I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead.
Thank you very much, and good afternoon, and welcome to this results presentation of Elanor Commercial Property Fund's first half results for this financial year. Thank you for joining this call today. We appreciate your interest in the fund. With me on the call today, I'm joined by David Burgess, Co-Head of Real Estate for Elanor Investors Group and fund manager of ECF.
I'm also joined on the call by Liz Boors, Head of Leasing and Investment for our office division, and Paul Siviour, Chief Operating Officer of Elanor Investors Group. We’ve been delighted to look forward to taking questions at the end of the presentation. For the presentation call today, we'll be referring to the presentation pack that were released to the ASX this morning.
Before I hand it over to David, I'd like to make some brief remarks in regards to the achievements that the team has made for ECF over the half. It's been another half of terrific progress for ECF in particular on all fronts. The successful execution of strategic leasing and ESG initiatives has been very pleasing. The team has done a tremendous job in asset managing the fund in those aspects. Another terrific acquisition was effected during the half with the acquisition of 50 Cavill Avenue. Another high investment quality asset for the fund.
In the short time that the team has managed that asset, we've achieved great progress and the valuation uplift for that acquisition. Also over the half, the fund experienced a strong increase in capital value, which is obviously a direct reflection of the income performance of the fund, but also the capital value prospects for the assets in the fund and the portfolio more generally. In summary, I'm pleased with the progress. Another half of terrific progress for ECF. Against that background, I look forward to now handing over to David to talk about the fund in more detail.
Thanks, Glenn. First half of this financial year has been extremely active for the funds. Now, investment approach has proven to be correct, that is owning assets that have a differentiated competitive advantage. We have a focus on ensuring our assets continue to meet the demands of tenants and specific requirements in this new era of office accommodation. We have invested in our assets and have a roadmap to a carbon neutral portfolio.
Our investment thesis for our recent acquisition of 50 Cavill Avenue is proving to be correct with immediate valuation uplift as a result of positive leasing momentum at that asset. As a result of our initiatives, we have achieved valuation increases of AUD 18 million across the portfolio, and our NTA has increased 5% to AUD 1.19. We are pleased to reaffirm our FFO and distribution guidance for the full year.
Turning to Slide 6. This fund continues to deliver strong results across all metrics. FFO for the period is AUD 0.055 per unit, which reflects an attractive 10% annualized yield. Our DPU of AUD 0.047 per unit reflects a high 8.5% distribution yield. As I mentioned, NTA has increased to AUD 1.19, reflecting the strong valuation increases. Occupancy is a high 95.6%, which pleasingly includes heads of agreement signed at Cannon Hill over 2,000 sq m. This occupancy level across the portfolio is significantly above market averages, reflecting the competitive quality and competitive advantages our assets have. Gearing is at the lower end of our target range of 32.8%, and importantly, our interest rate is 97% hedged. Turning to Slide 8.
The quality of our portfolio and the competitive advantages of our assets has contributed to the strong performance of the fund, not only in this half, but since we listed the vehicle in 2019. The assets in our portfolio meet the needs of tenants. For example, the average age of assets in the portfolio since last refurbishment is only eight years. 200 Adelaide Street is a great example of that, being a very high quality asset with a differentiated offering in that respective market. The average floor plate across the portfolio is a large 1,800 sq m. This provides total flexibility for tenants. For example, WorkZone West with 2,400 sq m floor plates that can easily be subdivided, and Nexus Centre with 2,000 sq m floor plates, which suits both full floor and half floor tenants.
We have above average parking ratios across our portfolio at 1 bay for 96 sq m in L.A. If we include the two CBD assets, it's a very high 1 bay per 52 sq m. Our average NABERS energy rating is 5.2 star, and we have a very acute focus on continuing to improve our ESG credentials, which Liz will talk about in a moment. Given the portfolio quality and assets position in their markets, we have attracted very high quality tenants, many of which we have renewed or expanded over recent times, and this can be seen on Slide 9. Turning to Slide 10. Across our assets, we've been focused on ensuring they continue to meet the demands of our tenants. For example, providing additional amenity at Nexus Centre, improving fit outs at Cannon Hill.
