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

Good morning, and thank you for joining us for the FY '26 results presentation for the LDR Capital Property Fund, referred to throughout this presentation as LED. I'm Ryan Pittman, the Managing Director and Fund Manager, and I'm joined this morning by Ben Vereb, our Investment Director and Assistant Fund Manager. You will notice that this presentation is longer and more detailed than you may be used to. This is deliberate. We have prioritized transparency so that every investor can have a clear view on the state of the portfolio and the Fund. Slide 4. For those less familiar with the Fund, LED is an ASX-listed A-REIT that currently owns commercial property. LDR Capital, a subsidiary of the Lederer Group, was appointed the investment manager in February this year. We have achieved a number of milestones in the first 6 months, which we will outline shortly. Like most investors we have engaged with, we want to return the focus of LED to generating compelling total returns per security. When we focus on total returns, we aim to deliver distributions plus NTA growth, not one at the expense of the other. We believe this will be achieved by continuing to reposition the Fund. FY '27 will be another pivotal year, and our focus shifts to completing the repositioning and redeploying capital into properties that can deliver enduring cash flows. This will uniquely position LED in the small-cap REIT space as an owner of exceptional properties, generally reserved for global investors, Australia's largest superannuation funds and the largest REITs. Slide 5. In the February half-year results presentation, we flagged 5 priority areas. This slide sets out what we've delivered against each of them. First, we immediately reduced funds management costs. We are on track to deliver $1.9 million of cost savings on an annualized basis, representing a 37% reduction in management fees compared to the first half. To put that in context, we had previously estimated $1 million of annual savings, and we are close to double that. Second, we have undertaken a detailed review of every asset, including the historical performance and future prospects. As a result, we have prepared bottom-up FY '27 budgets with a line-by-line review of leases, outgoings and incentives with a critical focus on cash returns. We have reforecast the future CapEx obligations of each asset, and we have found significant cost savings within the budgeted outgoings. These findings have helped shape the divestment program and guide us on the strategy of the Fund going forward. Third, we have announced the sale of 4 secondary assets, Cannon Hill, which has settled already; Limestone Centre and Nexus Centre, which is due to settle early next week and Campus DXC, which is settling next month. Fourth, we have retendered property and fund level service contracts to improve the quality and reduce fund level expenses. This work will continue in FY '27. And finally, the debt and hedging profile of the Fund is under review with the intention to refinance our existing debt facilities once the exchanged asset sales have settled. Slide 6. This slide is the clearest single picture of our journey so far. We started in February this year with 8 office assets of varying quality and a $45 million investment in the Harris Street Fund, which is managed by Kyron Capital. Gearing was elevated in the Fund, and we had a significant exposure to secondary assets. We've taken immediate action. 4 of the assets have been sold with the capital initially applied to retiring debt. Post settlement, gearing will reduce to 29%, whilst the portfolio has reweighted to premium-grade assets. The table on the right shows our aspirations for the Fund going forward. The repositioning has enhanced the portfolio already. Over the course of FY '27, we will continue to recycle assets and we'll redeploy the capital into new opportunities. I will note the bar for future acquisitions has lifted dramatically from what was previously acquired by the Fund. I'll hand over to Ben to provide a snapshot of FY '26.

Thanks, Ryan. Slide 7. Since LDR Capital was appointed the manager of LED, our achievements in this short period include realizing $105 million in net proceeds from secondary asset sales. We've leased 14,000 square meters or 32% of the retained portfolio, and we've achieved $1.9 million of annualized Fund management cost savings, a 37% decrease from the annualized rate achieved for the first half of FY '26. On the key financials, in FY '26, the fund generated FFO of $0.069 per security, AFFO of $0.018 and distributions were paid in line with guidance at $0.065 per security. I'll draw your attention to the gap between FFO and AFFO and then between AFFO and the distribution. That gap is the single most important thing to understand about FY '26, and we'll come back to it frequently throughout this presentation. Gearing at 30 June was 42.6%, but will reduce to 29.3% as the exchanged assets settle by the end of September. At 30 June, the Fund NTA is $0.58 per security. Thanks, Ryan.

