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Edited Transcript of APD.AX earnings conference call or presentation 20-Feb-20 12:01am GMT

Half Year 2020 APN Property Group Ltd Earnings Call

Melbourne Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of APN Property Group Ltd earnings conference call or presentation Thursday, February 20, 2020 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph De Rango

APN Property Group Limited - CFO

* Timothy Slattery

APN Property Group Limited - CEO & Executive Director

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the APN Property Group Half Year Results Briefing. (Operator Instructions) I would now like to hand the conference over to your presenters, Mr. Tim Slattery, Chief Executive Officer; and Mr. Joseph De Rango, Chief Financial Officer. Thank you. Please go ahead.

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Timothy Slattery, APN Property Group Limited - CEO & Executive Director [2]

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Thanks, Jody. Ladies and gentlemen, welcome to APN Property Group's December 2019 Half Year Results Presentation. As many of you will know, APN is a specialist real estate investment manager. We have an income investment focus, and we generate our profit from 2 key activities: first, providing investment management services to our series of commercial property funds; and second, by co-investing our own capital into those funds, as you can see on Slide 2.

Turning to Slide 3. As you can see, APN has delivered a strong operating and financial results for the first half, with our key earnings measure being operating earnings after tax increasing 33% to $0.0203 per share.

The composition of our profit also remained strong related to recurring income at 98%. Statutory profit, which includes the mark-to-market movement on the group's co-investments, was $17.4 million, an increase of 190% over the prior corresponding period or $0.056 per share for the half, driven by a particularly active period for our 2 listed REITs. Funds under management increased by $138 million to $3.1 billion or 4.7% over the half. Note that this excludes a further $49.5 million in acquisitions, which have been contracted but not completed as of 31 December.

Net tangible assets, which is primarily comprised of cash of $15.6 million and our fund co-investments, increased 8% to $0.434 per share. APN remains in a net cash position and remains particularly well capitalized to continue to execute on its growth opportunities.

On the strength of result, the Board has declared a $0.016 per security distribution, comprising a fully franked dividend and a trust distribution. The Board has also confirmed full year guidance for a total distribution of $0.0315 per security, subject to continuation of current market conditions.

I'll now hand over to Joseph, our CFO, for his commentary on our financial results.

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Joseph De Rango, APN Property Group Limited - CFO [3]

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Thank you, Tim, and good morning, everyone. Turning to Slide 4, and the results for this half year continued to build on 6 successive years of sustained growth across the group. Recurring income growth continues to outpace the compound annual growth in funds under management, as we continue to enhance our earnings and grow our co-investment model. Over the same period, APD's security holders have seen a 22.3% per annum total return, while distributions paid have increased from $0.0125 in FY 2014 to $0.0315 distribution guidance for the financial year 2020.

Turning to Slide 5, and APN delivered a strong operating earnings growth for the half year. Fund management fees increased 5% compared to the prior corresponding period, reflecting underlying activity across the group during the period. Importantly, it only recognizes part of the fees generated from the additional assets acquired by both APN Industria REIT and APN Convenience Retail REIT during the period that are due to settle over the coming months.

Co-investment income increased 12% to $4 million in the half, comprising distributions received from our co-investment in the APN Regional Property Fund and increased distributions from ADI and AQR.

Operating earnings increased 33% to $0.0203 cents per stapled security, largely driven by a change in the tax arrangements following the stapling restructure and lower employment costs in the half.

Non-operating activities totaled $11 million, comprising $4.1 million gain in APN's co-investments in ADI and AQR and the reversal of deferred tax liabilities as part of the stapling restructure. This was offset by $500,000 of business development costs, including stapling implementation expenses. And importantly, excluded from business development costs are $400,000 in new product development related costs that have been included in our operating earnings.

Moving to the following slide, and the group is well capitalized and positioned for future growth with a strong balance sheet, minimal debt and a healthy available cash position. Net tangible assets increased 10% to $138 million or $0.434 per stapled security as at 31 December. This was predominantly due to the reversal of the deferred tax liabilities as part of the stapling restructure. In line with our co-investment model, we continue to maintain material stakes primarily in our listed funds. It's important to note, though, that subsequent to 31 December, ADI and AQR share prices have increased 9% and 15%, respectively, as a result of the continuing strong demand in income-focused investment products.

I'll now hand over to Tim to run through the operational highlights across the group.

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Timothy Slattery, APN Property Group Limited - CEO & Executive Director [4]

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Thanks, Joseph. So turning to Slide 7. Our real estate securities division continues to be our largest division by funds under management. Our securities FUM closed the year at $1.67 billion, which follows the decline in the listed property market in December, which has since reversed.

The APN AREIT Fund delivered a 15.5% total return for calendar 2019 and continues to consistently beat its sector distribution yield benchmark. The fund remains well positioned delivering a running annual cash distribution of 5.9%, which is paid to investors monthly and with the fund having a significant lower risk portfolio, very strong towards rental income.

As a result of the Hayne Royal Commission impact on some of the distribution channels, we did see net flows for the period soften at negative $25 million. This was offset by $11 million in positive market movements. And we expect the impact on those channels to moderate over the course of the year as the industry dislocation reduces and adviser groups find new platforms.

On Slide 8, we saw continuing strong fund performance and inflows into the APN Asian REIT Fund, which delivered FUM growth of 30% over the period since June 2019 for the balance date and finished the calendar year with a total return performance of 23.8%.