ESG is a key focus, and we have a roadmap to a carbon neutral portfolio following successful execution of this at WorkZone West. This has resulted in leasing success across many of our assets, and importantly, deals completed are in line with pre-COVID pricing, as opposed to market declines across most parts of the commercial office market during this COVID period. The result of these initiatives is a strong AUD 18 million or 3.7% uplift on property valuations. Immediate uplift has been seen at Cavill Avenue, as mentioned previously, as a result of successful leasing initiatives, and there's been strong results at 200 Adelaide Street and Nexus Centre where we have invested capital and had successful leasing.
Importantly, there are more immediate opportunities to create value in the portfolio, and this includes opportunities at Cannon Hill, where we have the heads of agreement, and other assets, including Garema Court. On Slide 12, we just highlight our average valuation metrics across the portfolio, and it remains very attractively priced. The weighted average capitalization rate, 6.33% for this quality portfolio. Importantly, our average gross rent is a very low AUD 516 per sq m, and in many instances our rents are well below economic rents. As such, there is potential to continue to drive these rents higher. The portfolio is priced, an attractive rate per sq m of just under AUD 6,800 per sq m. I'll now pass over to Paul Siviour to talk through the financial results for the period.
Thank you, David. Turning to Page 14 of the presentation, the fund generated funds from operations for the half of AUD 14.33 million. On a weighted average number of securities on issue that reflected a funds from operation per security of AUD 5.5, and a distribution per security has been paid or declared of AUD 4.7. The guidance remains unchanged with a forecast distribution per security of AUD 9.4 for the year FY 2022. Turning to the balance sheet on Page 15. The fund has a conservative capital position with a net gearing ratio of 32.8% and an NTA per security of AUD 1.19.
That reflects the AUD 18.1 million increase in the value of the fund's portfolio during the half, and that increase is from the position immediately following the acquisition of Cavill Avenue during the half. Importantly, on Page 16, the fund is in a very strong position in respect of both its weighted average debt to maturity and its interest rate hedging profile. The fund has drawn debt of AUD 184.8 million, as I mentioned, reflecting a net gearing ratio of 32.8%. Importantly, that debt has a weighted average maturity of 3.1 years, and the interest rate in respect of that debt is hedged with an average hedge maturity of 2.7 years.
The fund enjoys an average cost of debt at the moment of 2.19%, and that level is locked in in relation to the hedging profile that I have mentioned already. I'll now pass to Liz Boors to talk more about the market and the assets in particular.
Thank you, Paul. We're starting on Slide 18. For the employment sectors, improved metrics translate to increased demand and confidence in the office market. What we are seeing on the ground is a consistent increase in demand for assets with superior amenity ESG. Employers, more than ever, have to create a competitive edge in attracting foreign talent. The office environment and its fit out plays a major role in their success.
We expect that 2022 will continue to see an increase in leasing demand for high-quality assets with a point of difference. To Slide 19 now. 50 Cavill Avenue is an example of a high-quality asset attracting strong leasing demand, being a strategic asset acquisition for Elanor. In the first quarter of ownership, we have achieved valuation uplift of close to AUD 5 million, which has been achieved through the outperformance of our leasing assumptions against our acquisition underwrite.
Specifically, we are achieving higher rents, higher tenant retention, lower incentives, and less downtime. Our leasing strategy identifies further areas which will continue to drive opportunities and value at 50 Cavill Avenue. Slide 20. We have continued to invest strategically in our assets, which has resulted in tenant retention, tenant expansion, and enhancing value. At Mount Gravatt, we have improved our tenant amenity with new end-of-trip facilities, outdoor areas, and over the last 12 months through this investment, we've retained two of our major tenants being Bunnings and Coles. 200 Adelaide Street is an exceptionally high-quality heritage building, which is a clear point of difference in its market. We have invested in improved tenant amenities throughout the asset and have facilitated the expansion of our anchor tenant hub.
