Centuria Capital Group (CNI) Earnings Call Transcript & Summary

Good morning. Thank you for joining us. I'm John McBain, joint CEO of Centuria. Together with my fellow joint CEO, Jason Huljich. We have a pleasure in presenting Centuria Capital's strategic partnership with ResetData. Joining us today, we have Simon Holt, our Centuria CFO; and Tim Mitchell, Group Head of Investor Relations, but also with us are Marcel Zalloua and Bass Salah, joint CEOs of ResetData. On behalf of Jason, myself and our team, we welcome Marcel, Bass and the ResetData team to the Centuria team as we outlined, what's an exciting real estate-based opportunity for the group. Earlier this morning, Centuria made an ASX platform announcement regarding an investment in ResetData. Today's announcement marks insurers' early mover entry to the data center opportunity set, which our team will explain in more detail. Starting on Slide 2. The ResetData initiative is the combination of careful planning and an innovative approach to the rapidly evolving data center opportunity. Centuria has acquired a 50% stake in ResetData to provide next-generation sustainable cloud service technology through Liquid Immersion Cooling, often referred to as LIC and these are bespoke data centers. The stake is being acquired for a consideration of up to $21 million and is funded within Centuria's existing debt headroom. The investment is expected to be earnings neutral for the group in FY '25, however, accretive from FY '26 onwards. Centuria has a call option from the end of year 5 to acquire the outstanding 50% interest in ResetData. This opportunity aligns Centuria to the strong growing data center sector at a time when traditional data centers and AI are commanding global focus, but also at a time [indiscernible] cannot deliver data centers at a rate to match forecasted future demand. It's also becoming increasingly obvious that traditional data center technology, energy efficiency and sustainability gains have continued. Moving to Slide 3. So Centuria's early mover advantage into Liquid Cooled Immersion Edge Data Centers integrates a dual PropCo and OpCo strategy for addressing this opportunity. The PropCo component of [indiscernible] enables us to generate higher rents from underutilized real estate space, which Centuria property funds can't access, along with utilizing untapped power or deployment as Liquid Immersion Cooled Data Centers within portfolio assets, particularly [indiscernible] it. Jason will provide more detail regarding this shortly. Turning to the OpCo component. ResetData relies on proprietary Liquid Immersion Cooling Data Centre technology, which enables a small sized footprint in traditional data centers, less energy consumption than those using air cooling services and, therefore, a reduced carbon footprint. This technology is coupled with the ability to offer full cloud computing services to their clients. Slide 4. We believe that this carefully considered strategy will create a new first-mover business segment for security holders and differentiates C&I funds platform at OpCo level. ResetData is positioned to provide low-cost and viable alternative to traditional off-site data warehousing solutions. ResetData aims to offer high-density storage of processing with low latency to tenants in our properties as well as surrounding enterprises that can benefit from an innovative data center offering. Before finishing, I'd like to touch on Centuria's corporate acquisition strategy. This strategy actively seeks real estate-based market opportunities, which are scalable and create new revenue streams for the group. It also provides security holders with access to an opportunity, which has strong market tailwinds to a high-quality management team and a new business line with a limited competition set. Now this echoes past investments and other sectors we have made, such as our entry to real estate private credit in 2021 with Centuria's best credit and our entry to the health care real estate sector in 2019 with Heathley. I will now hand over to Jason.

