Half Year 2020 ALE Property Group Earnings Call
Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of ALE Property Group earnings conference call or presentation Wednesday, February 5, 2020 at 10:59:00am GMT
TEXT version of Transcript
* Andrew F. O. Wilkinson
ALE Property Group - MD, CEO & Director
Andrew F. O. Wilkinson, ALE Property Group - MD, CEO & Director 
Good morning, ladies and gentlemen, and fellow investors. My name is Andrew Wilkinson. I'm the Managing Director of ALE Property Group. It's my pleasure to present to you the results for the half year ending 31 December 2019. I'll step through over the next 15, 20 minutes of the normal categories we cover, that is the highlights, the results themselves, some details about our properties and capital position, as well as the outlook.
But let me firstly start on Slide 3, the group highlights. Firstly, in the property area, the value of the properties increased this year. Our yields remained unchanged. Our lease expiry is still long at nearly 9 years. But more importantly, there's 4 10-year options to extend that even further. The property revenue increased, I'll run through the details of why, and our properties remain 100% occupied.
The capital position remains sound with gearing at all-time lows. Our debt maturity is well spread over a number of years, and our hedging remains in place across 100% of our debt for many years into the future. Our all-up cash rate of 4.26%, we expect to reduce following a refinancing in the second half of this financial year. Our investment-grade rating with Moody's, Baa2, was fully maintained.
And on the equity performance side, our distributable profit was up significantly. Our distribution remained unchanged. Our market cap at just on $1.1 billion, and our returns continued to outperform others in the real estate investment trust sector.
Turning now to Slide 5. I'll run through the property highlights. Property revenue of $30.7 million increased 3.4%. The -- that was driven by CPI increases and full period impacts compared to the -- or December '18 half when there was some increases on 36 of our properties.
I'll show you on further slides some very attractive photos of the Miami Tavern following a significant refurbishment that was completed just before Christmas 2019.
And on the property valuations side, up to $1.172 billion, with an average yield remaining unchanged at 5.09%. The valuers' advice is that pub properties with long-term leases to high-quality tenants continue to be in strong demand. However, there's very short supply. And overall, pub market metrics remain unchanged.
Turning now to Slide 6, the financial highlights for the half to December '19. Our distributable profit was up 11.5% to $15.6 million, and that compared to an accounting or IFRS profit of $20.5 million. Our distribution, as I said, remained unchanged.
And on the right-hand side, you'll see ALE has consistently outperformed. Had you invested $1 in early -- back in 2003, the accumulated value, including both reinvested distributions and share price appreciation, would give you an accumulated value of $19.54 as at 31 December. So what does that mean? It's -- that's effectively a 20.2% return over that period, and that has seen us consistently outperformed all others in the real estate investment trust index.
The capital position, as I mentioned earlier, remains sound. Gearing at an all-time low. We do have a debt maturity coming up this year, and we're looking forward to refinancing at a cheaper rate.
Turning to Slide 7. This where we go into the details of the results. You'll see the revenue is up to $30.7 million. That's off the back of increases across 40 properties. There were CPI increases as well as a full year -- or, I should say, a full half year impact of the 10% increases that came through in November '18. Now that applied to 36 of the properties. On the further 43, we are awaiting determinations. The borrowing expense at $11 million remains fixed. The management expense is significantly down off the back of reduced rent review costs. You'll see that $3.5 million was incurred in total expenses in the December '18 half, and that included $1.4 million of rent review costs. So significantly down in the current period, as you'd expect. The land tax expenses increased for one reason, the rate went up in Queensland to 2.75%. Very transparently, we paid a distribution of $0.1045 compared to a distributable profit of $0.0799 with the difference coming out of cash and undrawn facilities.
I won't go through Slide 8 in detail. That provides the normal reconciliation of accounting and distributable profit.
Turning now to Slide 10. As always, we update you on ALH, who is the tenant across 86 of our properties. And you'll see, and you'll probably know, we've mentioned this many times before, they are the leading pub operator in Australia with 328 licensed venues, and that includes serving 60,000 meals per day. They have 600 liquor outlets, and there was a successful vote for the merger of both ALH and the Endeavour Drinks business back in December, and that merger has now been completed. So together, both the retail liquor outlets and the pubs combine to form nearly -- or more than 1,900 venues and outlets across Australia to, again, be the #1 operator.
In terms of ALH, a very credible organization in its own right, with turnover of just over $4.6 billion last financial year and a very profitable outcome at the EBITDA line of $583 million. That compares -- you'll see, with the Endeavour Group, including both the drinks and the ALH business, to be, now, for financial year '19 more than $10 billion in turnover and nearly $1 billion in EBITDA. So at this point, the merger appears positive for ALE, and we are very conscious that the group has announced that in the event of a demerger, they expect their rating to be investment grade.
