LDR Capital Property Fund (LED) Earnings Call Transcript

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 very much, and good afternoon, and thank you for joining this presentation today, the presentation of Elanor Commercial Property Fund's Financial Results for the 2022 Financial Year. We appreciate your interest in the fund. On the call today, I'm joined by my executive management committee colleagues, and we'll be pleased to take questions at the end of this call. And also speaking on the call will be David Burgess who is Co-Head of Real Estate for Elanor Investors Group and David heads up our Office and Healthcare divisions; Liz Bors, who is the Head of Asset Management for our Office and Healthcare division at Elanor; and Paul Siviour, Elanor Investors Group COO. And as I said, we're pleased to take questions at the end of this call. A few introductory comments before I hand over to David. I'd like to commence by saying that I'm pleased and we collectively are very pleased with another strong performance by the Commercial Property Funds. Performance that is a credit to David and Liz and the broader team. Office management team have done another tremendous result in delivering earnings outperformance, growing NTA, the NTA of the fund, and achieving very strong growth, 58% increase in portfolio value for ECF to $609 million. So -- but in short, what that means is that, which happens very rarely, to achieve that sort of growth and achieve positive earnings is a credit to the team and a testament to the team's ability to identify high investment quality assets and also a testament to the team's ability to manage the assets and the funds. So congratulations to the team and a fantastic result. The quality of the earnings of the fund is such that we're prepared to provide guidance for the FY '23 year of $0.11 per security, which obviously, given the current security price represents, in our view, an outstanding yield for that fund and particularly outstanding year when you look at the high quality of the assets. So a fund that does not have a single asset that is -- that has immediate or has problems for [ stock ], it's a fund that has consistent office assets that all are of exceptional quality and delivering great results. So given that, I'll now hand over to David and to Liz to take us through the fund in more detail.

Thanks, Glenn, and thank you all for joining us today. ECF has again delivered a strong performance. This is due primarily to our investment approach of owning assets that have competitive advantages in their markets, but also on executing on asset-specific strategies. This has resulted in a material leasing success across many of our assets in the portfolio and subsequently higher capital values. Our key metrics on Slide 5 reflect this success. FY '22 FFO per security at $0.1094 is above guidance of $0.108 per security. Distributions were a strong $0.094 per security. NTA has increased to $1.20. Importantly, that is a material uplift from NTA following the Cavill Avenue acquisition at the beginning of the period. The contributor to the uplift as well, the Corporate Drive at Cannon Hill that increased in value by 58% after successful repositioning and re-leasing and we will talk about that more later. Our portfolio WALE is 3.4 years with limited short-term expiries and opportunities to create value in the medium term. Our occupancy is a strong 95.6%, increasing over the period because of key leasing across the portfolio. During the period, we leased a material 16,782 square meters of space, which has had a direct positive impact on property valuations. Our balance sheet position is strong, with gearing at 30.8%, and our hedged interest rate exposure is a high 97.3%. In FY '23, the fund is very well positioned. We have a very low expiring profile with just 6.4% of the portfolio expiring by income. There is minimal exposure to interest rate risk with 98% of our interest rate exposure hedged. We have a strong balance sheet, 30% gearing. And as we've already demonstrated over the past few periods, there is an opportunity to continue to increase rents, especially given the material spread between our market rents and the cost to build new competing products in the markets that we operate. As a result, we are pleased to provide FY '23 FFO guidance of $0.11 per security and distribution guidance of $0.094 per security. Turning to Slide 7. Our assets are positioned to continue to have strong leasing success due to a number of reasons. All assets meet the requirement that businesses expect today. This includes high-quality offerings, large, flexible floor plates, good parking, accessibility, ESG amongst many other features. Our assets have competitive positions in their markets, which mean they attract strong leasing demand from a wide tenant pool. Our rents are priced well below economic rents, which means we have an opportunity to continue to increase rents and drive value. And our assets are in markets that generally have limited supply of new stock, examples being the Gold Coast, Fringe for our CBD and Fringe Sydney per CBD. Our largest assets being WorkZone West, Cavill Avenue and Harris Street have all of those attributes, and we see great opportunities across them all. Our recent acquisitions to provide our investment approach and immediate success has been achieved throughout the year. At 50 Cavill Avenue, we have consistently outperformed acquisition commerce and are driving rents higher. This has resulted in an 8% uplift in value since its acquisition last August. We expect to be able to continue to increase rents in this asset. Harris Street in Pyrmont has had immediate results in the first 2 months of ownership. We have been able to successfully lease an entire level full to a multinational company at rents over $200 above passing rents. This proves the strategy of the asset and the underlying demand for high-quality commercial buildings in good locations. Turn to Slide 9. Our portfolio has increased by 58% over the period to have a gross asset value of $609 million. The impact of this growth is significant. It materially reduces single-tenant exposure. For example, CIMIC moving from 39% of the portfolio to 27%. It has reduced single-tenant building risk. It has increased exposure to a number of new sectors, including global media companies and life science tenants. Provide exposure to new markets that provide further opportunity to create value. And as mentioned before, there are additional opportunities to create value at our new assets at Cavill Avenue and Harris Street. On that, I'll pass to Paul Siviour to run through the financial performance of the funds.

