Stoneweg Europe Stapled Trust (SET) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Stoneweg Europe Stapled Trust webinar. We will begin with a presentation from the CEO of the Manager, Simon Gering, followed by a Q&A session. [Operator Instructions] Now I will hand across to the CEO of the Manager of Stoneweg Europe Stapled Trust, Simon Garing. Simon, over to you.

Thanks, Melissa, and good afternoon to everyone. Thank you very much for taking time out in your busy lunchtime break to join me this afternoon. Yesterday, we announced that SERT has entered into the acquisition of the REIT and the BT management companies of SERT as well as the European management and operating platform. This also includes the management of third-party asset management, which we'll also talk about as an exciting initiative for the group. And we think this is one of the most significant strategic steps taken in our evolution, and we're certainly building the foundation for the next phase of our growth. To bring everyone up to speed, SERT is already a large-scale European logistics platform with a predominantly logistics and light industrial portfolio, providing stable cash flows with a growing digital infrastructure strategy. As we showed in the first half results last month, we are continuing to pivot towards a 70% weight to logistics and 15% to 25% weight to data centers by converting both a handful of SERT own assets and via investing in Stone's data center development platform. Our structure is well defined. The REIT provides the recurring income and stable growing distributions and the business trust provides the flexibility to pursue these higher return opportunities such as the data center development and strategic investments. We will now discuss how we are enhancing the platform that executes the strategy and the additional benefits that today's and yesterday's transaction will bring to security holders. Investors should think about this internalization as the acquisition of a pan-European platform rather than simply the acquisition of a REIT manager. Today, security holders own a portfolio of assets but going forward, they will own both the portfolio of assets and the platform managing those assets. For details on this slide on the screen matters. The effective consideration of EUR 94 million for the manager and platform operating company. This is a 29% discount to the independent valuation. SWI Group as the seller of the company will subscribe for 40 million SERT securities at EUR 2 per security, well above the current market price of 1.50 and a slight premium to the NAV of SERT. The bottom line is that the pro forma impact of this transaction shows a 5.9% accretion to dividends, taking pro forma DPS up to $0.148. Based on the latest VWAP, this implies at today's price, a distribution yield of over 10%, which is almost 200 basis points higher than the current yield pre during this transaction. Securityholders acquire a platform at a discount to valuation while receiving immediate accretion. Slide 4 captures this fundamental change from REIT paying fees to the sponsor and manager to now earning fees. Last year's SERT's distributable income was EUR 74 million after paying Stone veg EUR 28 million in fees. Based on our estimates, under our new organization structure, this would deliver approximately a $13.3 million EBIT in the next 12 months, otherwise would accrue to Stoneberg now accrues to you as the investor in SERT. Following internalization, SERT retains this $13.3 million as its EBIT inflow, while future value creation increasingly accrues to security holders of SERT. We can also reinvest some of this into the business while growing distributions. So securityholders move from funding a platform to now owning the platform. One of our objectives in this transaction was ensuring the transaction creates value immediately. The purchase consideration nominally is EUR 114 million, but the effective consideration is $94 million on the basis that this price is the transaction at a material discount of 29% to the midpoint independent valuation of $133.2 million. So regardless of how you want to treat the EUR 20 million of value between the share price being issued at EUR 2 rather than being issued at today's price. Regardless of that, this represents approximately $39 million of value creation just by buying an asset at this material discount to its valuation. And this transaction is supported both by an independent valuer and by observable market precedents. The value of BDO has used a DCF approach, adopting a discount rate of 12.3% and a terminal growth rate of 2% based on 5 years of explicit forecast. However, what we've also shown here on the left-hand table is the valuer has adopted a number of comparable transactions shown here with a summary of the key metrics, both price to asset under management, price to earnings and price to revenue metrics. What we can show is in the first column is our purchase price is at an even more attractive multiple than the valuers' assumptions. We are effectively paying 2.9% of assets under management, a price to revenue of 2.6x and a price to EBIT of 7.1x versus the valuers assumptions on the right-hand column, which you can see through the midpoint is roughly 20% to 30% higher than the price we've