Centuria Capital Group (CNI) Earnings Call Transcript & Summary

Good day. Thank you for standing by, and welcome to the Centuria Capital Group FY '23 Results Presentation. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. John McBain, Joint CEO, to begin the conference. John, over to you.

Thank you. Good morning, and thank you for joining us. I'm John McBain, Joint CEO of Centuria Capital; and together with my fellow, our joint CEO, Jason Huljich; and Chief Financial Officer, Simon Holt. We have pleasure in presenting Centuria's financial results for FY '23. I will give an overview of the group, our FY '23 highlights and comments regarding strategy and outlook. Simon will give an FY '23 financial update, and Jason will present the real estate and funds management information in more detail. Starting with the presentation on Slide 2. Centuria pays its respects to the Traditional Owners of the land in Australia and New Zealand, to their respective cultures, to the elders, past, present and emerging. Moving to 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 to $21 billion during the period. It also shows the breadth of our diversity by fund type and asset sector. Approximately 2/3 of the real estate platform is weighted towards unlisted funds with the balance comprising 3 listed REITs. Our unlisted real estate is characterized by long-standing relationships across an extensive distribution network, and complemented by expanding institutional investment partnerships. Throughout the period, we've maintained key stakes in Centuria REITs, our joint venture partnerships and institutional mandates as well as our open-ended unlisted funds. Turning to Slide 5. Our gross real estate acquisition activity is largely attributed to expanding around listed alternative real estate activities, in particular agriculture, which increased 33% more than $0.5 billion, while Centuria Bass Credit expanded its loan book 59% to $1.3 billion. As I alluded to earlier, pleasingly, institutional capital investment continued to expand by 11% to over $2 billion, and Jason will provide further details on funds management, new capital sourcing and acquisitions shortly. Capital management was a clear corporate focus during FY '23, and I can report that our group operating debt gearing reduced to 10.6% at year-end with a $329 million of cash and undrawn debt facilities available at year-end. The group considers its balance sheet to be very healthy with ample capacity to operate its normal business activities. Furthermore, during the period, Centuria recouped $200 million from sales and recycling of co-investment assets. Turning to Slide 6. During the period, Centuria remained a disciplined approach to our strategy to grant value for securityholders resulting in $1.4 billion gross real estate activity and a $1.6 billion development pipeline. The increased recurring revenues to 91%, largely driven from management fees arising from '23 transit -- '22 transactions. Our ability to deliver on these forecast earnings was a function of strong recurring earnings, coupled with the execution of our strategy to diversify our real estate activities. During FY '23, Centuria delivered operating earnings of $0.145 for security, a distribution of $0.116 security, an increase of 5.5% year-on-year, both in line with guidance. Looking across our real estate platform, we continue to effectively manage our diversified portfolios across Australia and New Zealand. And our portfolio management is led by a very active in-house management team, providing hands-on approach to ensure high tenant satisfaction as well as performing assets -- well-performing assets. Turning to Slide 7. This slide focuses on the growth of diversification by both asset sector and capital sources. The first graph in particular, highlights the growth across our alternative sectors of agriculture and real estate finance as well as health care. As you can see, approximately 2/3 of Centuria's portfolio is comprised of the industrial and alternative sectors. We believe this to be a highly relevant point of difference. Centuria also benefits from a broad range of capital sources across the group. Our strong retail base remains another relevant point of difference. It is these investors who continue to support Centuria's recent push into, in particular, the agriculture and real estate credit sectors. We also like to highlight the strength of Australia's commercial real estate market in relation to global peers. In recent times, Australia is second only to Japan in the APAC region in terms of attracting inbound real estate capital. We have a strong track record for capitalizing on mandates and partnerships from international institutions such as the industrial and health care partners with investment based -- investment vehicles sponsored by Morgan Stanley, our real estate investing. Turning to Slide 8. As previously mentioned, Jason will provide a more detailed funds management and risk at overview. I'll just make a few comments for what I've highlighted. As at FY '23, the group manages approximately 420 properties, at least 2,500 tenants. And during the year, lease terms were agreed over more than 548,000 square meters across 542 transactions, representing 13% of the total platform. This significant leasing activity secured on strong tenant covenants resulted in rent collections across the platform remaining high at 99%. During the period, the weighted average capitalization rate across the group was 5.81%. And with the current securityholders to examine this metric in particular in any peer comparisons that might be undertaken. Turning to Slide 9. We continue our commitment to ESG initiatives through our flexible sustainability framework. During FY '23, we released our ESG policy and launched new sustainability targets, including targeting zero Scope 2 emissions by 2028, with our portfolio sourcing 100% of electricity from renewable sources. Through a combination of on-site solar and large-scale generation certificate deals which match our consumption. Electrification of our portfolio [ Group Capital ] eliminating gas and diesel in the operations where CNI has operational control by 2035. Continued expanding our 5-star green star-rated buildings with new assets delivered for COF and CIP by our in-house development team. And we continued to have 10-years support of St Lucy's Schools, which provided education to students with disabilities in New South Wales as well as other statewide charitable concerns. Centuria supports a diverse workplace culture, and we are proud to have increased female participation in our workforce to 45%. Turning to Slide 10. Part of our reputation as a funds manager is built on our ability to adapt to market changes by unlocking innovative new products. We have a strong focus on alternative well-performing real estate sectors to expand our platform and deliver diversified income sources, one of Centuria's points of difference. In addition to our recent alternative sector success, we'll also continue to harness strong tailwinds from the industrial sector moving forward. We'll continue to execute on our strategy against the backdrop of 10 cash rate hikes and high inflation during FY '23. And whilst we believe that the majority of interest rate rise should be behind us, a certain level of uncertainty will still exist moving into FY '24. Market sentiment indicates that at some point during FY '24, interest rates should stabilize, allowing markets to begin the journey towards normalization. Accordingly, Centuria will maintain a disciplined approach navigating what we believe will be a challenging FY '24 backdrop. We approach FY '24 a sharp focus on the industrial and alternative sectors, as important revenue drivers. The strong growth in our real estate credit book and our ag culture funds to $1.3 billion and $0.5 billion, respectively in FY '23 is expected to continue into FY '24, as is our ability to leverage our industrial real state expertise. In addition, our investment funds business, Centuria Life is experiencing increased inflows. Centuria benefits from an experienced management team. We maintain a disciplined strategic approach to capital management, and we also wish to ensure we are well positioned to continue our growth trajectory as markets normalize. We talk about this internally as our through-cycle approach. Finally, on Slide 11. We provide guidance at levels that reflect our best estimate of earnings based on current market conditions. This guidance anticipates lower performance fees and development profits, restrained transaction volumes and increased finance costs. Centuria provides FY '24 operating EPS guidance in a range of $0.115 to $0.12 security and distribution for security guidance of $0.10. I'll now hand you over to our Chief Financial Officer, Simon Holt, who will walk you through our financial results.

