform on Slide 23. As mentioned earlier, Centuria's unlisted funds have meaningfully expanded by more than 18% during FY '22 and continue to generate strong interest from a range of capital sources. Across the unlisted platform, we service more than 12,000 retail, wholesale and institutional investors. And during that period, our distribution team raised over $620 million of equity across new and open-ended opportunities. Our unlisted funds generated more than $33 million and recognized performance fees over the period of further circa $180 million in latent underlying performance fees. This part of the platform remains an important component of our overall business with very attractive margins. Although 32% of our unlisted AUM has no fund expiry review date and 56% has expiry review dates at or beyond 5 years. Slide 24 demonstrates the increasing breadth of fund types and asset offerings within our unlisted division. These include single asset fixed term office funds, such as Centuria government income property fund no. 1 and 2. which are assets predominantly leased to government. We also source new JV partners that we've spoken as an opportunity such as our 50-50 partnership with MA Financial on the $166 million 25 Grenfell Street office asset in Adelaide. And on the retail front, we launched a wholesale fund underpinned by the $70 million Northgate Shopping Center in Geraldton, WA. Our multi-asset unlisted fund suite further broadened throughout the period. This included the Centuria Healthcare Property Fund, which grew to $568 million, the Centuria New Zealand Industrial Fund, which increased to $588 million, the Centuria Diversified Property fund, which merged with Primewest property investment fund expanding its portfolio to $260 million, the Centuria New Zealand Healthcare Property fund which is underpinned by the $181 million Heritage-operated aged care portfolio in New Zealand. And the recently launched Centuria Agriculture Fund just seeded with $177 million Glasshouse estate operated by the Flavorite Group. Slide 25 outlines our $1.7 billion unlisted health care platform which span the Australian and New Zealand market. It totals 107 properties servicing more than 200 tenant customers. During the period, Centuria established a health care joint venture partnership with Morgan Stanley Real Estate Investing called the Centuria Prime partnership. This vehicle currently has assets worth $215 million with hopes to expand further. Centuria's open-ended Centuria Healthcare Property Fund is continuing to expand its scale with its assets under management increasing 200% to $568 million. Additionally, the group has more than $900 million worth of health care real estate across 7 other unlisted funds. During FY '23, we anticipate our health care platform will increase to $2 billion. Slide 26, moving to our $400 million agricultural platform. Centuria expanded its agricultural real estate platform to 3 funds including new open-ended retail fund, Centuria Agriculture Fund. Our agricultural assets are largely secured by triple net leases that provides secure income streams. We see strong tailwinds in agriculture real estate investment, including future export growth forecast, food security, highlighting the need for domestically sourced produce, Australia's reputation for growing high-quality produce in a sustainable environment, Australia's reputation of having a safe and highly regulated sector, and technological farming advancements that can deliver more produce with less wastage of natural resources. During FY '23, we expect our agricultural vertical to double to $800 million. Slide 27 outlines the strength of our real estate finance offering. During the period, Centuria Bass Credit funded 25 real estate projects worth $466 million and successfully exited 13 projects worth $87 million. More than 90% of its facilities were first mortgage loans. This exceptional growth throughout the year illustrates strong market demand for alternative real estate finance. With anticipated tightening lending condition from the banking sector during FY '23, we see further opportunities to grow Centuria Bass Credit funds. On Slide 28, we examine the institutional platform. Throughout the period, institutional capital investment in Centuria's unlisted platform increased 12% to $1.9 billion. This includes the previously mentioned healthcare JV partnership with Morgan Stanley Real Estate Investing and in addition to a JV with BlackRock for a prime office building in Perth as well as another 2 prime office mandates worth $634 million. We also expanded our existing daily needs retail investment mandate to over $600 million. Onto our listed property platform on Slide 29. As John mentioned earlier, our listed REITs expanded 24% to $6.8 million throughout the period. First, the ASX-listed COF is Australia's largest listed pure-play office REIT with 23 high-quality office assets worth $2.4 billion. During the period, it acquired $314 million of high-quality real estate office assets and achieved significant leasing success across more than 41,000 square meters. COF delivered an FY '22 FFO guidance $0.182 per unit and distribution guidance of $0.166 per unit. COF increases market relevance during the period with its inclusion in the FTSE, EPRA, NAREIT Index. COF is also a part of the ASX 300 Index. CIP is Australia's largest listed pure-play industrial REIT with 88 industrial properties worth $4.1 billion. During the period, it acquired 23 high-quality industrial assets and 3 development sites worth $765 million. It also leased more than 185,000 square meters of space. CIP delivered an upgraded FY '22 FFO guidance of $0.182 per unit and distribution guidance of $0.173 per unit. CIP is a part of the S&P/ASX 200 Index and the FTSE, EPRA, NAREIT Global Index. Finally, the NZX-listed Asset Plus Limited is underpinned by 5 high-quality assets worth NZD 300 million. Approximately 53% of the REIT is encumbered towards government-listed and multinational tenants. The portfolio's landmark development, Munroe Lane, is progressing well with a completion forecast in mid-2023. Before I hand over to John, let me conclude by reiterating that FY '22 has been a period of significant organic growth derived from our diversified real estate division. We remain focused on sourcing quality, real estate investment opportunities, utilizing our deep real estate expertise and leveraging our platform to create value for our investors. Thank you. And I'll now hand back to John to talk through our strategy.

