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Edited Transcript of ARG.NZ earnings conference call or presentation 19-Nov-19 9:00pm GMT

Half Year 2020 Argosy Property Ltd Earnings Call

Auckland Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Argosy Property Ltd earnings conference call or presentation Tuesday, November 19, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Fraser

Argosy Property Limited - CFO

* Peter Mence

Argosy Property Limited - CEO

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Conference Call Participants

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* Angus Simpson

ANZ Investment Services (New Zealand) Limited - Equity Analyst

* Nick Mar

Macquarie Research - Analyst

* Owen Batchelor

Jarden Limited, Research Division - VP of Equity Research

* Shane Solly

Harbour Asset Management Limited - Director & Portfolio Manager

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Argosy Property Limited FY '20 Interim Results Call. (Operator Instructions) I would now like to hand the conference over to Mr. Peter Mence, Chief Executive Officer. Please go ahead.

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Peter Mence, Argosy Property Limited - CEO [2]

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Good morning, and welcome to the results -- interim results presentation. I'll run through some highlights and the initial part of the presentation, then hand over to Dave for the financials. And we'll come back and talk about some of the leasing results a bit later on. There is quite a bit of overlap. So the latter part of the presentation, we won't spend a lot of time on those slides. And I know that we're catching up with many of you afterwards, so we can deal with questions after the presentation [will] catch up later on.

So if we turn to the highlights, basically, a fairly solid half with no big surprises, and here, we're pretty happy with that. Total shareholder return was good, along with the rest of the sector. We've seen a $51 million reveal, giving a lift in NTA to $1.28, and you'll see from the charts that Auckland Industrial was dominant in there. And realistically, we're looking at fairly good rental growth during the half and capitalizing that at slightly firmer cap rates.

So there's no surprise on the dividend but distributable income up $3.5 million, fairly good to see there. And really good for us to get a second successful green bond there, demonstrating really good congruity between the way we fund the business and the way we manage the business.

Turning to the strategy and the restatement of that. This really is about creating great product, managing it effectively and efficiently. And obviously, owning the right product at the right time in the right sectors. And the overweight to -- or the increase of the weight into Industrial in Auckland and Industrial in general has been quite good to us during that half.

So if we look at the 2020 focus and performance so far, we've continued to work on the value-add properties in the development pipeline, $194 million as you see that coming up a little bit later on. The opportunities are really very focused in the green developments, and we've got plenty that we're still working on there. So no shortage of opportunity going ahead.

Under the management section, we'll -- clearly, the positive result there is really good progress with 7 Waterloo Quay, getting some good leases away to Crown entities. And there's a graph a bit later on showing exactly how we've put that together. The seismic upgrade on that building has just been signed off. So that work is now complete.

In the own section, we've got several strategic acquisition and redevelopment opportunities that we're working on, with some long-term capital upside there. We completed the acquisition of the Puhinui Road new build. And along with that, you'll see later on under leasing, we extended the existing leases in the other 2 buildings, part of that combined site. The noncore, the Albany Lifestyle Center, that's been transferred to held for sale. Good sale on that one, with the settlement coming up in March of next calendar year.

Looking at the portfolio highlights, clearly, the occupancy remains relatively strong in spite of some persistent vacancy at Citigroup building. Fortunately, we've got a really good inquiry on that at the moment, the dominance of the Auckland portfolio and good rental growth during the period at 3.2%.

The weighted average lease term, 6 years. That was positively affected by the extension in the new lease for the new build at Puhinui Road, and the solid Industrial weighting at 47% that helped us with revaluations during the period. The revaluation gain was quite solid at $51 million or $50.8 million. As I mentioned, that was affected with firmer cap rates but on higher market rentals. To some degree, offset in the Wellington commercial space by higher insurance costs. The portfolio stats, they really are only affected by the change with the Albany Lifestyle Center, which is now in held for sale and the acquisition of the additional Industrial property [and] Puhinui Road.

I won't go through the sector summary in any particular detail. That stands for itself. The value add opportunity, there's a good list of those sitting in there. We've got 80 Springs Road, which is nearing completion, 211 Albany Highway, which is now complete. We've got 107 Carlton Gore Road, which is expected with a practical completion date pre-Christmas on that and is on program and on budget. So going reasonably well with those.

