U.S. Markets closed

Edited Transcript of LEP.AX earnings conference call or presentation 7-Aug-19 4:00am GMT

Full Year 2019 ALE Property Group Earnings Call

Sep 2, 2019 (Thomson StreetEvents) -- Edited Transcript of ALE Property Group earnings conference call or presentation Wednesday, August 7, 2019 at 4:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew F. O. Wilkinson

ALE Property Group - MD, CEO & Director

* Robert Wason Mactier

ALE Property Group - Chairman of the Board

================================================================================

Conference Call Participants

================================================================================

* Stuart McLean

Macquarie Research - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Robert Wason Mactier, ALE Property Group - Chairman of the Board [1]

--------------------------------------------------------------------------------

Okay. Good afternoon, and thank you to those in the room and online for joining us today. I'm Rob Mactier, the Chairman of ALE. And before Andrew presents the results, I'd just like to briefly address the release that we made today in relation to the CEO succession planning.

As you will have seen, we have commenced the CEO succession process as Andrew has informed the Board of his intention to pursue other challenges. And I think it is a mark of Andrew's character that he firstly didn't want to be making any laudatory remarks about himself and his very successful ALE career and wanted to assure investors that it is business as usual at ALE, and he remains firmly committed to ALE until a new CEO is identified. Andrew is committed to delivering a positive rent review outcome and ensuring that ALE remains well positioned to take advantage of the many value-enhancing opportunities in the years ahead.

We recently completed the Board renewal process. And one of the first discussions I had with Andrew when I become Chair of ALE around 2 years ago was Andrew wanting to assure me that when the time is right for him to step aside that he would do so in a way that ensured a seamless transition and minimized any disruption. Today's announcement is testament to Andrew being true to his word.

At the Board meeting yesterday, we agreed that it was premature for laudatory speeches as Andrew is not leaving in a hurry, and there will be more appropriate opportunities in the future when the job is done and we know Andrew's departure date. That said, I did wanted to -- I wanted to reiterate that Andrew has led ALE with distinction for nearly 16 years and presided over a tenfold increase in the market capitalization and a circa 20% annualized return on investment for ALE security holders. I suspect that there are very few CEOs that can lay claim to that track record of longevity and financial performance.

And to reiterate, on behalf of the Board and security holders, thank you, Andrew, for the measured way in which you approached today's announcement.

And without further ado, I'll hand over to Andrew to deliver the 2019 results.

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [2]

--------------------------------------------------------------------------------

Well, thank you, Rob. Thank you for those very kind words. I'd now step through the results presentation in a format that you've seen before. You've probably even seen the pub picture on the front, the Breakfast Creek Hotel before.

Okay. So what I'll cover this afternoon is the highlights of the results. We'll update you again on the property valuation, our position for the June year-end as well as a number of development updates, the latest on our capital position and what the investor proposition of ALE is going forward.

So turning first to the highlights: our property portfolio, a value of just over $1.16 billion; a yield on the properties of just over 5%; a lease expiry of just over 9 years. As you know, a tenant occupies 100% of the property; that is ALH. And the passing rent on the properties has increased 4.5% during this year.

The gearing when I first started at ALE was 88%. We held the cup very carefully in those years. Today, 41.5%, a historic low. The debt maturity, just under 3 years; the hedging, even longer at 6 years, ensuring earnings stability; and the all-up cash rate at 4.26%. We obtained an investment grade rating in 2014. And here we are 5 years later, that's been fully maintained through that time.

Equity performance: the distributable profit at $28.3 million or representing $0.209; 81.32% tax deferred, it's probably a bit higher than the guidance we gave during the year; market cap, just under $1 billion, I'm pleased to say a bit over $1 billion today; and the return that Rob mentioned, around 20% over that 16 years.

The Hamilton Hotel, just before you get to the Breakfast Creek Hotel, just before you get to the Brisbane CBD up in Queensland.

Okay. Turning to the highlights of the results. The distributable profit, $28.3 million; and a net profit or accounting profit of $26.6 million. The distributions, I've outlined. A consistent performance, yes, of 21% (sic) [20.1%], but that's outperformed the AREIT index over the last 5, 10 and 16 years since that IPO.