Moving to Slide 8. Before we talk about the future, we need to be honest about the past. This next section explains how the Fund arrived at its position in February. A core principle of LDR Capital and the Lederer Group is to prioritize transparency so that investors can make informed decisions about the future. This chart shows the total return of the Fund since December 2019, split between the distributions paid and the change in NTA per security. Whilst distributions have historically been paid each year, they have been declining. However, the change in NTA has been consistently negative and in the last 3 years, heavily so. The result is the total return since IPO have been negative in 4 of the 7 years. The point is simple. Distributions on their own are not a return if they are accompanied by an equal or greater decline in NTA. As a total return investor, LDR Capital is focused on making the necessary decisions to restore investor value, and that starts with restoring the fund's NTA. Slide 10. This slide sets out the 4 key drivers of that underperformance, the impact of each and what happens going forward. First, the whole-of-building lease at WorkZone West expired in August 2025, which has resulted in a reset of rents, new incentives being imposed and the occupancy falling from 100% to 71%. Since the IPO, this asset value has declined by $41 million or $0.10 per security and the AFFO impact of the reset is around $14 million or $0.03 per security. Going forward, the asset value now reflects this expiry and the revised cash flow profile. Second, a new lease for Garema Court was struck in February 2026. Since the acquisition of this asset in 2019, the valuation of Garema Court has declined around $32 million or $0.08 of NTA. The valuation that has been adopted now reflects the new leasing deal and the expected vacancy on the expiry of this tenant in May 2030. Third, the Harris Street equity investment has significantly underperformed since its acquisition in 2022. The value of this investment has declined by $32 million or $0.08. We consider this investment noncore to the Fund going forward. Fourth, and this is the one I ask you to sit with, a significant component of distributions has historically been debt-funded. Based on our review of the financial information, we estimate that approximately $48 million of debt has been drawn to fund distributions, which has impacted NTA negatively by $0.14. As a total return investor, LDR Capital flagged that this approach is no longer sustainable and intend for future distributions to be paid out of the asset cash flows and not funded by debt. Slide 11. LDR Capital and the Lederer Group are acutely focused on cash returns as the critical driver of total return. Whilst we acknowledge that funds from operations is the widely used industry metric for describing Fund performance, we believe as a cash-focused investor, it has limitations. Going forward, we will report results based on adjusted funds from operations, which goes further than FFO. It makes further deductions, including maintenance CapEx, landlord works, leasing fees, fit-out contributions and rent incentives. In doing so, it provides a closer representation to the cash generated by each asset. The charts make the point. Whilst FFO implies a strong performance, the portfolio AFFO tells a different story. On a yield basis, the portfolio was generating an FFO yield of 9.3% in FY '26, but the AFFO yield was only 4.8%. Two assets are the largest drivers of the AFFO impact in FY '26 and FY '27. At WorkZone West, the passing rent has fallen 37% as the whole of building lease expired. We're investing heavily back into this building with over $20 million in incentives and landlord works committed to new tenants, of which around $8 million was incurred in FY '26. You can see the effect on the chart. AFFO of $11.9 million in FY '25 turned to a negative $1.8 million in FY '26. At Garema Court, passing rents declined 18% in FY '27 -- will decline. There is an $11 million incentive committed to the government with $4 million incurred in FY '27, where previously there was none. We expect the current tenant will vacate at the end of the lease term in May 2030, having precommitted to a new development in Canberra. Garema Court contributes $5.6 million of AFFO in 2026. That contribution reduces materially from FY '27. The Harris Street investment sits in 2 parts. LED owns 95% of a debt instrument valued at $35.7 million in June '26. This investment, known as the capital notes, earns a 5% per annum cash coupon and a 7.5% capitalizing or PIK interest payable on maturity. $7.9 million of these notes were redeemed in January prior to LDR Capital becoming the manager. The remaining notes mature on the 30th of June '27 and the issuer has obligations to redeem them on or before this date. Separately, LED holds a 49.9% equity interest in the Harris Street Fund, currently valued at $11.8 million. We do not expect the Harris Street Fund to pay a distribution in FY '27. This is the slide I'd most encourage you to study. The bar graphs show Fund FFO in gold, Fund AFFO in blue and the Fund distributions in red over the last 5 years. In every year but one, distributions have exceeded AFFO. This has resulted in a cumulative shortfall of $48 million. That shortfall was funded with debt and the aggregate impact to NTA is around $0.14 per security. In FY '26 alone, $0.05 of the declared distribution was funded out of debt. These payments were made at the detriment of NTA per security and is the practice we will stop going forward. Slide 15. This slide provides a snapshot of the NTA per security since IPO. This has fallen from $1.19 at IPO to $0.58 in June '26, a decline of around 50%. The NTA bridge on the bottom left shows the causes. Equity raisings in 2021 and 2024 diluted NTA per security by $0.07 and $0.06, respectively. However, the largest single driver has been a decline in the valuations of approximately $0.30, which in turn has been driven by the changes at Garema Court, the Harris Street equity investment and WorkZone West, which we've outlined earlier. Distributions paid out of debt account for a further $0.14 of the decline in NTA. Other items, including the ENN termination payment and transaction costs account for the remaining $0.04. I will now hand over to Ben to provide details on where we are now.