Thanks, John, and good morning, everyone. I'd like to build on John's comments regarding today's announcement and explain how Centuria is inevitably approaching the data center sector by positioning ourselves at the forefront of bringing Liquid Immersion Cooled Data Centers to Australia's enterprises. Turning to Slide 6. As John mentioned earlier, Centuria is implementing a dual PropCo and OpCo approach to delivering edge data centers. A critical consideration for entering the ResetData investment is the value creation potential we see across our direct and listed real estate portfolios with over 400 properties and 2,500 tenants. Through the use of proprietary Liquid Immersion Cooling technology, Centuria and ResetData can create small footprint edge data centers that consume less energy than traditional air cooled data centers, implement edge data centers in space such as commercial office, retrofit industrial alternative property sectors with the utilization of the real estate space and availability of required power provides such opportunities, support growing artificial intelligence inferencing, gaming demand and Internet of Things, enabling lower latency cloud servicing and efficient data center solutions that Centuria's tenants and nearby enterprises to see alternative solutions to air cooled or traditional data centers that are not purpose. Centuria ResetData's proposition is designed to attract new tenants, retain existing tenants, create new revenue and rental streams across Centuria's real estate funds, while creating potential for improved property valuations. Turning to Slide 7, which illustrates the symbiotic relationship between the PropCo and OpCo strategies, each required a unique value chain to deliver Centuria's edge data center ecosystem. Having just outlined aspects of the PropCo strategy, you can also see how these features enable ResetData to be located at underutilized real estate spaces office buildings rather than out of city warehouses to delivering low connectivity latency to users. With its disposed hardware stack and proprietary cloud platform, ResetData has also cultivated partnerships with Dell, Nvidia, Submer and Unicom Engineering to provide original equipment manufacturer, OEM capabilities for Liquid Immersion Cooling technology. Moving to Slide 8. The application of our PropCo and OpCo strategy provides Centuria, an early mover advantage for building Australia's edge infrastructure network. The group investment in ResetData enables Centuria to unlock value from a strategically located and underutilized assets, establishing a network of edge data centers that can service tenants as well as other businesses in proximity. The technological innovation from Liquid Immersion Cooling coupled with ResetData's bespoke hardware stack and proprietary cloud platform creates compelling opportunity to roll out edge data centers and properties across our platform. As you can see, edge data centers are highly efficient and can offer a viable alternative to traditional air cooled data centers. A typical pod on the edge data centre [indiscernible] is 2.4 square meters, meaning around 7 pods that could potentially provide Centuria's tenants and surrounding business enterprises with around 1 megawatt of data capability and approximately 60 square meters of readable space. Slide 10. It is our view that this innovative approach will provide higher and better use for some properties across our real estate platform. A perfect example of this is 818 Bourke Street, Docklands, which is a Centuria-managed property buyer, the Centuria Office REIT. As part of today's announcement, ResetData has entered into a 10-year lease for a data center of up to 1.5 megawatts at 818 Bourke Street. This presents us with the opportunity to deliver one of Australia's first enterprise AI inferencing and ultra-high density liquidate called data centers. The establishment of those [indiscernible] up would involve repurposing existing infrastructure within the property, provide new rental sources, minimize leasing downtime and potentially create a property valuation uplift of between 10% and 15% net of costs. We will endeavor to keep investors updated on the progress of this initiative in due course. That concludes today's formal presentation. I'll now hand back to the operator to commence Q&A.

[Operator Instructions] Your first question comes from Simon Chan with Morgan Stanley.

Just simply want to start with this technology that you've bought, I guess, with ResetData, can you just -- does ResetData earn the technology? Or is it more of a distributor of the technology exclusively in Australia and then...

ResetData owns the technology stack and we've actually developed the infrastructure stack and hardware stack alongside those partners, but we own our own IP in terms of our infrastructure-as-a-service provision.

The actual [indiscernible] are -- come out of a company called Submer in Spain, which ResetData holds the license for both in Australia and New Zealand.

And is it like a long-term license that there's no near-term or medium-term negotiations that could complicate?

Look, it's -- the length to help the licenses -- 4 years. But I think the main thing with this is not just that technology, it's also the whole office purchase infrastructure stack that the ResetData guys have put together and all the partnerships with a lot of the operators in that space.

Very good. That's my next question. John, in your, I think, opening remarks, you mentioned that the deal is going to be earnings neutral to FY '25 and you're expecting it to be accretive in FY '26, what sort of growth are you assuming in the ResetData for you to make these comments? Like are there things in the pipeline that are pretty much locked in, et cetera. Can you just talk a bit about that delta between '25 and '26 in ResetData?

Simon, we've been quite conservative in our outlook. It's better to get the company time to get feet on the ground. But we are expecting...

But I think we're expecting to see the growth, and it's really a sales and earnings on earnings model. So part of the amount of money that we're putting in is working capital to build out a stronger sales team or a larger sales team. And as a result of that, it's our ability to generate new sales, and those sales are sticky and then go and get the new sales on top of that. And so the acceleration happens quite quickly from a very small base in that regard. So in terms of '25, we're also taking into account the cost of debt and funding expectations and the impact that has on the business. overall.

I think as 818 comes online, that's what flows through into the profitability that makes it accretive in future years. And then obviously, we'll be looking at other assets to add into the portfolio. And we've looked at a number of our assets that have excess power capability, which capacity, which we'll be able to roll more of these out over time.

Your next question comes from Tom Bodor with UBS.

I'd just be interested in just sort of zeroing in on those comments around revenue being a result of sales. Can you just talk to how revenue comes into Centuria from this business? Like what is the -- is it a rent? Or is it a sales commission? Or how do we think about that revenue pace?

