360 Capital Group Ltd

ASX:TGP

Earnings Call Transcript 2022-Q3

[James Storey, executive]

Hi, and welcome to the 360 Capital Group April update. Thank you all for joining. I'm joined -- my name is James Storey, I'm the CEO of 360 Capital Group and I am joined by Chris Chase, who is Head of Private Credit; and Glenn Butterworth, who is the CFO of the group. Today, we'll run through a presentation on TGP, which is 360 Capital Group plus 360 Capital REIT and 360 Capital Enhanced Income Fund. Some of this information we may have covered it before. So we give you the opportunity to ask questions during the course of the presentation, and we'll do our best to answer them at the end. Any questions that we don't get to answering, we will provide an answer in due course through our Investor Relations manager. Bear with me as I will share the screen. The 360 Capital Group is a very focused alternative asset manager. In starting from 1st January forecasting, we have fund under management of $1.3 billion. So that's across real assets, credit and private equity. The 360 capital REIT is due to complete on the IAP transaction and the acquisition of those assets in late FY '22, early '23. We'll talk to that in more detail shortly. And the PMG funds business is in the process of being sold between 360 Capital REIT and TGP, which is subject to security holder approval of both TGP and TOT and the notice of meeting is due to be issued to security holders this time over 29 April. As a key metric snapshot for TGP, so NAV is $1 as at 31 December, which is around where we're currently trading. And from an operating earnings perspective, we provided guidance initially at $0.06 to $0.07. And then with the IAP transaction, we're actually upgrading the guidance to $0.15 to $0.16 for FY '22. The first half dividend was $0.03 per security. We're forecasting a $0.03 per security dividend for the second half of the year. And we're also with the IAP transaction, we provided guidance for FY '23 of $0.06 per security, around a 6% yield on the current trading price. So importantly, with the IAP transaction, we've not only grown funds management platform through the assets the top [ side ], they've been able to acquire. But TGP itself has generated pretty significant operating earnings for FY '22 and as well as significant cash on balance sheet coming into what we think will be a more volatile period over FY 2022 and FY '23. In terms of key highlights for the group, so in 360 Capital REIT, Chris will speak to that in more detail shortly. The group sold its investments in GDC, which is Global Data Centre Group and also the funds management group. And we have now changed the responsible entity of that business as we report. And we also have a hotel business, Hotel Capital Partners, which acquired its first hotel in Sydney in the first half of FY '22 and is in due diligence to buy a number of other hotel assets. So that business has a mandate from a private equity sponsor to grow that portfolio to around 3,000 rooms across Australia and New Zealand. The first hotel we acquired was 300 rooms. So in terms of the mandate, we said that's been about $1.5 billion mandate for TGP and Hotel Capital Partners, and it's also expanded into hotel debt as well. So in terms of TGP and our focus, it's obviously recur income through growing the funds management platform in a disciplined manner given where our views of the current market conditions as well as diversifying the capital sources. So with the Hotel Capital Partners gives the opportunity to cross-sell some of our other products to [ enlarge ] our private equity type sponsors. In the private equity segment of 360 Capital, we have sold the FibreconX position that we had. And we continue to monitor the CardioScan business that we had during the -- given the conditions with COVID-19 and Chris will talk to you in the private credit business shortly. So with 360 Capital REIT, the major transaction that we undertook here was Irongate Group. So we have identified Irongate Group as an investment opportunity in late 2020, early 2021. That's trading at around $1.20 per security. We made an approach to [ Investec ] about buying their position, which was just under 10%. We acquired for around $1.40. And then with both TGP and then TOT [indiscernible] position of just under 20%. We see more consolidation happening in the listed real estate space given the way of private capital and also where some of those are to trade in royalties to NTA. That was a proposal we made with [ ASX ] which if you look at Irongate Group, it had a profile of industrial assets and a profile of office assets. We saw the industrial portfolio was significantly undervalued. And our assessment of that obviously has come truly given where Charter Hall has made their proposal to acquire the Irongate business. So out of that transaction, 360 Capital made 3 approaches with [ ASX ] who is our partner. And subsequent to that, we also entered into a memorandum of understanding with Charter Hall to acquire 3 properties. Initially, that