Slide 17. LDR Capital is backed by the Lederer Group, who is also the largest investor in the Fund. I want to stress the point on alignment with investors. Paul Lederer, our Chairman, sits alongside all other investors in the Fund and is exposed to the same outcomes. We manage capital with the mindset of an owner, prioritizing evidence-based assumptions from a rigorous bottom-up assessment of each and every asset. At LDR Capital, we are a small and nimble team with direct accountability. Slide 18. We are actively repositioning the portfolio. To date, we have exchanged or settled on 4 assets, which will realize $105 million in net proceeds that will be used to retire debt. All of these assets had one or more risk characteristics, whether in future leasing or CapEx burdens that would have impacted future AFFO of the Fund. For example, the combined CapEx burden in FY '27 of the 4 assets sold would have been around $4 million. 200 Adelaide Street is currently held for sale with a marketing campaign for this asset to commence shortly. As Ryan flagged earlier, the capital notes for the Harris Street Fund will mature in June 2027. Here is the justification for those asset sales in a single chart. The 4 disposed assets averaged 5.2% AFFO yield over the last 5 years, which is below our target return threshold. I will note, in our view, a number of key CapEx items were being deferred, which would have reduced these yields further. The deferred CapEx burden had a direct impact on the net sale price of the exchanged and sold assets. Slide 20. Since our appointment as Manager, we have leased more than 14,000 square meters and portfolio occupancy is currently at 93%, albeit the lease negotiation with the tenant at Garema Court had been progressing for months prior to LDR Capital being appointed as the Investment Manager. At Garema Court, the whole-building tenant was extended until May 2030. To achieve this extension, a substantial incentive was granted, which will particularly impact AFFO in FY '27. We believe the major tenant will be vacating the building in 2030 as they have pre-committed to another asset. And so we are actively exploring highest and best use options for this asset that capitalize on its exceptional location in Civic. In WorkZone West, we have leased over 2,000 square meters across 2 tenancies. And in Cavill Avenue, we were able to extend the lease on Level 17. Level 3 in WorkZone West is currently vacant, and we are undergoing a refurbishment of this level in parallel with the leasing campaign, aiming to achieve full occupancy in the building by the end of the year. Similarly, for 50 Cavill Avenue, we are refurbishing the vacant floor on Level 20 to maximize leasing outcomes in this building. After accounting for assets held for sale, the investment portfolio now includes 50 Cavill Avenue, WorkZone West and Garema Court and is valued at $255.5 million at 30 June 2026. Both WorkZone West and Garema Court were externally valued and 50 Cavill Avenue was internally valued. Our core principle when approaching the valuations was to accurately reflect the true CapEx liabilities and leasing risks of these assets. We think this is critical given the age of the portfolio. We've engaged third-party property, engineering and financial consultants to inspect the assets and help inform our robust 10-year forecasts, which have been reflected in these updated valuations. As a result of this bottom-up approach, the revised portfolio valuation has decreased by $6.5 million from December 2025, representing a 2.5% decline in value. The weighted average cap rate has sharpened by 5 basis points, driven largely by the significant CapEx adjustments giving support to a derisked asset price. Working with the external valuers, we deliberately extended the horizon for present value adjustments in the capital value to capture the impact of this forecast CapEx. I will now hand back to Ryan to share the Fund vision.

