Agriculture Investment Fundamentals – Why invest in Controlled Environment Agriculture (CAE)?

The Centuria Agricultural Fund is an open-ended unlisted property fund that aims to provide investors with stable income returns and the potential for capital growth by investing in a diversified agricultural property portfolio.

Our speaker tonight is Centuria's Agricultural Fund Manager, Mr. Calvin McKeown.

Having grown up on multi-generational family sheep farm in New Zealand,

Calvin has been involved in agriculture his entire life with a broad and soft knowledge born from critical experience.

Prior to Centuria, Calvin worked at Macquarie groups for 14 years, managing unlisted agricultural funds that owned and operated large scale horticulture, viticulture and forestry assets.

Calvin's topic tonight is agriculture investment fundamentals.

Why invest in controlled environment agriculture?

Welcome you, Calvin.

Thank you, Angelina.

Thank you for that lovely introduction.

Well, as Angelina said, my name's Calvin McEwen.

I'm the agriculture fund manager here at Centuria.

For those of you who don't know Centuria, we are one of Australasia's leading property fund managers.

We're listed on the ASX300.

We have approximately 21 billion of funds under management.

Over the last three years or so, we've been investing in the agriculture space.

Over that time, we've developed three different agriculture property funds with approximately half a billion of asset under management.

got quite a diverse range of assets from stone fruit orchards to citrus orchards, from almond orchards to vineyards, from tomatoes grown under centipede irrigation to market fruit and vegetables.

And then more recently we've been acquiring glass houses, which brings me to the fund I'm going to talk about today, the Centuria Agriculture Fund.

So this fund launched in July last year.

So we've been operating for approximately, it's an open ended fund.

We're targeting very, very high quality and sustainable agricultural investments.

To date, we haven't been taking any operating risk.

So we've been buying these assets, leasing them to very, very strong and very, very experienced tenants and mainly through triple net leases.

So very, very, very long triple net leases.

agriculture sector that we've been targeting at the moment is what we call protective cropping.

Protective cropping is a vast array of different agricultural assets, from blueberries grown under hail nets to strawberries grown under polytunnels to mushrooms grown in sheds or tomatoes grown in glass houses, which is the very, very, very top of the protective cropping sector.

And we always say, if you're gonna start anywhere, you might as well start at the top.

And that's what we've done.

So the last 12 months, we've managed to purchase three very, very large scale glass houses within Australia.

The fund's now the largest owner of glass houses in Australasia, with around 73 and a half hectares under glass.

And the assets under management for the fund now total around 323 million after 12 months.

So it's an achievement that we're very, very proud of.

So why Ag, why Australian Ag?

Well, the underlying thematic always comes back to demand and it's the demand that's increasing and it's increasing from the growing middle class, the growing global middle class.

So the middle class population is expected to increase from around 3.8 billion today to around 5.4 billion by 2030.

So it's a huge increase in mouse defeat.

These are people that are going to want to eat more food, a much larger variety of food, much more high quality food and safer food.

And that's very, very, very important.

The majority of this growth is going to come from the Asian markets.

So Australian farmers have a very, very large competitive advantage with their proximity to those markets.

We also have a huge advantage over here because we're globally known as very, very good farmers and they can produce a very, very large variety of food and very high quality food and the most key factor is the safe food.

But your typical Australian farmer, they operate in an environment of climatic extremes and

As we've seen more and more recently, the natural disasters in this country seem to be more frequent and more intense as a result of climate change.

And this is one of the reasons that we've identified protective cropping as a good agricultural sector to get into.

So you're able to mitigate all your climate risks, so your droughts, your frosts, your floods, your fires, and then also your pest and disease risks.

Because you're able to grow your produce within a controlled environment, you're able to significantly increase your productivity while significantly reducing the amount of inputs that you require.

You're also able to produce all year round.

So some of the crops you can only produce in winter, or sorry, in summer and can't produce in winter.

Where under a glass house in that controlled environment, you can produce all year round.

And you can produce a consistent quantity and a consistent quality.

Now this is what the end consumer wants.

By doing that, you're able to strengthen the financial security of your tenant.

So we know that they're gonna have less risk of cop failure due to the climatic conditions.

So we know that they're gonna be strong and they're gonna be able to sell the produce all year round.

And that's the sort of tenants that we want.

onto the sustainability piece and the ESG piece.

And it's all about the production piece as well for glasshouse production or protective cropping production.

So a lot of people use ESG as a marketing tool.

We've got hard facts to back up the benefits of growing within a glasshouse.

And what we'd like to do is compare ourselves to growing tomatoes out in the field.

So if you're growing tomatoes in the field, you'd expect to produce somewhere around 69 tonnes per hectare.

Where in a glasshouse, you produce 800 tonnes per hectare.

So it's a really, really significant increase in production.

With water usage, which is such an important resource in this country, you'll expect to use around 116 litres of water to grow one kg of tomatoes out in the field.

Where in a glasshouse, you only need 22 litres of water.

The reason that there's such a less requirement of water within a glasshouse is that in the environment, you're able to recirculate, recycle, and sterilise that water so it keeps getting reused and run back through the system.

Other benefits as well, when growing out in the field, you expect that your wastage is going to be somewhere, and it can be up to 30%.

Where in a glasshouse, it's less than 5%.

It's also much less reliant on fertiliser and your pesticides because you can control that environment.

And if you do have an outbreak of bad bugs or bad insects within a glasshouse, very simply, you introduce good bugs to fight the bad bugs.

So moving on to one of the three assets that we recently purchased.

This is the Sun Drop facility that's located in Port Augusta in South Australia.

We purchased this asset in December last year.

So Port Augusta ticks one of the boxes that's really, really important for glass houses, and that's sunlight hours.

