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

Thank you for standing by, and welcome to the Elanor Commercial Property Fund Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Siviour, COO of Elanor Investors Group. Please go ahead.

Well, thank you, and welcome to the investor call where we will present the results for the year to 30 June '24 for the Elanor Commercial Property Fund. On the call today, I'm joined by my colleagues: David Burgess, Head of Investments and Fund Manager; and John d'Almeida, Head of Office, who will present the results. We're very pleased to be able to present these results for Elanor Commercial Property Fund for the year to June '24. They reflect continuing strong performance by the fund. The fund met its distribution guidance of $0.085 per security, which reflected an 81% payout ratio during the year, and with strong occupancy and strong rental growth across the Fund's portfolio. David will expand on those points as we take you through the presentation. Before we commence, though, I refer those on the call to Elanor Investors Group announcement on the 23rd of August, that it's exploring a range of strategic options to enhance its financial position. I confirm that this relates solely to Elanor Investors group, and not Elanor Commercial Property Fund. Elanor Investors Group is the RE and Manager of the Elanor Commercial Property Fund. I'm sure that participants on the call appreciate that will not be able to provide any comment on ENN on this call other than to say that ENN will update the market in accordance with its previous announcement. So handing over to David Burgess, who'll take us through the majority of the presentation.

Thanks, Paul, and thanks for dialing in for today's presentation. If I may refer you to start on Slide 4 of the pack. Now despite what has been another difficult year for commercial property in Australia, ECF has performed well. From an operational perspective, all the valuations have continued to be negatively impacted. We have comfortably delivered on our cpu guidance due to strong leasing results across nearly all of our assets. The strength of our asset management and leasing throughout the year has resulted in the portfolio maintaining a very high occupancy, positive rental growth and a reduction in future lease expiries in both FY '25 and FY '26. Return hurdles have continued to rise and impact asset values, although we do believe we are getting closer to the trough of the cycle. Gearing is at the upper end of our target range, and our focus is to reduce this to the lower end. And there's a clear plan to execute on asset sales to achieve this, which is factored into our guidance, which we will talk about later. Now turning to Slide 5 for results highlights. FFO per security for the year was a strong $0.1047 per unit and distributions were as guided at $0.085 per unit, as mentioned before. This represents an 81% payout ratio. Occupancy at period end was a very high 98.4%, and the portfolio of WALE increased to 4 years from 3.1 years at the beginning of the period. Like-for-like income growth was a strong 4.7%. Over the year, valuations decreased 7.8% as a result of cap rates rising to 7.64%. This has resulted in gearing at the upper end of our target range and NTA falling to $0.84 per unit. Turning to Slide 6 on our leasing performance. There has been a significant amount of leasing that has been completed during the year at very good metrics with 85% of transactions completed or at heads of agreement stage having positive leasing spreads. Of the 26,000 square meters completed, nearly 15,000 square meters were for expiries in FY '26, specifically in key assets at WorkZone West in Perth, and OG Road in Adelaide, which I will discuss in a moment. This has resulted in a 43% reduction in FY '26 expires. Assets such as Mt Gravatt in Brisbane, 50 Cavill Avenue on the Gold Coast and 19 Harris Street, Pyrmont have experienced strong leasing spreads. At Cavill Avenue specifically, there were over 2,700 square meters of leasing completed had a very, very strong 10% positive leasing spreads. Conversely, assets such as WorkZone West were negative. As expected due to the material overrenting in that building that we have discussed previously. On Slide 7, we cover WorkZone West and Campus DXC in Adelaide. WorkZone West in Perth has been delivering an exceptionally high yield given the whole of building lease to CPB Contractors. The significant overrenting in the asset and the limited CapEx required given the quality of the building. We have now agreed terms for over 57% of the building from the current lease expiry in August of 2025. Of the remaining 6,300 square meters of NLA, 4,900 is in active negotiations. At OG Road in Adelaide, we have renewed the existing tenant for the -- over the entire building for a 5-year term from the current lease expiry. This increased the WALE to 6.2 years. And as a consequence of this deal, we have achieved strong valuation uplift on that asset. Looking forward on Slide 8, we will continue to execute on leasing across the portfolio and have strong renewal prospects. In 2025, there are mostly smaller areas across multiple buildings that expire, and we are in active negotiations with many of those tenants. As mentioned, in 2026, we are in active discussions with over 70% of the expiry, including WorkZone West and Garema Court in Canberra. Turning to valuations on Slide 9. Valuations have continued to be impacted as return hurdles for commercial real estate increase. However, we do believe they're getting close to the trough of the market. Our portfolio weighted average cap rate is an attractive 7.6%. Rental growth has offset some of the impact, and we do expect rental growth to continue across most of our assets. For the year, adopted valuation market rental growth was over 5%, and these rents are still materially below replacement cost rents, which provides a tailwind for many of our assets. Turning to the Harris Street investment on Slide 10. 19 Harris Street has been impacted by rising cap rates like other commercial assets in Australia. The current value of ECF investment on an equity accounted basis is $18.7 million, reflecting $0.059 per security. While leasing at the asset has been strong and occupancy is high, the decline in value has resulted in elevated gearing in that fund. It is worth noting there is no look through covenant for ECF therefor no adverse impact on ECF strong covenant headroom, which Paul will talk about in a moment. Our preferred course of action is to reduce gearing with a hybrid debt instrument to recapitalize the fund. This has support from the senior lender that will extend the senior loan facility to June 2027. I'll now pass back to Paul, who will discuss the financials.