paid. Now the right-hand football field shows that in the 15 or so comparable transactions, there's obviously a wide range of valuation multiples that have been applied. The orange column highlights the bandwidth that the valuer has put on our valuation of $133 million. But our consideration of $94 million is well below that of even the lowest price paid in those 15 comps. So I'm really pleased to be able to say the purchase price of this asset sits very favorably for you as the securityholder. And this is in part because SWI Group, Stoneweg, the seller of this company is going to become a 33% shareholder in SERT, up from the current 28%. And so in 1 hand, it was prepared to sell to us at a lower price than valuation in the expectation that, that should help the share price grow. And that's really where the alignment of this transaction occurs. And this is borne out on the next slide where we're showing that the EUR 2 per security that the sponsor is subscribing for the 40 million shares is well above the prevailing market price and well above the trading history of the last 1.5 years. I should also add that the shares are being locked up for 12 months and are not entitled to the second half '26 distributions when they are issued at the end of this year. So very much the SWI Group, our sponsor showing confidence in the long-term value of the platform and the benefits of this transaction to you as the securityholder of SERT. And this transaction is possible because of the work that we've completed over the recent years under Stoneweg. 5 years ago, we did not have the scale, capability or strategic positioning to undertake this transaction. Today, the platform manages approximately EUR 3.2 billion of assets with around 100 professionals across Europe and Singapore. We now have scale in logistics across our 10 countries in Europe and a business trust that provides for further data center developments in addition to the logistics. And the 3 key elements of Project Ignite, as we call this project are listed on this page. Let me take you through a little bit more detail of each of the 3 benefits. As I mentioned before, the structure of the deal is 5.9% accretive to DPS while causing no material change in NAV and net gearing. How does this happen? Well, this next slide captures the strategic and economic benefits to the stapled security holder as a result of this internalization. The table on the left-hand side shows SERT's pro forma FY '27 EBIT of this operating platform that we're acquiring at $13.7 million for the EBIT of 2027. This is well supported by the valuers pro forma EBIT of $13.3 million, which is a slightly different time scale between September this year through to September 27. But roughly, we're looking at a business that's generating earnings of between 13.3% and 13.7% depending on the time line that we're looking at. And this after transaction financing fees and after tax, this ends up with a net distributable profit of $10.1 million for next year. The chart on the right-hand side then illustrates how the projected $10.1 million distribution benefits a 5.9% accretion. In other words, the REIT continues to provide the $0.1339 with $74 million of distributable income. Investors now own both the REIT and the platform. So the REIT earned $74.3 million. The platform earns $10.1 million. So combined, you as the shareholder, you're entitled to the $84.4 million. With the extra 40 million shares on issue, now $595 million, the distributed per share goes up to $0.148. So there's no financial engineering in this $10.1 million. It's simply the earnings coming out of the company that we're buying. And that's just added to your investment in the REIT which is delivering the $74 million. So we'll take more questions post this. But I think this is a very important set of numbers to show to you that we are adding a new company to the REIT and that company is delivering stand-alone profits. Now some of those profits are coming from the REIT. So in the $74.3 million, that's including fees. So net-net, it washes out. But in total, at a consolidated line, we get to $0.148. So the profit that Stoneweg was making out of managing the REIT. That profit now goes to you. Turning to Page 10. I want to look at now the benefit going forward. So under the external management model, acquisition and management fees reduced the distributions of an acquisition to you. Following internalization, substantially more of those returns remain within SERT. And this slide highlights an example under the current model. If we were to acquire a 6% yielding property, we lose around 110 basis points of that yield from the fee structure. So future acquisitions become more valuable because we don't need to hire a new asset manager in Amsterdam or a new asset manager in Paris or pay transaction fees at the group level. We now have the opportunity to also partner with co-investors, managing their investment share of an asset, accelerating AUM, delivering further economies of scale to SERT and now providing additional potential pipeline. Overall, this transaction will see a lift in our EBIT margins, which improves our overall interest cover and our credit metrics, again, helping to support our bond market. So we might just turn to Page 13. For long-term investors, -- this