Elanor Commercial Property Fund (ECF.XA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elanor Commercial Property Fund, ECF Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Tony Fehon, Managing Director. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for joining us for Elanor Commercial Property Fund's FY '25 Full Year Results Presentation. My name is Tony Fehon, Managing Director of Elanor Investors, and I'm joined by John d'Almeida, Head of Office and ECF Fund Manager. We will be jointly presenting today. As you're all aware, the Elanor Commercial Property Fund is subject to a takeover offer. Elanor has a formal governance in place to manage the obligations of the responsible entity and the manager of the fund. We will open up to limited Q&A after the results presentation. We will not be taking any questions in relation to the takeover offer. I will refer you to recent announcements made by the Independent Board Committee representing the responsible entity of the fund that were released to the ASX. The ECF Independent Board Committee will, in due course, prepare a target statement responding to the offer, including a detailed analysis and a formal recommendation. Over the next few minutes, we will walk you through what has been a year of solid achievement. We'll cover our investment strategy, financial results, asset management achievements, market positioning and our outlook for FY '26. Over to Slide 4, please. Our investment approach is disciplined and bottom-up. We maximize occupancy, enhance value through a selective repositioning and pursue growth where our active management skills are at the most. This asset level focus has delivered consistent income even in volatile markets. What sets ECF apart? Our people are a highly experienced team, averaging more than 20 years' experience with each of them, proven in major -- managing major expiries and repositioning. Our income profile is one of the strongest yields in the market with 12% distribution yield for FY '25 based on the 30 June closing price, which is supported by high occupancy. Our sweet spot is midsized $50 million to $100 million assets, often overlooked by larger players where we can create value through leasing and upgrades. Our capital recycling is disciplined in realizing value once initiatives are complete or if the outlook for an asset is below requirements, we will recycle to deliver stronger returns. I'll now hand over to John on Slide 5.

Thank you, Tony, and welcome, everyone. Our strategy works across 3 horizons in parallel. Horizon 1 is leasing, our immediate priority. We have a strong team to tackle near-term expiries, driving tenant retention and rental growth above market levels. We also refinanced and extended our debt facilities to November 2027, giving us certainty to execute without refinancing pressure. Horizon 2 is enhancement, targeted upgrades that support leasing and uplift values. The WorkZone West's WALE and Harris Street Spec Suite program are good examples, helping us to attract tenants and achieve premium rents. Third is Horizon 3, is scale, preparing for selective growth once conditions improve. We won't chase acquisitions now, but we're ready to move when opportunities align with our active management expertise. So while leasing is our near-term focus, we're advancing all 3 horizons to maximize value creation. Now turning to Slide 7. FY '25 was a year of disciplined execution despite challenging market conditions. Funds from operations were $35.4 million, equating to $0.094 per security, slightly ahead of guidance. We paid distributions of $0.075 per security, in line with guidance, representing a 12.1% annualized yield at the 30 June price. Most importantly, occupancy remains strong at 96.3% as at 30 June. We leased nearly 12,000 square meters during the year, that's 15% of our entire portfolio and achieved a positive rental reversion of 3.1%. In a market where many are seeing negative reversions, this is an exceptional outcome. The portfolio was valued at $495 million at year-end, down 3.7% from June 2024. That's a much smaller decline than last year's 7.84% showing valuations are stabilizing. Net tangible assets ended at $0.69 per unit compared to $0.83 a year ago. The primary driver here was the equity raise dilution of $0.063 per unit with the balance from valuation movements. The equity raise was strategic. It strengthened the Fund's balance sheet, provided capital to stabilize Harris Street asset and provided working capital for leasing across the portfolio. Overall, this was a solid set of results that demonstrated both resilience and execution discipline. Turning now to Slide 8. Gross property income increased by 5% to $64.4 million. This reflects strong leasing outcomes, particularly in Southeast Queensland and the benefit of maintaining high occupancy. Property expenses rose to $14.3 million, primarily due to one-off expenses at CPB at WorkZone, which will normalize in FY '26. Net property income, therefore, rose just over $50 million, up 2.5% year-on-year. Borrowing costs decreased from $10.3 million to $9 million, reflecting reduced interest costs on the unhedged portion of the debt and interest earning on excess cash from the capital raised earlier in the year. Investment management fees increased modestly to $5.7 million, primarily due to Harris Street capital notes investment increasing our gross asset value. These remain in line with prior year percentages. As a result, funds from operations increased to $35.4 million, up 6.8% from the prior year. On a