Edited Transcript of IAP.J earnings conference call or presentation 6-May-20 6:30am GMT

There can be no doubt that REITs have been hit globally in the fallout of COVID-19. Since the 20th of February, we’ve been down some 31%. Large caps were down 41%, mid-caps down 30% and small caps in the REIT space down 33%. Unfortunately, it’s nothing we can control.

Over the year, we have, however, outperformed the ASX 300 REITs by 14% and the SAPY and the Johannesburg Stock Exchange by 106%. Also worth noting over the course of the year, migration of units over to the ASX from the JSE during the course of the year, the free float is now 43% on the ASX and 57% on the JSE.

Life post-COVID-19. Well, our immediate focus was ensuring the safety and health of our team and our customers. We have managed well dealing with the technology, and working from home has been less of a challenge than anticipated.

As I said, Zach will run through the tenant mix and profile, but we set out with the intent of assisting those most in need to provide the bridge necessary to come out the other end. Our retailers who occupy space under our commercial buildings were those most requiring an immediate hand. We are assessing requests for rental support on a case-by-case basis in order to achieve mutually acceptable outcomes.

In line with our underlying philosophy, our intent, as always, is to provide long-term, sustainable income for our unitholders, and we can only do that by providing an environment where we have open dialogue with our tenants. As I mentioned previously, our reporting season has straddled the early stages of this crisis. There’s been a rigorous process undertaken and tested by our auditors, KPMG, to determine fair value for our portfolio involving both external valuations and direct evaluations, taking into account the known and anticipated impacts of the pandemic.

The Board was presented with multiple scenarios stress testing the portfolio in order to understand the resilience of the fund going forward. Kristie will talk to the adjustments made post reporting period, which are reflected in our results.

There’s still a large unknown around work practices moving forward, including densities, lift use, split teams, common areas such as kitchens and meeting rooms, office cleaning and maintenance and co-working environments. This may or may not have an effect on densities, depending on the user and the environment.

One thing is certain that the last couple of months has provided us is that the age of flexible work practices have arrived. While both the state and federal governments have provided good leadership and direction in a largely bipartisan fashion, the noises around shrinking back into the hole and pushing back on immigration because they’ll steal our jobs would, in our opinion, be a seriously short sighted view. Our country needs to signal — send a signal that we’re open for people, we’re open for capital, and we’re open for business, and provide the productive environment for job creation and growth.

As a natural reaction to crisis is to save and not spend, we need the artificial stimulus of a positive migration policy to continue. Only growth will provide the environment for job security, which in turn creates a confidence of consumers to spend and the multiplier flow on FX will provide a tax base to support a well-balanced economy and society.

I’ve touched on this before, but our disciplines around process, value and conservative balance sheet management have enabled us to enter this crisis with almost 0 arrears at year-end, 99% occupancy and a balance sheet that doesn’t require equity raisings at significant discounts, thereby eroding shareholder value.

I’ll hand over to Zach who will now go into the property portfolio in more depth.

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Zach McHerron, [3]

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Thanks, Graeme. I’ll start on Slide 8 with an overview of the portfolio. Operationally, the portfolio continues to perform well and now comprises 30 properties valued at $1.085 billion. This is a reduction from the half year due to 2 factors: firstly, the sale of 757 Ann Street in Brisbane, which I’ll talk about shortly; and secondly, a decline in the fair value of the Fund’s properties following the year-end valuation process, which Kristie will explain in detail later in the presentation.

Occupancy remains high with 99% of the portfolio currently leased and only 2,540 square meters of space vacant. The weighted average lease expiry is 4.5 years compared to 4.7 years at 31 March 2019. The decline is a result of the passing of time, but also due to some shorter-term extensions being agreed with sitting tenants, which I’ll touch on later. 94% of the portfolio is subject to a fixed rent review in the next 12 months at an average rate of 3.3%. We believe that the Fund’s focus on metropolitan office and industrial properties will prove to be relatively resilient as we navigate our way through the current health and economic impacts of the COVID-19 pandemic.