Thank you, David. Just referring participants on the call to Page 11 of the investor presentation released to the ASX this morning, a summary of our income statement. The highlights are as described previously by David. FY '22 funds from operation of $0.1094 struck on a total FFO of $30.1 million and a distribution throughout FY '22 of $0.094, reflecting a conservative payout ratio of 86%. Strength and the quality of the assets and their performance, as we've said, enables us to provide guidance to the market in respect of FFO for FY '23 at $0.11 and distribution guidance of $0.094, which in the current market environment is not typical of other market participants. Turning to Page 12. Balance sheet reflects strong growth in investment properties, total assets and net assets during the year. That reflects 2 capital raisings during FY'22 in respect of the acquisition of Cavill Avenue on the Gold Coast and then more recently, Harris Street in Pyrmont. So that's seen our investment properties increased by $237 million to $609 million at 30 June '22. The increase in the investment property value included a net revaluation of $21.6 million. The fund has an NTA per security of $1.20 and is conservatively geared with a gearing of 30.8%. Turning to Page 14 of the presentation, detailing the capital management of the fund. The fund has conservative gearing at 30.8% and a very attractive weighted average cost of debt, 2.26%, reflecting the interest rate hedging position of the fund. The fund is well hedged and will enjoy low interest rates for some period of time. In respect of covenants, you can see that the fund has very significant headroom in respect of its LVR covenant and also its interest cover ratio. Just commenting briefly on the fund's look-through gearing and that relates to its investment of 49.9% of the Harris Street fund, which is the fund holding 19 Harris Street, Pyrmont. That fund also has a strongly hedged position. In that, the debt is fully hedged for 2 years on a forward basis commencing 31 March '23 at a swap rate of 2.4%, which means for the period through to 31 March '25, the fund will enjoy an all-in cost of debt of approximately 4%. I'll now hand to Liz to provide more detail in relation to the asset management of the portfolio.