The property revenue up 3.7%, that has some part year effects because the rent reviews clicked in from November in respect to the accepted properties. And there were 36 of those properties where a 10% increase was accepted. The other 43 remains subject to determination, and I'll go into some more detail on that in a moment.

The property valuations up 2.4%. The yields remained just above 5%. And on discounted cash flow methodology of doing valuations, the yields on a representative sample of properties, that is 34 of them, had a yield around 4.61%.

All the feedback from our valuers, both Savills and CBRE, is that the pub market remains strong. They see that in leasehold transactions. They see it in freehold going concern transactions. But there's been very few freehold-only transactions to high-quality tenants like ALH. The capital position, all-time-low gearing. But also our next debt maturity is around 12 months' time.

The distributable profit, as I mentioned, is in line with the revenue up 3.7%. The borrowing expenses unsurprisingly and pretty much unchanged with fixed and hedged positions. The management expenses, and we flagged this during the year, that we expect that the rent submission costs to be significant. And we actually hit the expectation of $3.1 million. We thought at one point, it might be a bit more than that, but we kept it to that number. And why that number, it is a large number, but there are larger number of submissions, 43 submissions that we have to prepare, with many, many pages and a lot of detail, a lot of very good advice went into that process. Our land tax expense increased for one reason only, in Queensland, the Queensland government decided to increase the rates.

Distributable profit of $28.3 million or $0.1445, very transparently, is $0.0645 short of the distribution paid. We paid that $0.0645 from capital and cash reserves. Most of you like to reconcile accounting profit with cash profit. All of those details are sitting there on the page.

Now let me turn to our favorite tenant, ALH. They have 327 licensed venues, more than 1,000 bars and nightclubs. 295 of those 327 venues have restaurants and bistros, so a very significant food business serving in excess of 60,000 meals a day to very hungry Australians. 550 liquor retail outlets and 2,000 rooms. Now probably from pretty much a standing start 5 to 10 years ago, now 1 of the top 10 accommodation operators in Australia with the brand of Nightcap Hotels.

As ALH and Woolworths announced on the 3rd of July, there is a 2-step plan and it's in our view a very positive plan, one where there'll be firstly a vote by Woolworths shareholders to merge the ALH pubs business with the Woolworths Endeavour Drinks business to form what's called the Endeavour Group. It will be Australia's largest hospitality and drinks business. And to give you a perspective on it, if ALH has 550 liquor outlets or retail liquor outlets, there'll be more than 1,500 of those including the Endeavour Drinks business.

ALH, to give you some perspective today or for the year-end June '18, turned over $4.4 billion, and the EBITDA was just under $600 million. After combination, after that merger is approved, the turnover will be just short of $10 billion and an EBITDA of close to $1 billion, so a significantly expanded group. And in the event of a demerger, they are targeting an investment-grade rating. A very encouraging size, but to be clear, we'll monitor the steps in that process very closely and keep the market updated as it progresses.

The pub property portfolio, the passing rent increased by 4.5% off the back of those 36 properties where we agreed to 10%. The valuations increased by 2.4% or $26 million. Savills and CBRE independently assessed 34 properties and in that sample base saw the -- on a cap rate basis, the cap rate would be 5.24%. On a discounted cash flow basis, which includes the future -- or the valuers' assessment of the future rented prospects, they've called out at 4.61%.

You'll see that from the bottom of the page that they continued to call the adopted yield or the blended position that they finally set on at very close to the cap rate method. So still somewhat limited recognition of that 2028 outcome.

Now this is not the chart I expected to show you today. Bond rates at 1.29% at 30 June. When I looked at very early out this morning, it was close to 1% or, at the time, it might have gone just below 1% very temporarily in the last few days. Our yields at 5.09%, so there's an increase in spread or gap between those 2. And that all goes well for future valuations, albeit the valuers will continue to look for the evidence. And if transactions are occurring at lower yields or cap rates, that will certainly -- I will certainly take those into account in future times.

I've said this so many times, but it's worth repeating. There are 3 layers of value for ALE's investors. Firstly, the income from a high-quality operator, ALH. 83 of the 86 properties are triple net, very high-quality lease. And the properties have been trading in their locations for more than 60 years. So many generations of people have been to those locations and will continue to go to them. In terms of future increases in income, as we've been through this 2018 process, we're encouraged by the opportunity for the open rent in 2028. And the 95 hectares of land was there 10 years ago, it's there today and probably will be there again in 10 years' time. That is and continues to be somewhat underutilized. 25% of that 95 hectares is occupied by pub buildings. The rest of it is car parking and some spare land.