Port Augusta's pretty much in the desert, so a huge amount of sunlight hours.

The more sunlight hours, the more production within a glass house.

The only thing that's really letting the site down though is its access to water.

Annual rainfall in Port Augusta is around 200 mils a year, so it doesn't have very, very strong access to fresh water.

To solve for this, this facility has a pipe that connects it to, five kilometre pipe that connects it to the Spencer Gulf.

and it sucks salt water out of the Spencer Gulf, and it uses it for a number of different reasons.

The first of all is to run through an evaporative cooling system that's attached to the glasshouse.

So the salt water's run through this evaporative cooling system, it cools the glasshouse down during the heat of the day, because it's in the desert, and that controls that climate.

Essentially, you don't want the inside of the glasshouse being above around 28 degrees, or the tomatoes will stop growing.

Next, the salt water's run through a desalination plant.

The desalination plant is powered by this large solar energy system that you can see on the screen at the moment.

So that's 12 and a half hectares of mirrors.

It's not a solar energy system like we think of on our roof that's generating electricity.

It's a solar energy system of mirrors, 24,000 mirrors that are all computerized, and they follow the sun like a sunflower.

And they direct and focus all that sun's energy and rays into the top of that pole there.

And you can see that black point.

What that does is it super heats that saltwater and creates steam.

That steam spins a turbine.

That turbine creates energy.

That energy runs a desalination plant.

The desalination plant creates fresh water.

That fresh water is then used to feed the tomatoes.

On top of that, all that hot water is then stored in the tanks at the bottom of that pole.

That hot water is then run through a piping system within the glasshouse and heats the glasshouse up during the cold of the night.

So it's an incredible piece of technology that combines this natural resource technology and an ad technology to grow tomatoes.

The facility itself can grow around 17,000 tonnes of tomatoes a year, which is approximately 14% of Australia's trust tomato supply.

The facility has a 10-year take-or-pay agreement with Coles, which is a very, very rare agreement.

We don't believe that these have been given out for the last sort of 10 years.

It supplies Coles with over 90%

of its annual trust tomato requirements.

So if you're going into a coal supermarket and buying trust, there's a very, very, very high likelihood that it'll be from this facility.

They have a very strong relationship with coals and sundrop.

Within 48 hours of a tomato being picked in the facility, it'll be on a coal shelf anywhere in Australia.

And they love the state sustainability piece.

And you can see that there is a number of sustainability that Sandro have won.

That's the end of my presentation.

If any of you out there are interested in the investment or want to discuss it more, these are some of the details for our sales team.

Thanks, Calvin.

I do have a question regarding to manual and glass.

That's very interesting to me.

But before we get to that, I do want to ask you,

question about predictability and the risk of your future cash flows.

Now, given that your lease structure and the hedging of that provides the level of certainty around the cash flow, the only potential variable, perhaps, is tender living and not being able to pay the rent.

So how do you manage this risk?

So you do diligence in all of them.

In a worst case scenario, how would you find a new tenant, even an existing tenant?

when you cannot afford their rent?

Yeah, thank you, and it's a very, very good question.

When you're looking at facilities like this, it's very different to looking at other property investments, such as an office block or a large warehouse.

So as part of that DD, we have to do a real deep dive into the production capabilities of the glasshouse and

along with that, what the costs are to run the glasshouse.

So we need a really good understanding of what the EBITDA is and what the EBITDA for the last five years is, what the risks are to the EBITDA, and what it's looking like for the foreseeable future.

From there, we can understand, OK, well, this facility itself is secure.

If the tenant was to go under for a reason outside of this glasshouse,

then we've got to find another tenant for the glasshouse because the facility itself isn't able to stand on its own two feet.

Now, a lot of people might say, well, it's very rare to be able to find these tenants, but it might be really difficult to find a new tenant for a glasshouse because it's such a unique skill set.

What we believe is that this is absolutely critical infrastructure for the supply of tomatoes to Australia.

So as I said, that one facility, Sundrop, supplies coals with up to 90% of its trust tomatoes on a manual basis.

So if it went offline for any reason, then that would severely impact the supply of trust tomatoes in Australia.

So we think that Coles would be very, very interested in resolving that solution and making sure that tenants continue, or not that tenant, but the facility continues.

We also now have four or three, sorry, of the five major glasshouse operators as tenants.

And we think that all of them would be very competitive and want to get the hands of the glasshouse to increase their production if one of them wants to come off long.

Here's my question about the tomato.

Assuming Australians and the growing middle class of Asian countries continue to eat tonight, such union class houses will become really prevalent when needs go up to the very top of it, are you interested in acquiring more assets and are you potentially looking to work with these communities to give any new glass masses the need of these two approaches to be accretive to the farm and buying my house?

Yeah, that'll be a good question again, Angelina.

So we...

Currently in Australia, there's around 215 hectares of commercial-scale glasshouses.

We now own 73.5 hectares of that 215.

We think there's maybe a couple more glasshouses that we might be able to acquire before we run out of existing glasshouses.

And then from there,

We're definitely always looking at development projects.

So the SunDrop facility, as an example, it was built – it's currently a 20-hectare glasshouse.

It was built with the idea of it being a 30-hectare glasshouse.

So you can quite simply build another 10 hectares and plug it into that existing infrastructure.

So it's significant cost-saving from starting from scratch.

And also all the major supermarkets are speaking with us about, OK, well, what sort of crops can we grow in glasshouses and how can we increase the supply?

The major supermarkets really love our produce that's grown in the glasshouse because it's that consistent quantity, consistent quality and the production's all year round.

Well, thank you, Calvin.

It's a great presentation.

Thanks for the Q&A.

It's good to see you.

Take care.

Thank you very much, Angelina.