I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead.
Thank you. Good afternoon, and welcome to this Half-Yearly Results Presentation for the Elanor Commercial Property Fund. We appreciate your interest in the fund and joining us on this call today. On the call today, I'm joined by David Burgess, the co-head of real estate for Elanor Investors Group and the fund manager for the Elanor Commercial Property Fund. Liz Bors is head of asset management for the Healthcare and Office division, special division for Elanor Investors Group, and Paul Siviour, Elanor Investors Group's COO. Before I hand over to Dave, I'd just like to make a couple of brief comments around and thank the team, Dave, Liz, and the team, for the performance of the fund and the efforts that have gone into that performance.
Clearly, the fund has performed strongly, and maintained a very high level of occupancy, which in a sector that's had well-known challenges. I think the Elanor Commercial Property Fund is an outlier as far as an office fund goes, and its performance supports that. But really, the performance of the fund is significantly a testimony to the investment approach of Dave and the team and the group more broadly, and being very, very clear and very, very focused on investing in assets that have very clear competitive positions.
And getting that right, and having assets in the portfolio that have just that, clear, competitive positions to enable them to differentiate themselves, particularly in more difficult times, is a key reason why this fund has performed very well. And, again, congratulations to the team. On that note, Dave, I'll hand over to you to take us through the details.
Thanks, Glenn, and welcome everyone to ECF's first half results. The portfolio continues to perform well from an occupancy, income, and leasing perspective. We're pleased to continue to deliver on our distribution guidance. While capital markets have been challenging and return hurdles for commercial assets have increased, we have offset some downward pressure on asset values with strong rental growth across most of our assets. Our focus is to continue to grow rents and capitalize on the material spread between our portfolio rents and the elevated replacement cost rents across the country. We are extremely proactive in regards to our lease expiries in 2025 and 2026 financial years, and are in active negotiations with nearly all our tenants over this period. Our result highlights are on slide six.
FFO has a strong 5.2 cents per security, with distributions at 4.25 cents per security, reflecting an 81% payout ratio. Occupancy remains very high, at 97.3%, and continues to be well above the national average. Like-for-like income growth is again strong at 5.5%, and of leases executed during the period, we achieved a positive leasing spread of 6.7%. Asset values are slightly down by 2.4% to AUD 544 million, primarily due to portfolio cap rates rising to 7.24%, which has resulted in NTA now at 95.4 cents per unit. Gearing is at 36.9%, and our interest rate hedge exposure is 66%. On slide seven, we summarize valuation movements across our portfolio.
As mentioned, at period end, our valuation declined by 2.4%. This is a result of capitalization rates increasing 29 basis points. This movement in isolation impacted capital values by 4.8%. However, it was offset by strong rental growth, which impacted values positively by 3.6%. Turning to slide eight. Our portfolio is well priced as shown, with a weighted average capitalization rate of 7.24%. We have mark-to-market our asset values, with the portfolio weighted average cap rate some 100 basis points higher than our peer group, and is in line with long-term averages and relative yields. Unpacking it a bit further, on slide 10, positive leasing metrics have continued across the portfolio. While there have only been a small amount of expiries this period, we did achieve a + 6.7% leasing spread.
This is the fourth consecutive half of strong leasing spreads across the portfolio. The like-for-like income growth, like mentioned, at 5.5%, the third consecutive period of strong like-for-like income growth across the portfolio. And importantly, our market rents have grown 6% over the past 12 months, but are still relatively low at an average net rent of AUD 478 per sq m, which is materially below replacement costs. Portfolio at material discount to replacement cost positions our assets very well, especially in light of the quality and the positive fundamentals in the markets which we are invested. Our weighted average book value of our assets are around AUD 6,500 per sq m, some 50% below the replacement cost of around AUD 13,000 per sq m.
In the markets that we are invested in, seeing this impact in supply and expect continued muted supply in the short to medium term. This in turn, is contributing to positive rental growth, especially in markets such as Brisbane and Perth, which Liz will talk about in a while. I'll now pass over to Paul Siviour to talk through the financial results.
Thanks, Dave. Turning to page 12 of the investor presentation, we can see that the funds from operation of the fund for the half was AUD 16.659 million, which translates to an FFO per security of AUD 0.0526 per security. With an 81% payout ratio for the half, of that translates to distributions of 4.25%. And we point out that the guidance provided at the start of the year was for AUD 0.085 distribution over the year, in other words, AUD 0.0425 per half, but off the back of an 85% payout ratio. In that regard, the fund is performing ahead of expectations.
Balance sheet on page 13 identifies the net tangible assets per security of AUD 0.94, reduction of AUD 0.06 from 30 June, reflecting the 2.4% reduction in the value of the portfolio, as Dave said, certainly reflecting capital, cap rate softening, but ameliorated to some extent by strong performance in market rents. The gearing of the fund is at 36.9%. In respect to capital management, on page 14, the fund has facilities of just under AUD 200 million and is drawn to AUD 192.7 million. Of that balance, 77% is hedged to 31 August 2026, and indeed, the facilities are also expiring on the 31st of August 2026. So we have significant debt maturity and significant hedge maturity in respect of this portfolio. The covenants relate solely to the wholly owned assets.