Thanks, John. Just moving to Slide 13, which shows our operating earnings and distributions for the full year as well as guidance for the FY '24 year. Despite prevailing macro conditions noted by John, the business has remained strong, as shown by scale and diversification established over recent years. Today, we reported that the group delivered a statutory NPAT of $105.9 million, an operating NPAT of $115.6 million and a distribution of $0.116 per stapled security. These were all higher than the prior year. The distribution of $0.116, combined with our operating EPS of $0.145 per security, were also in line with our GAAP guidance. As John mentioned earlier, we provided FY '24 operating earnings guidance of $0.115 to $0.12 per security and a distribution guidance of $0.10. FY '24 guidance, when compared to FY '23, does anticipate lower performance fees and development profits, restrained transaction volumes and increased finance costs. I'd also like to mention that our '24 distribution guidance of $0.10 further demonstrates our confidence in the underlying earnings and cash generating potential of the business. Slide 14 outlines the components of our operating earnings. The results for the current year were underscored by record earnings before interest and tax of $166.8 million, representing a growth of 7.5% on FY '22. Our property funds management fees increased 6% to $84.1 million. This was backed primarily by the full year impact of our FY '22 platform growth, supported by an additional $1.4 billion of gross real estate activity undertaken in FY '23. Property Funds Management business was supported by digital performance fees of $28.5 million, and the group still has a further $126 million of embedded latent unrecognized performance fees. It is worth mentioning the continuing contribution of co-investments to our operating results, which did increase 8% to $52.4 million, reflecting the increased deployment of capital in support of our unlisted fund business, higher interest income, which was offset by the negative impact of reduced distributions and cost of finance. I'm especially pleased to note that the development segment experienced significant growth this year, increasing its profitability by 45% to $9.4 million for the year. This result underscores the talent and commitment of our team, which leverage our active project pipeline and successfully delivered development profits on its recently completed projects despite challenging market conditions. As John mentioned earlier, an important highlight for the year has been our performance of our real estate credit finance platform, which through our collaboration with Centuria Bass, increased its loan book throughout the year, delivering a 61% increase in operating profitability. Rounding out our key income-generating divisions is the investment bond segment, which also has -- sorry, which while small, has, over the years, remained a consistent contributor to our bottom line, delivering an operating profit of $3.5 million for the year. Of note has been the continuing expansion and modernization of its product range, which have now been approved and offered by a wide range of dealer groups nationally. It's worth mentioning that the noted decline in profitability compared with FY '22 for the investment bond division relates to the impact of one-off fee recruitment on the unitization of capital guaranteed products. And the underlying results for the segment itself were pleasing. In terms of corporate overheads, I'm pleased to report that the business was able to deliver substantial savings for the current year, primarily through initiatives deployed across travel, consulting and other controllable overheads. At this point, it is important to pause for a moment and recognize that the increase in EBIT arising from the contribution of each of our segments have mitigated the full impact of rising interest rate environment. All in all, the reported operating profit after tax of $115.6 million to be a good result, reflecting the ongoing hard work commitment from all of Centuria's staff and management as we continue to navigate a challenging economic climate. Slide 15 highlights the important role, the continued diversification of our platform played in terms of the increased resilience of our fee-generating potential. Specifically, transactional fee income comprising acquisition, financing and underwriting and sales fees were underscored by $2.4 billion in transactional activity for the financial year, underpinned by $403 million of assets exchanged in FY '22 and settled in this period, generating fees in addition to the $811 million of FY '23 acquisitions and $542 million in real estate finance. It's also worth mentioning the group also completed $510 million of real estate divestments and $122 million of real estate finance settlements as part of its overall transactional activity. Looking at Slide 16. The group's balance sheet continues to be a source of confidence for the business with net asset value of $1.77 per security at 30 June 2023, up $0.04 on the previous year. Throughout FY '23, Centuria increased its funding optionality. In April, a new 5-year, $50 million debt facility was secured in addition to the refinance of $67 million of near-term maturities. And I am pleased to report that as at 30 June 2023, Centuria lowered its operating gearing ratio to 10.6% from its previously reported position of 17.3% at half year '23, while realizing $237 million of cash from the sale and recycling of balance sheet assets. Importantly, Centuria's balance sheet is positioned to fund organic growth with $329 million of cash and undrawn debt. Finally, to this slide, it's important to note that the group generated $83.4 million of cash from its operating activities alone and enjoys a net operating interest cover of 5x which despite recent increases in the cost of finance, represents a significant buffer above covenant requirements of 2x. Moving on to Slide 17, which highlights key attributes and profile of debt achieved across our managed funds platform. We continue to broaden our debt sources and risk concentration with now 24 lenders to the platform. Additionally, we accessed new capital through the issuance of $300 million of exchangeable notes within CIP. Lending facilities of the group totaled $8.2 billion, which covers more than 120 funds with a weighted average debt duration of 2.2 years. This weighted average reflects the typical lending term of up to 5 years in Australia and up to 3 years in New Zealand, along with the maturity of a number of our closed and unlisted funds. The group is hedged across these funds for a weighted average of 52% at 30 June, with a weighted average duration of 1.8 years, which is broadly in line with our debt duration and in line with our policy of not hedging beyond the debt or fund term in closed-end funds. During the year, the group refinanced approximately 60% of all funds. This significant body of work has increased our engagement with all our lenders, which has meant we have an enhanced understanding of our lenders' appetite and has led us to building stronger relationships with our lenders over the year. Moving on to my last slide, which examines the enhanced systems and processes delivered across the group's operations as part of our commitment to improving efficiencies and proactively managing costs. This extends to the continued integration of Primewest Commercial Property Services into Centuria's own infrastructure, which was delivered during the year as well as the transition of Primewest fund into Centuria's own property and financial management systems. Overlaid across these activities have been the delivery of an integrated customer relationship management solution used from West to East Coast Australia and across New Zealand. To support our business growth, back-end operations expanded in our [ Manila ] office, which coupled with our strategy to deploy increased automation, will continue to be a source of strategic advantages and future cost savings across our platform. Looking ahead, increased integration is expected across our treasury function with the impeding implementation of a unified treasury management solution. And in terms of new and emerging focus areas for our business, it is also important to note the importance of the IFRS sustainability standards with the business continuing also to invest and provision its enhanced data collection storage, aggregation and reporting systems in preparation for its introduction. Finally, with the increased threat of cybersecurity, it is important to reiterate Centuria's continued commitment in strengthening cyber defenses whilst continuing to comply with its IFRS CPS234 regulatory environment. I'll now hand over to Jason, who will take you through CNI's divisional highlights.