The portfolio is also geographically diversified with more than 75% exposure to the Eastern seaboard of Australia. The Fund has one large exposure in New Zealand at 100 Willis Street in Wellington. The New Zealand government imposed stricter lockdown measures than Australia, meaning only essential businesses were able to operate during alert level 4. New Zealand has now transitioned to alert level 3, but importantly, more than 75% of the building’s occupants are considered essential, and were therefore able to operate through the level 4 restrictions.

Slide 9 details the transaction activity during the year. The fund acquired 3 industrial properties in October 2019 for $81 million at an average yield of 7.3%. We discussed these acquisitions at the half year, so I won’t go into detail here, although they were the catalyst for the Fund undertaking an $84 million institutional placement in September last year, which allowed the Fund to reduce gearing.

The Fund’s strategy for acquiring properties has not changed. The Fund is focused on properties in established office or industrial precincts, supported by key infrastructure, where it can offer affordable occupancy cost for tenants and returns can be optimized through active asset management. There’s no doubt that deal flow has slowed significantly as a result of the COVID-19 pandemic, and it’s difficult to predict when activity levels might increase. However, we are keeping close to the market, particularly in the 3 key geographies of Sydney, Melbourne and Brisbane, where we have people on the ground. With gearing currently at 22.2%, we’re in a strong position to capitalize on future acquisition opportunities.

In December last year, the fund agreed to sell 757 Ann Street in Brisbane. We’ve always maintained that we would look to divest properties where we believe value creation has been maximized to protect against downside risk or to improve the overall quality of the portfolio. Given 757 Ann Street presented as new had a weighted average lease expiry of just under 4.5 years, and there was strong demand for high-quality office properties at the time in the Brisbane fringe office market, we determined that it was an opportune time to sell the property. The sale process is well supported by a mix of both domestic and offshore buyers and was ultimately sold for $94 million, which represented a 6.6% passing yield, a core cap rate of 6% and an 11% premium to the book value of $85 million. The sale settled post the reporting date on April 1 of this year, and the proceeds were used to reduce gearing and further strengthen the balance sheet.

Turning now to leasing activity on Slide 10. As in previous periods, the focus has been on minimizing downtime in the portfolio by extending leases well in advance of their expiry dates. This strategy resulted in 64,335 square meters of space being contracted since 31 March last year, notwithstanding only 19,082 square meters of space was either vacant or expiring during the year. Including early renewals, the retention rate for the period was 80%, with almost 90% of the space that was handed back and re-leased during the period.

One consequence of the uncertainty associated with the COVID-19 pandemic that we have witnessed is a reluctance for tenants to commit to the capital cost of changing their occupancy arrangements. Tenants are less inclined to Fund and make good obligation and commit to a new fit-out and are, therefore, exploring shorter-term lease extensions. We believe this creates an opportunity for the Fund, given we have entered into this period of uncertainty with very high occupancy.

One point to note on this slide is the relatively short WALE and low weighted average rent review for the industrial leases signed during the period. This is largely a result of an 18-month extension by the existing tenant at 85 Radius Drive in Brisbane with a CPI increase and a new 12-month lease at 24 Sawmill Circuit in Canberra, which doesn’t have a rent review due to its duration.

As you can see on Slide 11, on the assumption that current signed heads of agreement convert to leases, less than 10% of the portfolio is expiring in each of the next 4 financial years. Of the 9.5% due to expire in FY ’21, almost half of this is attributable to the Victorian government’s Department of Justice at 35-49 Elizabeth Street in Melbourne and Ernst & Young at 100 Willis Street in Wellington. We’re close to finalizing terms with both of those tenants that will see them extend their lease terms and which will further derisk FY ’21 expiries.

