Company Interview / Centuria sees interest rate relief

Key points:

John touches on the positive impact of falling interest rates on the market. Centuria is exploring options for diversification, namely in private credit and real estate sectors. FY25 is expected to bring growth opportunities for Centuria in the second half of the year.

John McBain, from Centuria Capital Group (ASX: CNI), reflects on a challenging environment for fund managers, seeing global signs of a retreat in official rates that are anticipated to be positive for majority of their products. He notes the stabilisation of group assets, at $21.1 billion alongside a statutory net profit of $102.2 million, a slight decrease from the previous year. John highlights that Centuria's focus remains on capital management.

John elaborates on the repercussions of falling interest rates in New Zealand, stating it has piqued the interest of retail investors. Anticipating this trend in Australia, he sees a surge in activity on the retail side of their business if banks trim term rates, as retail return rates from their products will be higher. This, he opines, alongside with the post-Covid recovery, could potentially help them provide higher returns.

Diversification is a key strategy for Centuria, evident in their foray into private credit and real estate markets. John cites that they hold $2 billion private credit loan book and are exploring opportunities in agriculture and edge datacentres. He expects the first half of FY25 to be challenging but foresees potential growth in the second half with opportunities to invest in cheaper properties, expansion of their alternatives, and stronger growth in private credit.

Full unedited transcript below:

0:11

Century capital rate has reported statutory net profit of $102.2 million, which is down from 105.9 in the previous year. It says group assets under management have stabilised at $21.1 billion. It achieved operating earnings per security of 11.7 cents, and is guiding a lift to $0.12 for the new financial year. Distribution per security coming in at $0.10, forecasting that to grow to 10.4 cents. And the company has emphasized that capital management remains a focus. Well, let's get some detail off the back of those results. John McCain is the chief executive of Centurion Capital Group. He joins us now. John, welcome. Thanks for having me. Of course, we know the rights. It's been a very difficult environment in which to operate. So given that, how would you describe your result? Oh, I think we were pleased to come in at guidance that it's a difficult period for all fund managers. Um, I think the tide's turning now. I think we're we're now starting to see global

1:11

signs of a retreat in official rates, which will flow through the swap rates. And that's positive for most of the products that we have

1:22

to that point. Then obviously, as you say, um, as interest rates start to fall, that will make your job a little easier. I would have thought. Notice that you've actually pointed towards New Zealand where they have begun cutting. What are you seeing there? Is that perhaps, um, you're looking over there and perhaps a reflection of what is going to happen here in Australia. Yeah, we actually have a we have a business in New Zealand, a relatively to 2 billion under management. Um, of course their cash rate topped higher than ours at 5.5% as, as your viewers probably know, dropped a quarter of a per cent last week. Um, but it's been a very interesting test tube for reactions from retail investors. So our phone's been ringing off the hook from investors in New Zealand because at the same time as interest rates have Are set to fall, and they're predicted to fall another 100 basis points by Christmas. Um,

2:16

uh, then, uh, some banks have been trimming term deposit rates, and that's a dual, uh, positive effect when you're looking at relative returns from our products being higher and relative returns from term deposits being slightly lower. You know, nothing wrong with term deposits, obviously, but people have probably been allocating a far larger part of their savings to turn deposits. And why wouldn't they? Well, yeah, you're looking for that yield. And in fact, well, you must be fairly positive then, given what we're seeing here, because of course, the retail banks here now cutting their term deposits as well. Yes, I think the and in the same way, I don't think Australia necessarily follows New Zealand. But you're seeing that trend. And I do anticipate if further banks trim term rates, I think you'll see a lot more activity on the retail side of our business. And uh, unlike uh, managers who simply rely on institutional capital from offshore, um, we have 14,000 retail

3:16

investors and they've been very strong supporters of our products, even, you know, post-Covid. And it's really this post-Covid period that's been tricky. But, you know, we build a half $1 billion agriculture fund, um, really when solely backed by retail investors. Um, so we can sense them getting excited about, uh, moving out of term deposits and we can sense, um, uh, I think a sort of a recovery, an ability for us to provide higher returns when we can fund slightly more cheaply. John, can you unpack, um, some of the activity then you've been engaged with internally as far as in real estate, with 1 billion, 1.3 billion of gross real estate activity, can you highlight what that amounts to? And at the same time, $1 billion of divestments? Where have you done that? Yeah. So, uh, the inflows that we've had from our that retail network about half have been in our private

4:16

credit business, which we entered three years ago. And that's been very successful. It posted a $24 million impact for FY 24 and about half into our conventional property property fund products that will be securitized individual properties. On the divestments, we've taken the opportunity to trim our portfolios where we've seen older buildings, all where we've got offers at or near book value. Um, and I think that's a sensible thing to do in these markets are often the divestments might be in a REIT to where we can sell an asset and reduce gearing within the REIT. As you know, we've we've run through, uh, independent REITs one an industrial SIP and one an office cough.

4:59

How would you assess the performance of your subsectors if you like industrial. That has been proven to be a strong performer. So yes, clearly you'd be very happy with that office. Obviously problematic. We know what's going on across the country there. Well we I think we when I come here we try to be transparent You know, I think the sentiment for our office globally has been poor and there's no point avoiding it within the portfolios itself. For example, cough. We're very proud of it. Uh, it's one of the youngest portfolios in the country, 17 years. Uh, it's 92.5% occupied. Now, you know, I've been around a long time in real estate, 95% occupancy in any markets, quite a good occupancy. So the actual metrics around a sound office portfolio haven't been that bad. But when you look at the effects of back to work globally, the sentiment is still quite poor. Fortunately for quality buildings, I think our values have started to stabilize and

5:59

almost stabilized. I would say for high quality property. You make a point that you you're looking to diversify further in real estate. Then how are you actually doing that? Yes. Well, we took a decision pretty well during Covid. No one knew how long Covid was going to last, did we? So so we thought, let's go into alternatives. Agriculture was the first one. Then private credit. And we've got now $2 billion private credit loan book, uh, funding, uh, conservative Developments. Um, and the third thing we've adjusted into is, uh, is edge datacentres or liquid immersion cooling for surrogate end of the data center market.

6:39

Can I just clarify. So perhaps this comes into the divestment, um, with, uh, the region group. Um, what you've done there in terms of its daily needs, retail, um, they previously managed by century. Has that been transferred? Yeah. So the the owner of those properties, the institution that owns them, wanted to have a we wanted to have a vehicle who had put far higher percentage of their capital towards it. I think they wanted about 20, 20% investment. We tend not to carry high levels of car investment because the market sees us as a capital light fund manager, so we might have between two and a half or 5% co-investment, but we would almost never have 20%. So it was a natural shift to a good manager So, um, John has just returned then to your guidance. Um, and what that's based on, then, because you're sounding at least optimistic at this point. Yeah, I think I think

7:39

FY 25, you know, we take our guidance very seriously. I think it's going to be a tale of two cities. I think the first half is going to be a little bit tricky as we react to reacts as we react to rates dropping around the world. Um, and I think the second half, we're really going to see an opportunity. We've got plenty of dry powder to take, opportunities where we can see cheaper properties. We're going to build our alternatives. There's 20% of our AUM now is an alternatives. Uh, we we've got to have very strong growth in private credit, where we've already signaled in our documents 20% growth in Ebit for that business. Um, and we'll, we'll be able to unlock our that core unlisted business and provide more unlisted property funds for our retail investors. Um, and I would say we'll probably do some more institutional business this year as well.