LDR Capital Property Fund (LED) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elanor Commercial Property Fund ECS Investor Conference Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead.

Thank you. Good afternoon, and welcome to this results presentation call for the Elanor Commercial Property Fund. This afternoon, we're joined by our colleagues, David Burgess, Co-Head of Real Estate for Elanor Business Group and Fund Manager for ECF; Paul Siviour, Chief Operating Officer for Elanor Business Group and Liz Bors, the Head of Asset Management and Investments for the health care and office division. We're handing over to David in the first instance, but by way of introduction, I'd like to congratulate David and leasing team for another fantastic performance in delivering the returns for the funds that they have over the half. All the results speak for themselves and demonstrate the performance and strength of the fund and indeed the portfolio of assets within that fund, particularly for me. Anyway, the like-for-like income growth of 4.7% of the period really demonstrate the strength of the assets and the durability and resilience of the assets in the current economic environment. And clearly, the selling a 16% positive leasing spreads needs to be applauded as well. But David, I'll hand over to you to take us through the results.

Thanks, Glenn, and welcome, everyone, and thanks for joining us today. Our portfolio continues to deliver on operational objectives that we set ourselves in what has been very uncertain times. On Slide 5 is a summary of the half year results. FFO is a strong up $0.0582 per security for the period, and we are on track to meet full year guidance of $0.11 for the security. Occupancy remains a very high 96% across the portfolio. Our portfolio WALE is 3 years, which, as we will discuss later, provides the right balance of short-term income security and opportunities to capture higher market rents. Our weighted-average capitalization rate was 6.4%, some 28 basis points higher than the beginning of the period, and this has resulted in NTA lower at $1.13 per security. Our capital position remains strong with balance sheet gearing at 32% and look-through gearing at 37.7%. Importantly, ECS assets continue to perform well. We have a very high physical occupancy at nearly 85%, which is pretty much full opportunity for an office portfolio. There's very little sublease space in the portfolio. Very high 92% of our tenants have renewed in the same space or have expanded. Like-for-like income has been strong at 4.7%, and leasing spreads are very strong at positive 16%. Looking forward, we have very little expiries for the remainder of the year. And in FY '24, we already have nearly 70% of expiries of terms agreed or in advanced negotiations. Higher interest rates are obviously impacting cost of capital and, therefore, commercial estate pricing. ECF weighted-average cap rate at 6.4% reflects 280 basis point spread above bonds within the bounds of long-term spreads but below the elevated spreads over the past 5 to 10 years. Whilst there is uncertainty regarding interest rates and commercial estate pricing, our portfolio average net rent of only $425 per square meter is well below replacement cost, which all goes well for future rental growth potential across many of our assets. Turning to Slide 8. Market submission of assets are located are generally performing well. As highlighted, all assets are located to the markets that are experiencing positive net absorption. And in most cases, our in-markets have had very little supply. Again, this holds us well for the asset to continue to deliver strong occupancies, income and rental growth. Based on the strong performance of our assets, we are pleased to reaffirm full year FFO guidance of $0.11 per security and distributions of $0.094 per security. Paul Siviour will now discuss ECF's financial results.

Thank you, David, and I refer those on the call to Page 11 of the presentation, the income statement for the fund. Importantly, this presentation reflects a look-through basis. And by that, I mean, it obviously includes the results for the portfolio that is wholly owned, but also it includes 49% of the results for the Harris Street property with the fund holding a 49% interest in that fund. Therefore, on a look-through basis, the funds from operations of $18.4 million reflects a $0.0582 per security and the distribution struck on a conservative payout ratio of 81% are $0.047 per security. I'll now refer to the balance sheet on Page 12. Again, on a look-through basis, showing the group's 49% interest in Harris Street in investment properties and indeed, the group's share of the secured debt that sits within the Harris Street fund and is secured solely by that asset. On that basis, as David mentioned, the look-through gearing it's 37.7%, but the raw gearing of the funds hits at 32.3%. Turning to Page 13, which shows -- provide some information in respect to the breakdown of the movement in the valuations of the portfolio over the period. But this sees on a like-for-like basis, a reduction in the carrying value of the portfolio of 3.2%. And this reflects higher capitalization rates, a 28 basis point decompression in cap rates, but also reflects, as David has mentioned before, and Liz will go in too shortly, the strong performance of the assets in respect of driving market rent, and that's reflected in the strong leasing performance, both in terms of the quantum of leasing done, but importantly, the leasing spreads and the like-for-like increase in rental income. To provide a little more color in respect to that net valuation movement of approximately $20 million, $19 million more than $15 million -- around $15 million has -- of that has been mitigated by increasing market rent. So cap rate decompression is sort of in the low 30s, if you will, with market rent resulting in a net valuation movement of only $19 million. Turning to capital management set out on Page 14, the fund is in a strong position in relation to the structure of its gearing, the extent of its gearing, GAAP balance sheet gearing of 32.3%, but also the structure of that gearing, the majority of the debt matures in quite some years. And indeed, the hedging profile is very strong. There is $70 million of the total facility on a look-through basis of $243 million that matures in February '24, that's the earliest maturity in respect of any of the group's facilities. With that, I'll pass to Liz to talk through the asset management performance of the fund during the half.