may be 1 of the more important slides in the presentation and supports why this internal REIT model is adopted in most parts of the world and favored by most global investors and governance experts. Historically, securityholders owned the assets and paid fees with little oversight over the manager as the sponsor owns the manager and the sponsor owns the operating platform and earns its profits from that. Following the acquisition of the manager and of the platform, the REIT investor now owns both. So ownership, governance and economics of the management entities and the broader platform moves into the search structure. The next page shows that the company that we're acquiring has been around for 30 years, and we're showing you here the last 9 years of history. We're not acquiring a new management company. We're acquiring a platform with decades of operating history. The platform has consistently managed approximately $3 billion to $4 billion of European assets across multiple market cycles, both for the REIT's assets but also for household name private equity firms and global institutional investors. We are fortunate that the transaction comes with this innovation of the third-party asset management business. There are currently 11 mandates that are predominantly logistics and light industrial across Europe with around EUR 820 million of assets under our management in very large portfolio, we're talking 618,000 square meters across 46 assets. This complements SERT's portfolio, which is around 1.6 million square meters and around 96 assets. Now some of these mandates have value-add strategies, i.e., we're being asked to buy an asset, fix the asset and sell the asset or the client has asked us to develop a large-scale big box logistics warehouse. So this new business line provides SERT with an enhanced pipeline, recurring and other fee income streams, institutional relationships, co-investment opportunities, operating leverage, and it's a proven global business model and a stronger asset management platform supports a stronger REIT. We've also intentionally structured downside protection into this transaction, such that if some of those mandates that have change of controls do not come across to SERT then the purchase consideration that we're paying drops down considerably. So even under a very unlikely scenario that some of these third-party mandates don't come across to us, the transaction still remains DPS accretive because the purchase price has been dropped. What I wanted to say on the third-party business, it's not just about fees. It's also about ensuring that we retain best-in-class transaction teams and best-in-class development teams. What do I mean by this? So when SERT previously had wanted to go into a particular country to acquire an asset, that has come through our trough hunters in each country, our transaction team, our acquisition team in each country. Now SERT is not always buying in any 1 particular country. but we want to make sure that our dedicated teams that are in Copenhagen or in Milan or in Paris aren't just sitting there idle doing nothing for the years that it takes before SERT wants to go back into those markets. So these people are actively involved with these third-party mandates that if they find an asset that suits a particular investor's interest, then they can go forward with that acquisition even if SERT at that point is not looking to buy into a particular market. So it's a way of retaining very high-performing level staff. It's a way of motivating them by keeping the doors open with more capital supply than just SERT's supply. And I mentioned earlier about co-investments. This is something that in Singapore, you do see in some of the larger assets where there are multiple owners of a particular asset. Now if that was to occur in our case, we would be the asset manager on our share of the asset and on the other investors share of the asset. So we would control the asset with SERT only owning a part of it. And we think this is a very valuable growth prospect in addition to the current growth opportunities that SERT has. One of the common concerns around manager internalization is potentially losing the access to the sponsor capabilities. But we've deliberately addressed this issue by entering into 2 strategic cooperation agreements with Stoneweg. With almost a 33% stake in SERT, the Stoneweg group is aligned to support our value creation also, but we've documented this agreement. So in these documents, SERT receives exclusive logistics and light industrial rights across Europe with Stone bag signing a noncompete. We have preferred data center access to its development management specialist skills of their digital platform. We have set a set of controlled fee structures to be managed -- to be able to manage some of our data center projects, which will also include a finder's fee should Stoneweg bring us a new client mandate or a new off-market investment opportunities. Importantly, where no broker has been involved. So this truly has to be a finder's fee. It's not mandatory. There's no hard lock-ins for us. So we're free to deal with others as well. This is just an added comfort for you as the securityholder that Stoneweg is not just simply selling the business and moving off into the