per unit basis, FFO was $0.094 versus $0.105 last year. However, it's important to note that we raised significant capital, issuing 30% more units, maintaining $0.094 despite this dilution demonstrates solid underlying earnings of the portfolio. On a statutory basis, after fair value movements and noncash items, the Fund reported a net loss of $5.4 million compared with a $27 million loss last year. The key point is that FFO, our reoccurring cash earnings measure was strong and above guidance. Turning now to Slide 9, the balance sheet. The balance sheet is in good shape, providing the foundation for future growth. Total assets rose to $554 million with cash balances of $14.7 million and a reserve of $20 million in working capital debt facility provides ample liquidity for our leasing programs and capital initiatives. Balance sheet gearing improved 38.1% from 39.9%, sitting within our range of 30% to 40%. However, on a look-through basis, including Harris Street, gearing is at 44.3%. Our intention is to reduce this level to within target range within the next 12 months, and we'll consider a range of capital initiatives to achieve this. Our covenants remain conservative with the loan-to-value ratio is 39% against the covenant of 52.5%. Interest covenant is 4.4x, well above the 2x covenant. This conservative balance sheet gives us flexibility to support leasing initiatives. Importantly, we now have no debt maturities until FY '27, providing certainty and stability for the Fund. We will consider further hedging of the debt facility to have similar duration to the newly extended debt facility. Turning now to Slide 10, portfolio valuations. 8 of the 9 assets were externally valued in June. Portfolio valuations fell 3.7% overall over the last 12 months. This was driven by just 2 assets, WorkZone West and Garema Court. Both have been impacted by softening cap rates and near-term lease expiries. These major single tenant expiries have been an active focus in recent years. And with the success already achieved in dealing with some of them, we are confident we will outperform the conservative valuation assumptions. Offsetting these declines to a large degree is 50 Cavill Avenue, which increased in value by over 10% during strong leasing demand and investment transactions in the Gold Coast market, leading to 50 basis points of cap rate compression. The remainder of the portfolio asset valuations had minimal movement and overall were effectively unchanged. Turning now to Slide 11, Capital Management. In terms of Capital Management, FY '25 was a transformational year. We raised $52 million in equity, invested in Harris Street notes to stabilize the asset and extended our debt facilities out to November 2027 with no increase in line fees. This is a vote of confidence from our lender. The outcome is over 2 years of funding with no refinancing risk, enhanced liquidity and capacity to support leasing programs and CapEx initiatives. Our cost of debt remains competitive at 4.4%. Turning to Slide 12, asset management overview. And then further to Slide 13, FY '25 leasing success. As I outlined in our highlights, our leasing performance was solid in FY '25. We achieved 12,000 square meters of leasing, representing 15% of the portfolio and 34 transactions over 1/4 of all leases in the fund. Our tenant retention was 75%, well above peers, and we delivered 3.5% rental growth with 99% cash collection rate, underscoring the strength of our tenant base. Current vacancy is low at around 3.5% of the portfolio spread across a few smaller assets. Looking ahead, the main focus is on FY '26 expiries in Garema Court, in Canberra and WorkZone West, in Perth. Early engagement is underway, and our team has deep experience in managing major single tenant rollovers. Beyond that, expiries are well staggered with no significant concentrations until FY '29. Overall, FY '25 leasing outcomes demonstrate strong execution, stable income and our ability to actively manage tenant rollover risk. Turning now to Slide 14, Southeast Queensland Portfolio. Our Southeast Queensland portfolio has been performing well. With 96% average occupancy, we completed 25 leasing deals totaling 7,861 square meters. Average gross rents increased 7.1% to $620 a square meter. This is real underlying rental growth, not just fixed increases. Overall, the Queensland Portfolio is essentially fully leased. Nexus Centre at 100%, 200 Adelaide Street at 91% with a WALE of 6 years. 50 Cavill at 99% and Corporate Drive 100%. This is a result of active management and strong market positioning. The Brisbane market fundamentals continued outperformance, CBD rental growth of 8.6%, positive net absorption and negative net supply, creating a favorable supply-demand imbalance that will drive rents higher. Turning to Slide 15, WorkZone West in Perth. WorkZone West represents our most significant repositioning success. We have converted 15,300 square meter A-grade building from single tenant to a diversified multi-tenanted income stream, securing 71% of occupancy before the August '25 whole building expiry of CPB. Our building upgrades completed in August with new lobby and end-of-trip facilities. We've leased 10,600 square meters across 5 floors on 5 to 7 terms with quality tenants of NBN, Vocus and Open Colleges with only 4,500 square meters remaining vacant. Current leasing inquiry includes multi-floor requirements, and we are confident of achieving full occupancy in the next 12 months, which will result in valuation uplift. Turning now to Slide 16, Harris Street