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Edited Transcript of APD.AX earnings conference call or presentation 21-Feb-19 12:01am GMT

Q2 2019 APN Property Group Ltd Earnings Call

Melbourne Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of APN Property Group Ltd earnings conference call or presentation Thursday, February 21, 2019 at 12:01:00am 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 Half Year 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. Good morning, everyone, and thanks for dialing into APN Property Group's Results Presentation for the First Half of Financial Year 2019. I'm joined by Mr. Michael Groth, our Chief Financial Officer.

Moving straight to Slide 3. APN delivered a strong result for the first half with operating earnings after tax of $4.8 million and statutory profit, which includes unrealized guidance on the group's co-investments of $6 million. Our operating earnings per share for the half were $0.0155. This figure is 7% lower than the prior corresponding period, which reflects the impact of a 96% increase of our cash holdings to $29.3 million to position the company for further growth opportunities.

We are also reaffirming our expectation of delivering full year earnings of between $0.024 and $0.029 per share and confirming dividend guidance for the year of $0.0225 per share fully franked.

Our funds under management at December 2018 were steady over the year, reflecting gains in our direct property funds, offset by unrealized mark-to-market movement in the value of our listed property securities funds. However, I'm pleased to report that the majority of this movement has reversed since balance date.

On Slide 4, we've outlined the underlying quality of our results. APN generated 98% of its operating earnings from recurring sources, including 7% growth in our funds management fee revenue over the prior corresponding period. With a robust balance sheet, we believe we have significant flexibility moving forward.

Moving on to Slide 5 and the group's operational achievements for the period. We have delivered -- continue to deliver strong income-focused investment returns across the business. Particularly pleasing was the accelerated growth in our Asian real estate securities fund, which has grown by 63% over the past 12 months, secured additional research ratings and platform representation. We are seeing very strong ongoing leasing results delivered by the APN Industria REIT team and continued acquisition and valuation growth for Convenience Retail REIT. Collectively, our 2 funds have delivered fund growth for the period of $48 million since June. We have also successfully completed our latest syndicate, the $24 million APN Nowra Property Fund and post our balance date, we have launched an equity raising to extend the $54 million APN Regional Property Fund.

Turning to Slide 6. As many of you know, we look at our long-term performance as well as our short-term performance. And here, you can see we have now delivered consistent growth and recurring income on funds under management over in excess of 5 years, supported growth in our annual dividend of over 80% over this period. We've delivered this growth without excessive leverage or the acquisition of goodwill through M&A. And we continue to believe that the business has excellent organic growth prospects in this one.

Turning to Slide 7. You can see that APN now has a commercial real estate platform at significant scale, with over $1.2 billion of assets across Australia. Our portfolio offers an excellent set of investment metrics in our deal with a weighted average lease expiry of in excess of 8 years and an occupancy level of 98%. We continue to believe the carrying values of our portfolio offer investors potential upside. As an example, our office and industrial portfolio has carried a cap rate of 6.5% and our convenience retail portfolio is at 7% in our 2 listed funds.

I'll now pass over to Mr. Groth for our income statement on Slide 8.

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

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Thanks, Tim. So turning our attention to the income statement. Operating earnings for the period were $0.0155 per share, marginally down on the comparative period result of $0.0167. This solid result is underpinned by APN's focus on quality recurring income, which I'm pleased to report continue to grow. Of note was the growth in the recurring revenue from funds management activities, up 7% to $7.6 million for the half, benefiting from a higher average funds under management balance, together with a favorable shift in the mix of fund to higher-margin products in our listed and unlisted direct property funds. This revenue growth emphasized the benefits of APN's diversified property management platform, covering the business lines of real estate securities listed and unlisted funds and provides a strong base to leverage future profitability and margin as scale is added to the platform.

Operating costs decreased $300,000 to $6.5 million, primarily the result of lower total employment costs. Our resourcing remains prudent, balancing the requirements of the existing operations while continuing our commitment to invest in our capability to pursue sustainable growth opportunities that will benefit investors. The group's average corporate tax rate normalized to approximately 28% in the current period, reflecting a reduction in the tax rate applicable to the group to 27.5%. The prior period result was lower than normal after the recognition of a one-off benefit of the previously unrecognized tax losses.

Turning our attention now to Slide 9 and APN's balance sheet. Net assets grew 3% for the period to $123 million. Net tangible assets totaled $0.386 per share versus our current trading price of approximately $0.44 per share. We deliberately sought to further strengthen the financial position and, therefore, flexibility of the group in the current period. In particular, this half saw the successful syndication, as Tim discussed earlier, of the Nowra Property Fund into a new fund managed by APN. This asset, together with its associated, limited recourse borrowings, was previously held on APN's balance sheet. While still retaining a small co-investment stake in this syndicate, it has helped to contribute the additional $14.3 million of cash available to the group at the end of the half, bringing the total available for emerging opportunities to $29.3 million.

In the current environment, this is an enabler for the business. It will facilitate APN sourcing quality risk-adjusted new and existing fund opportunities for its investors, leverage our core skill sets and, therefore, scale benefits of our property management platform and deliver increased margins and profitability for our shareholders.

I'll pass back to Tim.