was also to include in [ Wellington ] for 360 Capital Group, but we're no longer proceeding with that acquisition. So the 3 assets that TOT will acquire on this Slide 7 is Canberra, which is in Forrest, which is just outside of Canberra CBD. It's predominantly leased to the federal government as well as the defense contractor. It's around a 9-year weighted average lease expired in 39 [ Captain Griffith ] building. It was -- undertook a major renovation and refurbishment in 2019. The next asset there is in Cannon Hill in Brisbane. It's a hotcake industrial asset [indiscernible]. The asset active lease completion in April of this year and the tenant will pick up at the moment. So that is due to lease commencement 1st of April -- 1st of August, I should say, and has [ 3% reviewed ] for the next 10 years. And the final asset there is in Cremorne, which is in Eastern Melbourne, in Victoria, a 50% interest. Again, the asset was completed in December 2021. The tenants are currently undertaking the pickup now. That is a fantastic asset, the prime location and that 30% interest there [indiscernible] new while. It's about a 20,000 square meter building. So if you look at the portfolio and what TOT is post the IAP transaction, assuming that proceeds in FY '22. There's 3 assets. It's a portfolio of about $250 million. Gearing is around 35%. So we are fully deployed into these 3 assets. NTA is around $1.19 per security and through the sale of the securities, we've generated significant banking credits. So it's around $30 million of tax, which is around $0.09 per security and franking credits, and we'll look to get that back in the hands of security holders through paying a taxable component of income going forward from the passive side of TOT and supplementing that with the franking credits on the active side. So for the first 2 dividends this period have been fully franked. It's likely assuming the PMG transaction occurred in FY '22, that the balance of the FY '22 distributions are as well fully franked. And then going forward, once we settle the assets, we'll be able to fully guide into the market about where we see that franked component thing. So why we chose these assets, really, if you look at the portfolio, it's an there other new or recently been refurbished. There's limited leasing expiry risk, there is a limited capital expenditure. And whilst we do think there may be volatility in the listed breed sector, we think we're very well-positioned to take advantage of that, given the strength of the cash flow and the quality of those assets and their location. So the rationale we think is very sound progressing with these exact position of [ lease ] as well as the transaction itself to live close to 4.4x at the forecast earnings for TOT. As well as the IP transaction TOT initially acquired the PMG funds business in February of last year. That's a New Zealand-based funds management platform with around $80 million under management now. And we acquired in TOT, it was around $670 million. That business has been around since 1992, and that is a very diverse investor base that's [ 5 unlisted ] funds and 45 assets across those funds. The rationale for putting that investment in TOT was put an active business in tier 2 and give it a cost of capital that valued by the market, and our new and investor feedback is to perceive with the sale from TGP up from TOT, I would say to TGP. And as I mentioned previously, there's a notice of meeting for both TOT and TGP going out later this week with independent experts reports in that, which transaction fair and reasonable for both parties. So [indiscernible] the business is previously the opportunity to underwrite and support the growth of PNG. In terms of the New Zealand market, the interest rates have moved faster than they had in Australia. The base rates are now up 1.5% in New Zealand. And the direct property market is currently in somewhat of a standup between [indiscernible]. The PMG business still continues to raise capital. The most recent capital raising they did like the overall close to $25 million, so quite low here across both their funds, both their major funds, and we're in a very strong position coming into what could be a volatile period in the New Zealand market. With the private equity business. So we continue to look for opportunities in the private equity space and we will create opportunities to partner with other groups. The Cardioscan business, we had it's around a $12 million trust TGP has made a $6.1 million co-investment in that. It's in a very exciting sector being health care, both in Australia but also operations in Asia and the U.S., it's a 3-year investment drive and an investment that we realized during the first half of the year was, FibreconX, so FibreconX business build dark fibre dedicated to the data center industry. The total size of the plant was around $26 million. TDK made a $10 million investment and generated a $16 million profit as a result of that realization. I'll hand over to Chris to talk through. Chris?

