I would now like to hand the conference over to Mr. Glenn Willis, CEO of Elanor Investor Group. Please go ahead.
Good morning, and welcome to this results presentation call for Elanor Commercial Property Fund for the 2023 financial year. Thank you for joining the call this afternoon, and thank you for your interest in the fund. On the call today, I'll be joined by David Burgess, Joint Head of Real Estate for Elanor Investors Group, and Fund Manager of the Elanor Commercial Property Fund. Also joining us is Bessie Beresford , the Head of Asset Management for Office and Healthcare at the group, and Paul Siviour, COO of Elanor Investors Group. Before I hand over to Dave, a couple of brief comments, mainly in regards to congratulating Dave and the team for a what I think is a fantastic result for this fund for the year.
Recognizing the challenging market conditions that we all know that exist in the office sector at present. To have grown the occupancy for the fund from 96 to almost fully occupied at 98.4% for the year and also achieving the like-for-like rental income growth of close to 10% is a tremendous achievement, as I said in challenging market conditions. Congratulations to David and the team for that. Look, I'll without further ado, I'll hand over to David. David, please take us through the results.
Thanks, Glenn, and thanks, everyone, for dialing in today for the ECF results. Starting on page 4 of the pack, the operational performance of ECF is very strong, and that's despite the challenging capital markets that we're in at the moment. Importantly, we do start the FY2O24 financial year in a very strong position, and that's from an income, valuation, and capital management perspective. We delivered on our FY2023 FFO and DPU guidance on the back of a very focused asset management and leasing initiatives. As a result, the fund starts financial year 2024 with high occupancy of 98%, nearly fully occupied, and a very low lease expiry profile of just 6% of income for the forthcoming financial year.
Asset values have declined, with our weighted average cap rate now sitting at 6.95%, some 91 basis points above the national average and 130 basis points above our peer groups. Importantly, we are achieving rental growth across the portfolio and expect to continue that growth, given the unique position of market rents being materially below replacement cost rents. Our pro forma gearing, post proposed asset sales, is 26%, and we have extended the average hedge maturity to three years and two months, which we'll talk about in a moment. Turning to slide 5 and our results highlights. FFO and DPU were AUD 0.1101 and AUD 0.094 per security for the period, in line with our guidance at the start of the year.
Occupancy finished the year at a high 98.4%, which is materially above market and reflects our investment approach of having quality assets that have competitive advantages in their respective markets. Our portfolio WALE is three years and one month, which provides the right balance of income security, but also access to the rising rents that we're seeing in our markets. Like-for-like rental growth was a very strong 6.8%. NTA at 30 June was AUD 1 due to asset value declines as a result of capitalization rates increasing from 6.1% at the beginning of the period to 6.95%. Balance sheet gearing is 35.1%, and as I've mentioned, with the proposed asset sales of Nexus Centre and Limestone Street reduces to 26%.
We have extended and increased our hedged interest rate exposure to close to 80% and will be 100% following these proposed asset sales. Turning to slide 6. The portfolio's high occupancy is a result of strong leasing during the period. Our office assets are very well occupied, and as such, 92% of executed leases resulting in tenants either maintaining or increasing their footprint. As mentioned, like-for-like income growth was very strong at 6.8%, and leasing spreads across the 25,000 square meters of leases executed over the period was a high 11%. The momentum of leasing has resulted in a low expiry profile into 2024, with only 6% of income expiring.
The weighted average portfolio cap rate for the portfolio increased 14% to 6.95% over the period, resulting in an 8.5% decline in the asset values. The negative movement in cap rates was partially offset by higher market rents, which are supported by positive leasing spreads that were achieved in FY2023. Looking forward, our portfolio is well positioned with our cap rates well above market average and with assets that have more upward pressure on rents. Turning to slide 8. The portfolio's price is well below replacement cost, which we expect will result in two things. Firstly, it makes it more difficult for new supply to come to the market, and we have certainly seen this in the markets that we are invested in.
Secondly, quality assets like we have will have upward pressure on rents, which is evidenced in our FY2023 leasing statistics that Bessie will talk about in, in one moment. In terms of markets, which we summarize on slide 9, the office markets across Australia are experiencing significant divergence in performance. The markets where our, our, our assets are located are mostly performing very well, as evidenced by the charts. Generally, Southeast Queensland, Perth, and Canberra are performing far better than the markets of Sydney and Melbourne, with growth in occupied stock, positive rental growth, and low levels of supply. I'll pass over to Paul Siviour to talk through the financial results.
Thanks, David. Referring to page 11 of the investor presentation pack released earlier today, we've set out there the income statement of the fund. The funds from operations were AUD 34.858 million, which reflects a FFO per security on issue of AUD 0.1101, and a distribution of AUD 0.094 per security, reflecting a modest conservative payout ratio of approximately 85%. As David mentioned, the fund achieved its guidance in respect of FY2023 and continues to perform at a very high level. The balance sheet is set out on page 12. Investment properties valued at AUD 5,555.5 million as at 30 June 2023. As David mentioned, NTA per security of AUD 1, and balance sheet gearing at 30 June of 35%.