Moving now to Slide 12. At the start of the COVID-19 pandemic, we implemented a tenant engagement program to understand the potential impacts of the pandemic on our tenants’ businesses and how this might influence their ability to meet their lease obligations and impact their future leasing decisions. All of the fund’s tenants have been communicated with over the past 6 weeks on more than 1 occasion, and this interaction continues as it becomes evident that some tenants may require rental support given the significant disruption to their businesses. We have undertaken a formal process for collecting relevant information from tenants, including financial information to assist us in determining the need to provide rental support. In doing this, we are mindful of the code of conduct for commercial tenancies released by the National Cabinet and the subsequent legislation enacted by various states.

As Graeme mentioned, we’re assessing requests for rental support on a case-by-case basis with a view to agreeing commercially sensible outcomes with tenants where possible. To date, a small number of arrangements have been agreed with those tenants that demonstrated to us a significant financial impact. It is too early to assess the full impact of this evolving situation on both the tenant base and the Fund, but our intention is to approach discussions with tenants with a view to preserving the long-term sustainability of the Fund’s income.

We’ve also done a significant amount of work recently in analyzing the Fund’s tenant base, the results of which we believe demonstrate the resilience of the Fund’s portfolio. There’s no pure-play retail exposure in the portfolio with only 1.2% of income attributable to small food and beverage offerings and other service-based tenants at the base of some of our larger office buildings, such as 100 Willis Street in Wellington and 324 Queen Street in Brisbane. An additional 3.2% of income is exposed to the consumer discretionary sector, but the vast majority of this is attributable to the Australian head offices at KFC and Henkel, both of which are large foreign-listed organizations.

Almost 60% of the Fund’s tenants are either listed or government tenants and only 8.2% of tenants are classified as SMEs. Also importantly, no single tenant accounts for more than 4.5% of the Fund’s income outside of the Australian federal government. We’ve also been tracking rental payments on a more regular basis since the start of the pandemic. More than 99% of rent for March has been collected, and 95% of April’s rent has also been collected. The majority of rent not yet paid for April relates to tenants who we are in discussions with regarding rental support.

Given the nature of our tenant base and the close relationships that we try to maintain with our tenants, we believe we are well positioned to manage the impacts of the COVID-19 pandemic over the coming months.

I’ll now hand over to Kristie to talk about the financial results.

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Kristie Lenton, Investec Australia Property Fund – CFO of Investec Property Limited [4]

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Thanks, Zach. Now moving to Slide 14. The financial results for FY ’20 demonstrate the Fund delivering on guidance and key initiatives whilst positioning the Fund to manage the challenges in the coming year, underpinned by the strong balance sheet position.

Slide 15 includes the details of the distribution components for FY ’20. As outlined in May 2019 during the ASX listing process, the fund’s distribution policy was amended to align with other ASX-listed property funds, where the distribution would be paid out with reference to funds from operations and adjusted funds from operations, and the Fund would target a payout ratio of between 80% and 100% of FFO.

The guidance provided in the PDF was annualized amounts of $0.0957 per unit FFO and $0.0888 per unit AFFO and a distribution of $0.0888 per unit, which equated to 92.7% of FFO and 100% of AFFO. The Fund has delivered the following annualized results: $0.0978 per unit FFO, which is 2.2% above guidance; and $0.0917 per unit AFFO, which is 3.3% above guidance.

Whilst the Fund has exceeded guidance on both an annualized FFO and AFFO basis, we have determined to pay out the guided annualized distribution amount of $0.0888 per unit as a measure to maintain strong balance sheet fundamentals. The profit on the sale of 757 Ann Street has also been retained to further strengthen liquidity through the uncertainty related to the COVID-19 pandemic.

The annualized $0.0888 per unit distribution translates to a payout of 90.8% of FFO and 96.8% of AFFO. The distributions received by ASX and JSE investors for the FY ’20 year are different due to the Fund listing part way through the financial year. ASX investors will have received $0.075 per unit for the period since listing in May 2019 and 31 March 2020. JSE investors will have received an additional distribution for the period of time in the financial year prior to listing on the ASX by way of a special distribution. The special distribution paid to JSE investors was paid under the Fund’s previous distribution policy. JSE investors will have received distributions totaling $0.0909 per unit pre withholding tax.

