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

Thank you for standing by, and welcome to the Elanor Commercial Property Fund 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 half yearly results presentation for the Elanor Commercial Property Fund. We appreciate your interest in the fund and joining us on this call today. On the call today, I'm joined by David Burgess, who's Co-Head of Real Estate for Elanor Investors Group and the Fund Manager for the Elanor Commercial Property Fund. Liz Bors, who is Head of Asset Management for the for the health care and office division, special division for Elanor Investors Group; and Paul Siviour, who's Elanor Investors Group CFO. Before I hand over to Dave, I'd just like to make a couple of brief comments around in -- and thank the team, David, Liz and their team for the performance of the fund and the efforts that have gone into that performance. Clearly, the fund has performed strongly and maintained a very high level of occupancy which in a sector that's had well-known challenges, like the Elanor Commercial Property Fund is an outlier as far as an office fund goes and its performance supports that. The -- but the -- really, the performance of the fund is significantly a testament to the investment approach of Dave and the team and the group more broadly and being very, very clear and very, very focused on investing in assets that have very clear competitive positions, and getting that right and having assets in the portfolio that have just that clear competitive positions to enable them to differentiate themselves, particularly in more difficult times is a key reason why the fund has performed very well. And again, congratulations to the team for that. On that note, Dave, I'll hand over to you to take us through to details.

Thanks, Glenn, and welcome, everyone, to this year's first half results. The portfolio continues to perform well from an occupancy income and leasing perspective. We are pleased to continue to deliver on our distribution guidance. Whilst capital markets have been challenging and return hurdles for commercial assets have increased. We have offset some downward pressure on asset values with strong rental growth across most of our assets. Our focus is to continue to grow rents and capitalize on the material spread between our portfolio of rent and the elevated replacement cost rents across the country. We're extremely proactive in regards to our lease expiries in 2025 and 2026 financial year, and are in active negotiations in nearly all our tenants over this period. Our result highlights are on Slide 6. FFO has a strong $0.0526 per security, with distributions at $0.0425 per security, reflecting an 81% payout ratio. Occupancy remains very high at 97.3% and continues to develop above the national average. Like-for-like income growth is again strong at 5.5%, and of lease have executed during the period, we achieved a positive leasing spread of 6.7%. Asset values are slightly down by 2.4% to $544 million, primarily due to portfolio cap rates rise to 7.24%, which has resulted in NTA now of $0.94 per unit. Gearing is at 36.9%, and our interest rate hedge exposure is 77%. On Slide 7 we summarize valuation movements across our portfolio. As mentioned, at period end, our valuations declined by 2.4%. This is a result of capitalization rate increasing to 29 basis points, this movement in isolation impacted capital value by 4.8%. However, it was offset by strong rental growth, which impacted values positively by 3.6%. Turning to Slide 8. Our portfolio is well priced as shown with the weighted average capitalization rate on 7.24%. We have mark-to-market our asset values in the portfolio weighted average cap rate are 100 basis points higher than our peer group and is in line with long-term averages and relative to bond yields. I'm packing it a bit further. On Slide 10, positive leasing metrics have continued across the portfolio. Whilst there have only been a small amount of expiries this period, we did achieve a positive 6.7% leasing spread. This is the fourth consecutive half of strong leasing spreads across the portfolio. The like-for-like income growth, I would like to mention, is 5%, the third consecutive period of strong like-for-like income growth across the portfolio. And importantly, our market rents have grown 6% over the past 12 months. But it's still relatively low at an average net rent of $478 per square meter, which is materially below the replacement costs. Portfolio of material discount to replacement cost position our assets very well, especially in light of the quality and the positive fundamentals in the markets in which we are invested. Our weighted average book value of our assets are around $6,500 per square meter, 50% below replacement cost of around $13,000 per square meter. In the markets that we are invested in, they are seeing this impact in supply and expect continued muted supply in the short to medium-term. This, in turn, is contributing to positive rental growth, especially in markets such as Brisbane and Perth, which Liz will talk about in a moment. I'll now pass over to Paul Siviour to talk through the financial result.

