I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead.
Thank you. Good afternoon, welcome to this results presentation call for the Elanor Commercial Property Fund. This afternoon, we're joined by my colleagues, David Burgess, co-head of real estate for Elanor Investors Group and fund manager for ECF. Paul Siviour, Chief Operating Officer for Elanor Investors Group, and Liz Parsons, who's head of asset management and investments for the healthcare and office division. Be handing over to David in the first instance. By way of introduction, I'd like to congratulate David and Liz and the team for another fantastic performance in delivering the returns for the fund that they have over the half.
The all the results speak for themselves and demonstrate the performance and strength of the fund and indeed the portfolio of assets within that fund. Most particularly, for me anyway, the like for like income growth of 4.7% over the period really does demonstrate the strength of the assets and the durability and resilience of the assets in the current economic environment. Clearly the achieving a 16% positive leasing spread is to be applauded as well. David, I'll hand over to you to take us through the results.
Thanks, Glenn. Welcome everyone, and thanks for joining us today. Our portfolio continues to deliver on operational objectives that we set ourselves in what are and has been very uncertain times. On slide five is a summary of the half year results. Our FFO is a strong AUD 0.0582 per security for the period, and we are on track to meet full year guidance of AUD 0.11 per security. Occupancy remains a very high 96% across the portfolio. Our portfolio WALE is three years, which, as we will discuss later, provides the right balance of short-term income security and opportunity to capture higher market rents. Our weighted average capitalization rate is 6.4%, some 28 basis points higher than the beginning of the period, and this has resulted in NTA lower at AUD 1.13 per security.
Our capital position remains strong, with balance sheet gearing at 32% and look-through gearing at 37.7%. Importantly, ECF's assets continue to perform well. We have a very high physical occupancy at nearly 85%, which is pretty much full occupancy for an office portfolio. There's very little sublet space in the portfolio. Very high, 92%, of our tenants have renewed in the same space or have expanded. Like-like income has been strong at 4.7%, and leasing spreads are very strong at positive 16%. Looking forward, we have very little expiries for the remainder of the year, and in FY 2024, we already have nearly 70% of expiries with terms agreed or in advanced negotiations. High interest rates are obviously impacting cost of capital and therefore commercial real estate pricing.
ECF's weighted average cap rate at 6.4% reflects 280 basis point spread above bonds within the bounds of long-term spreads, but below the elevated spreads over the past five to 10 years. Whilst there is uncertainty regarding interest rates for commercial real estate pricing, our portfolio average net rent of only AUD 425 per square meter is well below replacement cost, which all bodes well for future rental growth potential across many of our assets. Turning to slide eight. Slide seven, sorry. Markets in which our assets are located are generally performing well. As highlighted, all assets are located in markets that have experienced some positive net absorption, and in most cases, are in markets that have very little supply. This all bodes well for the asset to continue to deliver strong occupancy, income, and rental growth.
Based on the strong performance of our assets, we are pleased to reaffirm full year FFO guidance of AUD 0.11 per security and distributions of AUD 0.094 per security. Paul Siviour will now discuss ECF's financial results.
Thank you, David. I refer those on the call to page 11 of the presentation, the income statement for the fund. Importantly, this presentation reflects a look-through basis, and by that I mean it obviously includes the results for the portfolio that is wholly owned, but also it includes 49% of the results for the Harris Street property, with the fund holding a 49% interest in that fund, therefore on a look-through basis.
The funds from operation of AUD 18.4 million reflect a AUD 0.0582 per security, and the distribution struck on a conservative payout ratio of 81% are AUD 0.047 per security. I'll now refer to the balance sheet on page 12. Again, on a look-through basis, showing the group's 49% interest in Harris Street in investment properties, and indeed the group's share of the secured debt that sits within the Harris Street fund and is secured solely by that asset. On that basis, as David mentioned, the look-through gearing is 37.7%, but the raw gearing of the fund sits at 32.3%. Turning to page 13, which shows provides some information in respect to the breakdown of the movement in the valuations of the portfolio over the period.
This sees, on a like-for-like basis, a reduction in the carrying value of the portfolio of 3.2%. This reflects higher capitalization rates, a 28 basis point decompression in cap rates. Also it reflects, as David has mentioned before, and Liz will go into shortly, the strong performance of the assets in respect of driving market rent, and that's reflected in the strong leasing performance, both in terms of the quantum of leasing done, but importantly, the leasing spreads and the like-for-like increase in rental income. To provide a little more color in respect to that net valuation movement of approximately AUD 20 million, AUD 19 million, more than AUD 15 million, around AUD 15 million, has of that has been mitigated by increase in market rent.