Look, the best way to describe it is ResetData is, in essence, a cloud services provider. There are obviously other elements to that. But the easiest way to explain it is, in essence, you're selling space inside a cloud solution in -- on service. And then, in essence, they are paying -- ResetData are paying rent to the likes of a cost for 818 Bourke Street, and it's the profitability of selling that as a cloud services offering to pull the tenants both clients, let's call them clients. And then there are other elements to that around co-location offerings as well as the actual infrastructure as a direct offering rather than through a cloud services offering. So there's a kind of a 3-pronged approach to it. So for a REIT time, it will be seen as rent in space that would otherwise not be producing -- potentially not be producing rent and at a rent, which is pitched on a different basis and higher for traditional office rent. And then to -- on a corporate basis, it will be a dividend from a business. So if you look at -- that's why we've described it as OpCo -- PropCo. So if you look at private credit, for example, we first invested in private credit. It produces a product, call that the PropCo, if you like, a fund for our investors. But in terms of the OpCo, our investment in Centuria base, now you'll see the numbers shortly. It's going to be a significant component of Centuria's earnings that would not have otherwise been there. In the same way, we're that convinced that this technology will spread very quickly, and we can talk about that in a moment why we believe that. That simply spreading it through our portfolio, yes, would give our REITs an active advantage and unlisted properties. But we think that just exactly the same way as Centuria data, I think if we offer our new partners support with systems, access to our portfolios, our balance sheet where it's required, you'd look at -- it's very simple for people to see private credit bet. I think, have a book at $230 million, when we got involved here, 2.5 years ago. That's got a book of $2 billion. It's not an accident. It was strategic consideration at the time, and it's been -- there's been a question of a lot of hard work and application of the balance sheet were required. We believe and a lot of these 2 businesses are not similar in terms of technology or product they offer. Our philosophy in terms of why we would invest with them at a group level is precisely the same. That's how excited we are about the opportunity.

So from a, say, cost perspective at 818 Bourke, is it right to think that this is essentially at least over 90 square meters to get the 1.5 megawatts that you're getting at a premium rent to what you would only...

They're actually in a larger space because where Reset we will be going into, is a disused small data center that was an existing tenant's data center on-premise that they moved out of. And so they're just taking over the whole facility, which is about 600 meters. And that will be a 10-year lease over that space basically. As Jason said during his presentation, it's a 10% to 15% valuation advantage of an asset like that. We're not flooded with good news about the office market at the moment. I think we all acknowledge that. So as soon as numbers like that start coming across our desk, we start looking at it very, very closely. And then -- and when we look at how we think this technology is going to spread the PropCo side of it is interesting to the point of fascinating, but then the OpCo side becomes extremely interesting to us at a group level.

Okay. Great. And just one more quick one, if I may. Are ResetData staff taking any Centuria stock? And is there any opportunity to do fund products in this space?

The Reset team obviously [indiscernible] half the business of the Reset business. They don't have Centuria stock. And they have, obviously, as we've mentioned, is earnouts in here that is purely based on profitability of ResetData over the next 3 years. So that's what they're going to be focused on. And on the fund side, look, I think there is, I think we have quite a few of our institutional investors have raised funds for investments into the data center space. So we think if we do scale up and some of the larger opportunities that we've sort of looked at, there could be potential to probably put an institutional fund around it as well.

But probably just a good time to just talk perhaps, Marcel, perhaps can comment, one of the issues that we uncovered during due diligence was ResetData has a strong relationship with Nvidia as it has for Dell, for example, it gives warranty of their [indiscernible] OEM equipment in electric cooled environment. The traditional data centers are air cooled and what the Nvidia people told us was that when they're designing chips from now into the future, their designing chips that aren't capably cooled in an air cooled environment. Maybe Marcel [indiscernible] that point because I think that's absolutely crucial to us. We could not believe that was the case.

Yes. So what we've seen over the last 3 years is essentially doubling every year of the actual GPU or chipsets in terms of heat output. And that heat output is no longer being able to call through a traditional air cooling. Liquid Immersion Cooling is seen as the solution to that problem, but it also provides significant density, so we can build with a lot less CapEx.

Your next question comes from Ben Brayshaw with Barrenjoey.

Jason. I was wondering if you could expand a little bit more on the history of Reset. Is there anything you could also share with us in relation to track record, how long the business has been operating and how many refits has it been able to carry out to date?

Sure. Look, I'll hand over to Bass to talk about through the business [indiscernible] start in 2020. We've got 2 small facilities so far, but I'll hand over to you guys.

Yes. So we've got 2 facilities currently operational. One is at Macquarie Park, which is a 300-kilowatt center, and we've also got a real working example of an underutilized space in a commercial building at 151 Clarence Street, which currently adds capacity of 150 kilowatts. So they've both been delivered and are operational.

Okay. And are you able to just comment on typically what are the capital costs involved in putting in places technology? And what are your expectations for the life cycle of the patent equipment?

So the [indiscernible] of the plant and equipment, generally from the CapEx side of it, it's 15 years. In terms of the cost...