For the benefit of the Fund’s JSE investors, the post withholding tax distributions for the year totaled $0.0857 per unit, which equates to an effective withholding tax rate of 5.7% for the financial year. This compares to an effective withholding tax rate of 8.1% in FY ’19. The reduction in the effective withholding tax rate is driven by 3 main components. The FY ’20 distribution component include the capital gains associated with the sale of 757 Ann Street. The tax associated with the profit on the sales of the property has largely been offset with the costs associated with the hedge book restructure. There are also additional deductions for the costs associated with the ASX listing process. The combination of the sale of 757 Ann Street and the hedge book restructure has resulted in a reduced tax impact when compared to FY ’19. This means that there will not be any further tax consequences in FY ’21 related to the sale of 757 Ann Street for all investors.

The next few slides cover the valuation process we have undertaken, which has been one of the main areas of focus during the year in reporting process for management, the auditors and the Board, given the uncertainty resulting from the current economic climate.

The year-end valuation process of the Fund’s investment properties has been impacted by the COVID-19 pandemic, and the constantly changing uncertainties around the underlying assumptions between reporting date and today have made the process challenging. The current response by the Australian and New Zealand governments to the COVID-19 pandemic means that we have faced an unprecedented set of circumstances on which to base judgment. The process to assess fair value has placed less weight on market evidence for comparison purposes to inform opinions of value. We have largely completed the process and had submitted the draft valuations to the Audit and Risk Committee in mid-March, at which point it was determined that a reassessment process be undertaken to determine if there had been any impact to the valuation. All properties in the portfolio were revalued as part of this process, with a portion by independent valuers and the remaining properties as direct evaluations.

We undertook a risk assessment of each property, factoring in each tenant’s circumstances. This process resulted in a risk rating which determined the valuation approach to be adopted and the level of adjustments to assumptions originally applied in mid-March to reassess fair value. The results of the tenant engagement program to underlying cash flows, relevant market indicators, along with the risk assessment factors of tenant covenant, WALE and possibility of rental assistance were considered in the reassessment process for each property in the portfolio. Eleven of the properties in the fund’s portfolio were externally valued for year-end reporting purposes, where we reengaged with the independent valuers to update their assessment in light of the COVID-19 pandemic. The adjustments applied by the external valuers informed the basis of adjustments for the remaining 19 properties, which were valued as direct evaluations. These were applied on a case-by-case basis, determined by the outcome of the risk assessment of each of the properties, consideration of cash flows and market indicators. A detailed description of the process undertaken as part of the reassessment of the fair value of the portfolio is disclosed in Note 9 to the financial statements.

As part of the reassessment process, we also undertook sensitivity analysis to further stress test the adopted assumptions. The sensitivity analysis undertaken applied additional softening of both capitalization rates and discount rates. The results of the sensitivity analysis demonstrated that the Fund’s financial condition would not be materially impacted if there was further weakening in the adopted assumption.

Moving to Slide 17. The results of the reassessment shows an adopted fair value of $1.085 billion for the Fund’s portfolio. The summary on this slide excludes 757 Ann Street in all periods disclosed. The properties where an external valuation was undertaken showed a year-on-year increase of 3.79%. This is largely driven by The Majestic Center in New Zealand, where the Wellington market has experienced strong rental growth, coupled with low vacancy in the prime office market. The movement in the properties externally valued since interim reporting in September 2019 is 1.3% growth, again, largely driven by The Majestic Center, which has seen an increase in value of NZD 10.5 million since March 2019 and NZD 8.8 million since September 2019, with a capitalization rate remaining at 7% year-on-year.

