Primewest Group Limited (CNI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the second webinar for 2021 from Primewest. My name is John Bond, and I'm the Executive Chairman of Primewest.

And I'm David Schwartz, and I'm the Managing Director.

So this morning, we wanted to cover 2 areas. First of all, the merger, which was announced yesterday with Centuria. We'd like to give you some background on the rationale behind that and why we think it's a good thing for our investors. And then secondly, we'll give you an update on where we see the property markets around Australia and the various sectors and the areas that we think are going to be good investing going forward. So I'll start off by giving you a very brief background to Centuria. It's a company not dissimilar to us. They do similar types of investing to us except they're bigger. So they have $10 billion of assets under management. And they focus largely in office and industrial space. So they have 2 listed trusts, an office trust, which is worth about $2 billion and an industrial trust of about the same value. But interestingly, they're also do private syndicates, very much the same as we do. And their assets are spread across those classes and also, interestingly, in health care, which is an area we're not currently in. And I'll pass over to David to just to give you some of the rationale for why we think this is a good idea for our investors.

So one of the things that we looked at when we looked at the possibility are putting the 2 businesses together. And the first thing we looked at was the culture. The question we asked ourselves is the culture the same. And one thing that we've always done, we've always had the philosophy of putting investors first. And Centuria must certainly have done this in the past. Their philosophy is very much the same as ours. They are entrepreneurial. They always look for good deals for the investors. And like I said, they have put investors first. So the beauty going forward is that we're going to be able to offer our investors, like John said, the opportunity to invest in health care. What we read to them is we bring the retail experience, the large-format experience, and now with our new push and driving agriculture, we're going to be able to bring that to their investors. But with the size and scale of this business, will now be a total of $15.5 billion of funds under management. And that brings with it the opportunity to, again, look at things like insurance costs, the costs of banking and provide these benefits to our underlying tenants, which, of course, then means a benefit to our investors in the underlying in the trust that they've invested in. From the Primewest point of view, our team is going to be exactly the same, everything, nothing changes from your investment point of view. Nothing changes from the management point of view. John, Jim and I will remain on with the business. We will remain on and as the trustees in the business. But the beauty of the size and scale is that we'll be able to present new opportunities. There's also things and benefits that they have, where they have what is known as the Quantum Club, where we will be able to invite our investors to enjoy the many benefits that are offered to the membership relating to the Quantum Club. John, just -- I don't know if you want to give them a bit of background as to what's going to now happen with the bid process.

Yes, absolutely. So the bid was announced yesterday. And essentially, it comprises $1.51 per Primewest share. And that's made up of $0.20, which will be received in cash. And the balance of $1.31 will be received in Centuria shares. And so from here, there'll be -- there's a period of 2 or 3 weeks where takeover documents have to be prepared. There'll also be an independent experts report prepared by Deloitte to establish that this is in the best interest as Primewest shareholders. And when those documents are completed, they'll be put together in a package and sent to all shareholders. You'll then have a period of time to consider the offer and make your decision. And I must say that we had a lot of investor briefings yesterday with institutional investors, many of them happen to be in both Centuria and Primewest because we're in a similar asset class as properly fund managers. And I have to say that was well received, and the large institutional investors seem to see the merits of the merger. So there'll be plenty of time to consider the transaction. And David and I are certainly available to talk to anyone individually has any questions about that. So it will be a process that will run probably until about the end of June. We'd hope it to be wrapped up around about that time. And so one of the great things about the merger is scale of it, means that the combined entity should enter the ASX 200. That means it's one of the largest 200 companies in Australia. And with that comes the need for large institutional investors to buy shares. And what we've traditionally seen when that happens to other companies is the share price rises as those large institutions have to buy shares. So not only do we think their underlying business is good, as good as ours, but we think that's a drive for institutions to acquire shares. We'll see really good share appreciation in the combined entity over the fourth coming period. And certainly, we're all very happy to have our shares locked up, and we have no intention of selling them. So the other thing just to mention is the tax. Once we get to 80% takeover, the shares that you receive in Centuria won't carry any tax further. So you will only pay tax on the $0.20 that you receive in cash. And you'll get what's called rollover relief. So your Primewest shares will be converted into Centuria shares, and there'll be no tax payable on that transaction. So it's quite tax effective in that sense. So that's all we'll say for the moment on that transaction. And perhaps I might hand over to David to just give you a general view -- overview on the various sectors of the property market that we're interested in to that.