Thank you, Simon. Good morning, everyone. I will start on Slide 20 which outlines our 7 real estate verticals that make up Centuria's $20.2 billion real estate platform. The platform has changed considerably in recent years, and now is diversified across the 7 sectors, including industrial, daily needs retail, large-format retail as well as the alternatives of health care, real estate finance and agriculture, the latter 2 providing significant growth in FY '23. On Slide 21, Centuria's office portfolio with a total occupancy of 94% remains exposed to Australia's better-performing office markets with 95% of the portfolio outside of the Sydney and Melbourne CBDs. There remains a bifurcation within domestic office markets based on asset size, quality and leasing risk. With an average office value of less than $100 million, Centuria's assets provide exposure to a wider transaction pool. Additionally, a healthy 4.6-year WALE mitigates leasing risk, while the large-office asset within the portfolio comprises a mere 1.7% of total group AUM. Demonstrating Centuria's differentiated market position throughout FY '23, 5 office assets were divested at an average premium-to-book value of 4.5%, reflecting investment appetite for smaller, metropolitan and near-city office assets. Furthermore, as a test of tenant attitudes and preferences, our 2023 office tenant survey revealed circa 75% of respondents anticipate retaining or increasing their space requirements throughout the medium term. Finally, we believe our office portfolio continues to provide affordable, well-located commercial accommodation that appeals to a wide range of professional workforces. Moving to Industrial on Slide 22. The domestic industrial market continues to provide strong sector tailwinds with the lowest vacancy rate globally at 0.6%. Centuria's $6 billion industrial portfolio is positively differentiated through a strategic positioning, building critical scale with an urban infill market, where occupied demand remains highest and land is most constrained. With occupancy of 98%, a WALE 7.2 years, an average asset size of $36 million, Centuria's portfolio is extremely well placed in the current environment. Adding to this, our average site coverage is below 50%, providing scope for value-add developments, repositioning and many refurbishment opportunities. Rental levels for our industrial assets improved significantly, particularly in the second half of the year with average releasing spreads reaching over 37%. Highlighting the quality of our portfolios Centuria divested 11 industrial assets during the period at an average 2% premium-to-book value. In addition, our listed Centuria industrial REIT established a joint venture partnership with institutional investor MSREI. This provides a strong indication of ongoing institutional appetite for industrial real estate. Slide 23 touches on our third traditional asset class of retail. Centuria's $3.2 billion portfolio contains its exposure to daily needs retail, underpinned by nondiscretionary spending and large format retail, which is aligned to household needs. Close to 44% of our daily need asset income is derived from supermarkets, providing a resilient revenue flow. Our large-format retail sites have low-site coverage, which, like industrial provides, value-add options. Our average re-leasing spreads for the period across our Australian LFR portfolio were 11%. This included 8% for existing tenants, an impressive 24% for new leases. This high-quality portfolio has occupancy of 97.5%. Now on to our alternative real estate verticals on Slide 24, beginning with health care. Close to half of our health care assets comprise short stay and day hospitals, making us one of the largest nonoperator landlords in Australia. Our health care assets are largely new and customized for particular procedures and uses. These are health care facilities that lend themselves to better operational efficiencies, which lead to better patient outcomes and cost efficiencies. Our in-house development arm is currently providing a further $360 million pipeline of assets for our unlisted health care funds. The portfolio has a strong occupancy of 96%, a WALE of 10.8 years and 48% of the leases are CPI-linked. During the period, we transacted several health care assets though our overall AUM remain unchanged. Centuria will look to progress its institutional partnerships to further grow its health care platform. Next, our real estate finance business has seen strong growth through the period, increasing AUM by approximately 60% from $800 million to $1.3 billion as the property industry looked to nonbank financing as the Big 4 tightened the lending criteria. This business lends to developer and investor clients, and we provide credit funds for our high