Securing long term income through Government leased Property

Our next presenter is Adam Bronz, Director at Castle Rock.

Adam has been with Castle Rock since 2003, playing a pivotal role in growing Castle Rock from the ground up.

He has overseen the successful development and purchase of more than 40 commercial properties throughout Australia.

His presentation topic today is Securing Long-Term Income Through Government Leased Property.

Welcome to the presentation, Adam.

Angelina, thank you very much for having me along today.

Yes, my name's Adam Bronz.

I'm one of the directors here at Castle Rock and I'm pleased to take you through our presentation today, Securing Long-Term Income Through Government Leased Property.

Just a quick disclaimer here.

This is general advice only, not personal advice, and it's designed to give you an overview of the fund and our niche market sector.

please read our target market determination and PDS in full before considering the fund or speak to your trusted advisor about your specific circumstances.

So what will we be covering today?

I'd like to start off with an overview of Castorock, who we are and what we do, and also an overview of our flagship property fund, the Castorock Government Property Fund, and the performance we've achieved for investors to date.

But I guess the key takeaway today will be discussion around sticky tenants equals sticky income, and how we've gone about achieving a rock solid income stream for investing in and managing government lease properties, and developing long term relationships with our government tenant partners.

So Huwacassa Rock, we are a property fund manager who's been specialising in the government lease property sector for over 21 years.

We have over $670 million of funds under management with over 86,000 square metres leased to governments throughout Australia across seven states and territories.

Here at Castle Rock, we see ourselves as a full-service property fund manager with a relationship-led approach.

We provide a full ecosystem of services for our investor clients and our government tenant partners with all operations occurring in-house.

Our highly experienced teams manage all aspects of the property life cycle from acquisitions, property development and construction, and yes, we build all of our own buildings,

through to property management and facilities management.

Now, all of those things happen in-house.

Why do we do that?

We do it to build and maintain key long-term relationships with our government tenant partners, which in turn drives value for our investors.

And we do it to have complete control over the quality and day-to-day management of our assets and the tenants that occupy them, again, to drive key returns for our investors.

all alongside providing positive outcomes for the communities in which we operate.

Quick overview of our flagship fund, the Castle Rock Government Property Fund was established back in 2014 and is an unlisted property fund that's strategically focused on owning and developing assets leased by state and Commonwealth governments throughout Australia.

It provides stable income distributions with the potential for long term capital growth and demonstrating the strength of our government centric investment strategy.

Just a quick overview of the property portfolio.

The total portfolio values about 590 million across 14 assets inside the fund.

The assets are 99% occupied and importantly 96% of that leased by Commonwealth and state governments.

The weighted average lease expiry of the fund is currently sitting at 5.4 years.

We have an annual average rental increase of 3.5% per annum.

The current gearing or the loan to value ratio is 36% in the fund.

And importantly, we have an average neighbour's energy rating of 5.4 stars.

So how do we go about selecting assets inside the fund?

So first thing we look for is tenant satisfaction and tenant retention.

You can't have sticky tenants or sticky income.

Governments won't pay income unless they stay inside the building.

We look for buildings that are fit for purpose, specifically designed for government and their operations.

The assets must have strong environmental credentials and must meet our stringent investment benchmarks.

We always look for opportunities for uplift, whether it's in capital value of those assets or opportunities to uplift the rent.

But importantly, we look for buildings that have little or absolutely no competition in the areas in which we buy properties.

So I wanted to take you through a couple of case studies today to help demonstrate the point that sticky tenants leads to sticky income that helps drive value for investors.

The first case study I wanted to take you through is a asset that we own up in Townsville in North Queensland.

It's an 11,000 square metre A-grade facility and it's nearly wholly Queensland State Government.

It's the primary Queensland Government headquarters in Townsville and houses a large diverse range of departments that are critical to servicing the surrounding region.

Importantly, the building houses the North Queensland Disaster Recovery Centre, which is a critical service provided up there in North Queensland.

And as a result, the building has been developed to an importance level four.

Now, buildings like this must be operational immediately after an earthquake or disastrous event.

Such buildings like emergency shelters, hospital operating theatres, triage centres and the like are critical and need to be operational after those disaster events occur.

Importantly, this building is able to operate for a period in excess of three days, essentially off-grid.

It has enough power on-site, power generation on-site, fresh water and sewage storage on-site, and there is no other asset like it in far north Queensland.

The asset is also six-star neighbours energy rated and five-star green star rated, and so it's well credentialed from an ESD perspective.

But what makes government sticky in this building?

Now, first and foremost, government need to be in Townsville to provide these services.

And there's simply no other building in Townsville or far north Queensland or possibly anywhere north of Brisbane, that not only has the same importance level four and environmental credentials, but equally as important, there's simply no other building in Townsville that's big enough or has enough vacancy for government to relocate into.

Nonetheless, we'll continue to work closely with government to upgrade the building to meet their ongoing needs and to ensure it remains current and meeting their requirements.

And in fact, we're working with government at the moment to install a large array of EV charging points to assist them with their transition to EV vehicles in the future.

And therefore we feel very confident that government will remain a sticky tenant inside this building for years to come because there is simply no place for them to go.

But we're not simply tying their hands behind their back, we are continuing to upgrade that asset to make sure that they're happy in there and continue to pay the rent.

Sticky tenant, sticky income.