sunset. So investors will retain access to Stoneweg's capabilities while owning the platform directly and gaining complete independence. Now let me turn to the governance and some of the benefits of this structure. So our Board combines expertise across real estate, investment management, banking, governance and global capital markets while maintaining a majority of independent structure. Something that Singapore REIT investors aren't familiar with, but as part of this new structure, you as the securityholder will have the ability to vote for the reappointment of 1/3 of directors every year under the SGX listing rules. While long-term incentive remuneration matters, will also fall more into the hands of the owners of SERT, i.e., you. So you will have transparency and control of the number of shares and in long-term incentive scheme that the Board and the NRC of the Board look to put in place for the C-suite of your group. This is very novel here in Singapore for REITs and this is something that the global investors, in particular, are very familiar with. One of the strengths of the transaction is the continuity of both the SERT team and the operating platform management team. We have assembled an expanded SERT leadership team with deep experience across real estate, capital markets, private capital, operations and corporate governance to support the next phase of SERT's growth. We will continue to invest in our people and selectively strengthen capabilities where required ensuring the platform has the depth and expertise to support future growth while maintaining cost discipline. We will be an AI-enabled group to reduce the mundane and really free up time to focus on the value add. Long-term incentives are aligned through SERT securities, as I've mentioned before. We intend to broaden the participation in the LTIPs across the whole platform. giving employees a greater sense of ownership and creating a stronger sense of alignment between employee performance, platform performance and ultimately, total return to you as the securityholder. This next page highlights the technical structure of the proposal. Let's not focus on all of the boxes. It's a very tax-efficient structure and will result in transparent financial statements so you can monitor the performance across the 3 pillars. The management entities and operating platform becomes part of the overall structure owned by you, the security holder. And distributions can be made from the operating earnings of the Share Trust that owns the asset management platform as well as out of the REIT and as well as out of the BT. So economic interest, governance and platform ownership are very aligned. Now let's try and simplify this structure. Today, investors view SERT primarily as a logistics and light industrial REIT with a business trust that invest in data center development opportunities. Post internalization, we will have 3 complementary earnings engines. The first 2 on the left-hand side with the REIT producing stable and growing property income, nothing changes there. The new share trust, the asset management portfolio management platform. This generates recurring fee income and transaction-related fees and potential performance fees which supports the payment of the salaries and the operating costs within the platform. These 2 pillars provide for stable and growing income and NAV. The third pillar remains the business trust and it's emerging high returns and growth opportunities focused on digital infrastructure and data center developments that also is there as the higher growth, the alpha generation. And the underlying platform operating in the 10 European jurisdictions and Singapore provides SERT with greater strategic flexibility and increases its relevance to global investors and capital partners. So what is next? Well, the process from here is relatively straightforward. There are 4 ordinary resolutions to approve the acquisition of these management companies or the internalization issue 40 million SERT securities to Stone beg, approve the whitewash waiver to enable Stoneweg to cross that 30% barrier without having to launch a full takeover, and enter into the cooperation agreements, which are deemed related party transactions. So we require the MAS approval on this transaction still. We're working with them and to clear other customary market CPs ahead of the AGM. Following the SGX review of the circular, it is targeted to be distributed to investors in November. The EGM is slated to be held on the seventh of December, with the first completion expected by year-end, and we look to complete the full operational integration by the middle of next year. So let me conclude. Project IGNITE as we have named this transaction is more than an internalization of the REIT manager. SERT investors acquire a platform at a 29% discount to valuation, receive immediate 5.9% DPS accretion and gain ownership of the management platform with a third-party asset management business attached while retaining strategic access to logistics and data center opportunities with improved investor rights over governance, such as board appointees and remuneration matters. So we look forward to your support, and we'll take questions that you might have. Melissa, please open up the call. Thank you very much.