Looking at current activity with the development pipeline. The only change to that slide, which rather stands as itself, is the Stewart Dawson Corner (sic) [Stewart Dawsons Corner] development, where we now expect that, that will be a green development. We've got -- the tenant interest is quite zealous, and we now have a green measurement tool that we assisted the Green Building Council to develop. And so we will be able to measure that retail asset as a green asset going ahead.

Continuing on with green projects that are currently underway, obviously, 8-14 Willis Street, where we're targeting a leading 6-star rating, working with statistics to achieve that, and that's progressing very well at this stage. The 107 Carlton Gore Road, which is, as I said, nearing completion so will be practically complete before Christmas. And there's a March handover date for Housing New Zealand on that. That's targeting a 4-star rating.

We've got some data, again, on the Mighty Ape green development out there. In the meantime, we were targeting 4 stars and achieved 5 in that building. It's been really successful working with the tenant. Mighty Ape really have a green focus at all at the beginning and on the way through this project, they've become very much a zealot for the cause. And Alastair Burns, the new general manager out there, has really taken that under his wing. And the -- all the staff are right behind it, has gone extremely well.

Then we turn to the graphic on 7 Waterloo Quay. And you can see the very solid leasing progress with that building, with only 3 of the smaller floors left. So in round numbers, the podium floors were around 3,000 -- just over 3,000 square meters. And the tower floors just over 1,000. So that building's now 82% leased. And as I mentioned earlier, the seismic project has just been signed off by homes. So we've now got that one sorted.

Just turning to the progress. Obviously, upgrade seismically to the building to achieve a minimum of 80% of NBS. Substantial progress has also been made with the reinstatement. And obviously, with the Crown moving in shortly, that's just as well. The building might still be somewhat ugly from the outside, but from the inside, it presents extremely well and certainly fitting exactly the right place for the Crown tenants across the building.

So with the insurance claim, we've given you a summary of where we're at with that. Obviously, negotiations with the insurer continue, but we've got good rapport going there, and we have done a lot of really good detailed work with that. We're progressing with that fairly confidently.

Turning to the revaluations. We've got some data sitting in there, and you can see where the changes were. What you don't necessarily see is some good growth starting to come through in Wellington Industrial rents. And we're seeing some really good growth in the Wellington Office rent that's yet to really show in values. But -- and of course, some of that offset by the increased insurance cost. But the star performer over the 0.5 year was Auckland Industrial.

I'll hand over to Dave Fraser to go through the financials.

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David Fraser, Argosy Property Limited - CFO [3]

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Thanks, Peter. So first slide for me is the income reconciliation. There was a continuation from March in like-for-like income growth led by solid rent reviews. 45 of the 50 reviews completed were in Auckland. Auckland Industrial accounted for 50% of the total annualized rental increase on 46% of the total rent reviews. The percentage annualized increase for Auckland Industrial was 3.2%, and that was a big contributor to the overall 3% annualized rent increase. And there's a lot more information on this in the appendix to the presentation.

So 7 Waterloo Quay was slightly down the prior year, and we expect the full year net income from this building to be approximately $4.2 million. The building will be 82% leased, as Peter said, by 1 April next year. Net income from the building fully leased is $8.1 million. We still have $1 million of business interruption insurance to come in at some point, and we're very confident we're going to get that. It's just a matter of timing. And also, there's a further deductible income to come as well from the -- when the material damage claim settled. And again, the timing of that's not certain.

The $600,000 of the increase from acquisitions related to 11 Coliseum Drive in Albany, and that's the warehouse that sits next to the Albany Mega Centre. Development number reflects 8-14 Willis Street and 107 Carlton Road. And the disposals decline related mainly to the sales of 31 El Prado Drive in Palmerston North and 7 Wagener Place last year.

So moving on to the next slide. So the introduction of NZ IFRS 16s resulted in a $1 million reclass from property expenses to interest expense. Overall, the impact of the new standard is being minimal. And if we adjust for this, net property income was slightly down on last year.

M&A expenses are up as we annualized hires from last year. We've got a new Wellington asset manager, a facilities manager and 2 new property managers in Auckland. In (inaudible), it's 63 basis points.

