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

Good morning, everyone, and welcome to the ECF Investor Briefing for the half year of 2025 to hear our results. By way of introduction, I'm Tony Fehon, the Managing Director of Elanor Investors Group. And today, I have with me David Burgess, who is Head of Investments for Elanor Investors Group and the newly appointed Fund Manager for ECF, John d'Almeida, who is the Head of our Office sector. The results today, we will go through with both an introduction from David and also an overview from David, and then John will take us through the detailed results. The team has continued to focus on the management of the funds, delivering consistently solid operational results. These outcomes are a combination of the excellent asset selection and to build a highly performing portfolio and the active management of the leasing and capital expenditure profiles of that portfolio. We're pleased with the results today. And so I'll ask Dave to give you an overview of those results.

Thanks, Tony. For the first half this financial year, portfolio continued to deliver stronger operational performance. In addition, we have executed on capital management initiatives and the fund is well-positioned as we move through the trough of the cycle. Positive trend we are seeing is a slowing of investment property value declines with 8 out of our 9 assets are holding value for the period. This, amongst other things, suggest we are approaching or at the bottom of the valuation cycle. We have significant leasing success, specifically at WorkZone West where we executed over 60% of leasing across the net lettable are of the building, well ahead of its August 2025 expiry. Our portfolio continues to maintain near full occupancy at close to 98%, significantly outperforming the national average while still achieving very strong rental growth [indiscernible] . Our key focus is on many fronts, including continuing that leasing momentum, especially in assets WorkZone West, Harris Street in Pyrmont and Garema Court in Canberra. We will continue to be proactive in regards to our capital management, including extending debt duration and ensuring our gearing remains within our target range, whilst we execute on these accretive listing capital commitments. For the full year FY '25, we are reaffirming our forecast distribution of $0.075 per security, which provides a 12% yield on a forecast payout ratio of around 80%. I'll now pass to John to provide more the details on results.