Thanks, John, and I think the investors are probably more interested in this part of it. Well, while we're still very bullish on most of the property sectors and we'll go through all them individually. But just our general view of where interest rates are while we still in a very low interest rate environment. Interest rates are starting to trend up a little bit. It was only in December that we look to the portfolio. We looked at all our debts. And we've taken out swaps for about 50% of our total debt, which is about $930 million that we've covered forward for 5 years. That means that what we've done for our investors, we've locked in a portion of the debt in all the underlying investments where we've locked it in for 5 years and only paying 0.4% plus, of course, the bank margin. But that means we're locked in. And even if the interest rates start rising, we're pretty much protected for the majority of the test. We do see interest rates starting to pick up over the next 5 years, albeit not dramatically, it will be small increases. But the turning point, I think, was probably December where we decided to do those swaps, where we think that interest rates are going to start moving, albeit very, very slowly.

And fortuitously, David, we managed to lock those in at about 0.4% of the margin. That margin is now closer to 1%. So there's a very significant savings already achieved for investors in that move.

Correct. But we do also see the inflation is going to pick up. And when inflation tends to go up, interest rates go up. So that was one of the [indiscernible] things for us to lock it in. And also, what we're starting to do now in all new leases, we're making sure that our investors are going to be protected and make sure that the -- whilst we do have this inflation increase coming through that our rentals then pick up at more or less the same pace. And in that point, we do give the investors the protection in case there is any sort of increase in interest rates. And it's with that, what we'll do now is just talk about each sector. Maybe, John, you want to talk about maybe centers and someone.

Sure. So we call these Daily Needs centers, convenience centers. And as many of you will know, we've been in this sector for a very long time. In fact, the first asset we ever acquired was the [indiscernible] shopping center. And the model is really very simple. We wanted to be anchored by Coles or Woolworths. And often these days, it also has an Aldi. And the reason we like that clearly is because they're very, very substantial covenants who can always pay the rent. And with set sought to limit the number of specialty shops that goes with them sort of 8 to 12 shops and in the service area. So we've avoided faction. And I think that's been proven to be the right strategy through COVID. The majors Coles and Woolworths performed extremely well, and we're achieving turnover it from them. And that's helped to support the smaller mom and dad operators, who are often associated with those assets.

So John, also when you do get that turnover, profit from Coles and Woolworths, the beauty of that is that also gives you a bit of a hedge with the inflation. So as inflation ticks up, their turnover ticks up, and we get that natural protection for our investors.

Yes. And so look, we really like that asset class. We always have, and we still do, and we're still interested in acquiring further assets in that space. It's important that we do our research. So we always use demographers when we're looking at a new asset to see what the population will be to support it, particularly going forward. So there's a lot of fundamental research that goes into acquiring these assets. And we're excited about the opportunity to buy more of them as they are available.

What we've also done is on the large format, you would have seen it would have been this last half for [indiscernible], which has just come through. The large-format sector, we think, is going to still perform particularly well. With all the stimulus that the government have put out into new housing and for the first home buyers, that takes a bit of time. As the housing starts building up, we'll find that the spending for all the new appliances will start happening. It benefits all the large-format centers. And it's an area that we think that there's also still a bit of growth still to come. And they've performed particularly well over the last couple of years and over COVID. We look at those that you've got a large piece of land, Maine and Maine, and the worst case...

And there's always -- the covenants in those centers are very good. There's only 30 or 40 national retailers.

Yes.

They're all well-known to us through our 25-year history. And they're substantial entities. So you're not at risk of having insecure tenants. And so they know the business well. And again, we really like that sector. We might just...