Thank you, Jason. So allow me to make some comments regarding strategy on behalf of the senior executives. As mentioned previously, no corporate is immune from fluctuations in financial markets. And we've spent considerable time internally assessing our view on how conditions may [ abate ] how much and over what period. Interest rates, for example, are expected to rise and then abate. It's important to take a through-cycle approach to real estate investment which, by nature, is long term. This business has operated for over 25 years in a variety of market conditions and cycles. And many of its executives have been with us for over 15 years, some even longer. This group of talented operators have seen various market cycles and have the experience to maintain a disciplined approach, but just as importantly, the ability to seize on well-priced assets for new funds. So we look forward to FY '23 with some anticipation. Centuria intends to retain a strong focus on the Australasian real estate sector. The group also intends to grow its platform strongly in the alternative healthcare, agriculture and nonbank lending sectors which are receiving strong investor demand. In addition, we will continue to leverage our strong distribution network and our institutional relationships to take advantage of both core and value-add real estate opportunities across our traditional asset classes. Finally, we will continue to consider further corporate acquisitions where they are accretive and provided they relate to our real estate bias. Before I open the floor to questions, on behalf of Jason, Simon, our management team and our Board, I'd like to thank our investors for your continued support. That concludes the formal presentation. I will now hand back to the operator for today's Q&A session.

[Operator Instructions] Our first question comes from the line of Ben Brayshaw from Barrenjoey.

[indiscernible] I'd like to just run through. Firstly, if you could comment, please on the composition of the inventory on balance sheet of $130 million, just the breakup of that, please, if you could. Presumably, it includes the 5 assets that you're listing on Slide 39. I was wondering if there is anything else that's reflected in that number?

Yes, it's Simon here. I'll just go on the right page. There's 2 components of it, the property sold for development and then we also have some heritage assets sit on our balance sheet, they're held for sale as we cease to sell those down over the coming period of time. I'm just trying to get you the -- let me find the page number. Just a minute.

That's okay. Maybe I'll just move on. The end value of the completed -- sorry, the committed pipeline for CNI's balance sheet has declined over the last 6 months, but the future pipeline has increased. Could you just touch on what has happened there? Has there been a reallocation from committed to the future?

The key change is we've -- as part of the Morgan Stanley joint venture in healthcare, a number of development assets that were on our balance sheet have moved into that joint venture. That's the reason for our balance sheet coming off.

Okay. And on performance fees, could you just -- I mean, there's been a significant increase in the future performance fees that can be recognized. How much are you accruing for in your guidance for FY '23?

Yes. So the main driver of the increase has been predominantly the work we've done over the last 6 to 9 months in relation to performance fees embedded in the Primewest business. And we've obviously booked what we're required to one of the accounting standards. With all of these latent performance fees, we are expecting to account for those in accordance with our policies, as we've discussed previously. So a lot of that latent performance fee is a lot further out than 2 years. However, there are some that will occur in the next couple of years. In terms of FY '23, look, it's going to be lower than what we've seen come through this year. I think there were 2 particular performance fees that came through in the first half that were unexpected that represent, I think, close to $11 million. So that's kind of -- we're expecting a lower performance fee number for FY '23 at this point.

Just probably [ to add to that ] -- it's John, this $179 million figure is simply based on valuation. These fees could go out to 2030. That will be highly dependent on future valuations. And the timing will be highly dependent on investors' expectations and instructions and relating to the termination of trusts. So we'll try each year to be as transparent as we can about how we're allocating them. In a perfect world, we'd like to have an equal allocation each year, but that probably won't happen like that. You might recall, last year, we thought we'd have about $233 million. And a couple of sales cropped up that we couldn't -- weren't anticipated. So it's a very difficult area to guide on, but we're just doing our best.

Our next question comes from the line of Simon Chan from Morgan Stanley.

John, Jason and Simon, I just want to pick up on one of those comments Simon Holt made about performance fee being lower in FY '23. Is that the reason why you have guided to flat earnings for next year? Because I mean, if I think about average AUM year-on-year, it's probably going to be about 10% higher even to start with. So is it basically the performance fee that's a delta? Or have you guys been a lot more conservative around transaction activities as well?