Turning to Slide 11. The value of our properties, I've already mentioned, the yield at 5.09% remained unchanged. Off the back of advice from Savills and CBRE that, that's appropriate. And the passing rent increased by 0.8% to nearly $60 million.
You'll see at the bottom of the slide the adopted yields are heavily influenced by the cap rate methodology, and that is the valuers' current view on that blend. As we draw closer to 2028, we'd expect the adopted yields to draw closer to the DCF method.
On Slide 12, you'll see that we have updated our chart, which shows the comparison of yields and bond rates. Over the last 12 years, the bond rates have fallen by more than 500 basis points, while our yields have only fallen by a bit over 110 basis points. Now we're not calling our yields further 4% lower. We are, however, very conscious that these bond rates were to increase, there's a significant buffer there. But more importantly, as the time frame to 2028, which is when the open reviews occur, as that time frame draws closer, we'd expect that to have a positive contribution to values.
On Slide 13, repeating what we said many times before, there are 3 layers of value: income; increases to income in the; future and potential value from the land bank, and that's potentially in the longer term.
On Slide 14, there has been significant development across the properties over the last many years, a number of reconstructions, refurbishments and more than 20 Dan Murphy additions. ALH have funded those commitments, and that has had a very positive impact on earnings for ALH.
Turning to Slide 15. You'll see what has been a transformation of the Miami hotel from something that needed some refurbishment. But you see the pictures now present the hotel very positively, and that was completed just before Christmas 2019, where there was a significant refurbishment to both the beach side, bar and bistro areas.
On Slide 16, you'll see we have provided the information around the land holdings of nearly 95 hectares across Australia, mostly in the Australian capital cities. Only 25% of that land is occupied by pub buildings and retail liquor outlets, with the balance being car parking and vacant land. So there is the opportunity in the medium to longer term for ALE and ALH to optimize the use of those sites. But as of today, beyond the development we have to announce is what has been completed at the moment.
Probably the most important message on this page is in relation to the Australian bushfires. While none of ALE's properties have been damaged by those fires and, of course, we remain fully insured by ALH, can we say our thoughts do go out to each of the communities that have been affected by the devastating fires, and we hope they receive all the assistance they originally deserve.
Turning now to the capital management aspect of the business. On Slide 18, you'll see an update of all the key metrics. We have a debt maturity in August this year. The maturities are spread over the next nearly 4 years, hedging over the next nearly 6 years. And 4.26%, we expect to be significantly lower following the refinancing.
On Slide 19, that shows the picture of the diversified maturities and what our rates look like. And again, that average fixed and hedged base rate, we expect to reduce following the refi on or before August of 2020.
On Slide 20, we set out all the various details of each of the tranches that we have. I draw your attention in particular to the AMTN on the top line, which has an all up fixed cash rate of 5%. Based on current rates -- from 2022 with the rates, however, at the time we refi, but based on current rates, we'd expect that to be significantly lower on what is a significant component of the total $530 million of debt.
Slide 21, again, reassures both our bond investors and our equity investors that there is significant headroom across both the gearing ratios and interest cover ratios of the group. That's currently in place.
Now to the outlook. On Slide 23, you'll see the rent reviews are continuing. We expect the results and the determinations to be issued in the current half year. As we have in the past, we've also set out some scenarios that show you the worst and best cases coming out of those determinations. Anyway, of course, we'll announce the results of those determinations once they're on hand.
On Slide 24, the outlook for financial year '20 has a number of factors that will provide influence on the outcome. Of course, the rent determination is a key component of it. But also rent review costs, we expect to be significantly lower than the $3.1 million incurred in financial year '19. And the refinancing of the $225 million, we expect that to be at a rate significantly lower than the 5% that currently prevails.
So the refinancing plans are well advanced. And of course, we expect the Endeavour Group to separate from Woolworths sometime during this calendar year.
Again, repeating what the Board and management have said many times before, following the determinations of the rent reviews, the Board will undertake a review of capital management and distribution policy. And we'll take into account all the factors we've listed there on the page, what the rent review outcome is, what the implications are for the property valuations. We'll be having 100% of the properties revalued following the determinations. So we'd expect those to be completed before 30 June. We'll be looking at the property and capital market conditions more generally and the expectations of securityholders. And off the back of that, a distribution will be set for the second half and, of course, the tax deferred components that align with that.
On Slide 25, and this is where I'll finish ALE's value proposition. We have a nationwide portfolio of first-class pub properties. Yes, they're in good locations, but they're also leased to a high-quality tenant on long-term leases, leases that can run for up to another 48 to 49 years, if ALH exercise their options. We have a low-risk and investment-grade capital structure, and that is particularly helpful as we run towards a refinancing of one of our maturing corporate bonds during this year.
There's some additional information included in the attachments, which will supplement your understanding of ALE. And as always, if there are any further questions, please make contact with us. We'd be happy to meet with you or have a call.