Thank you, Paul. If you could please refer to Page -- Slide 16. Demand for high-quality accommodation has consistently remained strong despite current commercial headwinds. We have seen strong demand across the portfolio for assets with amenity, accessibility and flexibility, which we have continued to invest. During the half, we have created outdoor amenity, co-tenant activations and invested in SEDAR, enabling us to have a competitive advantage within our market. A high-quality portfolio attracts high-quality occupiers. Across our portfolio, we have a broad range of industries and importantly, accommodate the top performers within those sectors. We have continued to build on this momentum by introducing new high-caliber tenants into the portfolio over the last 12 months including itv Studios, state and federal government, Alliance Pharmaceuticals and Abacus DX. Importantly, these tenants are physically occupying this space. Our average utilization of over 80% well exceeds the market average. This high utilization creates sticky tenants, increasing the likelihood of tenants renewing and importantly, expanding within the portfolio. Now to Slide 18. The combination of a high-quality portfolio, high-quality tenants and continued management investment has produced results. Over the last half, we have continued to build on our leasing success. Our like-for-like rental growth is 4.7%. Average incentives remained relatively low at 25%. And importantly, we had strong tenant retention track record. Our portfolio has maintained strong occupancy throughout the cycle, exceeding the national average year-on-year with our strong leasing producing a leasing spread of 16% over the half. Strong leasing momentum has continued with only 800 square meters in financial year '23 to be secured. Looking forward, we already have terms agreed over 12,000 square meters of the 21,000 square meters expiring in '24. We continue to deliver on our targeted-leasing strategies. We've already agreed terms with the federal government to extend at Garema beyond their current lease expiry and have commenced our two-pronged leasing approach at WorkZone West, maintaining active discussions with current subtenants for direct leases and responding to active market brief, specifically targeting government agencies. Slide 20. The importance of continuing to invest in the needs of our tenants is [indiscernible]. We are seeing the results of our continued focus on investing in accessibility, amenity and importantly, ESG reflected in our high occupancy, high utilization, joint tenant retention and engagement. The fund is committed to building on our ESG pathway with our portfolio review completed, energy monitoring software well underway with the focus on continued ESG improvements. Over the quarter, we have renewed our carbon neutral status and Wired Certification at 19 Harris Street, installed solar power at WorkZone West, increased our average native rating to 5.2 and focus on reusing and refurbishing fit-outs, reducing our carbon footprint. These management initiatives are continuing to build on our strong portfolio, we just continued its management and leasing success. I will now hand over to David Burgess, who will provide the closing remarks.

Thanks, Liz. In summary, our assets are performing exceptionally well from an operational perspective, and this is a result of bringing the right assets in the right submarkets that have good demand and supply supplementals and importantly, Liz and her team focused on delivering the right products in that market. Looking forward, we have very few lease expiries for the remainder of this financial year. And as Liz mentioned, are well advanced on our FY '24 renewals. We reaffirm our FY '23 FFO guidance of $0.11 per security. The distribution guidance of $0.094 per security, which reflects a very strong 9.8% yield on current trading cost. On that, I will now open up to your questions.

[Operator Instructions] Your first question comes from Leanne Truong from Ord Minnett.

Just a couple of questions from me. Just for the first question in terms of guidance. So obviously, you guided your second half -- your guidance assumes a second -- a lower second half. Is that largely due to rising debt costs and some upcoming expiries?

Thanks, Leanne. Yes, mainly due to slightly higher debt costs coming through in the second half.

And I'm just trying to reconcile from numbers. So apart from those leases that you've preannounced, have there been any other leases secured in the half?