Interest expense is lower than last year due to lower rates and higher capitalized interest, which has more than offset the negative volume variance in the IFRS 16 adjustment I just talked about. Profit after tax, $76.9 million for the half year or $9.30 per share.

Moving on to distributable income. So after adjusting for the usual items, gross distributable income per share was up by 2.5%, and net distributable income per share was up by 3.5% to $3.59 per share. The tax rate on gross distributable income was 13.4%, and I expect that the full year tax rate will be fairly similar to this number.

So I'm moving on to the investment property slide. So capitalized costs were $56 million in the period, including $4 million of maintenance CapEx. The top 3 were 7 Waterloo Quay at $21 million, Willis Street at $9 million and 107 Carlton Gore Road at $6 million.

So all major projects, as Peter said, are progressing well. And only Willis Street, [Stewart Dawsons Corner] and the new Big Chill development will push on into the next financial year. And we expect the spend on Willis Street, Stewart Dawsons Corner to be about $45 million next year.

So a little bit more about Big Chill. So we acquired a small Wellington Industrial lease to Big Chill for $3.6 million in April. And we're developing that property along with a piece of adjacent land that we already own. And I think many of you have seen that piece of land. Total development cost is $10.3 million. That's including the cost of the existing assets. And the initial yield on cost is 6.4%. So we're expecting an end valuation of $11.3 million so development gain of $1 million on that. And completion is due 1 June 2020. Lease term is 15 years, and we've got fixed reviews of 1.9% over that period.

The only (inaudible) has been unconditionally sold, as Peter said and settles in March 2020. And [tonight] we also just sold 223 Kioreroa Road in Whangarei for $12.3 million, and that settles in December.

We talked about the revaluation gain. Our portfolio pre the IFRS 16 adjustment is $1.69 billion, and the IFRS adjustment relates to the ground lease at the boarding [room of] 39 Market Place. So we now have $41.8 million asset and a corresponding liability on our balance sheet.

Right. So on to the next slide, NTA. Our NTA has increased by $0.06 per share from $1.22 in March to $1.28 through September, and it's a result of the valuation gain.

Slide [on] gearing. Our debt to total assets was 36.2% at 30 September compared to 35.6% at 31 March and 36.8% at half year last year. And this number excludes the $41.8 million value of the right-of-use asset from total assets, and that's just for consistency.

Next slide. Funding and interest rate management. So there's been quite a bit of action on the debt funding side. We've refinanced and extended our facilities and also our syndicate, it now includes Westpac and CBA.

In October, we issued our second $100 million green bond, which extended our tenor to 4.3 years and diversified our debt funding. So we now have 29% nonbank funding. Just for your information, our weighted average margin likely across all funding is 156 basis points. Our weighted average interest rate was 4.35% at 30 September and is down from 4.75% in March, and our interest cover ratio, 3.1x.

So final slide, dividends. We declared a second quarter dividend today of $1.56875 per share payable on the 19th of December. Our full year guidance remains unchanged. And just one final comment. We're very firmly on track to move to an [FO] cover dividend and new dividend policy within the next 2 years.

So now I'll pass you back to Peter for leasing update.

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Peter Mence, Argosy Property Limited - CEO [4]

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Okay. Thanks, Dave. Just moving back into the leasing. Obviously, we've had some good leasing activity, with extensions to Cardinal as part of the new build acquisition out in Puhinui Road. A renewal 10 years to the U.S. Embassy at Citigroup building. The Big Chill one that Dave spoke about, new development onto land we already owned, 15-year lease there, that's helped. New 10-year lease to Oregon Group, which is part of Turners Auctions in Great South Road. And if we look at the lease expiries going

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vacant floors then 7 floors of inquiry at Citigroup at the moment that's well qualified. And interestingly, the leasing market in general hasn't gone quiet as it often does at the end of the year. We're still fielding new good inquiry coming through with people wanting to make decisions prior to Christmas. So we've got good positive activity with Citigroup. We've got good positive activity with 99 Khyber Pass. So we are hopeful that we'll get some more leases over before we knock off for Christmas.