net worth, wholesale investor base through the Centuria Bass Credit brand. We have seen extremely strong takeup from our investors across the 2 open ended and multiple single loan funds as we are able to provide compelling returns for first mortgage secured loan funds to our high net worth clients. Finally, our agricultural vertical. Throughout FY '23, Centuria is focused on precision farming assets and more specifically protected cropping. The 3 agricultural assets acquired in the period are high-quality glasshouses, which lend themselves to high sustainable farming methods that also produce significantly higher yields than broad acre farming. These glasshouses have been acquired for both our Australian and New Zealand unlisted farms. Centuria is now Australia's largest large-scale glasshouse landlord. Across our entire agricultural platform, 92% of our assets provide net or triple net lease structures. We currently have 100% occupancy and a 14.5-year WALE across the portfolio. On to development on Slide 25. During FY '23, Centuria delivered $400 million worth of high-quality, sustainable projects throughout Australia and New Zealand. Projects include property upgrades, refurbishments, redevelopment as well as new assets through our listed and unlisted funds. Our award-winning in-house development team is also progressing $800 million worth of committed projects alongside a further $800 million of future projects. It's worth noting that our team recently took home the Urban Task Force Industrial Development Excellence Award for CIP Southside Industrial Estate. Our development division generates strong recurring development management fees and in some cases, development profits for balance sheet opportunities. Our development management fees increased 45% year-on-year to $9.4 million. Moving to Slide 26 and our unlisted funds platform, which grew 6% to $13.8 billion. During the period, Centuria expanded unlisted retail assets with 2 wholesale funds, which were fully subscribed, Australia's strong demand for regional daily needs retail assets. Furthermore, 50% interest was secured in the $223 million Allendale Square office tower in Perth, and several industrial assets were secured for both Australian and New Zealand unlisted funds. On the alternative front, the unlisted open ended Centuria Ag Fund, acquired 2 additional glasshouses for a combined $143 million and Centuria New Zealand agricultural property fund launched seeded with an $18 million glasshouse. Centuria Bass Credit launched 4 single-asset wholesale credit funds, which were fully subscribed, in addition to expanding the open-ended Centuria Bass Credit Fund. Collectively, $600 million of unlisted capital was raised during FY '23. Now on to our listed REITs on Slide 27. CIP is Australia's largest listed pure-play industrial REIT with 89 industrial properties worth $3.9 billion. CIP continues to harness the strong sector tailwinds achieving average re-leasing spreads for the year of 30%, together with more than 182,000 square meters of a grade leases across 30 individual deals. Significantly, during the period, CIP formed a joint venture with an investment vehicle sponsored by Morgan Stanley Real Estate Investing, Centuria Prime Logistics Partnership. Through this JV, CIP divested a 50% interest in 8 of its prime assets worth $215 million, which helped strengthen this balance sheet and provide liquidity. Additionally, CIP issued a $300 million exchangeable note at an attractive rate, increasing its debt diversity. The REIT maintains low gearing at 33.1% as at 30 June, with no debt expiry until FY '25. CIP delivered FY '23 guidance of $0.17 per unit and distribution guidance of $0.16. The ASX listed COF as Australia's largest listed pure-play office REIT with 23 high-quality office assets with $2.3 billion. COF executed a high volume of leasing transactions throughout the period which significantly improved its occupancy to 97%. Throughout the period, $63 million worth of divestments strengthened its balance sheet, reducing its debt and pro forma gearing to 36.7%. Additionally, more than $225 million of debt was refinanced, and COF has no debt expiring until FY '26. The COF delivered FY '23 FFR $0.156 per unit and provided distributions of $0.141 per unit. Moving on to Slide 28. Final slide. During FY '23, Centuria continued to broaden its capital structures and investor profiles. In particular, institutional investor capital expanded 11% to $2.1 billion with CIP establishing it's joint venture. Centuria also continued to service this office, retail and health care mandates throughout the period and is focused on increasing its institutional capital base. That concludes the formal presentation, and I'll now hand back to the operator to commence Q&A. Thank you.