Cap rate decompression's sort of in the low thirties, if you will, with market rent, resulting in a net valuation movement of only AUD 19 million. Turning to capital management, set out on page 14. The fund is in a strong position in relation to the structure of its gearing, the extent of its gearing, debt balance sheet gearing of 32.3%, but also the structure of that gearing. The majority of the debt matures in quite some years, and indeed, the hedging profile is very strong. There is AUD 70 million of the total facility on a look-through basis of AUD 243 million, that matures in February 2024. That's the earliest maturity in respect of any of the group's facilities.
With that, I'll pass to Liz to talk through the asset management performance of the fund during the half.
Thank you, Paul Siviour. If you could please refer to page, slide 16. Demand for high-quality accommodation has consistently remained strong despite current commercial headwinds. We have seen strong demand across the portfolio for assets with amenity, accessibility, and flexibility, which we have continued to invest. During the half, we have created outdoor amenity, co-tenant activations, and invested in fit-outs, enabling us to have a competitive advantage within our market. A high-quality portfolio attracts high-quality occupiers. Across our portfolio, we have a broad range of industries and importantly, accommodate the top performers within those sectors. We have continued to build on this momentum by introducing new high caliber tenants into the portfolio over the last 12 months, including IPG Studios, state and federal governments, Alliance Pharma, and Abacus dx. Importantly, these tenants are physically occupying their space. Our average utilization of over 80% well exceeds the market average.
This high utilization creates sticky tenants, increasing the likelihood of tenants renewing and importantly, expanding within the portfolio. Now to slide 18. The combination of a high-quality portfolio, high-quality tenants, and continued management investment has produced results. Over the last half, we have continued to build on our leasing success. Our like-for-like rental growth is 4.7%. Average incentive remains relatively low at 25%. Importantly, we have strong tenant retention track record. Our portfolio has maintained strong occupancy throughout the cycle, exceeding the national average year-on-year, with our strong leasing producing a leasing spread of 16% over the half. Strong leasing momentum has continued, with only 800 square meters in financial year 2023 to be secured. Looking forward, we already have terms agreed over 12,000 square meters of the 21,000 square meters expiring in 2024.
We continue to deliver on our targeted leasing strategies. We've already agreed terms with the federal government to extend at Garema beyond their current lease expiry, have commenced our two-pronged leasing approach at Workzone West, maintaining active discussions with current subtenants for direct leases and responding to active market briefs, specifically targeting government agencies. Slide 20. The importance of continuing to invest in the needs of our tenants is paramount. We have seen 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, Canopy monitoring software well underway, with the focus on continued ESG improvements. Over the quarter, we have renewed our carbon neutral status and WiredScore certification at 19 Harris Street, installed solar power at Workzone West, increased our average NABERS rating to 5.2 stars, and focused on reusing and refurbishing fit outs, reducing our carbon footprint. These management initiatives are continuing to build on our strong portfolio, which has continued its management and leasing success. I will now hand over to David Burgess, who will provide the closing remarks.
Thanks, Liz. In summary, our assets are performing exceptionally well from an operational perspective, and this is a result of being the right assets in the right submarkets that have good demand and supply fundamentals, but importantly, Liv and the team focused on delivering the right product in that market. Looking forward, we have very few lease expiries for the remainder of this financial year. As Liv mentioned, they're well advanced on our FY 2024 renewals. We reaffirm our FY23 FFO guidance of AUD 0.11 per security and distribution guidance of AUD 0.094 per security, which reflects a very strong 9.8% yield on current trading price. On that, 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 handset to ask your question. Your first question comes from Leanne Truong from Ord Minnett. Please go ahead.
Hi, guys. Good afternoon. Just a couple of questions from me. Just the first question in terms of guidance. Obviously, your second half, your guidance assumes a lower second half. Is that largely due to rising debt costs and some upcoming expiries?
Thanks, Leanne. Mainly due to slightly higher debt costs coming through in the second half.
Okay. Yeah, thanks for that. I'm just trying to reconcile some numbers. Apart from those leases that you've pre-announced, has there been any other leases secured in the half?
Uh-
Yes. Well, we've agreed terms with the federal government in Greenmount. The lease is yet to be signed, but it's in leasing process. We've also agreed terms with the Queensland Government at Limestone.
Okay.
Neither of which have had leases executed as yet, so we're not in a position to disclose.
Okay. Yeah. All right. With the Garema Court, are you expecting any... I mean, obviously, that looks like a renewal. Are you expecting any downtime then? How should we be thinking about that asset?