Look, I think there's 3 elements. One is performance fees. The other is the REITs on the distribution guidance that they have both provided has had a -- will have an impact into our numbers because we own 15% and 18%. And the transactions, our pipeline is -- we're expecting it to be not as large -- sorry, our acquisitions are expected to be not as large as this year.

Can you give an indication as to how much -- I think you did $3.1 billion last year, right? So are we expecting on 1/3 lower, 2/3 lower?

Simon, it's John. I think it's very difficult. We're at a point of time where we've got a major international political disruption. We have a very uncertain interest rate environment. We've tried to give information through the presentation in relation to our expectation and respective growth in the agriculture and health care sectors. But I think our security holders expect us to be accurate and conservative. I think our guidance is our very best estimate that ourselves and our Board can give in relation to earnings for the next 12 months. I think it's difficult to ask us to see 12 months into the future, when probably no one on this call has an accurate lens on that, including ourselves.

That's fine. Just on my next question then. In relation to the $179 million, can you just confirm that, that number is based on the latest actual book valuations that the values have recognized? Or have you guys built in a bit of buffer in calculating the $179 million, please?

It's a good question. Simon, it is literally on the current valuations. So when we talk about [indiscernible], we always calculate on current valuations because we don't know what future valuations may look like. So you've got to pick a point in the sand. But obviously, as we record revenue over time, we would apply our accounting policies and discount those valuations once with that policy.

What's the average cap rate across your platform? What's the average cap rate across your platform at the moment there, Simon?

Yes. I could tell you across the entirety. Obviously, the REITs are broken out the a cost at 4.2 and 5.5. But we couldn't tell you across entire portfolio.

Our next question comes from the line of James Druce from CLSA.

John, Jason, Simon, I don't want to harp on too much about transaction activity. But in terms of the baseline, it sounds like you've got $300 million from health coming through this year, $400 million from agriculture. Is there anything else in that exchange but not settled bucket that we should add to that? And can you talk about some of the capacity constraints potentially on that or the momentum in that business that's seen very good growth over the past 12 months. So there's a few questions there. Sorry about that.

On the first question, Yes. Look, we expect ag and health care to be busy, which has got really good demand. The equity raise for the new open-ended [ pharma ] very well. And we will -- we want to try and mirror the health care fund and continue to grow that out reasonably quickly. We're also looking where we're seeing some value in some of the other sectors is -- so you add office. We are seeing some assets come into that value range at the moment. So we're looking at some opportunities across there. Obviously, we've got our AXA mandate, which we're still another over $300 million of capacity in that vehicle as well. And we're still looking, obviously, industrial and other sectors. Obviously, where the REITs are trading makes it more difficult, but having 2/3 of the portfolio and unlisted means that we can still grow that part of the platform during this uncertain environment. Yes, the last question. Look, it's been very strong. Obviously, the presentation picked up the growth. What we've had over the last 12 months is a period of education for the Centuria Prime West investor base. In fact, it's a very strong ultra high net worth base. And we've spent time educating our investors on their product. And a lot of our guys and primaries haven't invested in credit products before, but we're now getting really good traction. We just -- we did a raise a couple of weeks ago, which actually surprised us on the upside. It was very heavily oversubscribed in 2 days. So we see, yes, this $30 million raise and it was well as described. So we see that gaining really good traction, continuing to grow.

Okay. And then maybe -- I don't want to talk about performance fees too much, but can you provide a bit of a sense of the sensitivity, I suppose, if there is a 10% change to asset values, how that starts to move that 179 number?

I think that's not an easy thing to do in the context of the way the calculations in the Prime was performance fees are somewhat different to our normal processes in Centuria where we can take a look at it and have a conversation of about it, if that's an important question.

Just -- it doesn't need to be precise. It's just sort of a rough feel for how much that number could actually move with asset base.

It is yes. Look, it is difficult to see different hurdles on each of them;. So it's not a simple calculation, yes. Obviously, if [indiscernible] should come through, were very valued in each 6-month period, that number will be updated.

James, it's John. We spent some time considering the release of this number, but we have released this summer in the past. And if you recall some of the conversations about over the years, we are trying to make our conversations regarding performance fees as transparent as we can compared to our peers. And I think we're making a meaningful effort. But it does open a can of worms a little bit. James, I think the best way to think about this number is it's a number in the future. And lease gives you a sense that every year, it should be of no surprise if there's $15 million to $30 million worth of performance fees pretty well in most financial periods just as a very, very, very rough rule of thumb. And you'll see that we will report that as accurately as we can. And as you know, every 6 months, Simon's team will apply the sensitivities in this model. And whatever has been sold or proposed to be sold in the forthcoming 24 months we'll have more granularity on.

Our next question comes from the line of Richard Jones from JPMorgan.

Just a couple of quick ones. The impact of interest rate rises. Can you just talk about what response you're seeing in terms of retail investor fund flow?