Thanks, Ben. Slide 23. Over the last 6 months, we've spoken with a wide cross-section of investors to understand what is important. This slide summarizes your feedback and what LED will offer against each point. Our overarching aim is to reposition LED to be an owner of exceptional assets that investors cannot otherwise gain access to, assets that are usually limited to the global investments, superannuation funds or the major REITs. We want to break the perception that investing in a small-cap REIT means investing in lower quality or challenging assets. Going forward, our focus is on ensuring that distributions are sustainable. To us, that means CapEx, incentives and distributions are funded out of the asset cash flows. Post the repositioning, we will aim to deliver a distribution yield on NTA of around 6.5% to 7.5% and a total return per security of 10% to 11% per annum. We understand the importance of liquidity. And whilst the Fund is tradable on the ASX, we will look to ways to enhance liquidity over time. Most investors have asked for a much clearer picture on the Fund's performance. We had originally hoped to deliver this within 100 days. Unfortunately, we weren't ready in May to provide a meaningful update on the assets and the repositioning at that point in time. Whilst I can understand this was frustrating, we wanted to ensure that any update to investors provided a clear picture. We hope that this presentation delivers this. You also wanted accountability and responsibility. In LDR Capital, you will always get a small and dedicated team and direct accountability from the business leaders, including myself. Finally, and uniquely in the REIT space, Paul Lederer, the Chairman of LDR Capital, is also the largest security holder, having invested over $125 million into the Fund to date. Slide 24. Whilst the repositioning is well advanced, we wanted to articulate our vision for the Fund going forward. We believe our vision will uniquely place LED as a standout in the small-cap REIT space and is the best path to restoring the NTA per security and delivering compelling total returns. Moving forward, our vision is simple. LED will own essential properties that deliver enduring cash flows to fund a sustainable distribution. Essential is a word that gets used loosely in the REIT space. So we wanted to define what it means for LED investors. To us, an essential property must have one or several of the following features: one, a multimillion-dollar tenant-funded fit-out or infrastructure investment; two, a global or national headquarters with brand and workforce cultural dependence; three, embedded operational dependencies or purpose-built specifications; four, be future-proofed, long-term relevant and that meets the tenant's ESG and sustainability requirements; five, located in a premium location with amenity that meets existing and future tenant demand; and finally, must sit within a liquid investment market. On delivering enduring cash flows, we target a portfolio of WALE of greater than 10 years, focusing on lease terms that will secure a decade's worth of future income. We want a tenant base anchored by the government or investment-grade corporates, and we will target modern buildings with a sustainable CapEx profile that isn't exposed to significant end-of-life replacement cost issues. Our focus right now is on proving the model. We will build upon the hard work in the last 6 months and continue to recycle assets, harvesting value from legacy and underperforming assets to initially retire debt. Over the course of FY '27, we intend to redeploy capital into assets that meet our new vision. We have a number of redeployment opportunities under assessment that align to both our vision and the target portfolio characteristics. Whilst we look at a lot of opportunities, we are incredibly selective and disciplined on how capital is redeployed. I'll now hand to Ben to take you through the financial results.