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

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So turning to Slide 10. Our real estate securities business continues to be one of the best reported in Australia, despite reporting a small decline in funds under management over the period to $1.59 billion. We saw slower net flows for the half, which we attribute to negative investor sentiment towards property over the 6 months, including residential property by association as well as expectations of interest rate rises. These factors have receded to a certain extent post balance date, and we have seen over $50 million of the $60 million negative market movement, in the chart at the top right, reverse between 31 December and today. The APN AREIT Fund remains the fund of choice for large-time investors looking for consistent income yields and a fund with a long-term track record.

On Slide 11, we've highlighted the current positioning and the future potential we see in our Asian real estate securities fund. We are pleased to report the fund has increased by 63% over the 12 months through December, with continuing strong income and capital growth performance. Among the reasons we believe in the growth potential of the fund, the underlying quality of the property assets, followed by one of the portfolio holdings on the top right and by Mapletree, which is a shopping center in Singapore as well as on the following page, you can see the fundamental drivers. So Asia offers unparalleled growth over the long term in our view, with excellent demographic trends and a wide and diverse investment universe, which is nearly 3x the size of the Australian listed property market, which will govern the REIT regimes across our 4 principal -- 3 principal markets of Singapore, Hong Kong and Japan. The APN Asian REIT Fund is a logical extension of APN's securities investment capabilities and is consistent with our strategy of building APN's scale and profitability.

Turning to Slide 3 (sic) [Slide 12,] you can see that we have taken the step to align our 2 listed REITs' branding to that of APN's. We've done this to simplify and maximize the leverage of the APN brand in the market between agents, tenants, advisers and investors. APN Industria REIT continues to go from strength to strength with occupancy increasing to 96% over the period on the back of some excellent leasing results. These results are continuing to drive earnings and distribution growth, as you can see on the slide. Similarly to Convenience Retail REIT, both of our listed funds are well capitalized with gearing toward the lower end of the target ranges, providing acquisition capacity.

On Slide 14, Convenience Retail REIT is continuing to beat its IPO forecast and has delivered over 8% growth in its NTA since listing The portfolio offers investors a weighted average lease expiry in excess of 12 years at a cap rate of 7% with 100% occupancy to high-quality portfolio of national and international tenants We're very pleased with the fund's operating performance and its future prospects from this one.

On Slide 15, our direct property business expanded over the period with the addition of a fifth fund, the APN-Nowra property fund successfully closed, which reflects ongoing demand for investors for unlisted commercial real estate funds. Our fund has made excellent progress with our Steller Development Fund with all initial capital already returned to investors and the fund making excellent progress towards its target IRR of 18% per annum. We have also launched an equity raising transaction since balance date for the APN Regional Property Fund, which we have summarized on Slide 17, which we'll now skip to.

The APN Regional Property Fund owns 2 A-grade office buildings in Newcastle and has an exceptional occupancy track record, on average over 99% over 10 years. We believe the properties offer investors competitive net rents at approximately $390 per square meter and represent attractive buying at an independent valuation of $51.75 million. This equates to approximately $5,500 per square meter of net lettable area, that's a -- on a fundamental metric, which is roughly 1/3 of the current value of comparable properties in Sydney CBD. The fund has a forecast yield of 7% based on initial gearing of 33% as outlined in the product disclosure statement. We believe the product is well positioned in the current market environment, and we are currently in the process of that equity raising transaction.

I'll now pass back to Slide 19 and Michael, for our stapling proposal update.

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

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So just briefly on the stapling proposal. Sound progress has been made with both shareholder approval and principle approval from ASX for the establishment of a new AFSL license. Discussions with the ATO are continuing. The class ruling necessary to provide tax certainty for investors. We expect completion will occur by 30 June 2019, and we'll keep the market updated with progress. Thanks, Tim.

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

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Moving to Slide 21. In terms of a couple of comments on key industry developments, like to touch first on the Hayne Royal Commission report. Having reviewed that report, we believe it is an independent specialist investment manager, which has made significant investments in our compliance and risk management, personnel prices and culture, we believe we're well positioned. We do expect a period of enhanced regulatory oversight for the industry as a whole. And we also expect uncertain investor channels to be impacted by some of the findings. The other key potential change is the Australian Labor Party's policy on the taxation of franking credits, which if implemented in our view has the potential to significantly increase the attractiveness of commercial property trusts, including APN's range of investment products for low income tax bracket taxpayers, such as retirees.

On Slide 22, our overall view of the market is essentially that APN's property for income value proposition remains relevant and in demand to a wide range of investors, both retail and institutional. Direct property investments are heavily skewed toward industrial, office and long lease term convenience retail, and we believe the property sets continue to offer attractive value in selected areas, while still providing an excellent income profile to investors looking for yield. This is particularly the case, as you can see in the chart at the bottom of the page, with the recent softening of interest rate rise expectations.

On Slide 23. In summary, we believe APN is very well placed. We have an excellent established platform, good governance and strong investment performance. We have a flexible balance sheet with good growth capacity, and we have excellent alignment between our shareholders, our fund investors and our Board and management team, with in excess of $100 million of APN's money invested in our funds. While we believe the previous years have delivered strong return for shareholders, as we've illustrated on the page, we continue to believe that the company has significant further growth potential ahead, and we are confident in our ability continue to grow the value of the business for all shareholders.

Thank you, again, for your time, and we're now happy to take any questions you might have. Thanks, Jennifer.

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Operator [7]

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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 [8]

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Thanks, again, everyone, for dialing in. Should you wish to contact us, please feel free to contact Michael or myself. Our contact data are there in the presentation. And thanks, again, for dialing in.