Given recent political unrest in Hong Kong and the greater region's recent challenge as a result of the coronavirus, we're pleased to report the fund have continued to deliver strong investment performance with a 3-month returns to 31 January 2020, delivering 13% on an annualized basis. This highlights, in our view, the value of our income-focused investment approach and focus on lower risk rental income streams.

Turning to Slide 9. The half was a very active period for APN's listed funds. APN Industria REIT, our $848 million industrial and business park fund, completed $57 million of acquisitions and raised $47 million in new equity. It's exceptionally well supported by new and existing retail and institutional investors. Industria delivered earnings growth of 8.5% over the prior corresponding period and delivered over 7,000 square meters of leasing transactions. This reflects both the attractiveness of the portfolio to prospective tenants as well as the efforts of APN's management team in driving this underlying results, which are really the backbone of Industria's success to date.

On the following slide, you can see that Industria has continue to achieve its portfolio management and growth objectives. The chart highlighting the amount of leasing, which has been delivered over the past 2 years as well as the target acquisition strategy, which has delivered significant value for Industria security holders.

With gearing below 30% and excellent investor support, Industria remains very well positioned, in our view, to continue to grow from this point.

On Slide 11, APN Convenience Retail REIT reported earnings growth in its key measure, funds from operations, up 6.8% over the prior period. And has exchange contracts for $78 million of new acquisitions in the period, which $49.5 million is not yet included in the fund figures. Convenience Retail also delivered a $0.17 or 5.7% increase in its net tangible asset backing per security to $3.13, which had a weighted average cap rate of 6.9% for its portfolio value and that continues to compare favorably to other recent market comparables.

On Slide 12, you can see over the past few years, Convenience Retail REIT has selectively grown its portfolio, announcing over $100 million of new acquisitions. Recent market activity, including BP's property sale, Caltex's M&A activity and global oil major Chevron's announced acquisition of Puma Energy Australia, which is AQR's largest tenant at approximately 60% of net income, highlights the value of the retail trading sites which comprise APN Convenience Retail REIT's portfolio.

Turning to Slide 13. APN's direct unlisted property team has completed a successful half year with an equity IRR of 17.7% per annum being delivered to investors in the APN Steller Development Fund.

In addition, very good progress has been made on the leasing initiatives for the APN Regional Property Fund and continued strong income performance has been delivered in our APN Nowra Property Fund, which is currently delivering an annualized cash yield of 8% per annum with the remaining lease term of over 10 years guaranteed by Woolworths Limited. We continue to see strong investor demand for quality commercial property investments, and we are actively looking for new acquisition opportunities to enable the launch of new funds in this [project].

On Slide 14, taking stock of APN's direct property funds from a high-level perspective for the group's overall positioning. We believe our portfolio is very well positioned in key sectors being office, industrial and long lease to convenience retail, which continue to offer attractive fundamentals. This chart also highlights the value and the challenges in establishing a high-quality commercial real estate portfolio at scale, and you can see the key metrics on the right hand slide. This is a portfolio that's particularly difficult to replicate in the current environment.

Slide 15 summarize our efforts to secure additional investment opportunities. And importantly, we have not altered our acquisition criteria risk approach. We continue to be highly selective on acquisitions with high levels of activity being required to identify and secure additional property acquisitions, which have been successful over the period.

In Slide 16, in terms of the corporate side of the business. As Joseph mentioned, we successfully completed the group's reorganization to adopt a stapled security structure in December 2019, which we believe will enhance APN's ability to compete for capital and growth opportunities. The slide provides an overview of the change in structure. And for investors seeking further information, we will shortly publish a tax guide on our website, which will contain further information.

On Slide 17, looking ahead, we remain very optimistic on APN's future. We have a well-established and difficult-to-replicate platform, which is fully independent and has an excellent governance structure, which enables us to compete for a wide range of capital. Our product set delivering reliable and growing cash income streams from high-quality commercial real estate portfolios is well positioned in the current interest rate environment, and we have successfully diversified the group's earnings across a range of asset classes and fund and investor types.

Our balance sheet is in very good shape in a net cash position, and we have excellent momentum in light of growth capacity in our 2 listed REITs with gearing below 30%. We're actively looking at launching new funds in our securities and direct property divisions over the course of calendar year 2020.

On Slide 18, we have reaffirmed our guidance for the full year for distributions of $0.0315 per security, subject to continuation of current market conditions.

And on Slide 19, we've again included, at the request of a number of investors, a breakdown of APN's net tangible asset backing relative to our December 2019 closing share price.

On Slide 20, I'd like to close by commenting on the start the business has made in calendar 2020. We've seen a particularly strong start to the year with our security division growing by nearly $70 million and strong trading performance from both of our listed REITs.

Including acquisitions yet to be complete and the January funds under management balance from our securities funds, our pro forma funds under management stands at $3.18 billion or approximately 9% higher than June 2019.

I believe this illustrates the positioning of the business and its future growth potential over the course of calendar year 2020 as we take our momentum into the rest of the year. Thank you for your continuing support and your time this morning listening to our results presentation. I'll now hand back to the operator to take any questions.

Thank you.

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Operator [5]

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(Operator Instructions) We're not showing any questions at this stage.

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Timothy Slattery, APN Property Group Limited - CEO & Executive Director [6]

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Thanks, everyone. If there are no questions, we will conclude the call there. We remain available if you wish to contact us directly with any queries. Thank you.

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Operator [7]

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Thank you very much. That does conclude the conference for today. Thank you all for participating. You may now disconnect your lines.