CENTURIA CAPITAL GROUP ANNUAL REPORT 2015
CONTENTS
About Centuria
2015 Highlights
Chairman's Review
Chief Executive's Report
7 Centuria Property Funds Management
14 Centuria Life
Centuria in the Community
Meet the Directors
Directors' Report
25 Remuneration Report (Audited)
Auditor's Independence Declaration
Financial Statements
86 Directors' Declaration
Corporate Directory
Management Directory
ABOUT CENTURIA
Centuria Capital is a Specialist Investment Manager focused on property funds management
and tax-effective investment bonds.
With $1.6 billion* in funds under management and a 35-year history, Centuria has a proud track-record of delivering value for investors, advisers and shareholders.
This financial year marks a year where the Group's balance sheet has been substantially strengthened and our focus on the performance of our core business units is delivering increased value for our stakeholders.
Our two core divisions, Centuria Investment Bonds and Centuria Property Funds remain dedicated
to creating products and services that meet, and exceed, the needs of both investors and advisers.
Our highly focused, experienced team continues to leverage our in-depth knowledge of the markets
we operate in and with our enhanced balance sheet, to drive increased shareholder wealth and produce consistent dividend returns for investors.
*As at June 2015
1
2015 HIGHLIGHTS
Statutory net profit
after tax at 30 June 2015
Underlying net profit after tax at 30 June 2015
23%
15%
74%
9%
Cash from sale of non-core assets realised
Property acquisitions during FY15
Listed Centuria Metropolitan REIT market capitalisation as at 30 June 2015
Total shareholder return for FY15
Net asset growth
Property funds management underlying profit increase
Investment bonds increase in client retention
2
Roger Dobson
Chairman
Dear Shareholders,
THE GROUP'S RESULTS FOR THE 2015 FINANCIAL YEAR WERE PLEASING AND REFLECT HOW WE HAVE CONTINUED TO INVEST IN THE GROWTH OF THE BUSINESS.
The Group's results for the 2015 financial year were pleasing and they reflect how we have continued to
invest in the growth of the business.
The highlights for the year are well summarised in our Chief Executive's Report in this Annual Report.
Markets remain volatile and will likely continue to be so. We want to make sure that the Group is well-positioned to deal with that, both in terms of threats as well as opportunities. One advantage we do have, which our CEO mentions, is the strength of our balance sheet.
The market for real property has been running quite hot in recent times and we have taken advantage of that in our Unlisted Property division, with a number of sales taking place leading to great outcomes for our investors. It is fair to say that such a market presents
more challenges when it comes to acquiring property. Nevertheless, the diversification we now have through
our Listed Property division and REIT, and through other initiatives we are pursuing, present more opportunities for growth than the Group has ever had.
For me, one of the most pleasing aspects of the Group's performance is in the Investment Bond division which, under the leadership of Neil Rogan, is gaining some real momentum. If that continues,
which I expect it will, it will have a significantly
beneficial impact on the Group and provide strong and
predictable income in an otherwise volatile world.
My sincere thanks to my fellow directors, to our executives and to all of our staff for their contributions
to the Group's success throughout the year.
Roger Dobson
Chairman
3
ACHIEVING THESE CLEAR GOALS SET THE SCENE FOR MAJOR CHANGES DURING
THE 2015 FINANCIAL PERIOD.
Financial Summary
John McBain
Group CEO
Underlying NPAT1 | 2015 $6.3m | 2014 $5.9m | Change 6.4% |
Underlying EPS1 | 8.1c | 7.6c | 6.8% |
Fully-franked dividends | 4.75c | 2.75c | 72.7% |
Net assets per share | $1.55 | $1.32 | 17.0% |
CEO Report - 2015 Annual Report
During 2014, Centuria Capital announced a clear strategy to focus on core operations and monetise non-core business. Achieving these clear goals set the scene
for major changes during the 2015 financial period.
During FY15 we announced the sale of the variable rate reverse mortgage portfolio and the Over Fifty Insurance Limited subsidiary, releasing
$37.8 million in equity (before transaction costs). These disposals were transformational because they greatly strengthened Centuria's balance sheet and supported the further development of our core Property Funds Management and Investment Bond divisions.
The 2015 financial year was uniquely challenging as our core divisions were tasked with not only replacing the revenue shed by the disposal of non-core
operations but growing total profitability. In FY14 these
non-core divisions contributed $4 million in net profit before tax however the majority of this profit was
non-cash in nature, limiting cash available to support dividend payments.