In both of these assets, our strategic investment has led to leasing success and valuation uplift over the last 12 months of 22% and 26% respectively. Slide 21. Across our portfolio, we have further value to be realized. At Corporate Drive, we have a strategic approach to value creation, with a recent execution of a heads of agreement on over 2,000 sq m. This, combined with the Abacus dx lease, increases the WALE at Corporate Drive to seven years, occupancy to 90% with further valuation uplift in the short term. Garema is an iconic Canberra asset positioned in a highly desirable location with large, flexible floor plates, abundant natural light, and balconies and outdoor areas on most floors. It has the potential for broad appeal from both the public and private sector.
Importantly, we have a leasing strategy underway to create rental and valuation upside through value enhancement initiatives ahead of the current 10-tenancy lease expiry. Slide 22. WorkZone West is an example of what our acute focus on ESG has achieved. WorkZone West is the first and only six-star NABERS carbon neutral asset in Western Australia. The success and knowledge base gained from the WorkZone West process has provided us with a pathway portfolio-wide to replicate this success, and we intend to start rolling this out in the next financial year. ESG initiatives have a clear social and financial benefit to both occupiers, investors and us as owners. We are committed to continuing to invest in best practice. I'll now pass over to Glenn for his closing remarks.
Thanks, Liz. Thank you, Dave. The performance of the commercial property fund, as I said at the start, has been very pleasing. The performance that fund has achieved over the last half, over the last two years, has been nothing short of exceptional, particularly when taking into consideration the market conditions that the all assets for that matter have contended with. The performance of ECF over the last half, again, is testimony to the investment approach. The very clear investment approach that targets assets with differentiated positions and true sustainable competitive advantages. Having an acute focus on that has proven very beneficial for the performance of the fund.
Coupled with having the right investment approach, the team has done a tremendous job in managing the assets over the period. That asset management capability, coupled with our investment approach, bodes very well for ECF going forward. All goes well for growing income and growing capital value. Against that background, we look forward to taking questions at this juncture.
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 are 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.
Good afternoon, everybody. My first question is just in regards to your guidance. In 1H 2022, FFO was AUD 5.5 per share. That implies the second half will be lower than the first half. Can you explain, I guess, why you're expecting a lower second half?
Yes, Leanne, we can. The AUD 5.5 is a weighted average FFO per security in respect of the half. You'll recall that Cavill Avenue was acquired towards the end of August when additional securities were issued in the fund. That weighted average is obviously increasing that amount in the first half. It does have some impact in the second half, but a more muted impact. We'd also say the guidance remains the guidance, however, the fund continues to perform ahead of expectations.
Okay. I guess just on that, I mean, Cannon Hill, you mentioned that a heads of agreements has been signed. I assume that you don't have that in your guidance, that assumption that will end up being executed.
That's correct, Leanne. If you recall, we didn't have any let up for that vacancy for this financial year. I'd assume that that's the right way to approach it.
Assuming that does get executed, when do you expect to receive income from that asset?
Next financial year.
Next financial year? Yeah. Just a last question from me. Looks like Limestone Center, the vacancy down a bit there. How are you seeing the market there? And also, it's interesting that even though the vacancy's up, your valuation on the asset is also up.
Yeah.
Can you just go through that asset?
Leanne. Leanne, it's Liz here. I can speak to the leasing at Limestone. We have two government tenants who we are speaking to and are very much engaged on Limestone. One of those would take up all of the vacancy, and the other one would take a substantial part of that. We've seen a lot of positive headway in terms of leasing in the Ipswich market over the last month, I would say.
Yeah. Just to add to that, Leanne, I think you've heard us talk about that asset previously where we have sticky tenants and a very long term, strong cash on cash yield out of that asset. The only reason for a bit more vacancy was one particular tenant, tenancy, and they have merged four of their offices into one. Otherwise, we're very confident about the ongoing potential with the cash flows coming from that asset together with the inquiry that Liz just talked about. In terms of the valuation, you're right. It has gone up a little bit. All of our assets for this period have been externally revalued. A number of valuers were rotated off, the new valuers rotated on. It's a different view of safety in terms of discount rate, cap rates and market rents for that asset.
Yeah. Sorry, and just one more question around the guidance. I mean, Nexus Centre, you ended up renewing Coles, I mean, for a smaller space. What had you assumed in terms of guidance for that asset? Were you assuming some, I guess, vacancy for a period of time?
No. Our assumptions were that we did renew Coles over a portion of their space.