Thank you, David. And turning to Page 13 of the presentation where we set out the funds -- income statement and income generation for the year. Funds from operations of $33.1 million reflected an FFO per security of $0.1047 and the distribution per security flowing from that FFO was $26.9 million or $0.085. That distribution was strike on relatively conservative payout ratio of 81%. Turning to Page 14 in relation to the balance sheet. David has referred to the reduction in the total portfolio value over the year of approximately 7.8% to $514 million, and that generates a net tangible asset value per security of $0.84 per security. As mentioned, gearing at 39.9%, while presenting significant headroom with covenants is at the upper end of the range of the fund's preferred gearing range of 30% to 40%. David will comment as part of FY '25 guidance on commentary in relation to potential asset sales to reduce gearing to the lower end of our range. And to link that further with forecast FFO guidance range on the basis of either realizing assets at what we believe would be appropriate returns for fund investors or alternatively, what that FFO guidance would reflect if no asset sales were realized. The -- in respect of capital management, turning to Page 15. The fund is drawn debt of $195 million at the 30th of June with a facility limit that provides a very significant capacity for CapEx, leasing CapEx as the fund continues to drive leasing rental income. The debt facility is well hedged at 76% and that generates a weighted average cost of debt of 4.5% per annum, which is an attractive interest rate. And based on no change in variable rates, the variable part of the facility is approximately $45 million. That presents a very stable interest rate forecast for the balance of the fund's debt term, which is out to August 2026. If I can just turn to gearing and provide some comments to explain that carefully. That the gearing of 39.9% reflects the balance sheet presentation that equity accounts the funds interest in Harris Street. As David mentioned before, the Harris Street fund is a separate fund with its own debt that is nonrecourse outside of that fund. And of course, Elanor Commercial Property Fund has a 49% interest in that fund. So on the basis of the presentation of the fund's interest in Harris Street fund as an equity accounted basis, the gearing is 39.9%. We have shown for market disclosure, what the look-through gearing is, which is 45% if you were to present the results on the basis of the fund taking up its 49% in both the value of Harris Street and the 49% of Harris Street's debt. As we mentioned, nonrecourse to Elanor Commercial Property Fund and does not have any impact on any of the funds covenant calculations or headroom. Turning to covenant calculations. The fund has very significant LVR headroom in respect of its covenant on the basis of a 44% loan-to-value ratio as measured for banking purposes, which presents a very significant headroom to the value of the fund's assets. It's approximately at least 15% in respect of the current valuation of those funds assets. In addition, the fund generates, as you know, a very significant income and the interest cover ratio is 4.66%, which is presenting an extremely significant headroom in respect to the funds covenants. I'll now hand back to David, who will talk specifically to FY '25 guidance.

Thanks, Paul. In summary, we're very pleased with how the assets are operating from an occupancy, tenant demand and income perspective. Our key focus for FY '25 is to position ECF to enable continued income stability, FFO growth and importantly, NTA stabilization and growth as the market recovers. This involves continuing our strong asset management and leasing focus across all our assets and executing on asset sales, like I mentioned, to reduce gearing to the mid or lower end of our target range. FFO guidance is $0.093 to $0.098 per security with the lower end of the range assuming several asset sales and the upper end of the range assuming no asset sales. Forecast distribution for the FY '25 period is $0.075 per unit, which reflects an 11.6% yield on current security price. And a payout ratio of just over 80% based on the lower end of the guidance range I just articulated. On that note, I will hand back and be open for questions.

[Operator Instructions] There are no questions at this time. I'll now hand back to Mr. Paul Siviour for closing remarks.

Thank you very much. And just to again reiterate the quality of the fund's performance in respect of FY '24. It's off the back of a fund that has 98% occupancy across the portfolio and is generating strong like-for-like income growth. We see ongoing positive leasing activity in respect of the fund's portfolio. And as David mentioned, we are guiding to a distribution per security of at least $0.075 per security, which is framed against the bottom end of the FFO guidance range of $0.093, which, as David mentioned, reflects the potential for several assets. I'd like to congratulate David and the team on another strong result for ECF and also for commencing FY '25 with strong prospects for the fund. I'd like to also thank those on the call for their interest in ECF and for joining us today. Thank you, and have a good day.

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