The direct evaluations delivered growth of 1.8% on a year-on-year basis, which is largely driven by active leasing activity in the Sydney Metropolitan office and industrial assets in the portfolio. The movement in direct evaluation since interim reporting in September 2019 has resulted in a reduction in value of 3.6%. The process we have undertaken in assessing fair value of the portfolio has resulted in a weighted average capitalization rate of 6.57%, which compares to 6.46% in March 2019. The active asset management resulting in transacting on over 64,000 square meters of space during the year has further strengthened the cash flows and underlying assumptions used to derive the portfolio value.

Moving on to Slide 18 and the balance sheet activity during the year. FY ’20 has been a year of active balance sheet management for the fund. The equity ratings as part of the ASX listing in May 2019 and subsequent placement in October 2019 have resulted in the Fund diversifying capital sources. Free float has increased from 64% to 82%, with the ASX now holding 43% of total free float.

The equity raisings, coupled with the sale of 757 Ann Street, which settled on April 1, has resulted in the Fund’s gearing reducing by 15.2% from 37.4% in March 2019 to 22.2% post the settlement of Ann Street. This is well below the Fund’s target range of 30% to 40%. The Fund’s balance sheet strength is the culmination of delivering on key strategic initiatives and aligning more closely with other ASX-listed property funds, as outlined during the ASX listing process in May 2019.

Another focus for the Fund in FY ’20 to further strengthen the balance sheet has been to restructure both debt and hedge books, which is outlined on Slide 19. Securing $150 million of 10-year fixed rate funding, coupled with extending facilities with the existing financiers, has seen the weighted average debt maturity more than double from 3.6 years to 7.4 years when compared to March 2019, with the earliest facility maturing in March 2023. The restructures also resulted in an all-in cost of funding reducing by 70 basis points to 3.05%, whilst maintaining a level of 95.8% of debt fixed or hedged to a weighted average term of 8.3 years.

As at March 31, 2020, we hold $17 million of cash and have $67 million of undrawn debt available, strengthening liquidity to manage through the potential impacts of COVID-19. This, coupled with gearing of 22.2%, underpins a strong balance sheet to manage the challenges over the coming year. I will now hand back to Graeme.

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Graeme A. Katz, Investec Australia Property Fund – CEO & Executive Director of Investec Property Limited [5]

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Thanks, Kristie and Zach, for that. Certainly, the last financial year from an operational and balance sheet management perspective was a very successful year. The listing on the ASX has provided us with a capital base in a geography in which we operate. The subsequent oversubscribed capital raise further strengthened our balance sheet and assisted in funding our triad of all acquisitions, and we entered the S&P/ASX 300.

Our annualized FFO and AFFO are both ahead of guidance, while our annualized distribution is in line with guidance. Our balance sheet, as Kristie said, is in good shape with gearing at 22% and a weighted debt expiry of 7.4 years with no maturities until FY ’23 and funding costs now sitting at 3.05%. [The portfolio’s] reflecting office at 6.46% and industrial at 6.83% and total weighted average cap rate of 6.57% reflects our relative conservatism in terms of our balance sheet management.

Our discipline in remaining true to our markets of acquiring assets 1 block back has meant we could still focus on value in affordable pockets with affordable rents. The new cost-focused world that we live in, our portfolio is well positioned to ensure tenants have affordable options in the markets in which we operate.

Our geographic, sectoral and tenant mix spread also ensures that we don’t have significant tenant risk exposures, with the majority of tenants government, listed or multinationals. There are a number of ongoing projects to continue to improve our NABERS energy and water ratings, and we have had pleasing results to date.

We entered the COVID-19 crisis almost 0 rental arrears as at March 31, and our portfolio and balance sheet is in good shape. Our short-term challenge was to hunker down and ensure the safety of all our staff. Our discussions with our tenants has been held in good faith, and we remain confident that we will work to mutually acceptable outcomes to ensure we get through this tough period. We will always maintain our disciplines and are not concerned about the things we missed out on. Our Fund is not focusing on bulking up for the sake of assets under management, as you saw with the sale of Ann Street in Brisbane. But we now have the capacity to take advantage of any market disruption or dislocation and believe there will be a number of opportunities for us to take advantage of, and we have circa $200 million to invest to get to the midpoint of our gearing range.

