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Edited Transcript of APD.AX earnings conference call or presentation 22-Aug-19 1:00am GMT

Full Year 2019 APN Property Group Ltd Earnings Call

Melbourne Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of APN Property Group Ltd earnings conference call or presentation Thursday, August 22, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Groth

APN Property Group Limited - Executive Officer

* Timothy Slattery

APN Property Group Limited - CEO, MD & 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 Limited FY 2019 Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Tim Slattery, Chief Executive Officer. Please go ahead.

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

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Thanks very much. Welcome to APN Property Group's 2019 Results Call. I have you here with me Michael Groth, our current Chief Financial Officer; and Mr. Joseph De Rango, our incoming Chief Financial Officer.

So look, just to start off, our team has delivered another year of strong results. Our statutory net profit after tax was $14.5 million for the year, which is a 7% increase over 2018 and represents $0.0467 per share, and our key profitability -- key management profitability measure, which is operating earnings after tax, was up 12% for the year to $9.2 million. Importantly, looking at the composition and the quality of the results, over 99% of our income for the year was generated from recurring sources.

Funds under management was up $127 million of the year to $2.9 billion. And on the strength of the results as well as the outlook, the Board has determined to increase our final dividend for the year by 50% to $0.015 per share, which will be partially franked, which takes our full year dividend to $0.0275 per share, which is a 22% increase over 2018. APN's balance sheet remains in excellent shape with $15.7 million of cash and net tangible assets per share of $0.402 per share, an increase of 7% over FY 2018.

So moving to Slide 3. 2019 has been an active year right across the business with our securities funds to start within the APN AREIT Fund, marking its 10th anniversary of its operation, and it's now delivered at 14% per annum since its inception with continued strong income-based investment performance. And pleasingly, the APN Asian REIT Fund has seen strong net inflows over the course of the year to $45 million at balance date and delivering 15.5% per annum since inception.

In our listed funds, Industria, which is our listed office in Industria REIT, delivered strong operating earnings growth at 3.8% for the year, which reflects over 50 individual leasing transactions and 13,700 square meters of space for 87% tenant retention. Industria also successfully acquired $65 million worth of Victoria industrial assets and a very well supported equity-raising transaction and associated debt refinancing.

Convenience Retail REIT delivered strong earnings growth of 6.4% over 2018 annualized as well as NTA per security growth to $2.96 per security, which is an increase of over 8% since it listed in 2017, and the fund continues to be well positioned.

In our Direct Property division, we remain active but also disciplined and value focused, and we completed $78 million of new property syndication transactions, including the $24 million APN Nowra fund syndication and the $54 million recapitalization of the APN Regional Property Fund and associated equity raising.

So I'll now pass over to Michael for some remarks on our financial results.

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Michael Groth, APN Property Group Limited - Executive Officer [3]

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Thanks, Tim, and good morning to all.

It's worth taking a moment to reflect on the performance of APN over the past 6 years and the returns to the shareholders through some of the key metrics we measure ourselves on, as set out on Slide 4.

Recurring income has grown from $12.2 million in FY '14 to $26.2 million for the year ended 30 June 2019, a compound annual growth rate of 16.6%. This has outpaced the compound growth in our funds under management of 11.5% per annum as we have been able to unlock the ancillary funds and property management revenue streams and have grown our co-investment business model. Over the same period of time, shareholders have seen their initial investment grow over threefold, while dividends paid have increased $0.015 per share to $0.0275.

Turning our attention to Slide 5 and APN's FY '19 results. Operating earnings per share increased 12% for the year to $0.0294 per share. This is a strong result on the current environment and is off the back of continued growth in net income and tight operating cost control, reflecting how we have been able to use our existing management platform and cost structure to deliver additional revenue for the growth -- group efficiently, effectively achieving an incrementally higher profit contribution for each additional dollar of revenue received by unlocking the inherent scale benefits available to specialist fund managers.

On the revenue front, net funds management income grew 4% over the period, reflecting higher average fund across our platform following recent property acquisitions by APN Industria REIT and APN Convenience Retail REIT, in particular. Co-investment income grew $8 million as the group -- or grew to $8 million as the group invested further capital in APN Industria REIT and received a $1 million profit distribution from its co-investment in the APN Steller Development Fund. Operating costs decreased $0.3 million to $13.8 million for the year primarily due to lower share-based incentive scheme costs and tight cost control across other expenditure items.

Moving to Slide 6. 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 7% to $126.1 million or $0.402 per share, following favorable mark-to-market valuation gains on our co-investment stakes primarily in respect to our listed co-investments. We have continued to successfully execute our balance sheet recycling strategy, actively deploying and then releasing capital to support the growth of our fund management activities.

Current year was notable for the syndication of APN's Woolworths HCG South Nowra Property as our new unlisted property fund, with proceeds realized we recycled to support the recapitalization of the APN Regional Property Fund, extending the term of this fund for a further 5 years. Good progress in selling down our co-investment in this fund continues with a further $1.7 million of cash released subsequent to year-end.