[Operator Instructions] Your first question comes from the line of Caleb Wheatley from Macquarie Group.

My first question is just around guidance. Conscious of your qualitative comments on some of the operational movements into FY '24. But just wondering if there are to be any more quantitative in terms of drivers, particularly in the real estate platform regarding revaluations. Any thought on the acquisitions, et cetera?

It's John. I'll make a few. Thanks for the question, Caleb. I think this year, in particular, the view of the management team and the Board was -- we believe it's one of the most difficult years to be precise in relation to the outcome. So whilst it's always challenging, we're in a backdrop now where we're uncertain whether it's going to be none, 1 or 2 more interest rate rises. We're relatively convinced of market sentiment that it will stabilize and the majority of the rate rises were -- are behind us. And I think that, in itself, is a significant uncertainty. We've tried to -- in our presentation, reinforced repeatedly that we believe that our retail business have given good support for the alternative sectors and industrial and that they continue to perform, whereas we understand it's common knowledge globally that the equity capital markets some REITs to, in some sectors have issues. We've tried to indicate that 2/3 of our portfolio is unlisted. So it's not necessarily subject to those restrictions what the equity capital markets place on listed platforms. But going too much further beyond that is more difficult this year than it's ever been. Jason [indiscernible].

Yes. No, that's right. And then looking forward, you mentioned acquisitions I think there's going to be a bend probably towards the alternatives such as ag and health care. And then I think another big -- another sector we think we'll be buying a bit in this is industrial as well. So I think the diversification of the platform is allowing us to continue to grow, but in some different sectors. And obviously, the credit business is going from strength to strength. And we think it will be another big year this year for them as well.