Yes, look, the office market is the one that's really -- it's the one that's...

Topical.

Topical and tricky because you've got this work from home. And you get different opinions. We think that it's going to be short live. But -- John.

Yes. Look, David and I have spoken a fair bit about this because it's a subject that comes up a lot with our investors, what's the future for offices. What we think the future for offices is still strong. Clearly, there's going to be more capacity within employers for their staff to work from home, but not full time. We think staff want to be in the office, and we think employers want them to be in the office. And I think our office is a perfect example. We came back very early from COVID. And we know that our business runs much, much better, we're interactive. Everyone's sharing ideas. Everyone knows what's going on.

But also building a culture.

It is.

And if you want to build a culture, you're going to do it with people who are around you. And I think what is going to happen, yes, some people do like to work from home. But what you'll find is that when somebody wants to get a promotion, if you're not seen, you aren't going to get it. And what people will find a minute is a bit of a downturn, the first person to be laid off is the guy that they don't see every day. So we think that, that's going to be short-lived. It is going to -- people will go back to the office. It's not going to be 100% like it was before. But I don't think it stands what some people are predicting, but there's still going to be opportunities.

And so the large majority of our assets -- office assets are actually in Perth. And I think we're fortunate in that regard because Sydney and Melbourne, there's some difficulty in the office space. So there's a lot of building done in those areas, and rents got quite high. In WA, as most of you would know, the economy is in good shape. There's a lot of growth going on with mining companies, in particular, and all the service companies that support those mining companies are now starting to look to take more space. So particularly in Perth, we're quietly confident that our office assets will continue to perform and do better probably than assets in Sydney and Melbourne. So we're fortunate to have those assets located here at the time. We might just then move on to Industrial.

Industrial has been pretty strong. probably is being able to buy. Our sweet spot really in the industrial market, and what we've done over the past is really paid in that $10 million to $30 million range. Anything above that, the institutions tend to be bidding these things down to like 3% or 4%, and none of our investors are happy with 3% or 4%.

No.

So we're being more the bigger ones. And some of the smaller ones. That's our sweet spot. That's where we can get good returns and have been and putting them into trust. You're not solely reliant on to 1 tenant, which is often the case and there's industrial properties. But as there's been the shift to more online shopping, that industrial space is getting used more and more, that will shop setting up little guys, wanting to set out of the warehouse, that's been a big driver for housing. But it seem as a very stable area to invest in. We're still going to be pushing very hard, trying to find good opportunities and may even be building some of these opportunities out because as the market picks up and as the shortage occurs, there are going to be opportunities, I think, for development and give our good returns.

I think that's one of the things I did mention, which is also a positive for our neighborhood centers. Coles and Woolworths, in many of our centers are now using them as distribution points for their online shopping. And we get share of the revenue, the turnover from that business as well as customers coming in store. So the online shopping in one sense has been good for us in terms of the neighborhood centers, not the thing just with the industrial. For the industrial assets that we've accumulated over the last few years, the compression in yields, the buy prices now for those assets is very strong. So I think we've done really well with the acquisitions that we've made in the past.

Yes. The other growth area and the other area that we think is a good opportunity is in the agricultural sector. Agricultural sector has been able to give us some good returns. And some people have misread it that what we're doing in the agriculture side of things is that what we're doing is we're buying farms with is a tenant. And we're not taking on the direct agricultural risk. And with these farms, we're looking at them where they need to have quarters, they need to have dependable income. And so that from an investor point of view, they have covered the risk. But the kind of properties we're buying are ones where it's fruit production, it's intensive farming, and we go and analyze the tenant and we say can the tenant pay the rent, that's the number one thing that we look at. Is it dependable earnings. Does he have water. Do we eliminate the majority of the agricultural risks. And then we'll look at the covenant and how good the tenant is. And what we've been able to do is to accumulate and to put together into this 1 trust some really, really good properties. We've got, for example, [ Amantina ], which produces about 55% of all the salary that gets consumed in Australia. Again, that property is -- has got fantastic, dependable thing.