In terms of the opportunities, in the medium to longer term, there is the chance that the properties will have things added to them or the pub might be relocated on the site and the site optimized, but we're not calling any of that in the short term. Between ALH and ourselves, there've been very much a focus on the rent review in the last 12 months. Time will tell if those discussions we've previously had with them are reactivated for those opportunities.

Just to recap on what development has occurred over the last 16 years, 10 substantial reconstructions, 24 refurbishments, 23 Dan additions, very significant indeed. And to remind you that all earnings from all activities are included for rent review purposes irrespective of the funding source for the additional leasehold improvements. So all those Dan Murphy additions, all those refurbs, Crows Nest Hotel, for example in Sydney, those become significantly more profitable because of those refurbishments in their case or going to those 2018 and '28 and '38 reviews as we go forward.

In the next 6 to 12 months, the Miami Tavern on the Gold Coast will go through a significant refurbishment. A Dan Murphy's was added during financial year '18. And ALH will fund that addition -- or refurbishment, I should call it.

The Young & Jackson, I've shown you this before. If you can't see the picture in the middle that you see, there's a lot of cranes and construction occurring around the Young & Jackson Hotel, also there's the construction workers. And in 2026, that will open, we will hope, on time, ready for 2028 rent review.

Capital management. I've said most of these numbers already. Debt maturity is well spread over the next 4.4 years; hedging, even longer; a refinancing in August next year. But you know our form, we'll probably refinance it earlier. As you'll see on the -- that's for those who'd like to see a picture. F '21 exposure -- expiry, also maturity is in '23 and '24. But you will note that the AMTN of $225 million has a coupon of 5%. As we've watched the AREIT issuance in the domestic bond markets and in the offshore bond markets, most of the domestic bonds have a 2 in front of them. So if interest rates between now and the refinancings stay at current levels, we would look forward to some potential interest rate savings there.

In terms of covenants, the headroom remains significant. We'd have to see more than 32% of the valuated properties disappear before it came up against the closest covenants; also a very good headroom on interest cover as well.

In terms of outlook and strategy, the rent review has been a very significant task in the last financial year. Yes, 36 properties were agreed, 43 are subject to binding determinations by the determining valuers. They're right in the middle of that right now. And we expect towards the end of this year that they'll come out with those determinations all at the same time.

And our view remains one that the portfolio is significantly under-rented, albeit on an individual property basis, that isn't even. And as I mentioned earlier, we'd spend that $3.1 million putting those submissions in.

The outlook is, at the moment -- or before there were any increases, the gross passing rent was $58.5 million. So if you take a worst case view of that or a glass empty view of that, we end up with the same gross passing rent. The best case is where all the remaining 43 properties go up by 10%, in which case should have an 8.9% increase. The reason that isn't the full 10% is because there are 7 of the 86 properties not included in that review.

As when those determination results are handed down, we'll be announcing those to the market in as much detail as we possibly can. For those of you who like the details, there are the rent review information in respect of all the properties.

And let me finish by just recapping on what the value proposition of ALE is: 86 pub properties spread nationally, mostly in the capital cities, on high-quality leases to a very high-quality operator in ALH; long-term leases over what are strategically important properties; 9.3 years but 4 10-year options for ALH to extend their tenure at the properties. The investment grade and low risk capital structure and the distribution for the year of $0.209 is 81.32% tax deferred.

With that, I'll pause, and I'd be delighted to take any questions. And I'll be taking questions here on the floor first. And then we have an online webcast, and I'll be taking those questions second.

Welcome, [Mr. Bashorati].

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

Andrew, your current distributable profit is $0.145 per share. If you adjust for the extra expenses in relation to the rent review, comes to maybe $0.155 a share. If you adjust for the best case scenario of 10% cap on all the properties, your earnings per share will still be less than $0.20. So what is your dividend policy going to be going forward assuming you get a home run on all outstanding properties of the full 10%?