[Operator Instructions] Okay. Simon, there are no questions in the queue. Would you like us to wait.

We'll give it 1 more minute.

Okay. We have our first question. And [indiscernible], and I hope I pronounced your name correctly. You are our first question, if you can unmute yourself and ask your question, that would be great.

Simon, this is [indiscernible] from [indiscernible]. Congratulations on this next step. I think maybe you're setting a trend in Singapore now. Now the only question I have is that what was a trigger for you guys to do it now because you've been listed for 8, 9 years. Did something happen? Are there -- are there strategic changes in the background, which has led to this thing happening? Because I'm not sure there was a huge amount of investor pressure to do it, maybe there was. But is this part of a bigger thing that you guys are thinking about?

Yes, it's a very good question. So specifically on timing, we are coming up to a contract negotiation on the fees between the REIT and the European property manager. So if you go back to the IPO prospectus, it talked about a fixed fee structure for the first 10 years and then an opportunity to negotiate the fees at the end of the ninth year in time for the automatic renewal for the following 10 years, okay? So that was coming up. Secondly, when we were acquired by Stoneweg, we could tell that they were very much entrepreneurs themselves. We could tell they were really value-focused that they weren't employees of a larger global organization that this was their own money. It was Max and James owned $280 million that they invested in the REIT and in the management platform when they acquired that from Cromwell at the end of '24. So what we've been doing over the last few years working with them is we've been trying to maximize the opportunities. So the first thing that we did in April last year was we created the business trust. We stapled structure together that enabled the business trust to then take advantage of Stoneweg's data center development platform. And so we very quickly after that invested into Europe's largest data center development platform, Aonics. And we are looking at other opportunities to grow our data center development exposure. And I can come back to why that's an important part of our growth strategy. For that growth, we need capital. And so if we're going to maximize the opportunity to raise capital at reasonable prices that are accretive, we need to be in a structure that encourages more investors to look at us. And so an internal managed REIT is a globally recognized and preferred structure. There's nothing wrong with an external managed structure here in Singapore. I'm not saying that. I'm just saying for where we are, which is a European portfolio, that European and global investors that can see some of the exciting opportunities in our portfolio, we don't want them to book and say, "Oh, we like what you're doing, but you're an externally managed REIT, the governance is not so good, not online blah, blah. We now take that off the table. So this now means that going forward, not just in Singapore, but globally, we should be more attractive for more capital to support our opportunities that will end up driving higher dividend growth and higher valuation growth and ultimately higher share price growth. This has all come at the same time as the sponsor themselves change direction earlier on this year. So previously, our sponsor for 15 years has been a private family office with some institutional investors in it. But earlier on this year, they listed their company on the Euronext in Amsterdam. Now they listed that company at $3.75 per share. That company is now trading at EUR 12 per share. Why is that? It's because European investors are seeing the value in the data center developments. So that company in Europe, it's 2 major investments on its balance sheet is into oncs, which we have a stake in as well and its investment in us. So global investors are looking at our sponsor, pricing that at a substantial premium to where it was 6 months ago versus where we are, which is not quite in the same situation. So what the sponsor is doing is it's looking at its own investments and saying, okay, we have this really strong logistics and light industrial platform that serves SERT and it serves other mandates. Let's combine that in with SERT. Let's offer the ability to integrate the management with the REIT and deliver the accretion and deliver the earnings and allow the REIT to be very focused in logistics and light industrial. This is why we're exclusive. So the sponsor will go off and do something similar in hotels that will do something similar in living. We will do something in alternative and it'll do something in digital. So this year, it's all come together nicely as part of a longer-term strategy, but the timing we think is ideal.

Thank you, Simon. And on to our next question from Victor Co. Do you foresee more of such internalizing of the asset manager within the trust structure among listed trusts in Singapore?