They are high-tech enterprises.

They are high-tech enterprises, their sophisticated farmers, but that particular farm has got 3 sources of water. It's in a climate that for the last [ 10 ] years has produced a regular crop every single year. And those are the kind of properties we're looking at. And that particular one, even if it's on the Mornington Peninsula, it's got 27 type of. Even if they stop filing tomorrow, we get more -- probably more for the farm has serving the land.

It's interesting. The valuation on that one was purely based on the underlying land value and no recognition of the business. So I think that was a very good acquisition.

Well, the other one that we've got is the -- is find and get, that 1 leased out to [ Kagami ]. [ Kagami ] is a $2 billion Japanese operation. So we don't have the agricultural risk. The tenant pays us regards. And the beauty with these is that there are normally 10-year leases, triple net, no cost from our point of view, and so you're getting a pure return. Into that trust, we've now acquired Rolf Binder Wines, the Vineyards that sits alongside it.

Right in the middle of [indiscernible].

It's a very well-known brand. And not only that has been -- it's operated and the tenant is now Accolade Wines, which is a pretty substantial operation. Again, we're not taking on the agricultural risks, we're not taking on whether there's ground or not. In that particular instance, that property has got mostly done. So it's pretty much draft proof. We've then also bought [indiscernible] Orchards, and that 1 does plumbs, that plumbs that have got high [ antioxidant]. They get a premium in the supermarket. Again, got its on water, well-established brands developed farm, producing good income at a good tenant. This scenery, which is -- that produces table grade leased out to [indiscernible] business that have been gained for 80 years, pretty substantial tenant. And we're now looking at -- we haven't finalized them yet, but we're pretty comfortable that it is...

The backlog. Yes.

The backlog. Fabulous asset. And what we've seen and the reports that we've got will be absolutely fantastic. Again, it's got its own water. It's leased out to a fantastic tenant. And with all of these together in the current trust, we're able to pay and will be paying our investors a return -- cash-on-cash return of 7.25%. But what I didn't mention, John, we were looking at the statistics the other day, Australian farm man has grown compoundedly by 7% per annum for the last 20 years. Now I'm not saying that, that's going to continue to happen. And there's no reason why I shouldn't. But even if we get 3% or 4% in capital growth...

On top of the income.

On top of the [ 704 ], you're getting nearly 10%, 12% return, and that's pretty healthy. And not only that -- your risk is now spread over 5 different properties. I wouldn't say totally risk-free, but it's as good as you get, and they're just fabulous properties.

Yes. And so you can get the impression that we're quite excited about the agricultural space. One of the reasons is that it's not as competitive as some of the other spaces, as David mentioned, industrial is very, very hard to buy on decent yields. And we've picked up a very, very good guy who looks after our agricultural assets has just done a slide by a drone little video, which will be sending to you for the [indiscernible] acquisition. And it really is a great way to see these properties. And as I mentioned, they're very high-tech these days. It's not harming, as you might have imagined to 20 or 30 years ago. They're very sophisticated, and they do a lot to reduce the risks involved in the business these days.

Yes. So that's an high end, that's open that if you wanted to discuss with any of us, feel free to give either John or myself a call or Larry, most of you would know Larry before for that matter. But that's an opportunity that is open at the moment. And like I say, I think, really safe and good returns.

Yes. It's a vast asset class. So look, we might leave the presentation there. And so just to wrap up, once again, to confirm that the David, Jim and I, all of the team in the Perth office will remain in place, very committed to our business. We're very conscious of the goodwill that comes from our underlying investors view our underlying investors, and we can give you our assurance that nothing will change here. And the best thing will happen is you'll get more opportunities alongside the ones that we currently offer. So from my point of view, thank you very much for your support in these last many, many years, and we look forward to a strong future going forward as well.

Yes. Again, thank you for the support. And I would like you say to many more years together.

Yes. We'll keep you updated as we go, and thanks very much.

Thank you.