Yeah. There'll be no downtime. It is a straight renewal at the end.
Leanne, generally with, as a generalization with government renewals, they need approval before those can enter terms agreed. We're very confident that Greenmount side too, as mentioned, will happen. The other comment there is in relation to the forward-looking expiry, which is very low. I mentioned it gives the right balance. While it gives the right balance of capturing upside on leases, but also having strong short-term income, so there's a lot in the pipeline from 40, but there's a fair chunk of opportunity for us to drive rental income across many assets. The larger ones are being dealt with, as we discussed, in terms of expiries, and there's opportunities for the smaller tenants before rental upwards.
Yeah. Sure. Sorry, I just have one more question. Gearing's up a little bit. What's your your LT loan-to-value ratio? Has that increased a bit too? Are you comfortable where it is?
Yeah. Yes, we are comfortable, Leanne. There's good headroom in respect to that covenant.
Okay. What's your loan-to-value ratio in respect to?
I have to get back to you on the precise number. I, the, Allow us to do that, but it's in the higher 30s, but not close to 40.
Okay. Yep. Yeah. Thank you. That's it from me.
Your next question comes from Edward Day from MA Financial. Please go ahead.
Afternoon. David, I'm just actually interested in your thoughts on the valuation, particularly at Greenmount Court, given it was off AUD 4 and a bit million. I'm assuming that doesn't take into account the discussions you're having with the government?
Yeah, that's correct, Ed. It assumes that there's vacancy on expiry and a full incentive pay. Yeah, given the uncertainty on the valuations, Amanda, you wouldn't want to comment on what that meant.
Yeah, sure. Okay. Just on the leasing spreads, can you sort of just possibly break up the components or main drivers of that during the period?
Maybe I'll let you know, answer first, and I'll pass over to Liv. You know, look, obviously a very strong result. There's an element of that leasing spread as a result of the Harris Street asset, where there was some under-rented components to that asset where we've executed ITV and March market. It's proved that the strategy is right, that we're achieving. Then there's positive leasing spreads coming from a number of other assets. It's, if you break that down, even without Harris Street, still high single-digit positive leasing spread across our main leases.
Yeah, specifically, that'd be 50 Cavill and Mount Gravatt.
That's great. Thank you.
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 Hugh MacNally from PPM. Please go ahead.
Thanks very much. Congratulations on the result. I just wanted to ask you, what's your average debt cost running at now?
The average debt cost, Hugh, including on a look-through basis, would be circa 2.5%.
I'm sorry, I couldn't quite get that.
2.5%. I've got the individual facilities in front of me. I'm just trying to do a bit of mental math on the weighted average.
About 2.5%.
Yeah. Excuse me, Willis. That I'm allowing for some increase in costs going forward as one of the hedges rolls off. For the half, it was AUD 2.6.
Right.
Going forward, it's more like two and a half.
What would that translate to, say, that the debt was rolled over at current rate? What would be the increase in the average rate that it got to?
It'd be significantly higher than hedges we put in place at attractive rates some time ago. I'd point out here that the... Excuse me. Yeah. I'd argue that the hedges were fully hedged in relation to all of our facilities and all of the long-dated facilities. Other than a facility that matures in February 2024, that hedge rolls off soon. All of the other facilities are fully hedged and for varying periods of tenure from 2.2 years-3.7 years. Those rates are locked in for really for a considerable number of years.
Right. Okay.
Depending on what, I don't know, if you're asking what our underlying swap is compared to today's three-year swap rate, you know, there's considerable benefit within the numbers.
Okay. Yeah. Second question, what would be the leasing spread on the large proportion of the 24 expiries? What would be the spread you'd be getting there?
Yeah. We're not dialing out any information like that at the moment. Hugh, obviously, the terms agreed with
I'm sorry, you're fading out. I couldn't quite hear that.
Yeah. Just as it's, the leases aren't executed on a large portion of those forward-looking expiries, I would rather not disclose the leasing spread on those until they're executed.
Right. It would be a positive number, would it?
Dave said, we're not gonna comment until it's executed. Hugh, there'd be wrong to do that.
Okay. Oh, thank you very much.
No problem.
There are no further questions at this time. I'll now hand back to Mr. Willis for closing remarks.
Yes. Well, I'd like to in turn hand it to David for the closing remarks for this fund.
Again, thank you everyone for joining us. We're very pleased on the operational performance of the Fund. We'll continue to work hard to extrapolate the best possible performance going forward. Thank you.
That does conclude our conference for today. Thank Thank you for participating. You may now disconnect.