We look at the lease expiry profile going forward, we like to keep those under 10%. They're not looking too bad. The largest single expiry over the next round of 5 years as the MBIE lease in 147 Lambton Quay. At this stage, we are expecting a short-term renewal out of that, but we are working on a -- re-presenting that building to the market, and we have some lease inquiry already for that.

So lease expiry is to address over the second half. Obviously, Lambton Quay, a Digital Island in Nugent Street. We know that they are likely to leave, and we're marketing that space for lease at the moment. Steel & Tube in Wellington, where we expect that tenant will execute the renewal. So we expect they'll stay.

I won't spend a lot of time on the sector summary. I think we've pretty much done that to death, and there's no big changes in there. But with the Industrial sector, we are expecting to see, in due course, some positive impact from the Wellington rating changes, improving the relative attraction of Industrial space down there. And we are starting to see some good rental growth and low vacancies in that Wellington Industrial space as well.

So limited land supply and good net absorption continuing to drive the Auckland Industrial market and looking pretty good for the period ahead there too. I mentioned Wellington rental growth looking pretty good in the office area, but you've got some big increases in insurance costs to swallow on the way through there.

But overall, market looking relatively stable with new supply and net absorption matching up quite well, both in Auckland and in Wellington. The retail sector continues to show some change, and we're expecting to see some movement to a more of a retail industrial-type hybrid as tenants move more into bulk retailing, just-in-time delivery and courier basing.

So the focus for 2020, much the same as we've been doing. We'll continue to work on the value-add pipeline, ensure that we deliver on the projects we have and keep working with strategic acquisitions, particularly where we've got contiguous sites. Under the management, big ones and here really finishing off the 7 Waterloo Quay leasing and maintain that solid transition that Dave mentioned towards the FO-based dividend policy, looking pretty good there.

Under the ownership scenario, we will be continuing to focus on green assets, environmentally sustainable design, and we're expecting to see some technological changes over the next 2 years in next phase that will make that even more attractive. The green building thing is getting us good solid engagement with tenants and potential tenants. We are finding that quite a bit of our early time is spent educating tenants on why it's good business. But once we do that, we find that they're very keen to progress with that.

Won't go through the appendices in any detail, happy to pick up any questions now or to follow up with questions when we catch up with you later on.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Owen Batchelor with Jarden Securities.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [2]

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Just a question on portfolio target band. So retail's now producing the same, which is slightly at the lower end of your 15% to 25% band. I guess, looking forward, are you looking to get that weighting back into that band maybe through, I don't know, retail acquisitions or divestment of offers or industrial assets?

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Peter Mence, Argosy Property Limited - CEO [3]

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Yes, good question, Owen. Thanks for that. We've got -- with the acquisition of the warehouse out in Albany Mega Centre, obviously, we've got a lot of [type deal grass] out there that's used for car park. We've got a lot of opportunity to add value to the site. So not looking to address that in the immediate future. Expect that it will correct itself over time. The retail sector is still somewhat challenged. I don't think the values have hit an equilibrium level. So I don't think you'll see us acquiring something in that sector to address that balance.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [4]

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Okay, that's great. And then just a question on leasing. Can you talk to the level of interest for the vacant space at 99 Khyber Pass Road? And also, just give us an idea of the level of incentives being paid in that Auckland suburban office space at the moment.

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Peter Mence, Argosy Property Limited - CEO [5]

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Yes. Perhaps I'll address the second part of the question first. In general, across the market, very much more focused on net effective rentals. And some tenants, depending on their funding levels, have a different requirement. And we've seen a number of tenant inquiries just in the last 6 months where they're saying, "No, no, just give us a net effective rental deal. We can afford to fund our own fit-out. We just want the cheapest rent," which is a bit of a change. And sometimes you also end up with tenants are saying, "No, we don't want to fund our own fit-out. We want that all picked up." So it is much more a net effect of rental look than it is something that's typical across the market.

We had seen, in general, incentive levels creeping up over the half year. But since the end of the half, that appears to have stabilized and if anything, moved back the other way. So interesting one. At 99 Khyber Pass, we did get to an agreement to lease stage with a good international tenant. But when they went for their offshore board approval, they were turned down. So unfortunately, that cost us some time, but we do have another tenant that's at heads of agreement stage and going to an agreement to lease.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [6]

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Okay, that's great. And then just one more on leasing. There's still some lingering vacancy in Citibank Center, but you did mention good interest in that building. But I guess, given that there has been lingering vacancy for a while there, do you still see that as a core asset in the portfolio?