Thank you, Paul. I'm starting on Slide 16. So our strong leasing and valuation uplift is a result of the execution on asset-specific strategies on which we've delivered. Amenity has been a real focus of the asset management strategy for FY '22. And we've improved amenity at assets such as Mount Gravatt, created a new outdoor meeting and barbecue areas and other assets that have rolled out new industry facilities, flex spaces, improved outdoor amenity and upgraded lobbies. We've also established a tenant engagement strategy. We've completed both new and refurbished high-quality fit-outs at Cannon Hill, Limestone, 50 Cavill Avenue and Mount Gravatt, with close to 80% of our new leases pursued at our premises, which is in line with tenant demand. We continue to progress our ESG strategy, and we'll discuss that in more detail later through the presentation. As a result of the execution of these strategies, we've leased close to 17,000 square meters, which represents 19% of our portfolio. And we've also achieved positive leasing spreads throughout these transactions. Our results support the thesis that demand has remained strong. We have a very strong tenant retention rate of 70% with 89% of these renewals for tenants while maintaining or expanding their footprint. We have also created value to the successful execution of our asset-specific leasing strategies. At Cannon Hill, our targeting leasing approach was to reposition the asset to a life science hub. By securing leases to Alliance Pharmaceuticals and Abacus dx, our strategy was realized, resulting in a valuation increase of 57% and increasing occupancy to 90%. 50 Cavill Avenue have increased net effective rents by $59 per square meter, representing approximately 15% increase for new leases. With current heads of agreement, the building is 100% leased up from 97% at acquisition. We have complete confidence in our ability to continue to drive market rents, particularly given strong demand for quality commercial assets in the Gold Coast and the lack of supply. Within 2 months of 19 Harris Street ownership, we executed on the first stage of our acquisition strategy, securing ITV, a multimedia company over Level 4, surrendering the incumbent tenant and resetting the face rents by $217 a square meter. We have complete confidence that we'll continue to execute on our strategy. We're now on Slide 18. In 2023, for financial year '23, we will continue to build on the momentum of FY '22 with planned initiatives, including spec related fit-outs at Nexus Centre, Limestone, 50 Cavill Avenue and Cannon Hill. We've got the creation of and activation of flex space at 19 Harris Street, 50 Cavill Avenue and WorkZone West, upgrade of lobbies and tenant engagement and activation programs tailored for each asset. But importantly, with an ESG focus on wellness and giving. This results in positioning us in a very strong position to drive rents, particularly given the large discount to economic rents across our portfolio. This is particularly evident in our larger assets such as 50 Cavill, Garema, WorkZone West and 19 Harris Street. The portfolio is in a strong position with limited lease expiries and advanced average occupancy. We currently have strong momentum on the vacancies that we do have within our portfolio. In 2023, we have a low expiry profile across several small tenancies and assets we have experienced extremely strong demand. The 2024 lease expiring, Garema, we see as an opportunity to create and unlock value with the rebranding and repositioning underway being a two-pronged leasing approach. Renewal of the existing tenants or repositioning the asset to target both the public and private sectors. Both options unlock value, which we are well planned to execute on. The WorkZone West in 2025, the lease expiry, we have multiple leasing options, including extending leasing -- leases with existing occupants in the building, including CIMIC and the sub-lessees. We also are aware and are participating in briefs, which line up with this expiry, particular major upcoming government briefs, for which WorkZone West would provide a compelling opportunity. Slide 20 now. Environmental, social and governance remains a very high priority for the portfolio. We continue to develop and enhance our sustainability approach through environmental initiatives, by increased reliance on solar, reusing and refurbishing fit-ups rather than rebuilding. This aligns with reduced landfill and improved our carbon footprint. Our portfolio gap analysis is underway, which will provide us with a road map towards carbon neutrality. A process we followed at WorkZone West being the first 6-star NABERS carbon neutral building in Western Australia. Through social initiatives, we have held fundraises, which have both raise funds to charities and fostered a sense of community within our assets. In summary, FY '22 was the fiscal year for asset management and leasing, further reinforcing the merits of our fund strategy of acquiring assets with a differentiated position in their markets, further supported by our continual investment in both assets and initiatives. I'll now pass to David Burgess, who will cover the outlook and guidance.

Thanks, Liz. Our investment strategy of owning assets that have competitive advantages is working, and our focused asset management is delivering the results. To summarize, we have provided a strong performance in FY '22, delivering on income and distributions, successful leasing and asset management strategy resulting in strong asset level performances. The fund is well positioned going into FY '22 with limited property income risk, a strong hedging position and opportunities across the portfolio to drive rents higher. Based on this, FY '23 FFO guidance of $0.11 per security and distribution guidance of $0.094 per security. On that, I'll now open up to questions.

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

Just wanted to talk about some of the upcoming lease expiries. What are the issues in terms of guidance for Cavill Avenue and Nexus Centre? Have you assumed any downtime there?

Thanks. Yes, we have. So generally, we take a view on each particular tenancy and where we're at in our negotiations with that and our debt tenant interest. But we generally do allow downtime in our numbers.

So what should I be -- on average, what should I be assuming in terms of downtime on those assets?

It just varies on a tenancy by tenancy perspective. So it's hard to give a broad number across all the tenancies and their particular downtime. Some of them they have [indiscernible] on heads of agreement any moment. Others that might be 3 or 4 months what we've [ declared ] in downtime. But I mean, if you're trying to model something, I mean, as a rule of thumb, we probably allow a 3 months average downtime.

And just a question on the Harris Street fund. Given that you be partly unhedged in financial year '23, what have you assumed in terms of the floating rate?

Leanne, the -- we've certainly forecast that the 90-day be a something the rate is going to rise from current levels, probably to -- probably to circa 3.4% by March of next year when the swap will take effect. The base rate of the swap is 2.4%. That's a fixed base rate for 2 years from the 31st of March '23 to 31st March of '25.

And just a last question on your revals. You noted is that you quoted some losses there. Can you just explain why that is, what the values have assumed?

Yes, sure. The main one would be around WorkZone West. And that's essentially the roll-off of some of the over renting. So that's primarily the reason for the pullback in that valuation. We're still -- the strategy to that asset is still believed as strong in terms of the rents are significantly below economic rent, and there's no supply on the fringe at first. So we expect that the market rents will increase to continue to offset that over renting position of that asset.