I'll now hand back to Tim to run through the operational highlights of the group.

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

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Thanks, Michael. So turning to Slide 7 and a few brief comments on each of our operating divisions. In our securities funds, we continue to deliver on our proposition for investors of delivering lower commercial -- lower-risk commercial property incomes insurance with consistency.

Our largest fund, the APN AREIT Fund, currently has a distribution yield of nearly 400 basis points above the cash rates and offers investors monthly income payments. We now have a 20-plus track record in this space. And over the course of the year, we successfully transitioned the leadership team to Pete Morrissey, returning strong independent research ratings across the funds in this part of the business.

Our funds under management for the year increased to $1.684 billion, as you can see on the bottom right hand panel, reflecting $65 million of positive market movements, offset by net fund outflows of $53 million, which we attribute to some challenges in the distribution channels associated with the Hayne Banking Royal Commission impact as well as some profit taking as a result of strong AREIT market total return performance over the course of the year.

On Slide 8, as of today, and publicly-reported information, I'm pleased to advise that the APN Asian REIT Fund now exceeds $50 million in funds under management, which reflects a very strong year of performance, delivering a 28.9% return for the FY 2009 financial year and 15.5% return since inception in 2011. We continue to see the Asian REIT Fund as well positioned offering investors a relatively high distribution yield as well as access to the growth markets of Asia, that's by a high-quality commercial property portfolio.

Turning to Slide 9. Our ASX-listed industrial and office REIT, Industria REIT, reported its results yesterday, including an excellent set of leasing outcomes and earnings results, which has been driven by a highly active management approach across the portfolio. Its earnings or funds from operation includes 3.8% to $0.192 per security, and Industria successfully acquired $65 million of Victoria industrial assets over the period, with a very well supported equity raising of $50 million.

You can see, with gearing at 30% and a weighted average lease expiry in excess of 6 years and industrial remains well positioned for further growth. You can see from the bottom right-hand panel on the slide, that illustrates Industria's growth profile over the last 5 years. And you can see that Industria, in its current trajectory, remains well on track to be a $1 billion fund with its market capitalization in excess of $500 million and as a member of the ASX 300 index now.

APN Convenience Retail REIT, on Slide 10, has delivered a strong earnings growth of 6.4% over 2018 annualized as well as net tangible assets per security growth of $0.09 per security to $2.96. The fund has acquired a $7.3 million acted in the period on a 6.75% cap rate with a 15-year lease and remains well positioned for growth.

We continue to be pleased with the Convenience Retail REIT's cost of capital and its strong security price performance on the ASX, and we think that the fund remains well positioned with a 100% occupancy, a cash distribution yield of 6.5% with continuing growth, a weighted average lease expiry of 11.7 years and gearing in the low 30s.

In our Direct Property division on Slide 11, our clear achievements for the year included the successful completion of the APN Steller Development Fund, which has delivered investors an equity IRR in excess of 17%. The successful syndication of the $24.2 million APN Nowra Fund, which offers investor a 12-year weighted average lease expiry and a forecast FY '20 distribution yield of 8% as well as the 5-year extension and recapitalization of the $54 million APN Regional Property Fund.

On Slide 12, we have sought to outline our overall direct real estate fund investments. And there's just a couple of comments to make here. The first one is in terms of inspector allocation, you can see that our -- overwhelmingly, the portfolio is positioned without exposure to discretionary retail expenditure. So we have the overwhelming majority of the portfolio in office, industrial and convenience retail.

The second point is that the metrics, $1.2 billion worth of property at a weighted average cap rate of 6.7%, a weighted average lease expiry of just under 8 years and 98% occupancy. So we continue to believe that our real estate holdings are well positioned both from an ongoing invest income-generation perspective, but also as far as the risk profile.

On the following slide, we have outlined our investment origination activities for the year, and we continue to be active in the search for new opportunities to deliver our client base strong risk-adjusted returns. We've looked at over $2 billion worth of individual property acquisition opportunities and transacted on $151 million worth of real estate in the period. So we continue to believe that commercial property remains well placed, and we continue to believe that we will be able to execute on these growth opportunities.

I'll now pass back to Michael for some comments on our stapling proposal and the balance sheet composition.

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Michael Groth, APN Property Group Limited - Executive Officer [5]

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Thanks, Tim. So turning to the stapling proposal on Slide 14. Further to the 17th of May 2009 -- 2019 update provided to shareholders. APN is continuing to progress this restructure as the previous shareholder approvals to implement the proposal have now lapsed. Documents are being prepared to seek renewed shareholder approval for this transaction.

It's worth noting that the rationale for this proposal and its potential benefits remain unchanged. It brings the group's capital structure in line with its listed peers, offering the potential for an improvement in our cost of capital and that will allow the group to further grow its funds under management and its profitability. We will continue to keep the market informed of the progress.