Yes, all at a great term -- with the great terms with the federal government in Garema, lease is yet to be signed. But it's in the leasing process. And we've also agreed terms with the Queensland Government at Limestone neither of which have had lease executed as yet. So we're not in a position to disclose.

All right. And with the Garema Court, are you expecting -- I mean, obviously, that looks like a renewal, are you expecting any downtime there? Or how should we be thinking about that asset?

Yes. There will be no downtime. It's the straight renewal, Leanne.

Leanne, generally with -- as a generalization of government renewal, they look through before they enter terms of agreement. So we're very confident that selling price which Liz mentioned will happen. The other comment there in relation to the forward-looking expiry, which is very low. I mentioned it gives the right balance, [indiscernible] the right balance of catching upside on that, but also a strong short-term income. So there's a lot of [indiscernible] fair chance of opportunities for us to drive mention income across many assets. So the larger ones [indiscernible] as we discussed, in terms of expiries and there's opportunities for the smaller tenants [indiscernible] like this.

And I just had one more question, gearings up a little bit. What's your loan-to-value ratio, has that increased a bit, too? And are you comfortable where it is?

Yet we are comfortable and there's good headroom in respect of that color.

Okay. So what's your loan-to-value ratio, in respect of ...

I have to get back to you on the precise number, allow us to do that, but it's in the high 30s, but not close to 40.

Your next question comes from Edward Day from MA Financial.

David, I'm just interested in your thoughts on the valuation, particularly at Garema Court given that we go for a bit new, but I'm assuming that doesn't take into account the discussions you're having with the government?

Yes, that's correct. It assumes that there's vacancy of expiry and I [indiscernible] given the update on the rent valuation [indiscernible] we don't want to comment on what that one.

Yes, sure. Okay. And then just on the leasing spreads, can you sort of just possibly break out the components for main drivers of that during this period?

Maybe I'll answer first and I'll pass over to Liz. Look, obviously, a very strong result. There's an element of that leasing spread as a result of the House Street asset. There was some underrented components to that asset where we've executed itv in mark-to-market. So I've proven that the strategy is right, that we're achieving. Then there's a [indiscernible] coming from a number of other assets to achieve. If you break that down even without Harris Street, it's still high single-digit positive leasing spread across our make businesses.

It's specifically by the 50 Cavill and Mount Gravatt.

[Operator Instructions] Your next question comes from [ Hugh McNally ] from PPM.

Congratulations on good result. I just wanted to ask you, what's your average debt cost going at now?

The average debt cost to you, including on a look-through basis would be the circa 2.5%.

I'm sorry, I couldn't quite get that.

That's 2.5%. I've got the individual facilities in front of me. I'm just trying to do a bit of mental math on the weighted average...

I'm sorry, it's 2.5%, is it?

Yes, excuse me. Well, that I'm allowing for some increase in costs going forward as one of the hedges roll off. But for the half, it was 2.2%. For '24, it's more like 2.5%.

And what would that translate to say that the debt was rolled over at current rates, what would be increase in the average rent.

It would be significantly higher. We kind of just put in place an attractive rate some time ago. But I'd point out that -- excuse me, the hedges were fully hedged in relation to all of our facilities that -- and all of the long data facilities. So other than a facility that matures in February '24, that hedge rolls off soon. All of the other facilities are fully hedged and for varying periods of [indiscernible] from 2.2 years to 3.7%. So those rates are locked in for really a very considerable number of years.

Right. Okay.

But depending on what -- if you're asking what our underlying swap is compared to today's 3-year swap rate, there's considerable benefit within the numbers.

Okay. And second question, what would be the leasing spread on the large portion of the '24 expiries? What would be the script you'd be getting there?

Yes, we're not doing any information on that at the moment. If you obviously that terms greater would not execute [indiscernible].

I'm sorry, it was -- you're fading out. I couldn't quite get that.

Yes. Just as -- the leases aren't executed on a large portion of those forward-looking expiries. I would rather not disclose those leases to you at the moment.

Right would be post -- positive number would...

As Dave said, we're not going to comment until it's executed you, so we will not want to do that.

There are no further questions at this time. I'll now hand back to Mr. Willis for closing remarks.

Yes. Well, I'd like to turn hand it to David for the closing remarks for the good time.

Again, thank you, everyone, for joining us. We're very pleased on the operational performance of the fund and will continue to work hard to extrapolate the best possible performance going forward. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.