Thanks, Dave. Turning to Page 12 of the investor presentation. We can see that the funds from operation of the fund for the half was $16.659 million, which translates to an FFO per security of $0.0526 per security. With an 81% payout ratio for the half that translates to distributions of $0.0425. And we point out that the guidance provided at the start of the year, it was for $0.085 distribution over the year, in other words, $0.0425 per half, but off the back of an 85% payout ratio in that regard, the fund is performing ahead of expectations. Balance sheet on Page 13, identifies the net tangible assets per security of $0.94, reduction of $0.06 from 30 June, reflecting the 2.4% reduction in the value of the portfolio, as Dave said, certainly reflecting a cap rate softening, but ameliorated to some extent by strong performance in market rents. The gearing of the fund is at 36.9%. In respect to capital management on Page 14, the fund has facilities of just under $200 million and is drawn to $192.7 million. Of that balance, 77% is hedged to 31 August '26. And indeed, the facilities are also expiring on the 31st of August '26. So we have significant debt maturity and significant hedge maturity in respect of this portfolio. The covenants relate solely to the wholly-owned assets. There is no look through covenant in respect of the capital structure of the debt facilities. And we're at -- our loan-to-value ratio the purpose of that covenant of 41.7% against a covenant of 52.5%. And I'd just point out that, that provides for headroom of approximately $100 million of value from the current value of the wholly-owned assets of $462.5 million, a very significant headroom. And indeed, very significant headroom in the ICR also, and I've mentioned that interest rate is substantially [indiscernible]. I'll now hand to Liz, to talk about asset management across the portfolio.

The ECF portfolio, both geographical diversity, with a significant portion of assets situated in the nation's most robust markets, namely Brisbane and Perth, which collectively represent 68% of our portfolio. Throughout the half, the portfolio has upheld at stabilized high-caliber tenant mix dominated by government entities, multinational corporations and ASX-listed tenants. Notably, our top tenants have all maintained their presence, and we're currently engaged in active renewal negotiations with several of them. On Slide 17, drilling deeper into the Perth and Brisbane markets, which have emerged as a top performers among all capital cities. With ECF being significantly weighted in these cities accounting for 68% of our portfolio, we have witnessed that hedge will result for their strong performance at an asset level. In both Perth and Brisbane, there has been a notable uptick in demand with tenants actively engaging in transactions. These tenants are displaying increased confidence, evidenced by their willingness to commit to longer-term leases and their improved certainty regarding the space requirements. The limited new supply, combined with rising demand, has resulted in declining vacancy rates, particularly for high-quality well-positioned assets. This trend has fueled rental growth, demonstrating the favorable market conditions we are currently experiencing. We maintain a proactive approach to leasing -- to our leasing strategies, having executed a significant portion of forward leasing last year that consequently meant that the volume of leasing transactions this half was notably reduced. Nevertheless, our performance on executed leases has been robust, underscoring our continued leasing success. Our rental growth remained strong at 6.7%, with like-for-like rental growth standing at 5.5%. We've effectively managed to keep our average incentive below 30%, while consistently achieving occupancy levels well above the market average. Importantly, less than 2% of the portfolio's income is set to expire in the upcoming half, the majority of which we are already addressing, ensuring stability and continuity in our income [ stream ]. Furthermore, our aged arrears remain below 2%, reflecting the high quality and caliber of tenants within our portfolio, we are further reinforcing the stability of our income. On Slide 19. Now looking forward, our next significant lease expiries are anticipatable will be in late 2025 for both WorkZone West and Campus DXC, both whole building tenants. WorkZone West has long served as a cornerstone asset in our portfolio, both in strong tenants, and we can attribute this to the exceptional quality across all aspects of this asset. We've actively been pursuing a multi-tenanted leasing strategy. We've engaged directly with subtenants and are pleased to announce that we're currently in active negotiations for over 70% -- 80% of the net -- succession of the net lettable area. Meanwhile, Campus DXC presented a distinctive opportunity in a highly sought-after location. It appeals to diverse markets such as medical, education and mixed-use sectors. We've been extremely proactive in the market and are making significant progress with negotiations for the entire building. Additionally, with the recent renewal of the federal government lease of Garema, the lease expiry has been extended to the 30th of June 2026, ensuring full income realization for FY '26. The markets in which all these assets are located have robust fundamentals, including positive demand, limited new stock and rent significantly below replacement cost. Coupled with our proactive leasing approach, we already have 73% of FY '25 and '26 expiries in active negotiations, importantly at or above valuation rents. Further positioning the fund for sustained rental growth and income security. These metrics bode well for the fund's continued rental growth. I'm on Slide 20, we're diving deeper into WorkZone West and the leasing strategy there. So as we've always previously mentioned, timing has been pivotal in executing our leasing strategy at WorkZone West. We've maintained a steadfast belief in the growth potential of market rents at WorkZone. And strategically, we've deferred any renewal discussions with tenants to capitalize on improved market conditions, which are now playing out. We have seen on the ground robust rental growth driven by heightened demand and limited new supply, amidst backdrop of economic expansion. WorkZone West is aptly positioned to meet the evolving demands of tenants who increasingly prioritize premium office space offering flexibility, amenity, accessibility and best-in-class ESG credentials. Attributes at WorkZone West excels in providing. Through our focused leasing strategy, coupled with active asset management initiatives, we've cultivated a strong tenant interest in maintaining their presence within the asset. Presently, we have secured leases or in active negotiations for 80% of the net lettable area, a noteworthy achievement, which is delivering on our leasing strategy. Now finally, to ESG on Slide 21. The importance of continuing to invest in ESG for both Elanor and ECF is paramount. We are now measuring our Scope 1 and 2 emissions and continuing our partnership with The Smith Family. At an asset level, we have continued our strategic capital investment in sustainability initiatives, and in the half have achieved a 5.5 NABERS rating at 200 Adelaide Street, a heritage asset in the heart of Brisbane CBD. We continue to be focused on reusing and refurbishing fit out to reducing our carbon footprint and continue to deliver our Sustainability Improvement Plan. By continuing to invest in ESG initiatives, it is not only beneficial for mitigating environmental and social challenges but also for creating long-term value, maintaining a competitive edge, and building stronger relationships with all stakeholders. I'll now pass back to David Burgess.