Turning the page. On this slide, we've outlined for shareholders one way that is commonly used to assess the value of our business and funds management platform. What this shows is that taking into account the net tangible assets of the group with $0.402 per share and APN's 30 June 2019 market price of $0.50, the market-implied value of our $2.9 billion funds management platform is $30.8 million, representing just 1.05% of funds under management. On that note, I'll hand back to Tim to run through the outlook and guidance for FY '20.

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

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Thanks, Michael. Now look, fundamentally, in terms of the market, with a cash rate at 1% and the Australian Commonwealth Government 10-year bond yield at less than 1%, we continue to believe that commercial property as a source of reliable cash income insurance for investors is ideally positioned.

APN now is at $2.9 billion commercial real estate investment management platform. We have a very solid earnings base across 4 divisions with our listed and unlisted commercial property funds. We believe the real estate we own is well positioned and our funds are well capitalized for further growth. And the balance sheet of assets and management company is in excellent shape, with $15.7 million of cash, and we have strong alignment both with our shareholders and also with our investors with over $120 million of investments in our funds.

So we see that we are well placed to deliver bigger, sustainable growth.

On Slide 17, finally, in terms of our dividend and our guidance, the Board, over the course of the year, has reviewed market practice and also Canada's shareholders' views on what would be most helpful going forward for investors. As a result of that, we have concluded to move to provide dividend guidance exclusively moving forward.

With this, we have confirmed that our full year dividend will be $0.0275 per share, which will be partly franked, and the Board has also determined to provide a statement that I believe that the dividend is sustainable at this level moving forward, subject to a continuation of current market conditions.

Thank you all. At the end of this presentation, we believe the company remains very well positioned to grow moving forward. And I just wanted to close with a final note of thanks to Michael Groth, our Chief Financial Officer, who will be departing the business between now and the end of calendar year 2019. Michael has been with us for 13 years, isn't? A number of shareholders will appreciate and has been a significant contributor to the growth and the success of the business to this point.

So I just wanted to thank Michael for his contribution and wish him well for the future. That now brings to a close the formal part of our presentation, and I'll now hand back to the operator for any questions that you may have for us. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from [Hamish Burns].

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Unidentified Analyst, [2]

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Firstly, congratulations on another fine result. If I could just ask, firstly, within the recent securities, it's been a strong year for the Asian REITs, sort of now at $50 million, as I think Tim commented. Would it be fair to say that it's kind of reached the size that you're getting inquiries from institutional investors?

And I guess a secondary question is, does the -- does the Asian REIT track the growth trajectory that the APN AREIT took at a sort of similar stage in its life cycle?

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Timothy Slattery, APN Property Group Limited - CEO, MD & Executive Director [3]

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Yes. Thanks, [Hamish]. Look, I definitely think that, yes, there has been so many inquiries from institutional investors on our Asian real estate tax security strategy. Where there are couple of reasons for that, I think the first one is that the addressable universe of investments in the Asian listed property space is much larger than the AREIT sector. So larger number of markets, larger number of asset classes. It's roughly 3x the size of the market cap as the AREIT Index. So yes, I said, I think it's on the investor's radar. And I think also people are attracted to the growth profile that the Asian markets provide moving forward as long-term investors.

In terms of the growth profile and the trajectory, we would have seen a steeper trajectory earlier on with the AREIT Fund. And I think a couple of the reasons for that is that -- I mean the wrong way. I think investors view the Asian real estate securities fund as more of a -- I guess a niche or a specific opportunity, doesn't probably fit as neatly into an allocation for domestic real estate and international real estate. And it's also taken us some time to win the necessary research ratings that we're now well on track to go. And that's the significant driver of inflows through our distribution channels that require independent research to have the fund available and wraps, platforms and those sorts of channels. So we're certainly optimistic about the trajectory of the Asian REIT Fund though. So hopefully, that answers your question.

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Unidentified Analyst, [4]

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Yes, it does. And more -- I guess more broadly, the listed securities which you mentioned was down slightly for the year or -- no, it wasn't down, sorry, the outflows were down $54 million. Is this -- does APN report inclusive of institutional flows?

And if so does that mean that there was an outflow in terms of retail fund?

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Timothy Slattery, APN Property Group Limited - CEO, MD & Executive Director [5]

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Yes. Basically that. That's bigger than aggregate for the year across all investor types. So yes, there was some -- that reflects some retail outflows, [Hamish]. What it also -- I mean in terms of the composition, you would have seen this is in the public because you asked about website. But in the month of June, there was a fair amount of profit taking, it was roughly $20 million that came outside. The AREIT hedges obviously had a very strong performance for the year. So that was certainly a factor. But also we also mentioned a couple of those distribution channels with the outcome of the Hayne Royal Commission findings, have certainly experienced some challenges. So those are the 2 reasons we see.

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Operator [6]

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(Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Slattery for closing remarks.

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Timothy Slattery, APN Property Group Limited - CEO, MD & Executive Director [7]

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Thank you all for dialing in and participating in the call, and please feel free to contact us if you have any further questions. And thanks again.