[Christopher Chase, executive]

Thanks, James. So private debt in private credit continues to be an attractive asset class for investors globally, particularly the macroeconomic changes that are happening across the market. We spent a lot of time working with investors and increasing our FUM over the last -- over the period. And as you can see the group AUM has increased to $31 million, which is approximately a 50% increase in the AUM of the group. TCF is one of our vehicles, which we took over the responsible entity of in the first half of '21. Throughout the period, we also added a new private credit vehicle, which is a wholesale unlisted managed fund. That's an important addition to our kind of credit offering. That provides the ability for 360 Capital to co-invest and secure transactions to underwrite yields and then effectively sell into our investor market. And one of the unique kind of aspects of 360 Capital as a credit fund manager that other credit fund managers don't have is the ability to underwrite that with a significant balance sheet. And James touched earlier on the capital that 360 Capital Group has and how we utilize that across growing the recurring funds management revenue across the business. So TCF fully invested. It has 2 loans in the portfolio and is currently generating a distribution yield of 6.1%. That equates to $0.36 per unit per annum, which is $0.03 per month. We still see private credit is a really attractive part of the market, particularly moving into these more uncertain times. Having security over the cash flows or real assets provides strong equity buffers and gives us the ability to have some sort of macroeconomic cyclicality with standing. And the positions that we're at the moment are trading work very well, the cash flows of the businesses that the underlying credits that we have are performing strongly, and those interest payments continue to be distributed through to investors. Sorry, back on slide deck, thanks. Thanks. Next one, so 360 isn't new to lending. It's something that we've been doing for 5 years. Some TOT investors may remember TOT was previously in the lending market, and this is a little bit of a stature of a track record of our real estate lending experience. So we have done over $220 million worth of deals. We have a strong pipeline for new transactions. Our average IRR when we do undertake credit investment is 15%, and we're certainly seeing more opportunity in the real estate part of the market. Strategically, we made a decision to distinguish our real estate debt and our real estate equity investment activity, which saw TOT move away from real estate lending back to real estate equity. And of course, now we pick up our real estate lending activity in the credit part of the business through the Enhanced Income Fund and through the private credit fund. We were strategic in 2020 as the way of capital started to move towards real estate lending about being a bit more cautious around what real estate exposures we did look at. We certainly saw a lot of yield compression through in the market, and we felt that risk-adjusted returns were probably narrowing to the point where it didn't make sense or it wasn't as effective an investment for us and for our investors. We are starting to see that change. And as you can see there, our focus is really around that stretch senior real estate and the mezzanine loans. We prefer to be fully deployed from a capital perspective, and we're assessing a lot of opportunities at the moment in the investment part of the market, residual stock. We're cautious on development and construction finance, given what's happening across the sector and the pressure that's been put on supply chains and developers. So we continue to assess it, but we certainly see plenty of opportunity in the next 12 months around the real estate lending part of the market.

[James Storey, executive]

And we're seeing a lot of answers in that spot. It's truly why TOT and 360 Capital Group more broadly put out the real estate lending sector. There's a lot of capital that's come in. There are a lot of inexperienced groups that may not have the direct real estate or the equity learnings. I think one of the key differentiated 360 Capital Group has in this space is our deep real estate equity experience and the fact that we can step in and finish a project or manage through a sales process, which puts us in a very strong position compared to some of our peers and gives us a lot of opportunities with some of these positions going to default for other lending businesses and the nonperforming items and opportunities in that set.

[Christopher Chase, executive]

Yes. That's kind of the key part of our credit structuring and credit thesis is always applying the equity lens in what we do. And we are in a core real estate investment house, and that certainly bodes well when we're assessing real estate debt transactions.