It really depends on the asset and what's required for it. If you look at, for example, 818 Bourke Street, there's a cost of about $13 million to $14 million to set this data center up. And that's obviously, that's infrastructure around uninterrupted power supply, generators, things like that is a big chunk of the cost.

They're a bit different, Ben, it's John, to certainly air cool centers, which use water cooling towers. And one of the issues that's really going to be on where you can build a traditional center is water consumption. This technology has no waste of water.

I'll just jump in there. The sustainability story around this is utilizing existing space and minimizing the amount of the carbon footprint or even the amount building materials that takes to create new utilizing existing space is quite significant in terms of being able to bring this technology to smaller spaces, utilize existing infrastructure and saving the cost of creating net new...

Just final question. Are there any specific characteristics that you're looking for to roll this out at the asset level can it be applied to any office building?

Yes. Look, the big thing is when it comes down to power capacity. So we've been going through the portfolio, looking at where we can -- where we have capacity or we think we can get further capacity. So in terms of -- you can put a very small gap 100-kilowatt site together with basically one hub. So it doesn't take out much space at all and doesn't need much power. If you want to go larger, up until that 1.5% to 2%, then you need that capacity. So we've gone through a big chunk of our portfolio, just working out where our focus will be for the priority locations. But 818, we'll kick it off, and then we've got sort of a list that we want to get to after that.

Yes. So Ben, I think just Slide 13 to 15 will probably answer some of your questions just in regards to some of the benefits and reasons why liquid cooling over air cooling is -- from an ESG perspective, but also from a cost perspective. I mean, we are looking at the cost to an end-user client of ResetData to be potentially up to 40% cheaper than your traditional buying a cloud computing service. And there's a few other statistical information on Page 15.

Your next question comes from Solomon Zhang with JPMorgan.

I just wanted to just double check, I guess, my understanding of the business model. Is it 2 components? So do you provide data center space for enterprises to sort of bring in their own hardware? Is there competing with [indiscernible] and also providing cloud services sort of competing with the likes of [indiscernible]?

Yes, that's right. So it's both co-location services and Infrastructure-as-a-Service, the fundamental difference here is we'll be the first co-location provider in Liquid Immersion Cooling. So it's -- excess built predominantly on air cooling.

I think the opportunity set here, Solomon, is to do it inside our offices near our tenants, particularly as AI starts to take off at the enterprise level as opposed to, let's call it, the hyperscaler conversation. Enterprises will want to be able to see that data and see the responses back in almost real time. And so [indiscernible] have that close to where your employees in an enterprise are and allow that for AI to play out with these [indiscernible] density centers. That's really the opportunity set that we -- mitigating or reducing latency significantly. So we think there are some industries that will assist on having lower latency. And this is one of the main advances because this technology will be very close to the user. And anyone -- also those users -- any of those users who are concerned about their carbon footprint, which is probably 90% of them, on any view of looking at alternative storage technology, I mean, it would be very stark in relation to where the footprint is. This is approximately half the footprint and half the cost.

Just an interesting statistic is, in liquid immersion, the server, what they basically do is you take the server that you normally bought for an air cool server. And the first thing that's actually done is -- you take out the fans out of that server to merge it into the liquid. And the outcome of that alone is a 10% saving on energy costs. There's other benefits, I'm just giving you a specific example of the first thing that actually happened in terms of saving money. And there's a number of different outcomes that come out as a result. But around the ability to cool and not having to cool as far down from room temperature rather than a cooling temperature right at the chip.

Yes. Maybe just the next question. Can you just walk us through, I guess, the current financials of the business now that have tracked over time. So any color on revenue, margins, profitability?

I think we'll -- I think at the moment where we are focused on is putting working capital into helping this business grow around sales, in particular, around building that sales opportunity with what is existing on the back of 818 Bourke Street, and we believe that there can be an exponential growth. And we think that, obviously, it's going to be accretive to earnings for FY '26, is the statement that we've made to date.

Yes. So it sort of implies maybe a multiple of 15x assuming a cost of debt of [ 6% ] for '25, would that be about right?

I'll have to come back to you on that one.

And maybe just finally, just on the order book. Any color you can provide on the size of that relative to current customers that you haven't had?

Look, the challenge with this is that most of the customers have to remain confidential. But what I can say is that we've actually got a large telco negotiation happening, a very large facility provider that we're negotiating currently as well, some government opportunity, which we will see as significantly scale as well as SME across the marketplace.

Thank you. There are no further questions at this time. I'll now hand back to Mr. McBain for closing remarks.

Thanks very much for making time to come available per se. I know it's roughly short notice but I know there's another [indiscernible] mid-day, which Tim will give you details of and I really appreciate your feedback today.