We are pleased to report that during the FY15 period we were able to grow underlying net profit after tax by 6.4%,
increase fully-franked dividends substantially to 4.75 cents per share and grow net tangible assets per share to
$0.86 per share. It is noteworthy that this was achieved in a backdrop where, by the completion of FY15, the Group's balance sheet was transformed with cash in excess of
$25 million and undrawn corporate debt facilities.
Total shareholder returns during the FY15 period equalled 22.8% which takes into account the increase
in share price over the period plus FY15 dividends.
These results were made possible due to the consistent profits generated by the Investment Bond business
together with another strong performance by the Property Funds Management division. In addition,
corporate and finance costs were reduced by $800,000
during the period as a result of expense control and reduced interest costs.
Underlying Results (see table on page 5)
Accounting standards require the inclusion of the Friendly Society Benefit Fund financial results in our statutory
corporate results.
In order to provide greater clarity, the table on page five provides a reconciliation of the Group's corporate
underlying earnings by segment (excluding benefit funds)
to the reported statutory profit.
Property Funds Management
In FY15 our property funds management business generated an underlying profit, before finance costs and tax expense, of $8.774 million, up over 70% from FY14 and aided by significant sales and performance fees from
disposals of assets in the unlisted managed portfolios.
Total property funds under management (FUM) decreased by 5% year-on-year to $876 million as the
unlisted division took advantage of a buoyant commercial property market to sell selected assets which had been acquired with the express intention of adding value and
disposal at a profit.
The unlisted division, led by Divisional CEO, Jason Huljich, has an extensive track record of acquiring under-valued
assets. As these properties are repositioned, significant profits are released to our investors and substantial sales
and performance fees are generated for Centuria.
4
We expect unlisted property FUM to fluctuate to
a certain extent as the unlisted property division reacts to property cycles and is either a net buyer or seller during a particular period. It is anticipated that FY16 will be a growth year where acquisition fees and FUM will increase and performance fees will be generated but over a reduced number of asset sales as we move into an acquisition cycle.
In summary, we are expecting another strong profit performance from this division and the announcement in October 2015 of the acquisition of an $86 million
office investment in St Leonards, Sydney is an excellent
example of Centuria's ongoing ability to secure quality investment stock irrespective of market cycles.
A highlight of FY15 was the successful listing of the Centuria Metropolitan REIT (CMA) on the ASX in addition to the completion of a $100m equity raising in May 2015, bringing CMA's total market capitalisation as
at 30 June 2105 to $245 million.
The listed property Divisional CEO, Nicholas Collishaw and Fund Manager, Nicholas Blake have overseen the creation of a new highly complementary division to the Group
which will build FUM steadily and represents a new profit
centre for Centuria with excellent potential for growth.
Underlying Segment Results
Whereas unlisted property FUM tends to fluctuate
as market cycles occur and assets are recycled, listed property FUM will generally increase in a predictable manner. The addition of the REIT brings a host of advantages to our platform including the
ability to raise funds efficiently in the equity capital
markets, the strength to contemplate larger acquisitions and the ability to acquire assets jointly with Centuria's unlisted funds.
Finally, the property group pioneered a new style of investment product recently when it restructured an
existing ten-year duration Centuria passive office fund
for redevelopment.
Investors were invited to participate in a high-end, 62 unit, residential development in the prestigious
Sydney suburb of Mosman, which is now 92%
pre-sold and under construction. An equity raising to replace passive investors wishing to exit was significantly
over-subscribed and Centuria co-invested a modest sum alongside its clients.
The development, management and performance fees payable to Centuria provide meaningful down-stream
profits which would previously have been lost to the
Group as well as a new style of investment which was highly attractive to our investors.
2015 | 2014 | Commentary | |
Underlying profit by segment (1),(2) | |||
Property funds management | 8,774 | 5,043 | Reflects increased performance and sales fees |
Investment bonds | 5,803 | 6,430 | Retention improved 9% with increased business focus |
Reverse mortgage portfolio | 456 | 2,897 | Reflects sale of portfolio in Oct-14 |
Insurance | 244 | 1,090 | Reflects sale of subsidiary in Oct-14 |
Corporate | (4,628) | (4,878) | |
Underlying profit before interest and tax | 10,649 | 10,582 | |
Corporate finance costs | (473) | (1,040) | Reflects repayment of facility in Dec-14 |
Underlying profit before tax | 10,176 | 9,542 | |
Underlying tax expense | (3,896) | (3,638) | |
Underlying net profit after tax | 6,280 | 5,904 | |
Non-underlying adjustments: | |||
Unrealised gain on fair value of derivatives | 1,148 | 5,007 | Accounting valuation of Reverse Mortgage interest rate swaps |
Centuria Life seed capital valuation movement | (1,795) | (511) | Refer to Note (3) below |
Accounting gains on sales of non-core assets | 5,194 | - | $4.873 million gain on sale of Insurance Agency and $0.321 million gain on sale of Reverse Mortgage portfolio |
Other non-underlying adjustments | - | 38 | |
Tax impact of above non-recurring adjustments | (2,266) | (1,360) | |
Statutory net profit | 8,561 | 9,078 |
Underlying profit is a financial measure which is not prescribed by Australian Accounting Standards ('AAS') and represents profit under AAS adjusted for specific non-cash and significant items.