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [2]

--------------------------------------------------------------------------------

Well, firstly, I won't preempt the Board's decision on that. The only other moving part I would point to, and I did touch on it briefly as I went through the presentation, was in respect of the debt refinancing that's coming up. We're currently paying 5% on $225 million. The expectation we'll pay 2 point something on that same $225 million. There may be some hedge break costs as part of that process, but that's another moving part. But again, the Board will consider the rent review outcome, look at the capital markets, look at the property markets and consider what the right capital structure and distribution policy is going forward.

Another question?

--------------------------------------------------------------------------------

Unidentified Analyst, [3]

--------------------------------------------------------------------------------

Given you valued the same -- the financials of all the hotels for the first time, could you give us an estimate to the extent you think the whole portfolio is under-rented?

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [4]

--------------------------------------------------------------------------------

That's a statistic we would love to publish. Unfortunately, we are bound by confidentiality arrangements in respect of various information we receive from ALH from time to time. Yes, our valuers make their own assessments, but those confidentiality obligations continue. What we are able to do is once the determinations are handed down, we can then, at that time, because it's a public result, then make that information very, very transparent. And we'll announce that in its fullness to the market including the methodology, including the ratios, including all the earnings in as much detail as we possibly can. But just for the moment, we do our best to respect our obligations.

Another question, please?

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [5]

--------------------------------------------------------------------------------

Stuart McLean from Macquarie. Just had a couple of questions. Just a question to begin with on capital management and the dividend. There used to be a slide, I think, in the presentation saying that capital management would be reviewed. It was taken out -- or at least that line anyway. Is that an indication that things may not change?

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [6]

--------------------------------------------------------------------------------

It's not an indication of anything. Simply the Board has an entitlement to consider dividends, distributions, capital management at all times in all half and full years. Naturally, the Board will have regard to a whole range of things including the rent review outcome at the end of this year.

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [7]

--------------------------------------------------------------------------------

I've seen in the announcement or the presentation a comment in there that's hopeful of a positive outcome on the rent review.

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [9]

--------------------------------------------------------------------------------

What does -- can you just define what does positive mean?

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [10]

--------------------------------------------------------------------------------

With respect to the remaining 43 determinations, something that's more than 0. No, in all seriousness, we have a bit of the same -- on the same guidance we've given is we do acknowledge that the portfolio is under-rented but not evenly. And we don't necessarily expect all of the properties to go up by the full 10%. That's going to be a matter for the determining valuers. And as when those results are handed down, we'll expand them in significant detail.

Any further questions in the room? If not, I'll pass to our moderator to ask the questions on the line.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [12]

--------------------------------------------------------------------------------

Just while we're waiting for that to come through, this is the first time we've used this mechanism. We did it to enable people who might be based in Perth, Melbourne or Adelaide or Brisbane and might be seated at the Breakfast Creek Hotel and wanting to ask a question.

No? Well, at this time, there's no further questions -- sorry, there's another one here in the room.

--------------------------------------------------------------------------------

Unidentified Analyst, [13]

--------------------------------------------------------------------------------

Andrew, with the potential change or the combination of the ALH with Woolworths and the Dan Murphy's stores, there was -- some of the commentary around that was that they haven't put in as much CapEx as they could have. Would you expect, if everything goes ahead with the Endeavour Group, that the intention would be to increase the CapEx expenditure on some of the portfolio?

--------------------------------------------------------------------------------

Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director [14]

--------------------------------------------------------------------------------

Like you, we did note of that. Brad Banducci, when he was talking everyone through the Endeavour Group plans, did note that compared to the profit contribution, the Endeavour Group made to the wider Woolworths Group, the capital expenditure was well under. And please don't quote me on these numbers, but my best recollection was that group contributed around 25% to the earnings whereas they only tracked around 15% of the CapEx. I can't talk for future Endeavour Group's plans, but it was interesting that in the Endeavour Group presentation, they did single out additional expenditures as a potential and development of the properties that they own as a potential for the group. But that will be a matter for the future Board of the Endeavour Group. All we can say as a landlord is just look at our properties. There's lots of spare space. And it's up to them to take the opportunity and put extra businesses and show any improvements on those properties to take the most of that opportunity.

Any other questions? All right. I'll just check again. Is there anything else online? No? Everyone in the Breakfast Creek Hotel this afternoon is happy as they often are.

Okay. All right. Well, thank you, everyone, for coming along this afternoon. Rob and I will be happy to take questions while we're having a nice cup of tea and lamington at the back of the room. Thank you very much.