There is no look-through covenant in respect of, the capital structure of the debt facilities, and, we're at a loan-to-value ratio, the purpose of that covenant of 41.7% against a covenant of 52.5. And I'll just point out that that provides for headroom of approximately AUD 100 million, of value from the current value of the wholly owned assets at AUD 462.5 million. A very significant headroom, and indeed, very significant headroom in the ICR also, and I've mentioned that interest rate is substantially immunized. I'll now hand to Liz to talk about asset management across the portfolio.
The ECF portfolio boasts geographical diversity, with a significant portion of assets situated in the nation's most robust markets, namely Brisbane and Perth, which collectively represent 68% of our portfolio. Throughout the half, the portfolio has upheld its stabilized, high caliber tenant mix, dominated by government entities, multinational corporations, and ASX-listed tenants. Notably, our top tenants have all maintained their presence, and we're currently engaged in active renewal negotiations with several of them. On slide 17, drilling deeper into the Perth and Brisbane markets, which have emerged as the top performance among all capital cities. With ECF being significantly weighted in these cities, accounting for 68% of our portfolio, we've witnessed a tangible result for their strong performance at an asset level. In both Perth and Brisbane, there has been a notable uptick in demand, with tenants actively engaging in transactions.
These tenants are displaying increased confidence, evidenced by their willingness to commit to longer term leases and their improved certainty regarding their space requirements. The limited new supply, combined with rising demand, has resulted in declining vacancy rates, particularly for high-quality, well-positioned assets. This trend has fueled rental growth, demonstrating the favorable market conditions we are currently experiencing. We maintain a proactive approach to leasing, to our leasing strategies, having executed a significant portion of forward leasing last year, that consequently meant that the volume of leasing transactions this half was notably reduced. Nevertheless, our performance on executed leases has been robust, underscoring our continued leasing success. Our rental growth remains strong at 6.7%, with like-for-like rental growth standing at 5.5%. We've effectively managed to keep our average incentive below 30%, while consistently achieving occupancy levels well above the market average.
Importantly, less than 2% of the portfolio's income is set to expire in the upcoming half, the majority of which we are already addressing, ensuring stability and continuity in our income stream. Furthermore, our aged arrears remains below 2%, reflecting the high quality and caliber of tenants within our portfolio. We are further reinforcing the stability of our income. On slide 19. Now, looking forward, our next significant lease expiries are anticipatable, will be in late 2025 for both WorkZone West and Campus DXC, both whole building tenants. WorkZone West has long served as a cornerstone asset in our portfolio, boasting strong tenants, and we can attribute this to the exceptional quality of- across all aspects of this asset. We've actively been pursuing our multi-tenanted leasing strategy.
We've engaged directly with subtenants and are pleased to announce that we're currently in active negotiations for over 70%, or sorry, 80% of the net lettable area. Meanwhile, Campus DXC presents a distinctive opportunity in a highly sought-after location. It appeals to diverse markets, such as medical, education, and mixed-use sectors. We've been extremely proactive in the market and are making significant progress with negotiations for that entire building. Additionally, with the recent renewal of the federal government lease at Garema, the lease expiry has been extended to the 30th of June 2026, ensuring full income realization for FY 2026. The markets in which all these assets are located have robust fundamentals, including positive demand, limited new stock, and rent significantly below replacement cost.
Coupled with our proactive leasing approach, we already have 73% of FY 2025 and FY 2026 expiries in active negotiations, importantly, at or above valuation rents, further positioning the fund for sustained rental growth and income security. These metrics bode well for the fund's continued rental growth. On slide 20, we're diving deeper into WorkZone West and the leasing strategy there. So as we've always previously mentioned, timing has been pivotal in executing our leasing strategy at WorkZone West. We've maintained a steadfast belief in the growth potential of market rents at WorkZone, and strategically, we've deferred any renewal discussions with tenants to capitalize on improved market conditions, which are now playing out. We have seen on-the-ground, robust rental growth, driven by heightened demand and limited new supply, amidst a backdrop of economic expansion.
WorkZone West is aptly positioned to meet the evolving demands of tenants who increasingly prioritize premium office space offering flexibility, amenity, accessibility, and best-in-class ESG credentials, attributes that WorkZone West excels in providing. Through our focused leasing strategy, coupled with active asset management initiatives, we've cultivated a strong tenant interest in maintaining their presence within the asset. Presently, we have secured leases or in active negotiations for 80% of the net lettable area, a noteworthy achievement, which is delivering on our leasing strategy. Now, finally to ESG on slide 21. The importance of continuing to invest in ESG for both Elanor and ECF is paramount. We are now measuring our Scope 1 and 2 emissions and continuing our partnership with the Smith Family.