Extracted from Segment Information in Note 3 of the Centuria Capital Limited financial statements lodged with ASX on 20 August 2015.
Impairment of seed capital resulted from the write-down of the two remaining legacy non-performing commercial loans within the Income Accumulation Fund Friendly Society bond.
5
Investment Bond Division
Centuria Life manages two friendly societies -
Centuria Life Friendly Society and the Over Fifty Guardian Friendly Society. Combined, the two friendly societies are the fourth largest friendly society/insurance bond issuer
in Australia with 9.7% market share.* These societies had
a total FUM of $715 million as at 30 June 2015.
Centuria Life is a wholly owned, APRA-regulated,
Life Insurance company authorised to issue Investment Bonds (Insurance Bonds) and this division is led by industry specialist, Neil Rogan, ex-AMP Head of Marketing and Campaigns.
Neil was appointed in October 2014 with a mandate to create positive inflows to put the division into a
growth trajectory and we are witnessing markedly higher inflows to date in FY16.
We experienced steady growth in policyholder numbers to 83,814 primary holders at 30 June 2015, up from 83,136 at 30 June 2014. Over Fifty Guardian FUM
continues steady growth up 8.93% from 2013/2014.
Centuria Life Friendly Society retention improved by 8.93% from FY14 and total redemptions decreased
from $46.58m to $42.42m for the period.
We believe our focus on this division as a core business and our commitment to its growth will provide continuing
annuity-style profits for years to come and growing these
profits will be highly accretive to the Group.
Capital Management
As part of Centuria's on market share buy-back scheme, in FY15 the Group purchased and cancelled 1.37 million shares. The scheme was instituted because the company
held the view that the security price did not fully reflect
the underlying value of the Group and the purchase and cancellation of the shares was accretive to earnings
per share.
Group Strategy
Centuria has a strong track record of communicating its strategies clearly and executing on them. Both the board and management embrace a philosophy of continued
strong growth in profitability and distributable earnings.
Many of the goals set over the past few years have been achieved, transforming Centuria Capital into a simpler, highly focussed group with two operating divisions and a strong balance sheet relative to market capitalisation.
To maximise leverage on these improved circumstances it is necessary to set out refreshed strategic objectives and detailed strategies such that our stakeholders clearly understand Centuria's new goals and how we intend to achieve them.
Strategic Objectives
Centuria has clear strategic objectives:
To utilise its existing skills base to expand core business activities
To provide reliable, growing shareholder returns
To generate increased earnings per share
To increase the scale and profile of the group
Detailed Strategies
Stakeholders deserve a clear picture of how Centuria's objectives are to be fulfilled, accordingly we have listed
some of these detailed strategies;
Continue to grow Centuria Metropolitan REIT (CMA) to achieve strong annuity style management fee revenues to parent company
Expand and diversify the unlisted property funds management product range to meet increased investor demand
Co-invest with clients in down stream value-add projects, particularly in relation to existing property funds
Utilise and recycle the balance sheet to underwrite new product offerings
Demonstrate Centuria's Investment Bond business is in a clear expansion phase
Consider corporate acquisitions where scale and market position is enhanced and they are logical in terms of core operations
It has been a pleasure reporting the progress of the group in this annual report and the board and
management team look forward to meeting shareholders at our forthcoming annual general meeting. I am privileged to work with such a skilled and highly motivated management team and I want to thank them and the
entire staff for their engagement and the hard work
they have put in to achieve our goals to date.
In particular, I would like to thank our independent directors. Whilst they are scrupulously independent, they
work very much 'in' the business and are a great source
of wisdom and inspiration to myself and the senior management team.
Finally, thank you to our shareholders for your continued support and the great interest you take in our progress and ambitions. We are committed to repaying this support through the steady growth in shareholder returns.
John McBain
Group CEO
*Plan for Life, March, 2015
6
CENTURIA PROPERTY FUNDS MANAGEMENT
Overview
This financial year saw the creation of our
Listed Property business unit and the establishment of a development model creating two new revenue
and profit streams for the Group, delivering upon
strategic objectives. These two business units will generate significant profits for the Group in the
near term supplementing the strong recurring earnings from the well-established unlisted property funds management business.