Importantly, that balance sheet gearing reduces to 26% post the asset sales that were announced to the ASX on the 17th of August, 2023. The gearing is, remains within the target range of 30%-40%, but the fund manager, and management are of a view that taking the opportunity to realize value for two assets that were sought out, is the right approach in the current market, given that sale, sale price for these assets, is only approximately 4% below the independent valuations at 30 June 2023. Turning to page 14, where we've set out the capital management of the fund, and it's important to note here that the fund has invested in a number of respects in relation to capital management since 30th of June 2023.
That is, it has increased the tenor of the hedge, of the debt facilities of the fund. It has, it expects to lower the leverage of the fund from 35% to 26%. It has taken out further hedging in respect of the interest rate profile to achieve greater interest rate protection, and it has also increased the tenor of those interest rate hedges. Notwithstanding those reductions in leverage, the fund is still providing strong guidance of AUD 0.085 per security as a distribution for FY2024.
The weighted average cost of debt after that hedging I referred to is 4.42%. On completion of the asset sales and reduction of the debt by approximately AUD 50 million, that will repay the unhedged component of the debt facilities. On that basis, the weighted average cost of debt will decline. The fund has very significant headroom in respect of its, its, its debt facilities. Its loan-to-value ratio, as measured for the purpose of the covenant, is 42% against, a covenant of 52.5%. That provides, headroom of approximately AUD 100 million in respect of, in respect of any potential movement in the valuation of the office portfolio.
Importantly, and reflecting the strong performance of the assets, the fund has quite an exceptional interest cover ratio of 8.4 times in respect of the year to 30th of June 2023, against a covenant of 3 times. I'll now hand to Bessie to talk more about some of the asset management initiatives.
Thank you, Paul. I'll start on slide 16. The combination of a high-quality portfolio, high-quality tenants, and continued management investment has produced results. We entered FY2023 with strong occupancy, with our proven track record of retaining and attracting high caliber tenants continuing. We finished the year with even stronger metrics. We've increased our occupancy to 98.4% of an already high base of 95%, with high caliber tenants entering the portfolio, such as Bank of Queensland, ITV Studios, and McGrath. 2023 was a busy year, with over 25,000 square meters leased during the period. As previously mentioned, our occupancy has increased to 98.4%, but importantly, we have maintained strong leasing terms, with average incentive at below 13%.
Our average net rents of AUD 504 a square meter are also above valuation rents, while we maintained strong annual increases. Our positive leasing spreads have remained strong at 11%, with our tenant retention remaining exceptionally high at 83%, with 92% of those tenants, they retained or expanded their footprint. With our average net rent remaining below replacement cost, this provides us with further opportunity to continue to build on these metrics. Turning to slide 18. Through the execution of our asset management initiative, we continue to deliver. At Fifty Cavill Avenue, we continue to focus on driving market rents and retaining tenants, and delivered with 8% leasing spread, with average incentives remaining low at 15%. The resetting of market rents across the asset has largely, or has offset any cap rate softening, resulting in valuation uplifts.
At Limestone, our focus was increasing occupancy, which previously sat around 75%. Once again, we delivered, finishing the year with 100% occupancy over the commercial area, with over 70% of these tenants government-backed. We extended the Federal Government across the whole building at Garema at attractive commercial terms. At 19 Harris Street, our leasing success has produced a positive leasing spread and introduced high-caliber tenants such as ITV Studios and McGrath Real Estate. Slide 19. We entered FY2023 with 22% of the portfolio's income due to expire in 2024. Throughout 2023, our focus was on mitigating this exposure. By executing on our forward plan leasing strategies, we can now report that that 22% is now reduced to 6%.
We activated this by engaging with and renewing major tenants early, including the federal government at Garema, Accor in fifty Cavill Avenue, and Queensland Government at Ipswich. Our FY 2024 income exposure has been reduced by 76%, with the remaining expiries, they're all tenancies less than 1,000 square meters across multiple assets. Our key areas of focus for FY 2024 are two-pronged: to continue to increase rents and to forward solve 2025 expiries. Fifty Cavill, Nineteen Harris Street, and WorkZone West are three of the portfolio's assets in a strong position for rental growth, with market rents at a material discount to replacement costs, as is the case for all of our assets across the portfolio. Our continued focus on forward-solving lease expiries will continue with our attention on both WorkZone West and OG Road, with expiries in 2025.
Both of these assets are located in markets which once again have exceptionally strong market fundamentals. We are well progressed at both assets with our dual approach, engaging with current tenants as well as actively participating in market rent. Given our track record in executing on our leasing strategies and the strong credentials of both assets, we are confident we will achieve results. Slide 21. The importance of continuing to invest in the needs of our tenants is paramount. We are seeing the results of our continued focus on investing in accessibility, amenity, and importantly, ESG, reflected in our high occupancy, high utilization, strong tenant retention, and engagement. The fund is committed to building on our ESG pathway, with our portfolio review completed, net zero roadmaps completed for 3 of our assets, asset electrification strategy set.
