Augusta Capital Ltd’s annual meeting last Thursday was an opportunity for investors to gain an insight into a changing world.
The company’s annual results, out in May, showed an entity determined to shift completely out of long-term passive direct investment and into a range of portfolio management roles. It now has a $1.7 billion portfolio of syndicates & other funds under its wing, including privately held portfolios and the Value-Add Fund No 1, which is not about the traditional yield-based returns on property but about repositioning assets and making a profit.
Managing director Mark Francis said the company had limited opportunities for growth in its remaining direct property portfolio without substantial new capital being introduced, and market conditions favoured diversifying.
He listed these alternatives, which he saw offering much better returns:
- Realising further opportunities to manage funds
- Launching additional funds with the potential to expand & diversify these types of offerings into niche & strongly performing sectors of the economy
- Ongoing, measured expansion into Australia
- Maintaining prudent capital management structures throughout
- Balance sheet transformation
- Working closely with Bayleys Real Estate to maintain optimal efficiency across the existing asset portfolio, and
- Active management.
Here & there he would throw in a corporate catchphrase, realise it and revert to blunter language. Augusta is about making properties work – and if they don’t work, can’t be improved further, don’t offer redevelopment opportunities, are syndicates at the end of their time, the company will move on.
While the company’s refashioning ownership away from long-term passive, it’s also been adjusting its balance sheet to cater for different ownership forms (syndicates closing earlier than they used to, funds with other imperatives, development) and for volatile cash holdings.
The issue of volatility was sorted out at the annual meeting when the constitution was changed with a 99.74% vote in favour of removing the loan:value ratio clause that had impeded some investments.
Recurring fees are the cement
Augusta chair Paul Duffy said the focus of the last year, growing recurring management fee income, remained the focus and would be driven through new syndicates & a range of multi-asset property funds. The company would also invest in new staff, technology & processes to further that aim.
“Recurring annualised base management fees increased 10% in the last financial year. This trend has continued in the new financial year with the completion of the 33 Broadway Offer at the end of June and our latest Australian syndication, which will settle this coming Monday.
“In the last financial year, we raised over $200 million in equity for the establishment of new syndications. This included the 2 largest-ever syndications completed by Augusta – the NZME & BDO buildings at Graham St, Auckland. Outside of the KiwiSaver sector, there are very few entities across the financial sector which will have raised similar amounts of equity.
“The success of those capital raisings has seen the number of investors in our syndicates & funds grow 20% in the past year. Augusta now has over 3000 investors in its syndicates and 880 shareholders in Augusta Capital.”
The sale of remaining Finance Centre properties will be completed in 2018 & 2019, and Augusta will use the released funds to warehouse property before syndication, underwriting & co-investments in new funds. However, Mr Duffy said it was proving harder to source these opportunities.
Augusta increased adjusted funds from operations by 19% to $6.75 million, equating to operating earnings/share of 7.7c (6.5c in 2016). Net profit after tax fell 43% to $7.75 million, the result of lower revaluation & disposal gains as directly held investment portfolio assets continued to be divested.
However, as those directly held gains fell, the company increased funds under management by 9.5% to $1.6 billion at balance date – and to $1.7 billion since then, following settlement of the 33 Broadway and Nudgee Rd, Brisbane, properties.
Augusta raised $203 million in new equity through 5 new syndications, lifting assets under management by $347 million and continuing the expansion into Australia. Recurring annualised base management fees rose 10% to $5.6 million at balance date, and have since risen to $5.8 million following settlement of 33 Broadway at the end of June and Brisbane syndicate property Nudgee Rd, settling today. Net asset value/share has risen from 94c in March 2016 to 98c.
He said Augusta, which carries buildings on its balance sheet at cost, would launch more funds this financial year, including “measured expansion” into Australia.
All those funds were about yield, but the Value-Add Fund No 1, is about total return, repositioning assets for capital gain for the investors in the fund, including Augusta itself.
Of the 5 properties bought for that fund, all in Auckland, 3 have been sold:
- 100 Carbine Rd, Mt Wellington, unconditionally sold for $36.8 million (purchase price $33.45 million)
- 11 McDonald St, Morningside, sold for $24 million (purchase price $17 million), and
- 36 Kitchener St in the cbd, sold for $21 million (purchase price was $16.5 million).
Mr Francis said the company was working on options for the other Value-Add Fund properties, Hangar 54 at 54 Cook St and 151 Victoria St West.
Next task is to transform balance sheet
Next up for Augusta is to transform its balance sheet. In short, this is about moving out of direct property ownership – albeit investments such as the company’s stake in the value-add fund and short-term underwrites amount to a form of direct investment – and into portfolio management for other investors. It’s contract management for a spread of entities, expanding the external management concept which listed property entities have switched in & out of over the last 3 decades.
Mr Francis said Augusta was getting better use of its capital through that contract management than it would have by sticking to direct investment. That change led to the 19% increase in adjusted funds from operations, he said.
Instead of being “a listed property company”, Mr Francis said: “We’re a pure-play funds management initiative. We’re getting a better earn – 31% – off funds management than we were off direct property investment.”