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Peter Mence, Argosy Property Limited - CEO [7]

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Yes, I do. I mean let's be fair. The level of vacancy has been concerning. And it's -- we're certainly not happy that it's taken so long to get this level of interest. We're hopeful, though, that we will get some good progress before Christmas. And we do have tenants now who are asking for agreements to lease that have moved past the heads of agreement stage. But certainly disappointing that it's taken so long. But there's quite a bit of activity in that space now. The asset, yes, we still see that as a core asset. It would be very hard to replace that income level at those sort of rates. And once we do get tenants in the building, they tend to stay. We did have a change of tenant when we went through as we upgraded the quality of the building. And obviously, that had some effects. And equally, we lost 1, 2, 4 tenants to the old BNZ Tower in the Queen Street through direct-ship connections that weren't -- we weren't able to directly control. So disappointing that it's taken so long but still happy with the asset.

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Operator [8]

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Your next question comes from Angus Simpson with ANZ Investments.

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [9]

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Just -- first, just around the insurance claim at Wellington. So with the total CapEx spend, I think it was at $45 million, has there been anything spent in addition to that sort of -- I guess, in addition to the seismic work that was -- about the absolute reinstatement work that was required?

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David Fraser, Argosy Property Limited - CFO [10]

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Well, there's nothing that we can claim back. But there is -- there's the seismic project, and there are some smaller leasing projects, if you like, in terms of moving people around the building and another small capital project to do with the vertical infrastructure. Again, it's nothing to do with the claim. But because we -- because [he's] on (inaudible) the part of the tower. The tower has been empty for a short period, and we've used that window to do some work on the risers, the chillers, the source stacks and a bunch of other things as well. So that expenditure is about $3 million that we're spending on the vertical infrastructure.

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [11]

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Okay. So that will be in addition to the $49.5 million...

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David Fraser, Argosy Property Limited - CFO [12]

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(inaudible) yes.

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Peter Mence, Argosy Property Limited - CEO [13]

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Well, those [projects] were taken into account in the interim (inaudible).

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [14]

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Perfect. And then can you give any color around -- I know it's probably a million dollar question but timing for insurance? Is there a sort of a date that's coming up that you're likely to hear from them? Or can you give any color around -- any color?

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David Fraser, Argosy Property Limited - CFO [15]

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That's a very good question. I think we'll get -- I think it would be (inaudible) -- we think it's indisputable, and I think we'll get that remaining $1 million, I believe. In terms of the MD, which is a big one, we really are getting to the pointy end of consultant discussions. We're about to engage in consultant meetings. So we're getting to the point now where we're getting experts together to talk about methodologies and so on. So we are making good progress on that. The first consultant meeting is in about 2 weeks. So hopefully, that will lead to a settlement sometime next year.

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [16]

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Okay. That's brilliant (inaudible)...

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David Fraser, Argosy Property Limited - CFO [17]

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As we said, we can't promise anything. It's been a while, isn't it? I mean (inaudible).

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Peter Mence, Argosy Property Limited - CEO [18]

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Unfortunately, insurers aren't really incentivized to move in a hurry.

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [19]

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Yes, and I can understand that. And just moving on to a slight different question. Just on mid-development or the redevelopment at 107 Carlton Gore Road, can you sort of talk about -- talk through what sort of rental uplift you've got having done the green upgrade?

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David Fraser, Argosy Property Limited - CFO [20]

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Yes I just got to [find a bit of a] paper out here. [Can't] find it, sorry. Here we go. Yes, so the rental uplift was $577 million as net effective rental uplift. And there was a 4.8% rental uplift on the development spend, $12 million. So it was 4.8% was the initial increase in rent as a result of that development.

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Operator [21]

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Your next question comes from Nick Mar with Macquarie.