We have all read the expert reports and predictions for the year ahead: V shapes, U shapes, W shapes, L shapes, [lag suches], but the bottom line is you don’t know what next week will look like, never mind the year ahead. What we can say that we are — is that we are extremely well positioned. Due to the uncertainty, it is not possible to assess the full impact of the crisis on the fund, and we will not be providing guidance for FY ’21.

We thank you for all your support and attendance today, and we’re happy to accept any further questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Darren Leung from Macquarie.

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Darren Leung, Macquarie Research – Analyst [2]

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Good result here. Just a few from me. So first one, can you please provide some clarification as to what percentage of your tenant base has asked for rental relief?

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Zach McHerron, [3]

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Darren, it’s Zach here. At the moment, it’s fair to say that the vast majority of inquiries we’ve had for rental support come from those smaller retail tenants, particularly at The Majestic Center in Wellington and 324 Queen Street in Brisbane. They would make up more than half of all of the inquiries we’ve had, and those tenants sit within that 1.2% of retail exposure that I mentioned earlier.

In terms of other requests, there’ve been a handful of what we would term SME tenants asking for various levels of support. We are cautiously assessing those requests, some of which appear opportunistic, some of which are genuine, but we are being diligent in terms of the collection of the necessary financial information to make those assessments.

There have been a couple of requests from larger sort of multinational or foreign-listed organizations. They appear in some instances to be blanket, better sent to landlords. It’s fair to say that they are not the priority for us at the moment. The priority is dealing with those smaller tenants who it’s obvious have been impacted. For us, we want them to have viable businesses coming out the back end of this so that we don’t have vacancy in the portfolio.

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Darren Leung, Macquarie Research – Analyst [4]

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You’re obviously still working through all the detail. But indicatively, what is the average revenue declining for an SME?

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Zach McHerron, [5]

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Sorry. Can you just repeat the question, Darren?

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Darren Leung, Macquarie Research – Analyst [6]

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So of your SMES, and I think you quoted 8.2%. Perhaps of the ones that have come through, and are happy to — I assume they’re coming to you and asking for rental relief and coming at you with a bunch of financial statements. How much has their revenue declined, on average?

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Zach McHerron, [7]

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Look, it varies, Darren, depending on what kind of sector they’re exposed to. Some have suffered more than a 50% decline, the smaller retailers, particularly those in CBD markets, it’s closer to 100%. But once again, that’s a very small portion of the portfolio. One thing I would say is that tenants are very open to exploring mutually beneficial outcomes in terms of these discussions. And for us, that means potentially extending the term of a number of these leases in consideration for providing some level of short-term rental support.

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Darren Leung, Macquarie Research – Analyst [8]

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Understand. The second one I had is perhaps a bit more longer-term thought process. But stuff like working from home and office densities, have you had any initial discussions as to how tenants are thinking about their space requirements? Are they shrinking them because staff are going to be working from home permanently? Or are they increasing them because they need more square meters per person to sort of make their workforce a bit safer?

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Graeme A. Katz, Investec Australia Property Fund – CEO & Executive Director of Investec Property Limited [9]

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I think it’s an answer that — it’s Graeme speaking. It’s an answer that everybody is looking for. I think there are guidelines that the government will be releasing in the next couple of days, which will give us guidance as to where things are sitting. It really depends on the enterprise, their use of staff. A lot of the offices we have are project-type staff, and that will obviously affect their businesses. But I think what seems to be clear is sharing of desks won’t be occurring in the industry anymore, certainly in the short term, so that what you might lose on density, you’ll gain on the fact that people won’t be able to use their shared desks. So I think it’s a little bit early to tell. In the next couple of weeks, I think we’ll get more clarity on that.