The change in focus reduced group gearing from 35.5% a year ago to 26.6% in December and 21% now, but Mr Francis said shareholders could expect that ratio to be volatile, depending on the state of investments: “Given what we’ve got on the radar, you wouldn’t expect us to sit at those gearing levels [in the 20-25% range] very long.”
Shareholders approved amending the company’s constitution, by removing the loan:value ratio limit, with a 99.74% vote in favour of this change. The result, Mr Francis said, was that against a target gearing ratio of 35%, the actual gearing could range from 0-55% on a drawn basis.
Future borrowings will consist of 3 categories, each with its own target gearing levels:
- Real property: A gearing ratio of about 45%, with interest serviced by the income from the relevant real properties; this category includes properties warehoused short-term, with an exit strategy
- Investment assets (shares or co-investments in managed funds): A lower gearing ratio, with interest serviced by the distribution or dividend income from such assets, and
- A separate working capital facility, which will be serviced by the cashflows generated from the funds management business and only used to facilitate new deals or funds initiatives.
“The key focus will be servicing the debt, as the debt profile will be low on a long-term average basis, but may increase with respect to new initiatives.”
Mr Francis said that before the constitutional change, “you will see where we’ve bought property to syndicate and underwritten ourselves, but sometimes we’ve hit a debt barrier.”
Changes for syndicate investors
Syndicate investors will see changes too, as Augusta rationalises the portfolios it manages. It’s prepared to be active in closing a syndicate, including offering investors in some of the provincial syndicates the opportunity to enter a new syndicate with better growth prospects.
Mr Francis said Augusta had put proposals to investors to sell out of syndicates and had sold $150 million of such assets in the last 12 months.
“We believe we’re exiting them at the right time, and we can get better investment outcomes. This is a win-win in our minds. We’ve certainly had strong support from investors for our exploring this avenue, and we still see plenty of opportunity for divestment.”
The NZ portfolio
Augusta’s NZ audited portfolio delivered a weighted average total return of 16% for the year to March, an unrealised average 25% equity gain since establishment and a 4.8% valuation gain in the last year. That $1 billion portfolio excludes Australian audited properties, new schemes, the directly owned portfolio, the Value-Add Fund and privately owned & other properties.
The portfolio is about two-thirds exposed to Auckland and is across all commercial sectors. Mr Francis commented: “If you believe the data, it’s hard to ignore Auckland as the preferred investment location.”
How Augusta goes about buying, and building on what it buys
Company chair Paul Duffy & director Bryce Barnett added some detail on how Augusta goes about syndication purchases.
Mr Duffy said there would be an informal discussion with the board about a proposal – at that morning’s board meeting there 3 of these – and, if an agreement to buy was prepared, the board would have a due diligence committee look at the tenants: “It’s not a passive investment. The returns we achieve, close to 16% – it’s a very active management to achieve those results.”
As Augusta looks more at Australia, and Brisbane in particular, Mr Bryce spoke up as the expert in that market segment. KCL Property Ltd, which he headed, merged with Augusta in 2014, taking $850 million of assets under management into the enlarged group, including a number of syndicated Brisbane assets.
“The Australian opportunities at the moment with the best upside are in the Brisbane region,” Mr Barnett said.
One shareholder was curious to know if Augusta improved a property during its brief ownership before passing it on to a syndicate. “Not as a rule,” Mr Francis said. “We’ll buy something then pass it on. Sometimes that will be in passive form, sometimes it will need working on. But we’re not buying, putting a bow on it and then passing it on.
“For the Value-Add Fund, all 5 properties required some sort of addition. The real opportunity there was the short lease to Bunnings and no opportunity to renew it.”
Mr Duffy added: “At McDonald St, management initiated a plan change. We were able to increase the density of that building. We then found the risk to develop it was too high and we’ve now realised it at a substantial profit.”
Future for syndication
On a question of syndication becoming more difficult if interest rates rise, Mr Duffy said: “We’re trying to tie our bank finance to the lease period with interest rate swaps & so forth, and the team lock in a chunk of bank finance. That’s why the recurring earnings become a driver.”
Mr Duffy also said Augusta had hired accountancy firm PWC to provide treasury expertise.
He also commented on likely investment in commercial property by New Zealanders, especially the impact of KiwiSaver on the flow of capital: “With KiwiSaver, you’re going to have 10-15% weighted in property. New Zealand has seen foreign capital coming into commercial real estate, so I don’t see commercial property yields going to 6.5-8% in the next 3-4 years. It’s just not possible.”
Loughlin defers retirement
John Loughlin, who’d intended to retire at this annual meeting, will stay on until the end of the year, when a replacement is expected to be named. Mr Duffy said the search for a new director was progressing but wasn’t quite complete.
And Mr Francis complimented Mr Loughlin, who joined the board in 2007, saying they’d had “many robust discussions over the years” and had disagreed as many times as they’d agreed – “and that’s what you want from a director”.
Attribution: Annual meeting.