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Nick Mar, Macquarie Research - Analyst [22]

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Just on the timing of the lost income insurance that you're kind of putting through. It's pretty lumpy, like the first half last year is 2.3, then the second half was 0.4, and then you've done 2.5 this time. What's kind of -- is that just the timing of the [green], the claims? And that $1 million, would you expect that in the second half?

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David Fraser, Argosy Property Limited - CFO [23]

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I think it's on balance, 50-50. We do get it in the second half or early in next financial year. And we haven't got it yet. We're in November. And really, we're sort of -- we're in a position with our insurance. It's -- we did a strip feeding based on we're obviously asking for money all the time and making claims all the time. But unfortunately, they control the [peer strings], and it is lumpy. But I'd expect that $1 million to come sort of sometime in the next 6 months. And whether it's next -- this financial year or next financial year, I'm not sure, to be honest.

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Nick Mar, Macquarie Research - Analyst [24]

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Yes, and the way you're allocating between reinstatement and kind of [lot reading] -- is that pretty kind of clear-cut for you guys in terms of how you...

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David Fraser, Argosy Property Limited - CFO [25]

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It is. That may indicate whether it's MD or BI. The only time that they haven't done that was the last payment of $2.5 million. And the reason we've allocated it to BI is because all the discussions leading into that were about BI. So they paid us, and we've allocated it to BI. Everything else has recently cleared up between the 2 parts.

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Nick Mar, Macquarie Research - Analyst [26]

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Yes. And the $4.2 million number you said for the full year for that building, is that including the $2.5 million?

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David Fraser, Argosy Property Limited - CFO [27]

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Yes. So we got -- the net income from the building for first half is $3.2 million. So I'm not paying an extra $1 million for the second half, and that's really just rent less OpEx.

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Nick Mar, Macquarie Research - Analyst [28]

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And that doesn't include the $1 million you might get?

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David Fraser, Argosy Property Limited - CFO [29]

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No, I haven't included the $1 million. So if we get the $1 million early next year, the net $4.2 million will become $5.2 million, which is, I believe, very close to the number I said last year.

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Nick Mar, Macquarie Research - Analyst [30]

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Sure. And then the $8.1 million fully let, can you just talk me through the moving parts there? Because Wellington rents are probably up 10% since you started trying to go through leasing the same. Obviously, rates are a component, and I think there was some talk about [smaller] in LA. Can you just talk through what sort of moved around from the second (inaudible).

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David Fraser, Argosy Property Limited - CFO [31]

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The issues with that building are, one, insurance rates have gone through the roof. We've got an extra $0.5 million of insurance on that building from 2 years ago. The other issue is we've lost a bit of NLA on the ground floor because it's moved from being a single-tenant building to a multi-tenant building. So the [meted] area on the ground floors has diminished reasonably substantially. And as a result, the net income for the building has dropped. Despite the fact we have had increases in the per square meter rates, it hasn't been enough to compensate at this stage for the loss of area and the increase in the insurance and rates for that matter.

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Nick Mar, Macquarie Research - Analyst [32]

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Okay, that's cool. And then just lastly, on the rental income bridge, you've got kind of vacancy and leasing up at $500,000 contribution. The closing vacancy was -- or so the closing occupancy was lower in the first half '20 versus the first half '19. Obviously, these averages and the [lines], but can you just talk through the positive number there?

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David Fraser, Argosy Property Limited - CFO [33]

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Yes. Look, I can tell you -- I mean we do this sort of -- this is a really detailed way we do this. We look at income from each building in the first half versus last year. So in terms of leasing up, the main changes are relating to Citigroup Center, and that's from leasing up a number of park floors there. So that $400,000 of that is Citigroup. And the other big one is Rothwell Ave, Albany. So we had some spaces vacant. We got the building ready, and then we lease it up to New Zealand couriers in the latter part. The other -- I guess the other one is 147 Lambton Quay as well, where we've got an increase in rent because part of that building was vacant for a period in the first half of last year. Offsetting that, has been 80 Springs Road. So obviously, we had some rental income from that last year and at the moment, it's vacant. So we've lost $450,000 from that. So [they're] kind of the main moving parts to that vacancy and leasing up.

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Nick Mar, Macquarie Research - Analyst [34]

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And would you classify vacancy in 99 Khyber as vacancy? Or is it just keeping it in development even though [it's]...