Thanks, Ryan. Slide 27. Starting with earnings. FY '26 FFO was $28.2 million or $0.0693 per security. AFFO was $7.3 million or $0.0179 per security. The gap between FFO and AFFO is due to $12.8 million of rent incentives, the majority of which was at WorkZone West as a result of the reset, $5.3 million of CapEx, primarily on new tenant fit-outs, landlord works and end-of-life replacements across the portfolio and an adjustment of $2.9 million for the capitalizing interest component in the Harris Street capital notes. Distributions of $0.065 per security met guidance for the year. As a total value, LED declared $26.5 million in distributions from $7.3 million of AFFO that was generated by the Fund. This is clearly not a sustainable distribution. I will now take you through the balance sheet as at 30 June and the pro forma balance sheet at completion of the exchanged asset settlements. The key takeaways from this slide are NTA per security is now at $0.58 and gearing is reducing from 42.6% at 30 June to 29.3%, which is below the target range. During FY '26, LED drew around $20 million of debt to fund distributions. This was offset by the settlement of Cannon Hill, which retired $24 million of debt. And as such, debt is drawn at $190.9 million at 30 June versus $195 million at 30 June 2025. This will be reduced by a further $81.6 million as debt is retired by the end of September from assets that have exchanged but not yet settled. Slide 29. On to capital management. At 30 June, the facility limit was reduced from $215 million to $211 million following the settlement of Cannon Hill. We have preserved $20 million of headroom in a revolver facility. We will continue to pay down debt and reduce the existing facility limit following further settlements of asset sales. The Fund's interest rate hedging expired in August 2026. But given the active asset recycling program, the drawn debt will be temporarily unhedged. LDR Capital intends to refinance the remaining debt facilities and enter into new hedging arrangements by December 2026. Back to you, Ryan.

Thanks, Ben. To recap the year, LDR Capital was appointed the manager in February 2026, and we immediately commenced a review. We've achieved a number of early milestones in our first 6 months, the most significant of which is the disposal of the 4 secondary assets, all of which will have settled prior to the 30th of September this year. Slide 32. FY '27 is a pivotal year for the Fund. However, we can't hide from the fact that there is elevated CapEx and incentives of $12.5 million. The WorkZone West reset resulted in a significant CapEx burden, much of which has already been incurred in FY '26. However, we estimate annual abatements of $2.5 million in FY '27 and a further $1.4 million in landlord works and fit-out contributions. Garema Court incurs a $4 million abatement in FY '27, reducing to $2.5 million per annum for the remainder of its lease term to May 2030. At 50 Cavill Avenue, we will invest around $2 million in landlord works and fit-out contributions. We will fund CapEx and incentives out of the Fund's cash flows and not by drawing debt. In doing so, we will preserve around $0.03 of NTA per security and retain gearing capacity equivalent to about 5% versus the status quo. This slide is deliberately structured as 3 columns: the reality of FY '27, what we're doing about it and the early wins already banked. There are some elements of FY '27 we can't avoid. CapEx and incentives are elevated as the assets are reset. The Harris Street Fund units are not contributing distributions, and there will be a short-term cash flow impact as assets are sold prior to the capital being redeployed. However, investors will benefit from some early wins already banked. Gearing has already reduced to 29%, whilst a number of leasing successes will contribute to future income. Further, we have identified an incredible redeployment pipeline available at target metrics that supports the AFFO reset. Slide 34. FY '27, we are guiding to FFO of $0.048 per security and AFFO of $0.016 per security and a distribution of $0.015 per security. Unlike previous years, the LDR Capital Board has determined that debt will not be drawn to fund CapEx, incentives and distributions. As such, the distribution has been set with reference to the forecast FY '27 AFFO per security, reflecting a 94% payout ratio of AFFO. The $0.015 distribution will be delivered by declaring no distribution in the September '26 and December '26 quarters and then quarterly distributions of $0.75 in each of the March and June 2027 quarters. We recognize that deferring distributions is unwelcome, particularly for those investors who hold LED for income. But paying a distribution we haven't earned funded by debt whilst deferring CapEx that assets require is how the Fund got to $0.58 of NTA. To support the Fund, LDR Capital has committed to waive investment management fees whilst distributions are not being paid. This generates $1.1 million of incremental benefit and highlights our commitment to all Fund investors. The repositioning is earmarked to complete by the end of FY '27, at which point full year regular distributions will recommence. In closing, transparency is a critical step to winning back investor support. As a management team, we are committed to providing an accurate picture of the Fund so that all investors can make informed decisions. We have provided our contact details for myself and Ben should any investor wish to contact us going forward. Thank you for your time this morning and for your patience with a longer and more detailed pack than usual. Ben and I will now take your questions via the online platform. It doesn't appear we've had any submitted written questions. If any investor would like to contact myself or Ben, please reach out via e-mail, and we can arrange a direct conversation. We thanks again, everyone, for your time and look forward to continuing our conversations.