Thanks, David, and welcome, everyone. Looking at our results on Slide 5. Our funds from operations came in at $0.0492 and distribution of $0.0375 per security, reflecting a payout ratio of 79%, both of which are in line with the previous guidance. Occupancy remains exceptionally strong at 97.7%, significantly outperforming the national average of 84.3%, a testament to the quality of our assets and our active management approach. Portfolio WALE is 3.7 years, with a slight decrease from 4.0 years of June 2024, which reflects some natural lease expiry progression. Portfolio market rental growth has been robust at 10.8% over the last 2 years to December 2024, showing the underlying strength of our assets and markets. Our weighted average capitalization rate increased slightly to 7.76%, up from 7.74%, reflecting some continued but moderating cap rate pressure. Total portfolio value now stands at $506.6 million on a consolidated basis, representing a decrease of just 1.2% in June 2024. Importantly, 8 of our 9 assets are holding their value. This is a clear sign of stabilization occurring in market. Our NTA per security is $0.74, down from $0.83 at June 2024, reflecting the impact of our capital raise discount and the December half valuation writedown. As mentioned, our balance sheet gearing has improved to 36.1%, down from 40.1% following our capital raise. Turning to our financials on Slide 7. In terms of our income statement, despite some increases in expenses some of which are one-offs, we've delivered solid results with net property income increasing by 1.8% to $24.9 million, contributing to an FFO of $17.1 million, which was up 2.5% on the same period last year. The improvement in our statutory profit of $2.8 million, up from loss last year shows we're moving in the right direction. This has resulted in FFO of $0.0492 per security and payout ratio of 79%. Distribution per security is in line with guidance at $0.375 per security. On the next page, our balance sheet represented on a consolidated basis remains strong. We've got a healthy cash position of $20.7 million, and our investment properties have made of $506.6 million on a consolidated basis, which is only down 1.2% from 6 months ago. We've also added the Harris Street capital notes of $39.1 million, which is an important strategic investment for us. Turning to portfolio valuations on Slide 9, where we're seeing some encouraging signs. Over the last 6 months, our market rents increased by 1.5%, offsetting some minor cap rate expansion, resulting in just 1.2% overall valuation decline. Looking into the future, our portfolio values have come down from $609 million to $507 million since the June '22 peak. But importantly, the rate of decline is significant moderated. Our weighted average cap rate is 7.76% remains attractive compared to peers and the cap rate decompression has slowed just 12 basis points over this period. 8 of our 9 assets are now holding new value. We're considering the overall portfolio valuation rate of $6,000 per square meters, very attractive to peers and significantly below replacement costs. Looking at the market cycle data on Slide 10. We can see some really encouraging signs to support our view that we are near the bottom of the cycle. If you look at Sydney CBD cap rates have stabilized over the last 2 quarters, which is significant. What's particularly interesting at this current cycle has followed a very similar path to historical cycles about 150 basis points of decompression over roughly 2 years. When we compare this to market capital values, we're seeing a similar story. Values have defined about 20% from the peak, mirrors what we saw during the GFC. However, this decline appears to have halted over the last 2 quarters, giving us confidence that we're approaching the bottom of the cyle. Turning now to Slide 11. In October, we completed $52.5 million equity raising with strong support from our security holders, achieving a 65% take-up rate. This has strengthened our balance sheet while maintaining our FY '25 distribution guidance of $0.075 per security. We then invested a significant portion of Harris Street notes, giving us 5% annual coupon, 7.5% PIK on maturity and 10% of the asset valuation upside through June 2027. This helps us stabilize Harris Street interest and has brought our gearing down to 36.1%, well within our target range. Looking at our debt profile on Slide 12. We've maintained a weighted average cost of debt at 4.5%, gearing at 36.1%, sitting nicely within our target range. We've took a prudent hedging position with 77% of our interest rate exposure hedged, increasing to 81% on a look-through basis. Our debt facility has 1.7 years to maturity and the key initiatives for the fund is to optimize duration and interest rate hedging. With $20 million in undrawn CapEx facility and $6.7 million in cash, we've got good capacity to manage a lot of funding. Looking at our portfolio performance on Slide 14. We're maintaining exceptional occupancy at 97.7%, which is significantly above the national average of 84.3%. Particularly impressive is that 6 of our 9 assets have an occupancy rate of above [ 98% ], really demonstrating the quality and appeal of our properties. Rental growth story is also compelling with 5 assets achieving double-digit growth over the last 2 years. WorkZone West, 200 Adelaide Street, Mount Gravatt, 50 Cavill and Garema Court, all have seen rental growth of 10% or more, highlighting the strength of our assets in key markets. Let me take you through our portfolio starting with Queensland, Southeast Queensland on Slide 15. Brisbane market showing real strength with CBD and Fringe rental growth of 11.9% and 15.1% per annum [indiscernible]. Our Heritage building at 200 Adelaide is achieving 11% market growth over 2 years, while 50 Cavill continues to dominate Gold Coast market, leasing well and with 13% growth in market rents over the same period. We secured Bunnings at Nexus Centre until 2029, successfully leased Corporate Drive to life science tenants and we're repositioning Limestone Street with our health services folks. Now Southern markets on Slide 16, we've had some good wins. At 19 Harris Street, Pyrmont, we've retained Thomson Reuters in the building until 2030. Garema Court remains a prime Canberra asset with full government tenancy with which we had an encouraging active engagement ahead of their June 2026 expiry. At 196 OG Road at Adelaide, we successfully retained the whole building tenant, and the asset now has a strong WALE of 5.7 years. Turning to Slide 17. One of our biggest successes of WorkZone West, a prime grade, carbon-neutral building with excellent environmental credentials. We've already secured 61% of NLA of expiry and including active negotiations that takes a total of 77%. Furthermore, rents were 6% above valuation expectation 12 months ago. This asset has enjoyed strong cash on cash returns since acquisition several years ago and the reversion to market rent is fully factored into the valuation. Looking at our leasing program on Slide 18. We've got 50% of the expiries to FY '26 on the active negotiations. We're primarily focused on Harris Street, WorkZone West and Garema Court. Each asset has the level of capital initiatives currently being undertaken in order to assist with leasing campaigns or negotiations. Thank you, and I'll now hand back to Dave for his concluding remarks.

Thanks, John. In summary, our portfolio have maintained market-leading occupancy and experiencing positive rental growth, which we expect will continue. There is strong leasing momentum across many of our key assets, capital values are stabilizing and importantly, a price well below replacement costs. Looking forward, we've got many key focuses, including to continue on its leasing initiatives that John has mentioned, specifically at WorkZone West, Harris Street and Garema Court, will continue to be proactive in capital management that includes maintaining gearing within our target range and extending and diversifying debt duration and managing our interest rate risk exposure. Importantly, we will focus on positioning the time to grow FFO and NTA and close the NTA gap. We reaffirm our FFO guidance of $0.093 per security for the full year, supported by a higher portfolio occupancy and interest-rate hedging position. We also reaffirm our distribution guidance for the year of $0.075 per security, which provides a very strong distribution yield of over 12%, which is well above our peer group. With that, I'll now open up to questions.

[Operator Instructions] Thank you, everybody. As we are showing no questions, we can conclude the call for today. Thank you all for participating. You may now disconnect your lines.