At an asset level, we've continued our strategic capital investment in sustainability initiatives, and in the half, have achieved a 5.5 NABERS rating at 200 Adelaide Street, a heritage asset in the heart of Brisbane CBD. We continue to be focused on reusing and refurbishing fit outs, reducing our carbon footprint, and continue to deliver on our sustainability improvement plan. By continuing to invest in ESG initiatives, it is not only beneficial for mitigating environmental and social challenges, but also for creating long-term value, maintaining a competitive edge, and building stronger relationships with all stakeholders. I'll now pass back to David Burgess.
Thanks, Liz. In summary, we are well advanced on our future leasing expiries, as Liz mentioned, 2025 and financial year 2026 periods, and pleasantly at levels which are above valuation metrics. Our assets are attractively priced at a high capitalization rate of 7.24%, relatively low rents achieve AUD 6,600 per sq m of capital value, which is well below replacement costs. We are within our target gearing range with material headroom to cover. The FY 2024 guidance is reaffirmed at AUD 0.085 per security. On that, I'll open up to questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Leanne Truong with Ord Minnett. Please go ahead.
Good morning, guys.
Hi, Leanne.
Yeah. Just, first question in terms of your payout ratio. Obviously, you paid 81% this half. What is your expectation in the second half?
We're broadly similar, Leanne, we're about the same.
So it sounds like, I mean, I think at your August announcement or result, you said 85%, so it sounds like it's reduced a little bit, your payout ratio. Is that correct?
Yep, correct. Yeah. Yeah.
Okay. Yeah, and the second question is just in regards to gearing, I guess, what are the plans there? Are you comfortable with those levels, or are you still looking to reduce that?
Yeah, we are comfortable. As Paul mentioned, we have a lot of headroom. Essentially, our capitalization rates have to go to circa 9.5% across the entire portfolio to get anywhere near our LVR covenants. And as I mentioned, we actually obtaining rental growth in the portfolio. So we are very, very comfortable with where our levels are at the moment.
Yeah. And just on that, the Harris Street Fund, what's the LVR there now? Yeah, a bit more color on that.
Yeah, it's similar to where it was previously. So, it's in the low AUD 0.60 range. So, and they're monitoring that very closely in terms of our capital management of that asset. Pleasingly, we've done a lot of leasing in that building, and operation is performing very well-
Yeah.
-and getting rental growth. So, but we're closely monitoring that capital position of that there. The other important point there, Leanne, is that the hedge that debt facility is fully hedged at attractive base rates. So, the ICR continues to perform well in the context of the performance of the asset and the immunization of the interest rate.
Yeah. Thank you. That's it for me.
Thanks, Leanne.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Edward Day with Moelis Australia. Please go ahead.
Good afternoon, Dave and team. Thanks for the color on WorkZone West. Just a couple of questions there. With the negotiations you've got underway, when do you think the earliest deal would commence?
This year.
Yeah. So, Ed, we are hopeful to get a signed or firmed up on at least one of those tenants in coming weeks. We're potentially looking at rolling forward the lease commencement date on at least one of those. As you know, we have the overrenting rolling through, and we're really conscious of sort of staging the new lease start date between now and August next year when the head lease expiries. So, potentially, one of those may start in the next financial year.
Yeah. Virtually,
Early next financial year.
So we've always been very, very confident regarding this asset and the leasing of the asset.
Yeah.
Just understanding the sub leases in the buildings and the head lease. We're, we're even more pleased now, given the, what's happening in that market and how, how we've been able to further position it in terms of the, the rents, the incentives. So the yeah, it's a very high, high level of confidence at that lease. And so the other point on that one, importantly, there's, there's not a huge amount of capital to spend because it's a very high quality building with a first generation fit out in there. So a lot of the fit out will be recycled for the next generation of leases, which is a, a big factor in leasing this time.
Okay. Are you expecting much tenant churn there, and should we be thinking about any downtime coming through?
Uh-
No.
All the existing tenants are very actively engaged in
In renewal.
In a renewal.
Yeah. Yes, a direct lease with us.
With a direct lease. So we do not expect much vacancy or downtime on that.
Okay, that's good. Then the final one is just on your leasing spreads. Can you just dive into that in a little bit more detail in terms of the major contributors to that?
Yeah. Maybe this can sort that-
In this particular half, Ed, we haven't had a lot of transactions. So, the main-- You know, we've had some smaller deals coming through, but the main contributors to those would be a couple that we had in 19 Harris Street, and we've also had 50 Cavill Avenue as well.
Yeah. And the important thing there is that we've talked for a while about upward pressure on rents. We've tried to articulate in the past that there's been consecutive periods now of positive leasing spread. That is continuing. Areas like Brisbane, where there's limited supply, Gold Coast, where there's very limited supply and a very high occupancy. Similarly, the fringe of Perth. So we actually... It's the trend that's playing out very, very well, and we think will continue.
Thank you. Appreciate your time.
Thanks, Ed.
There are no further questions at this time. I'll now hand back to Mr. David Burgess for closing remarks.
Thanks again for joining us, and we'll happily catch up with anyone post-results.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.