That's really helpful. So good support from the retail base. I'm keen to hear what you're seeing on the opportunity side. I know you mentioned a few of the alternatives there. But what are you seeing in terms of pricing or relative attractiveness in some of those new subsectors? Obviously, credit, relatively attractive at the moment, particularly with regard to agriculture as well?

Yes. So credit, as we see, is going very well. We've -- our products that we are distributing to our investor base, which is probably mainly the high net worth investor base, our wholesale products. We've got 2 open-ended funds that are returning between 8.5% and 9.5% there. And then we've got single asset loans at around 10%. So they're extremely attractive for debt products, and the high net worths are really piling into them, which is good. And the other asset sectors, look, we've been watching and waiting. We haven't seen great value over the last few months, but we're starting to see it. And we're putting some different sort of vehicles to get -- to take advantage of that. So particularly for the high net worth end of the market that likes the sort of total return play. And obviously, we've got a long history in repositioning assets. So that's something you'll see us take advantage of over the next 12 months.

Great. That's really helpful. Final question for me. Just wondering if you could talk to any comments on how you're viewing gearing across the entire platform. Conscious you made the comment around average cap rates being at 5.8% relative to peers, but any high-level thoughts on where gearing is across the platform and what you might do from here on that front?

I think from a platform point of view, we obviously are dealing with 120 different funds, and they all have their different unique assets. In terms of -- we will continually and consistently keep doing what we have been doing, which is monitoring and managing that debt platform. When we talk about having touched facilities of 60% of those funds, they are ranging from all sorts of things that we're talking to, to being new funds, refinancing just because it was near the end of term. I think what we're probably focused on is making sure that we don't fall current on a go-forward basis in terms of those single asset funds. We don't do that in the listed vehicles today, but we have, from time to time, done that on the single asset funds. So we're very focused on making sure that we're bringing forward the debt refinancing in particular.

I think -- Jason here. Just one other thing. I think we learned lessons from the GFC around covenant buffers. And the management and the Board have been extremely focused on debt, particularly in the unlisted vehicles, having so many of them of having lower gearing and higher covenant. So as you look across the platform, the average covenant is in the high 50s to 60, and the actual drawn amount sit in the low 40s. So we've made sure we've got a good strong buffer between covenants.

Your next question comes from the line of Solomon Zhang from JPMorgan.

A couple more questions on gearing. Just wanted to clarify, what is CNI's balance sheet debt covenants based on? Is it based on operating or look-through gearing, please?

It's based -- there's a number of different covenants, but the key one is actually an LVR covenant test that actually isn't operating. It's down in its underlying funds. But we use operating gearing as a good metric. There is a look-through gearing metric as a covenant that we do have, but it is a different calculation to what you may normally see in the market.

All right. Now so in terms of look-through gearing, what would that be at? And just curious if the LVR calc, does that include or exclude intangibles? Obviously, you've got -- that's quite important gearing. You've got $100 million of goodwill in management rights on the balance sheet?

Just on the LVR covenant, it relates to a number of trust entities within the group. So it looks at the assets of that trust and to other trusts. And so it's at a very low gearing level compared to the covenant itself. Sorry, what was the other part of the question?

It's goodwill.

Yes. Sorry, it doesn't include goodwill in that calculation of LVR. And look-through gearing question -- sorry, look-through gearing, I'm sure everyone's going to ask it. Is it 33.5%? It's down a couple of percent from June last year and down about 3.5% from the half year numbers.

Right, right. And that's excluding the intangibles?

No, that would be our covenant calculation, which would include management [ cost ] and exclude goodwill.

All right. Just a question as well on the performance fees. Could you just call out what you've assumed in guidance for '24? Is it a material step down from '23?

Yes. Look, I think even going back 12 months ago, we were talking about performance fees. It's going to be much lower. I mean, we were looking at 12 months ago in that $10 million to $15 million range. I think that's where it's going to be in '24.

Well, maybe if I could sneak in one more. Just on the, I guess, the latent performance phase. I guess you previously called out that a substantial portion of that was sort of pulled across as part of the Primewest merger. Could you just talk about your control and visibility of, I guess, recognizing that $126 million over the next couple of years? Is it highly dependent on investor exits? Or is it sort of linked to finite life funds?

It's pretty much linked to [ finite ] life funds. There's a significant portion of funds that expire in '29, '30 in the Primewest portfolio that will have some of those performance fees. So it will -- there will be -- I suppose if you're thinking about how you're looking over the next 3 to 5 years, I think we'll see it fit reasonably plotting along, and then there's a kicker in, I think, '29 and '30 coming off the platform.

Your next question comes from the line of Ben Brayshaw from Barrenjoey.