We have renewed our Carbon and Wise certification at Nineteen Harris Street at WorkZone West, and obtained the fund's first portfolio NABERS rating of 5.1 stars for energy. We continue to be focused on reusing and refurbishing fit outs, reducing our carbon footprint, and have completed the portfolio's sustainability improvement plan. These management initiatives are continuing to build on our high-quality portfolio and demonstrate our active asset management approach. I'll now hand back to David Burgess, who will talk through the FY2O24 guidance.
Thanks, Bessie . As we move into FY2024, ECF is well positioned. We've got secure income, as, as you've heard from Bessie . We have a strong capital position, and we've got opportunities to continue to grow rents. We'll continue to work hard to do whatever is within our control. Our guidance for FY2024 is a distribution yield of AUD 0.085 per security, which represents a 10.6% distribution yield. On that note, I will now 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 headset to ask your question. Your first question comes from Leanne Truong from Ord Minnett. Please go ahead.
Good afternoon, everybody. Just a couple of questions from me. The first question around financial year 2024 guidance. When do you assume the settlement of Nexus and Limestone in the guidance?
Yeah, we've assumed that it's the in October, Leanne.
Okay. Yep, sure. The second question is around the Harris Street Fund. What's your current LVR on that, and what is the debt covenants?
Thanks, Leanne. The current LVR for the Harris Street Fund is approximately 62%. Covenant is 65%. The fund is fully compliant with all of its banking covenants and has a strong relationship with the debt provider.
You have some lease expiries for that asset, is that correct?
The, the, the actual, main one is the Thomson Reuters, based on levels 5 and 6, and that's a January 2025 expiry. We do have very good early engagement.
Yeah, we've already got engagement with them. We are longer term, and then there's, at the moment, we only have a vacancy of around 250 square meters.
Yeah, okay. Yeah, so you, you, you think that would be a lease up and that won't there's no risk of, some, I guess, valuation decline from, from upcoming lease expirations on the asset?
It's actually in the valuation, all the lit up is conservatively priced into that valuation. And that includes that 2025 expiry. We're very comfortable with the allowances in that valuation. The leasing, as you've seen in the pack, there's been over 4,000 square meters of leasing that we've done in that building since we acquired the asset. The inquiry is very strong.
It is, yeah.
We're, we're very comfortable with, with where that's the direction of that asset.
Thank you.
Your next question comes from Edward Day, from Moelis Australia. Please go ahead.
Afternoon, team. Just firstly, on your FY2024 leasing initiatives, just with WorkZone West, clearly that's a reason we're expiring in FY2026. I'm just keen to hear how you think that's positioned with regards to passing versus market and I guess initial discussions you're having with tenants?
Yeah. Oh, maybe I'll start, and then Bessie can, Bessie can follow up. Look, I, I've never been as more confident on the leasing of that asset than I am now. That's, that's, firstly, that market is performing well. The fringe market of Perth, there's very little vacancy, rents are moving up, and, and that's been reflected in the valuation that we have now, where the value has actually gone up despite having cap rates, cap rates also moving up. That's because the rent, the rents are, are going higher. We think we can do better than valuation in terms of our re-leasing. We've got very good engagement with all the tenants that are within the building.
We've also got some very good engagement with tenants that would like to be in the building, and that's a reflection of where that particular market's at at the moment. I'll, I'll let Bessie
Yeah, Ed, that just echo what Dave said, and we are progressed in conversations with both the head tenant as well as the subtenants in the building. All of them expressed their desire to remain longer term. We've also got one particular government agency that's expressed it as their preferred option, as a larger occupier in the building. We're running everything in parallel.
That's great. Thank you. Then just on your leasing spreads, it looks like the main drivers there were Harris Street and Cavill Avenue. Is Harris Street, I guess, under-rented to an extent, still?
Yeah. Harris Street, we've... That was part of the investment metrics. The passing rents are considered to be, under-rented, Ed. If we, if we take, Harris Street out of that, equation, our, leasing spread still sits around, high 7%.
Yeah. Even without that mark-to-market at Harris, still a very, very strong leasing spread result across those.
Across the portfolio.
25,000 square meters of leasing that's been done across the portfolio. Importantly, we a lot of those deals that we have done are still above valuation. That's where we have confidence that we can continue to drive those higher.
Yeah.
That's excellent. Thank you.
Thanks, Ed.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We'll now pause for a moment to allow participants to register their question. There are no further questions at this time. I will now hand back the call to Mr. Burgess for closing remarks.
Thanks again for everyone dialing in and having interest in our Elanor Commercial Property Fund. We look forward to seeing many of you in the near future. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.