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David Fraser, Argosy Property Limited - CFO [35]

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[I wouldn't call it] vacancy. [But the only core developments --] the big ones. We're talking about -- so in that development column, we're talking about 107 Carlton Gore Road, Willis Street and 7 Waterloo Quay, that sort of thing. 7 Waterloo Quay, we treat separately anyway. But we're talking about significant developments only in that column.

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Operator [36]

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(Operator Instructions) Your next question comes from Shane Solly with Harbour Asset Management.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [37]

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Can you just talk through what you need to do to bridge that FO gap on you over the next year, couple of years? What was it you need to achieve that closing the gap up versus your dev?

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David Fraser, Argosy Property Limited - CFO [38]

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Well, that's a good question. I think we've got some real momentum, actually, through -- and we're in a bit of a development phase at the moment. I think I've said that most of them are finished by the end of the year. And then we've got Willis Street being finished -- not quite by then -- well, 1 April 2021 for Willis Street. So we've got the real momentum from the completion of these developments. The other thing, too, is I guess we're a little bit down in May because we did have this development transition period of a couple of years. But what's happened in between is interest rates have dropped. And because we've got a significant amount of floating, that impacts us immediately and positively. So the more those interest rates stay where they are, we've got quite a bit of momentum from interest rates as well. And also tax is good because we're doing a lot of developments. We've got a lot of write-offs, we've got a depreciation steam train at the moment as well. So we're pretty confident that by FY '22, we are in a pretty good position.

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Peter Mence, Argosy Property Limited - CEO [39]

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And we've got some good rental growth that will be coming through over the next couple of [months] as well. So I think it's all looking fairly tighter from that perspective, Shane.

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Operator [40]

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We have a follow-up question from Nick Mar.

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Nick Mar, Macquarie Research - Analyst [41]

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Sorry, just a couple more. On that hedging, can you tell me what your bands are because 49% seems quite low for interest rate hedging...

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David Fraser, Argosy Property Limited - CFO [42]

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From year -- from 0 to 1, it's 40% to 100%. And then the next 2 is 50% to 90%. And then -- oh sorry, 30% to 90% and then 20% to 80% and then from 4 to 5 is 5% to 60% and then 0 to 60% -- sorry, 5 to 70% and then 0 to 60% from 5 years on. So they're -- the bottom ends of the band are -- near-term is 40%. So [we've gotten very close at the] bottom end to that band.

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Nick Mar, Macquarie Research - Analyst [43]

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Yes. And what would make you move towards the middle of the band versus staying at the bottom?

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David Fraser, Argosy Property Limited - CFO [44]

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It's just our view on interest rates, I think. Really, I don't know if flexing now is a great idea. We're quite happy to be in with -- [prepared] advice on this. We're quite happy to be positioned towards the bottom end of those bands at the moment.

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Nick Mar, Macquarie Research - Analyst [45]

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Yes. No, that's cool. And then, sorry, just one other question. Can you talk me through what the key things were in the maintenance number? Or is it a bit higher this period, which seems like a more normal number? (inaudible)

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David Fraser, Argosy Property Limited - CFO [46]

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Let me just get my list out. I [can't see without] my glasses on. So biggest one was 320 Ti Rakau Drive, we put a new roof on. There's 970 -- well, actually, the roof was $700,000, then we did general replacement of $120,000. And then we did the Bunnings roof as well, that was $100,000. So there's quite a bit on Ti Rakau Drive, $980,000 all up. Next big one was Stout Street, $856,000 on carpet replacement, roller door replacements and exterior waterproofing. And then the third biggest one, $550,000 on 90 to 104 Springs Road, and that's just a roofing gutter replacement there. And then this gets coming down quite dramatically now, but 11 Coliseum Drive Albany, $223,000, that was roof remediation, mainly but also some rusty part working sprinklers and so on. So they're basically roofs, roofs and carpets. Yes?

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Nick Mar, Macquarie Research - Analyst [47]

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And the second half, what number do you think will be there?

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David Fraser, Argosy Property Limited - CFO [48]

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[Well] it always goes down because of the holidays, we lose a couple of months. I think it will be about $2 million second half, roughly.

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Operator [49]

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Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.