The Asian investor base has now been established and Singapore operations will be relocated to Australia.
Total Property Funds Snapshot
Revenue Sources ($millions)
25
20
15
10
5
-
FY2013 FY2014 FY2015
Performance and sales fees Net acquisitions fees Development fees
Property services and other revenue
Fund management fees
14
Number of funds
23
Number of properties
4.7 years
Portfolio weighted average lease expiry
7
Jason Hujich
CEO Unlisted Property
2,274Number of investors
The Unlisted Funds division purchased two assets during the year, including our largest purchase to date. In December 2014 we
purchased a commercial office building located at 2-10 Wentworth
Street, Parramatta for $45 million and in June 2015 we purchased the second 50% of 8 Central Avenue, Australian Technology Park, Sydney
for $109 million.
Due to historically low interest rates, investor demand for both investments was significant. For the Parramatta purchase, the Company received over
500 Reservations of Interest for the required equity and as a result, the capital raising was oversubscribed and closed two weeks early. Demand was even higher for the Sydney property. This $64 million capital raising
was the most heavily oversubscribed offer in the history of the company and was so successful, capital raising for the fund closed five weeks early.
The strength of the Australian property market throughout FY15 also allowed Centuria to sell thirteen mature assets over the period
resulting in significant profits for investors and releasing substantial
performance fees to the Company.
During FY15, we commenced construction of 62 apartments at Belmont Road, Mosman for our first Centuria development fund. This is the first example of Centuria co-investing with property investors to reposition an existing passive office trust. This
project has maximised investor returns and released substantial development, management and performance fees to Centuria.
In line with the Belmont Road development, the Company has increased its development team capability to take advantage of its existing residential development pipeline. One project currently in advanced stages, is the repositioning of an existing mature Macquarie Park, Sydney
office property which will consist of a 350 apartment residential project.
Prevailing low interest rates afford Centuria an extended period to market unlisted vehicles with a comparative advantage to traditional fixed-interest
investments. The Unlisted Property division continues to focus on self-managed superannuation fund trustees and the high-net-worth/ family trust markets.
5.1 yearsPortfolio weighted average lease expiry
Portfolio by Sector
9.09%
Portfolio by State
18.18%
Number of properties
Office
90.91%
81.82%
New South Wales
Residential development
8
Queensland
UNLISTED PROPERTY - PASSIVE CASE STUDY
8 CENTRAL AVENUE, AUSTRALIAN TECHNOLOGY PARK, SYDNEY
Centuria acquired this asset for a new Unlisted Property Fund. The Fund was the most heavily oversubscribed in Centuria's history.
Investment Rationale
Average unexpired lease term of 11.0 years
High quality tenant profile - NSW Government and
Seven West
~2.5km from Sydney CBD - emerging business precinct
Modern asset with low forecast CAPEX requirements
Asset Summary
Purchase price (50% stake) $109.38m
Valuation (1.9% premium) $111.50m
NLA 36,451sqm
Occupancy 100%
WALE (by income) 11.0 years
Fees
Acquisition fee 2.00%
Fund management fee 0.80% Performance fee 20% over 10% IRR
Forecast Distributions
Year to June 2016 2017
Forecast distribution 8.50% 8.75%
Forecast tax deferral 100% 100%
Distribution payments Quarterly
Offer Summary
Equity raised $64.48m
Minimum investment $50,000
Offer closed oversubscribed May 2015
100%
$109.4m 11.0years
Occupancy Purchase price
WALE (by income)
9
UNLISTED PROPERTY - CORE PLUS CASE STUDY
441 ST KILDA ROAD, MELBOURNE
Centuria acquired the property in June 2012 for $58 million. Over the next two years, the Centuria team added significant value to the asset utilising our strong asset management skills and sold the property in October 2014
for $82.1 million.
Background
Purchased off-market. Centuria researched target precinct as having high growth potential
Re-leased 40% of the total Net Lettable Area (NLA) of the property within 6 months to quality tenants
in a difficult leasing environment
Increased the average rental in the property from
$280 psqm to a new benchmark of $330 psqm on sale (18% increase in 2 years)
Repositioned the asset and its WALE to ensure it was highly sought after by prospective purchasers
The sale set a record rate per square metre for a St Kilda Road asset and generated a 20% IRR for
investors (post fees)
CNI realised significant sales and performance fees
Investment Returns
Purchase price $58.0m
Sale price $82.1m
Capital gain 35.1%
IRR (post fees) 20.6%
Average income return 7.5%
Add image of 441 St. Kilda Road
$82.1m
Sale price
35.1%
Capital gain
10
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