Thanks, Liz. In summary, we are well advanced on the future lease expiries as Liz mentioned, 2025 and financial year 2026 periods. And pleasingly, at levels which are above valuation metrics. Our assets are attractively priced at high capitalization rate of 7.24%, relatively low rents, shaped $6,600 per square net of capital value, which is relatively below than pricing costs. We are within our target gearing range with material headroom covenants. FY '24 guidance is reaffirmed at $0.085 per security. On that note, I'll now open up to your questions.

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

Just first question in terms of your payout ratio. Obviously, you paid 81% this half. What is your expectation in the second half?

Broadly similar, Leanne, will be the same.

So it sounds like, I mean, I think at your August announcement result, you said 85%. So it sounds like it's reduced a little bit, your payout ratio. Is that correct?

Yes. Correct.

Yes. Yes.

Yes. And the second question is just in regards to gearing, I guess, what are the plans there? Are you comfortable with those levels? Are you still looking to reduce that?

We are comfortable. As Paul mentioned, we had a lot of headroom. Essentially, our capitalization rates have to go to circa 9.5% across the entire portfolio to get anywhere near LVR covenants. And as I mentioned, we actually are getting rental growth in the portfolio, so we are very, very comfortable with those level, at the moment.

Yes. And just on the Harris Street fund, what's the LVR there now? Yes, a bit of more color on that?

Yes. It's broadly similar to where it was previously in the low $0.60 range. So -- and they're monitoring that very closely in terms of our capital management of that asset. Pleasingly, we've done a lot of leasing in that building and operation is performing very well. And again, in rental growth. We're closely monitoring there our capital position of that...

Yes. The other important point, Leanne, is that the -- that's hedged -- that facility -- that debt facility is fully hedged at attractive base rates. So the ICR continues to perform well in the context of the performance of the asset and the immunization of interest rate.

[Operator Instructions] Your next question comes from Edward Day with Moelis Australia.

Thanks for the color on Workzone West. Just a couple of questions here. With the negotiations you've got underway, when do you think the earliest deal would commence?

Well, probably Liz -- Elizabeth...

Yes. So we are hopeful to get a signed [ Work ] firmed up on at least one of those tenants in coming weeks. We're potentially looking at rolling forward the lease commencement date on at least one of those. As you know, we have the overrenting rolling through, and we're really conscious of -- sort of staging the new at least start dates between now and August next year when the head lease expires. So potentially, one of those may start in the next financial year.

Yes. We've always been very, very confident regarding this asset and the leasing of the asset, just understanding the [indiscernible]. We are even more pleased now given what's happening in that market and how we've been able to better position it in terms of the rent incentives. So it's a very high product that cost [indiscernible]. So the other point on that one, importantly, there's not a huge amount of capital to spend because it's very high [ level of ] building as the first generation fit out in there. So a lot of setup will be [ resides ] from next-generation leases which is the big factor in this part.

Okay. Are you expecting much tenant churn there? And should we be thinking about any downtime coming through?

All the existing tenants are very actively engaged in...

In renewal.

In the renewal.

and direct claims with...

With the direct claims. So we do not expect much both still downtime in that...

Okay. That's good. And then the final one is just on your leasing spreads. Can you just dive into that in a little bit more detail in terms of the major contributors to that?

Yes, maybe Liz can sort a bit.

In this particular half, we haven't had a lot of transactions. So the main -- we've had some smaller deals coming through, but the main contributors to those would be a couple that we had in 19 Harris Street, and we've also had 50 Cavill Avenue as well.

Yes. And the important thing there is that took for a while about upward pressure on rents. We tried to articulate in the past that the same consecutive periods now and positive lease spread that is continuing, areas like Brisbane [indiscernible], Gold Coast with a very limited supply and very high occupancy. Similarly the [indiscernible] Perth. We actually -- the trend that's playing out very, very well and I think will continue.

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

Thanks again for joining us, and we'll happily catch up with anyone post-results.

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