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Darren Leung, Macquarie Research – Analyst [10]

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Understand. Final 2 for me. So Zach, you mentioned you’re still actively looking at deals. Is there any color as to what sort of deals are coming on, maybe not the name of, but who are the sort of types of vendors are and what their motivations are for selling in the current market, please?

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Zach McHerron, [11]

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You’re talking about acquisition opportunities?

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Darren Leung, Macquarie Research – Analyst [12]

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Yes.

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Zach McHerron, [13]

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Yes. Look, I mean, there’s no doubt that deal flow has thinned out. Offshore buyers can’t travel to inspect. We’re not seeing sort of large institutional buyers putting assets on the market at the moment because there’s no need to sell balance sheets that are generally in pretty good shape. We are spending a lot of time talking to various stakeholders in the industry, the other REITS, the agents, just keeping close to the ground in terms of what may come on in the future. Graeme, I don’t know if you want to add anything?

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Graeme A. Katz, Investec Australia Property Fund – CEO & Executive Director of Investec Property Limited [14]

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Yes. I think Darren, I think once — and this really gets to the earlier point. We’re very early into this cycle. And I think once there becomes certainty in terms of people understanding the cash flows and where everything lands, it’s very hard for either vendors or purchasers to actually land at a value until — unless you’re sitting with something with a very long lease.

Yes. I think opportunities and we’ve seen in previous cycles do come apart — come to the market. We — from us and certainly, where our balance sheet is sitting right now means that we’re well positioned to take advantage of any of those opportunities. But we’re certainly seeing these dislocations for us, where we’re sitting at the moment, is not a bad thing because sitting with 22% gearing and a fully leased portfolio means that we can act on those opportunities.

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Darren Leung, Macquarie Research – Analyst [15]

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Understand. And perhaps just a final one for me. In terms of capital management, so you’re obviously at 22.2% gearing at the moment. Graeme, you’ve made a few comments around just uncertainty in the economic environment, which I’ll agree with. It obviously makes sense to run low leverage given that uncertainty. And do you think about reducing your target gearing range at any stage? Or alternatively, if you’re happy to stick to the 30 to 40, how do you think about deploying that capital? I guess, is a capital return a potential option, please?

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Graeme A. Katz, Investec Australia Property Fund – CEO & Executive Director of Investec Property Limited [16]

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I think for us, we really are, as I said, we really are in the early stages. I think the gearing of — in the initial stages our Fund, when we were looking at growing the Fund, our gearing at that stage was sort of 35% to 40% range. And the Board and management have agreed that we would be sitting close to — if we’re close to 30% would be the guidance that we gave to the market, we’re now sitting at 22%. I would think that we’d certainly want to be at the lower end of the range. We’re sitting — currently where our stock is trading at the moment, we are comfortable sitting where we are. But our capacity and ability to move quickly, that’s not subject to debt and subject to raising. It certainly gives us a competitive advantage in the market. I would think that the 30% to 35% range is a comfort level that the Board is happy to be at.

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Operator [17]

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Your next question comes from Krzysztof Kaczmarek from JPMorgan.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division – Analyst [18]

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Could you just talk just roughly around some of the assumptions that you’ve used in sort of adjusting evaluations, per sort of Slide 16?

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Kristie Lenton, Investec Australia Property Fund – CFO of Investec Property Limited [19]

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Sure. So in terms of the assumptions, what we did is we undertook a risk assessment of each of the properties in the portfolio. And that was based on the tenant covenant, the WALE, if the property or the tenant was over-rented and if they had sought rental relief, what we did then is we assigned a risk rating, and that then applied the valuation methodology that we adopted.

So per Slide 16, you see that the lower risk impact assessment outcome. We adopted the midpoint approach when we reassessed all of the properties. And for the medium to higher, we adopted the DCF. So for the properties where we saw that there was potentially going to be some more risk in relation to COVID-19, we adopted the DCF, which meant it was a more conservative valuation.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division – Analyst [20]

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Right. And in terms of the sort of broadly what you’re sort of thinking around the potential risk to, well, I guess, market rents or market growth — market rent growth rates and market rents potential increase in vacancy. I mean, are you — would you just roughly talk around those sort of numbers that [you’re entering] your sensitivities?