Okay. Yeah. Thanks. That's it from me.
No problems there. Thank you.
Your next question comes from Ed Day from MA Financial. Please go ahead.
Good afternoon, team. Dave, I'm just keen to get your view on the valuations. I know you just said that they were all externally valued during the period, but somewhere like Cannon Hill where you've got the head-
The agreement was executed post period end. Whereas the valuation was obviously done leading into year-end. I think I've mentioned before that there has been comparable sales in this immediate location in the 5% top range. We do, you know, think there's a potential for upside. We'll get it externally valued for next period.
Are there any other assets in the portfolio? I mean, Ipswich is probably one, right, if you get some deals done there, where you think there's still yeah, a bit of cap rate compression to come through?
Yeah. Look, I think that slide which we talk about, you know, average rent, average cap rate, it is all very attractive metrics. We think there's upside. I'd point to the fact where the average rent is what gets us excited about what we can drive and where we can create value, as much as the cap rate compression. A couple to point out, Garema Court, for instance, where there's transactions that are trading in the 4.5% type range in that market for good quality, medium to long term leases. We have a great opportunity in Garema, given the quality of that asset, of resetting the existing tenancy or re-leasing, and repositioning that asset.
There's a great opportunity for value creation on that asset, and that will come from both rents and cap rate compression. Importantly, where we've created value so far in the portfolio, if you notice, it's all come from assets where we have invested capital and have successful leasing that has resulted in cap rate compression. It's activities that we have done to create the value upside and there's various opportunities within the portfolio. I hope that answers your question.
Dave.
Yep.
Yeah. Thanks, David. That's great. That's all from me.
Your next question comes from Aiden Bradley from Shaw and Partners. Please go ahead.
Afternoon, all. Just a couple of quick ones. Just confirming, Cavill Avenue settled 31st August, so the rental income is three months as reported, so September, October, November. Four months. Sorry. Is that correct?
Yeah.
Yep.
That's correct.
Yeah. Great. Just over here in the west, obviously we're really opening up to the world again. WorkZone West, any comments, updates on where CIMIC are at, the sublessees just on that asset and any updates from the last time we spoke?
Yeah. Look, we've had some engagement with some of the sublessees. If you recall, there's around 75%-20% of that asset is sublet to about five different tenancies, all of very high caliber that we would welcome into our portfolio. As we get close to that lease expiry, there will be more negotiations where we can take over those leases and extend. Obviously, that's commercial discussions with the head lessee. One thing, the investment thesis on that particular asset when we acquired it a few years back, was around the pricing of the market rent that we priced the asset at, which is significantly below economic rents.
The thesis is working in the fact that the market rents is gradually improving and moving upwards, albeit still well below economic rents. For example, the market rent on that asset is around AUD 430 a sq m. Economic rents to replace this type of building is around AUD 600 a sq m. While we're in that great position with this quality asset, we can only see further upside on those market rents, which will create value. It's a fine line about what point do we start negotiating with those sublessees.
Great. Thanks.
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 Mark Skoczek from Kinetic Investment Partners. Please go ahead.
Good day, all. Good result. Well done. I have just a couple of questions. This one may be for Liz or David, I'm not sure. You both mentioned ESG several times in your call, in your spiel. Do you think we're actually at a period in time now where prospective tenants are now openly asking about ESG credentials on buildings they're looking to lease, please?
Great question, Mark. The ESG is at the forefront of tenants now. We are actively speaking to our tenants, and it is very much front of their agenda about what we are doing as owners and how we can help them with their tenancies and their businesses on their ESG credentials. In our view, it's only going to get greater and greater, and the gap between assets that have strong ESG credentials and that don't will widen.
So it's become more prevalent. Some of our international tenants have requirements that they need to report back to their global board about what they are doing on the ground with regards to ESG. As you rightly picked up, it is an acute focus for us. We're really pleased with what we've achieved at WorkZone West, and we have a roadmap for the rest of the portfolio. Liz, has anything to add?
No. Just to reiterate what David was saying, we're actually surprised at, you know, it is so important not just to the occupiers, investors, landlords alike. It's something that in tenant meetings, it once would never have been raised, but now it regularly is. It's really looking to the landlord as to how we can support them in their ESG reporting as well.
