ALE Property Group (ASX:LEP) FY19 results


by Jessica Amir

ALE Property Group Limited (ASX:LEP) Managing Director, Andrew Wilkinson discusses the company’s FY19 results, valuations and rent reviews

Jessica Amir:
Thanks for your company. My name is Jessica Amir for the Finance News Network. And with me today from ALE Property Group (ASX:LEP) is CEO and managing director Andrew Wilkinson. Andrew, thank you so much for coming in.

Andrew Wilkinson: I'm pleased to be back.

Jessica Amir: For those who are unfamiliar, you are Australia's largest owner of freehold pubs here in Australia. You're also a real estate investment trust (REIT) technically. Just give us an introduction.

Andrew Wilkinson: ALE was first listed back in 2003, nearly 16 years ago. We own 86 pub properties all around Australia, mostly on the eastern seaboard of Australia, Sydney, Melbourne, Brisbane. All of the properties are leased to ALH. ALH is the largest pub operator in Australia. There's 75 per cent owned by Woolworths, 25 per cent by the Bruce Mathieson group.

 They turn over around $4.5 billion a year in a profit before rent of more than 800 million. A very credible organisation in its own right. In terms of the properties we own, where will I start? Over in Perth, the Sail and Anchor in Fremantle. In Melbourne, the Young & Jackson, right opposite Flinders Street station. In Sydney, the Crows Nest Hotel. And up in Brisbane, the Breakfast Creek Hotel. So, a well established and very credible property portfolio.

Jessica Amir: Earlier you touched on profit. You've also just handed down your numbers for the full financial year, so all in entirety. Can you give us a snapshot and some of the highlights?

Andrew Wilkinson: A distributable profit of $28 million in line with expectations. The distribution was up half a percent, 81 per cent tax deferred. The value of the properties up around 2 per cent to over $1.1 billion, and our gearing at an all-time low of 41 and a half percent. The total return for our equity investors since 2003 to 30 June this year was around 20 per cent. And that's outperformed not just the property index or the REIT index, but also the All Ordinaries Index

Jessica Amir: And what drove the results? And congratulations as well.

Andrew Wilkinson: The result was driven by an increase in the rent on around half the portfolio. That flowed through to the valuations, and the value is very focused on the fact that the pub property market continues to be very strong, and we grow closer to the 2028 open reviews.

Jessica Amir: And you're in the midst of a pub portfolio review. Looking at your rents as well, just tell us how that's going, and what it also means for shareholders as well.

Andrew Wilkinson: For the 79 properties that ALE owns, we have actually 86 but 79 subject to review. Of those, 36 ALH has agreed to a 10 per cent increase. For the remainder, another 43, we are proceeding through a determination process. By the end of this year, we expect those determinations to be handed down ,and we'll announce those results to the market.

Jessica Amir: What's the margin now with long term rates and portfolio yields?

Andrew Wilkinson: As you'll see from the chart, and it's quite an interesting chart, across the top of the chart, there's a line which shows what's happened to our yields over the last 10 plus years. And they've fallen by around 1 per cent. Over the same period, 10 year government bond rates here in Australia have fallen by more than 5 per cent, to at 30 June, just around 1.3 per cent. But since 30 June, they've fallen to below 1 per cent. It's quite extraordinary really. For ALE's investors, lower interest rates are a positive. Why? Because lower interest rates in time translate into higher property valuations. Let's wait and see as they come through. But it is a very positive tailwind for the portfolio.

Jessica Amir: And Andrew, for those who are not familiar, Woolworths (ASX:WOW) has just recently announced that they're spinning off their Endeavour Drinks business, which includes drinks and pubs, some of which are owned by the ALH investment group. Just tell us what this means for ALE (ASX:LEP).

Andrew Wilkinson: There'll be two steps to the process. The first is a merger, and that is a merger of the ALH pubs with the Woolworths Drinks business, Endeavour Drinks. Together, there'll be named Endeavour Group. That'll take the ALH turnover from around $4.8 billion to the Endeavour group at around $10 billion and similar doubling of the profit line.
 The second step is once that merge groups been voted on towards the end of this year, sometime during next calendar year, there'll be a separation of that Endeavour Group from Woolworths (ASX:WOW). And there's a number of forms that can take, but we're particularly encouraged that the aim is for an investment grade rating to be achieved for that Endeavour Group.

Jessica Amir: All this is boding extremely well for you and for your group rather. What does this mean for your outlook?

Andrew Wilkinson: For financial year 20, a number of things will dominate the first half, and that is the handing down the rent determinations. We will also be preparing for in the early stages of a refinancing of around half of ALE's debt. $225 million comes up for maturity in August 2020. And currently that has a coupon of around 5 per cent. We expect to refinance that if current rates prevail with a coupon of under 3 per cent. Over and above that, we'll be monitoring each of the steps of the Endeavour Group, merger and then de-merger as they occur.

Jessica Amir: And just lastly Andrew, before we let you go, sadly you've announced that you'll be leaving the group. Tell us about the succession plans and where you're headed.

Andrew Wilkinson: Well, it's been 16 very enjoyable years working with ALE (ASX:LEP). I've decided after that many years of loyalty to go out and look for another executive challenge. Importantly it's not right now. I'll be completing some important projects like the rent determination and working with the board to ensure that the new CEO transition goes very smoothly indeed.

What I would say to the new CEO is he has a fantastic property portfolio to work with, a very capable board, and a very experienced management team. But for me, not right now, but sometime soon, I'll be moving onto that new challenge, and I'm very excited.

Jessica Amir: Congratulations on your results, and thank you very much for your time, Andrew Wilkinson.

Andrew Wilkinson: Thank you, Jess.


Jessica Amir

Finance News Network
Jessica joined FNN in January 2017 after having worked in financial advising for seven years and in TV journalism for seven years, specialising in finance, equities and analysis. She has interviewed former Prime Ministers of Australia, Tony Abbott, Julia Gillard and Kevin Rudd and ex Treasurer Jo Hockey. Jessica has worked as a journalist with Sky News Business, ABC 1, ABC's The Business, ABC24 and has also been a regional Channel 7 and 9 TV reporter with Prime7 and Win News.