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Kristie Lenton, Investec Australia Property Fund – CFO of Investec Property Limited [21]

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Look, I think it depends. It’s on a property-by-property and tenant-by-tenant basis. But we absolutely did lower the probability of tenant retention, especially in the short half term. So in the next probably 12 to 24 months, we definitely did push those out for any vacancies coming up. We did also allow for longer lease-up periods for all of those vacancies as well.

We reduced market rental growth also over that 2-year period as well, and we did soften net effective market rents on any deals that we were forecasting over the near to medium term. But it was on a property-by-property basis. So I can’t give you an exact — there’s not an exact number that would apply to all.

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Krzysztof Kaczmarek, JP Morgan Chase & Co, Research Division – Analyst [22]

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Okay. Sure. And just in terms of — I know it’s early days in terms of your negotiations with tenants. But how are you thinking around the treatment of deferred rent, if you will have any deferred rent component, will you still be recognizing that in FFO? And I guess, how will you be thinking about whether to distribute that? Or whether to, I guess, retain that and distribute that potentially when you actually receive the cash?

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Kristie Lenton, Investec Australia Property Fund – CFO of Investec Property Limited [23]

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I think it’s still early days, and we need to work through all of the issues with the tenants who have requested relief. But in terms of FFO, if it’s not cash, we probably wouldn’t pay it out, but that is dependent on the number of tenants and the arrangements that we reach with those tenants. So it’s still in early days, and we’ll be able to provide an update as we progress through that.

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Operator [24]

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There are no further questions on the phone. I’ll now hand back to the speakers for questions that came through online.

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Graeme A. Katz, Investec Australia Property Fund – CEO & Executive Director of Investec Property Limited [25]

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Okay. I’ve got a question here. It’s Graeme Katz speaking. If we’re looking at opportunities in the retail market. Retail has always been a part of our mandate. But obviously in the last 6.5 years, we had — we certainly didn’t have confidence that it was a market that we could see added value, and we certainly remain of that view. It doesn’t mean we don’t look at it or we don’t assess opportunities. But at the moment, we certainly aren’t in the business of catching falling knives. We still are uncertain, but to my earlier point as to where rents are going to be sitting. And until that lands, given the conservative nature of our Fund, we — certainly in the short term, we aren’t looking to seriously look at retail at the moment, albeit it does remain part of our mandate.

The other question we were asked is really around our future — view of future values in terms of the different sectors. Also early to call. Certainly, I think one thing that has become quite clear are the process we have in terms of our valuation process and setting discussions with values capital transaction people in the market is that long leases and lease — and strong lease covenants are the king. So that really, I think, will be a big swing in terms of valuation, certainly in the next 2 years or so. So tenant covenant is king, and that will really determine the values of properties to a large extent moving forward, and we believe there will be a big difference now between sort of prime properties with long leases and good tenant covenants and those with secondary tenant covenants and short-term leases. I think the spread there will probably be bigger than it is currently.

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Kristie Lenton, Investec Australia Property Fund – CFO of Investec Property Limited [26]

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I have a question. What was the interest cover ratio for the period? So for the year, it was 5.2x with our ICR at 2x.

I have another question saying, medium to high-risk valuations, how much did valuations drop by on a DCF versus 6 months ago valuations? So in terms of — the way that we’ve split it in the presentation, which is on Slide 17, is we put it in external and direct evaluations. So in terms of the direct evaluations, they’ve resulted in a reduction in value of 3.6% since September. And for the external valuations, there’s been an increase of 1.3% since September, again largely driven for external valuations by The Majestic Center, which had an increase of NZD 8.8 million but no change in capitalization rates since the September valuation.

Thank you. That’s all the online questions. Sean, we’ll hand back to you. We’ll hand back to the operator. Thank you.

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Operator [27]

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