Just as a follow-up, if you don't mind, both of you or either of you, if an existing tenant is actually asking, like the example David had of an international, you know, tenant, whatever, if you have to spend some money on the property, does that give you more pricing power to increase the rent? Out of interest, how does that actually work?
Yeah. There's actually some great research that's come out around that, and it's more prevalent in overseas markets in Europe and the U.S. where
Yeah.
Those assets with strong ESG credentials versus those that don't in terms of rent levels and in terms of total returns are quite a large difference and getting wider. You know, the investment and some of the initiatives you're doing on the environmental side, some of them don't cost a lot of money around monitoring or, you know, issues.
One of the other areas is solar, like the rolling out of solar, which we are about to commence across the commercial portfolio. You get immediate electricity savings by having solar. A number of our buildings are growth assets, so therefore, that translates to an uplift in income as well, particularly in a growth asset.
Okay, that's great. Just to squeeze another question in this, Glenn, seeing you've actually reported all your companies at the moment, obviously we're in an inflationary environment. Every company we speak to is talking about it. I'd just be interested to hear your thoughts on what you think, you know, being in an inflationary environment with obviously interest rate upside risk means to your assets and/or your sector, please.
I'll make some comments there. As I said on the call earlier today in regards to, we've been planning. We've been, I guess, forecasting for interest rates to bias upwards for some time. You know, the fundamental behind how we look at good interest rates hedging in place for it, so it's protected for us. Having said that, if we were to make a judgment, we continue to believe that rates will bias upwards, but probably not substantially. You know, all in all, as we invest, we always invest with a view to hedging our interest rate risk because, as I said, it's not. It's, you know, an investment in a real estate shouldn't be an interest rate risk play.
In terms of, you know, cap rates, where cap rates will go, you know, I guess vis-a-vis inflation and therefore interest rates, yeah, the gap between or the margin between cap rates, real asset cap rates and interest rates are still at historical highs. You know, our view is that interest rates can bias upwards, but cap rates not so. If you add to that, I guess the weight of capital looking to invest, particularly looking to invest in great assets like this fund has, you know, we feel positive about the cap rate performance in a macro sense, going forward.
Good. Yeah, that's good. All right.
Mark, maybe I could just add to that for one moment in relation to the office sector and our portfolio specifically. In terms of the office sector, there's still a lot of unmet demand from investors that want exposure to our key markets in Australia that haven't got set. Even of late, there was a multi-billion-dollar fund that's been raised with Sydney CBD office being the primary number one investment choice for that fund, and they haven't invested in Australia yet. There's still a whole depth of capital, despite the upward bias in interest rates, that want to get fed in Australian commercial office. What gives me comfort in this portfolio is that rental price point I talked about before, where we are, in many instances, well below economic rent for many of our assets.
With this inflationary environment and what you heard about building costs, et cetera, it makes it harder to get new supply to the ground. If it does, it's going to be at a higher economic rent than what it was previously. That all bodes well for this type of portfolio. We've got good quality assets that meet the demands of the local market and attractive rental price point. The rents should, and we believe, certainly believe they will, continue to rise.
Just your gut feel on how below you are, so how much lower than economic rent? Any gut feel on that?
It varies a lot on asset by asset. I haven't done a portfolio average, but as I said on the call, the WorkZone West is a good example where it's around AUD 170 sq m below the economic rent. That's been probably looking at best possible light without factoring in elevated building costs for that AUD 600 sq m economic rent I mentioned for to replace WorkZone. Things like 50 Cavill is AUD 50 million below replacement cost is what we acquired that building at.
Yeah. Right. Okay.
Serene McCord is another one. Economic rents there are now AUD 600 sq m. We're at AUD 475.
Yeah.
There's a number of examples like that across our portfolio.
Okay, that's good. All right. Thanks, guys. Thanks very much.
There are no further questions at this time. I'll now hand back to Mr. Willis for closing remarks.
Thank you very much, and thank you all for joining this call today. We do appreciate your interest in and support of the Elanor Commercial Property Fund. We look forward to providing further updates on the progress of the fund over the course of this half. Thank you very much.