Just had a quick question. I was wondering if you could provide an update on performance fee receivables, just the current and the noncurrent. How are you positioned for the next 12 months and beyond in relation to the [ $16 million ], please?

Yes. Look, there are a few that will -- a few that will settle during this year. The continuation of some of the largest funds that we had booked performance fees in the past have been extended through the course of FY '23 that will push out the collection of those. I think, Ben, what's worth mentioning and repeating is that we do take a very conservative approach to what we recognize in our approach to performance fees, particularly on initial recognition where we have taken into account at that particular point in time, a 20% reduction in the asset -- the underlying asset valuation of that property. And then if there was a performance fee, then looking some on that. So we believe we've taken a conservative approach to those -- to the recognition. And we're not expecting to have to write anything back in the future if valuations keep progressing the way they may progress over the next 12 to 18 months.

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

First question, I appreciate that. I think 50% of your unlisted AUM doesn't actually expire or mature until year 5 or beyond. Can you give us some color as to anything that's going to be expiring over the next 12 months in FY '24?

Yes, there's a couple of larger single assets coming up. What we've seen in -- over the FY '23 period is, as Simon mentioned, there's a couple hits. We've had a couple of extenders. I think, as you know, Simon, so how the funds work is there's usually a 5 -- 5-year term. We go back after 5 years and give the recommendation to hold sales. Sometimes we sell early and sometimes like extend longer. But -- so -- and we've got some couple of the health care funds coming up in FY '24. So that's CHPF 1 and #2. So CHPF 1 will probably be sold down. So [ CHPF 2 ], we've got to -- we're still working that through with investors. There's about 9 months to go. In the Primewest portfolio, we've got a mix of retail, industrial and office coming up there. It's got 400-odd million. And look, that will be on a case-by-case basis throughout the year. If we think -- that it's the right time to sell the asset, we'll sell them. If not, we'll be recommending to hold for that sort of 2-year period.

Jason, so of the $14 billion unlisted platform, how much is expiring there? Should we assume 10% in '24?

It's 900 -- probably about $900 million.

$900 million, total. Okay. Okay. Understood. Very good. Next question. Maybe it's for Simon Holt. But hey, Simon, can you talk a bit about the weighted average cost of debt for CNI in FY '24 and how that compares to FY '23?

Yes. Look, compared to FY '23, the -- well, average -- sorry, weighted average cost of debt. It has definitely gone up with obviously the underlying BBSW. We've got the house view that we've used both in CIP and COF, and we are using in CNI on that BBSW rate of 4.6% in our forecasting for '24. So we've been consistent across the entities. I think that's probably the main thing that's going to change between '23 and '24.

But like all-in cost of debt, including your hedge -- including hedges that you have in place, 50% hedging, what should the market expect for CNI group's weight average cost of debt all in, in F '24?

That is a calculatable thing that can be done. We don't have much hedging in stock. We've got $100 million of fixed rate debt. The rest is all variable. And in the accounts we provide plenty of detail to be able to calculate that number probably quite accurately.

Okay. Great. And final question, any changes in the way you accrue performance fees over the last...

No.

None at all? Any intention to change over the next year?

No. We set the policy whenever the standard came in, in 2018 or '19, and we haven't changed that policy in any way, shape or form.

Next question comes from the line of Tom Bodor from UBS.

I was just interested in your progress in selling down both New Zealand Aged Care that you have at Allendale. I saw the Allendale number in the back of the pack, but just was keen to understand run rate of selling down and when you expect to sell both coinvestments down.

Yes. For heritage, we've -- I believe last year's number was a closing of about AUD 89 million, and it's come down to about $48 million. So we managed to move some of the larger assets off balance sheet. We ran that through 2 processes. One was to put a number of those assets into a New Zealand unlisted fund, and also we have been selling some individual assets in the market in relation to Heritage. To date, we've sold one. And we're in the process, as we speak of, selling another -- seeking to sell another 3. So that's Heritage.

There's a few others, right, the Cook Street, which is the based -- [ backpack pod ] hotel in Auckland. That was settled for about $30 million. That was on balance sheet. We brought down our Allendale exposure by $13.5 million. It's about [ 32 ] of Heritage assets. There was also a legacy investment in 111 St. George's Terrace and Perth, which was reduced by $20 million. And then we had some seed in both [ cat ] and some of the Bass loans as they go out and then get collected. So that all contributed to the $237 million of recycled cash.

Okay. That's great. And then just on -- to Bass, clearly performing well from an earnings perspective, but just wanted to understand the underlying lines. Are there any loans that are in arrears or problematic across the book?