[James Storey, executive]

The next slide is principal investing. You can see we've got a strong track record here since 2014 in principal investing activities and generate significant trading profits as a result of those. So while they're not recurring, as you see there on the chart, it's recurring in nature given the volume of transactions that we've done and the profits we've made over time. So really, those trading profits have been related to our funds management business. And if you look at IAP as an example, we made the investment in IAP in both TOT and sponsored as well with TGP balance sheet managed to grow the funds management platform, increase the recurring income nature of funds management fees through TOT growing its asset base as well as TGP managing to secure a trading profit of around $23.5 million as a result of exiting that position. And then from the PMG acquisition perspective that is recurring dividend that come out of the funds management company, which is PMG Funds as well as the opportunity to underwrite our capital raisings and help facilitate the growth of the PMG business, which obviously grows the road value of that investment. I'll hand over to Glenn to talk through the financials.

[Glenn Butterworth, executive]

Thank you, James. I'll briefly touch on the financials for the half year ended 31 December '21, starting with the balance sheet on Page 17. The group ended the half year with a healthy cash balance of $91 million, up $72 million on the prior period. That was contributed to by the realization of its digital infrastructure investments, being Global Data Centre co-investment and the FibreconX investment. GDC totaled about $42 million in proceeds and FibreconX is about $26 million proceeds during the half. Also, we expect our cash balance to increase over the next 6 months, post the settlement of the proposed IAP transaction and also taking into account the acquisition of PMG as James spoke about earlier. The Irongate Group, we held at 31 December with ASX closing value of $1.73 per security. Based on the IAP transaction, the proposal there is at $1.90, so the increase that investment, value will increase to approximately $92 million based on that proposed transaction value. The group continues to coinvesting its funds. It held $40.8 million in 360 Capital REIT at 31 December. It took its interest up to 23% at 31 December. And then subsequently we also increased our investment post 31 December to approximately 24.5%. The net asset value of the group increased by $0.09 to $1 at 31 December. Again, that was contributed to the realization in digital fiber investment, together with the mark-to-market revaluation on IAP during the period. I'll just turn to Page 18. In regards to the profit and loss for the half year. Funds Management revenue was $5.7 million, up $3.5 million from prior periods, and that continues to be a focus for the group to grow that recurring funds management revenue. Outside that, the group also had $20.7 million in investment revenue during the 6 months. That was underpinned by the realization of FibreconX which delivered a profit of approx. $17.1 million during the half. Tax expense is obviously up given the realization of those investments, so $6.2 million, which will underpin our fully franked dividend that we're paying out for the remainder of the year. The group delivered a $0.071 per security operating profit for the half year, a strong result and also distributed $0.03 per security during that period and is forecasting to distribute $0.06 per security for the full year, which is expected to be fully franked. I'll now hand back to James.

[James Storey, executive]

In terms of key focus and guidance, so I'm concluding the IAP transaction, as we've spoken about previously, the group will have around $0.70 per security of $154 million of cash. We're focused on deploying that capital to grow funds management business across assets and credit. Obviously, cautious about where the market is today and potential volatility that rising interest rates more. So we're focused on the credit side of the business as well as, I guess, if you look at transaction history of 360 Capital Group has been somewhat opportunistic, and we'll continue to focus on growing that recurring income as well as diversifying the capital sources through partnering with groups like we're doing in the hotel space and like we're doing on the IAP transaction. And the outlook will be close to $1.3 million of forecast by 30 June. We'll look to conclude the pending transaction prior 30 June. In terms of Irongate [indiscernible] we believe that mill be mid-July, June and settlement is surely thereafter, given where it's kind of be trading relative to the post take-up across, we are confident of that transaction will go ahead. Chris is focused on the [indiscernible] credit strategies, and we've diversified the capital sources there through high levels as well as some family offices in some of the real estate debt transactions and overall continue to focus on growing that funds management recurring income base. So we provided dividend guidance of $0.06 for FY '22 and then we've also provided to earn distributions for dividend guidance for FY'23 and then $0.06, which at this stage of will be franked as well. So we don't have any questions at this point. You might give people a few minutes to ask any questions if they have any, through the chat box press to ask for questions. If anybody does have any questions post this webinar and there's no questions that have come through at this point, please feel free sending them to [e-mail] and we'll do our best to get back to you shortly. But on behalf of 360 Capital, thank you for your continued support, taking your time today and listen to management provide a quarterly update.