and Garema Court. Harris Street. At Harris Street, our spec fit-out strategy is delivering results. We've completed 5 new spec fit-outs on Level 5, a retrofit on Level 3 and leased the lobby cafe. Two spec suites are leased to Thomson Reuters and Toohey Miller on a 5-year and 3-year terms, respectively. We have 3,250 square meters available across visible suites from 165 square meters to 961 square meters. Despite a slower Pyrmont submarket, Harris Street is outperforming peers with high-quality specifications attracting premium rents. Our inquiry pipeline from SMEs, professional services and tech sector supports further lease-up in the first half of FY '26 with valuation uplift expected within 12 to 18 months. Garema Court is our prime CBD asset, 11,400 square meters, A grade with large floor plates and 100% leased to the Commonwealth government until June 2026. We have a dual strategy approach to dealing with the leasing expiry in June next year. The renewal pathway involves active discussions with the Commonwealth for lease extension, which would significantly enhance WALE, income stability, and provide positive valuation uplift. The repositioning pathway involves the prepared upgrades for sustainability and tenant appeal if the tenant vacates and we undertake a re-leasing campaign. Importantly, the valuation reflects a tenant expiry of 12 months. So any renewal delivers immediate upside to income, WALE and NAV. We're positioned to create value under both circumstances. Turning now to Slide 19, market overview. The broader market context is increasingly favorable for ECF. We're clearly at the bottom of the cycle. Cap rates have peaked and are stabilizing. Historically, this is followed by a period of plateau and then multiyear tightening. Rental growth is already feeding through in markets like Brisbane and the Gold Coast. Turning to Slide 20. ECF exposure is focused on outperforming markets. National prime office demand is now nearly 9% above pre-COVID levels, showing that the fears of work from home and low occupancy post COVID has not had an impact in the amount of office space leased. The flight to quality trend is widening with prime outperforming and secondary still struggling. ECF's portfolio is predominantly weighted to prime and well-located fringe markets, positioning us to benefit as demand continues to recover. Turning now to Slide 21, FY '26 outlook and guidance. For FY '26, we are guiding to FFO of $0.075 to $0.08 per security and a distribution of $0.065. At the June security price, that equates to a yield of around 10.5%, which is well above our peer group. Our priorities for the year ahead are clear. First, execute on leasing strategies at WorkZone, Harris Street, and Garema Court. Second, maintain disciplined capital management. We want gearing at the lower end of our range and look through gearing is below 40%. Thirdly, position the portfolio for recovery. With valuations recalibrated, the downside is largely factored in and leasing success should now translate into upside for NAV, income, and distributions. ECF has a strong leadership team, a clear long-term strategy, and is well positioned to drive performance from its existing portfolio while creating a solid foundation for future growth and scale. I'll now hand back to Tony.

Thank you, John, and I'll guide everyone to Page 23, which talks to the Lederer Group Takeover Offer. Let me address the Lederer Group Takeover Offer. On 4th of August, the Lederer Group announced its intention to make an off-market takeover for ECF. And on the 18th of August, ECF received a copy of the bidder statement in relation to their unsolicited off-market takeover offer for ECF for $0.70 cash per security reduced by any distributions declared or paid after the June 2025 quarter distribution and before the offer closes. The Board of Directors of Elanor Funds Management, as the Responsible Entity of ECF, established an independent Board committee to represent the interests of ECF and ECF security holders in connection with the takeover offer. As outlined in the ASX announcement released on the 21st of August, the ECF Independent Board Committee has recommended that security holders reject the Lederer takeover offer. The Independent Board Committee will, in due course, prepare a target statement responding to the offer, including a detailed analysis and a formal recommendation to reject. As the takeover offer is a matter for the independent Board committee, we will not be commenting further at this time. So in closing, to conclude, FY '25 was a year of solid execution. We strengthened the balance sheet, delivered distributions in line with guidance, made real progress on leasing and positioned key assets for valuation upside. Looking to FY '26, our focus is simple: lease up the remaining vacancies, maintain our capital discipline and create value for investors as the market turns. We have the right strategy, the right team and importantly, we have momentum. Thank you for all your time today. That concludes the formal presentation. I'd now like to open up the line for a limited Q&A.

[Operator Instructions] At this time, we're showing no questions. I'll hand the conference back to Tony for closing remarks.

Thank you, everyone, for joining us today. We're very pleased with the outcome. We're very pleased to be able to present our results. We look forward to catching up with you over the next few weeks, particularly after the target statement is released and further information will be released to market. Thank you very much.