The next case study I'd like to take you through is a property developed by Castroctus recently, actually finished in January this year.

It is fully tenanted by the Victorian state government.

It's a seven and a half thousand square metre building and it houses the Department of Families, Fairness and Housing and the Department of Justice and Community Safety.

Now, this building provides key social services for the Frankston and Mornington Peninsula region, a number of which are quite sensitive, including child protection services, working with children with estranged parents,

foster care and the like to managing people with parole, check-ins and youth justice services as well.

It's been designed to meet or exceed a neighbour's energy rating of five and a half stars.

We're hoping to get that up to six after its first year of operations.

We've got a 99 kilowatt solar array on the roof and we harvest all the rainwater on site for recycling and reuse to flush the toilets and

water the gardens, so it's got a high ESD credential there as well.

But what makes Victorian government sticky in this asset?

Well, first and foremost, again, government need to be in Frankston, provide these key services and require a very bespoke building in which to occupy.

Things like large ground floor space for customers to come to, very high levels of security and onsite secure car parking are crucial for government to occupy this facility.

The building also houses CBD quality end of trip services and, as I mentioned before, high levels of environmental credentials.

All of this in something that's been designed and built to suit their exact operational requirements and we've built in flexibility for the future to come as well.

There is simply no other building in Frankston that's big enough to house government or has enough vacancy in which to house government or has the services that I just mentioned before being able to provide that for government in which to occupy.

So again, sticky tenant, sticky income.

Just a quick side note on this building, we work closely with the Bunurong people, traditional owners of the area, to complete a cultural heritage study for the area to better understand what happened in days gone past in the space and installed a lot of artwork, some of which you can see on the rear of that building during the development phase.

So sticky government tenants, what are they?

So first and foremost, there must be a deep requirement for government to be in that location, whether it's a disaster recovery centre or providing key social services, we look to identify where government need to be to provide those services.

Then the building must meet the government specific requirements.

So operationally, does it need to be an importance level four or does it need to have large ground floor space for providing key social services?

It must meet the environmental requirements of government, which are continuing to increase and upgrade.

And we also look for buildings where there's no other buildings in that particular area for government to move into.

The Castle Walk has always been very strong on relationships and providing high levels of services in the regions for government.

and we anticipate and understand the needs of government moving forward and we build them into the buildings during their development phase or during the occupation phase as well.

So all this means that government stay in buildings for the long term if you continue to treat them right and manage the buildings appropriately.

So with all that in mind, how has our fund been delivering for investors?

Pretty good.

Over the 10 year period, the total return for the funds being 10.1%.

Our current forecast distribution for FY 2025 is 7.85%.

We pay quarterly distributions and portions of those distributions are tax deferred as well.

Just moving through to a quick graph.

This is an extract from the Morningstar website, which provides data on how we are travelling against our peers.

The blue line at the top is the Castaway Government Property Fund.

The red line below that is the S&P AS6-200 aid rate index.

And the yellow line below that is our peers being the unlisted and direct property category.

As you can see, we've been far exceeding our peers and the index today.

You can see up there, there has been a slight dip in the returns, which is a result of the valuations of commercial assets, which has come off recently due to interest rate rises.

However, our returns are income focused, which takes me on to my next graph.

On this graph, each bar represents the total distribution for each financial year.

You may be able to make out in financial year 2015, the total distribution for that year was 8 cents per unit.

We have now grown that distribution through to 9.9 cents per unit, which has been forecast for 2025.

We have been very focused on continuing to grow and maintain distributions back to investors, and this graph sort of demonstrates how that growth has been slow but steady over the period.

The fund has also had some independent research completed by both Core Property, which received a recommended rating and a favourable rating from SQM Research.

Importantly to note there that

The fund won the Unlisted Fund of the Year from Core Property Research back in 2019 and also last year in 2024.

And with that, that's probably enough for me.

Thank you very much for having a listen.

Please reach out to the team here at Castor to learn more about sticky income and sticky tenants and anything to do with government leased assets.

Our website is there and our email address and contact details are there for everyone to have a look at.

And with that, I'll hand back over to Angelina.

Adam, why have you chosen assets that are regionally based?

And how often do tenants leave your assets?

Yeah, it's a good question.

We've tended to focus on assets that are regionally based for specifically the reason that they tend to stay in those buildings much longer.

In CBDs of Australia, governments have the opportunity to move within buildings.

There's always spare space available in buildings in the CBD.

But as I mentioned previously in the presentation, in places like Townsville, there is simply just not the opportunity for governments to move from building to building because they're simply just not available.

So we've tended to focus on regional locations because we've found them to be extremely sticky.

And to date, in both this fund and our first fund, the Castle Rock Services Australia Fund, we've not had government vacate any of our assets inside our fund to date.

So how has the fund delivered such strong outcomes for investors in what has been a challenging period for property related funds?

Well, first and foremost, we tend to sign up long term leases with our government tenants.

So they're usually initial terms of either 10 or 15 years.

So we're able to lock away that income stream for years to come.

But also importantly, during the good old days, back when debt was a lot cheaper, we hedged a lot of our debt and about 90% of that is locked away for an average term of about 3.4 years at the moment.

So we've been able to sort of ride that wave of interest rate rises quite comfortably and maintain our distribution for investors during the period.

Thank you for your time Adam.

Thanks very much for having me Angelina.