Look, as a business, I've never lost $1 of principal or interest. So they run a really tight ship. Now when you've got 80 loans out there, there's always some that's more difficult than others, but they've got a fantastic team that are looking after them. There's no lines in there that we're worried about it all. So yes, they're very good at mitigating risk and managing the book.

Okay. Great. And then maybe just a final one on covenants within the funds. You talked to the significant headroom on average, but would just be keen to understand if there's any outliers there amongst your stable of funds that are breaching covenants, how the discussions are going with the banks around that?

No, there's none that are breaching covenants. There are, as we've, I think, said at the half year, some that we haven't renegotiated the covenants. And to date, we continue to negotiate the covenants as and when we refinance to continue to create those buffers. So we -- as we've been probably dealing with for almost 18 months now working with the banks on managing that much earlier before we ever get to a point of ever breaching the actual agreement on covenants.

Are those issues generally ICR? Or is it LVR as well?

Yes. [indiscernible] ICR, yes, yes.

And we're seeing a bit the banks. Obviously, ICRs are increasing the low interest rate environment and the banks being pretty amenable to reducing them, which has been good.

Your next question comes from the line of Edward Day from MA Financial.

Just a follow-up on that ICR question. As part of that ICR renegotiation, what's the bank's view on distributions?

We have not had an ICR issue that we've had to adjust the distribution on. So we actually haven't had that conversation with the bank.

Over the past few years, they've been probably pushing the ICR covenants a little bit more than -- that perhaps should have might, and I think they have appreciated that, have been very good deal in my view.

And are they typically going from 2x to 1.5?

It will be -- various -- some within that range.

Yes, okay. And Jason, just one for you. I think you mentioned you were looking at some new style of products. Could you just give a bit of a flavor for what you're thinking about there?

Well, I think a couple of things we're focused on. Obviously, as I said, taking advantage of any value we see in the market. So you'll probably see some sort of opportunistic vehicles. And then the other focus is on the institutional side, where we're having a lot of discussions with different offshore groups and demand for mandates and partnerships and the like.

Presumably, that's mainly in office?

It's a mixed, yes, across different sectors.

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

Just to hark back to some of the guidance comments. Can we expect simply FUM to be up for '24?

Yes.

That's helpful. And while you might not have a lot color on all of the moving parts, you probably do have a good feel for the divestments for '24 we stepped through some expiry events earlier. Can we get -- how much of that sort of $900 million up for review would you expect to sell next year?

Look, it's hard because some of the investor conversations haven't even commenced. Probably the first one that does have some certainty about it is the health care fund #1, which is one of the Heathley original funds. It's got over $100 million in it. That one, I think, will be sold. The other assets, we still have -- we haven't spoken to investors later in the year.

Okay. That's clear. And then can you talk a little bit about what the banks are doing in terms of terms, margins for office syndicates versus other asset classes for new syndicates in this instance?

Look, I think the important thing here is that it really is a conversation with the bank, and there are banks that have different views on how they look at office. So to give one answer, specific answer is not really going to be a fulsome answer. I think what we have seen is we have managed to maintain our margins throughout the period that we have seen some increases in margins, but not as probably significant as we were expecting to see.

As Simon mentioned, we have got 24 different lenders into the platform. So there is a variety of appetite. One good point is, obviously, COF did a $225 million refinance during the period, and we didn't see any material changes in terms. So that was a very good sign.

Yes. Okay. That's great. One final one, if I may. Just curious, have the Primewest founders left the business now? Just curious.

It's John, James. Look, they -- they've still got a big involvement in the platform. I think they've 2 additional holdings circa $500 million on the platform. They collectively, and I'm not suggesting that [indiscernible] but they collectively own over 30% of the head stock in Centuria. So while they don't have a hard line day-to-day executive tasks within the company. I could tell you, they're still very involved in the business. We've got a great relationship with them. We find certain of the sectors, particularly ones where we weren't involved with prior to the merger, for example, Perth office and some of the retail activities. They are very, very useful contributors to the pipeline meetings. But I wouldn't like to be misleading. They're certainly not [ 8 to 5:30 ] employees of the business. I think they are major stakeholders and partners in every sense of the word. But we don't regard them to be employees. Is that helpful?

Yes, no, that's very helpful.

This brings to a close our Q&A session. I'd like to hand back over to John for closing remarks.

Thank you. Look, yes, I think, firstly, thanks, everybody, for participating today. We've put a lot of thought into the presentations and the releases that we've made today. And I can undertake to you, we'll be trying to ring the most out of our platform in account over the next 12 months. We're certainly not fearful of the conditions, in no way. And we're just hopeful that some of the opportunities that are supposed to be on our way actually arrived. Thank you very much.