ALE Property : Results for Year Ended 30 June 2017 Opens in a new Window

ASX ANNOUNCEMENT

Announcement No. 11/17 The Manager

Australian Securities Exchange

8 August 2017

ALE Increases Distributions to Securityholders

ALE Property Group (ASX: LEP), the owner of Australia's largest portfolio of freehold pub properties, increased distributions by 2.00% for the year to 30 June 2017 and forecasts an increase in FY18 distributions.

Highlights

• Distributable profit of $29.1 million

• Net profit after tax of $130.0 million includes increments to investment property and derivative values

• Full year distribution of 20.40 cents per security

  • increase of 2.00% on previous year

  • 100% tax deferred

  • funded from current year distributable profits and capital (cash reserves)

• Weighted average capitalisation rate reduced from 5.53% to 5.14%

• Directors' valuation of 86 properties increased by 9.10% to $1,080.2 million

• Capital position remains strong

  • debt maturity dates diversified across next 6.4 years

  • all up cash interest rate currently fixed at 4.26% p.a.

  • base interest rates hedged for next 8.4 years on 100% of debt

  • gearing of 42.7% provides significant debt covenant headroom

• Distribution guidance restores gearing to target range in medium term

  • aim to increase annual distributions by at least CPI

  • expect FY18 distribution to be 100% tax deferred

  • consideration will be given to enhanced distribution profile or other capital management initiatives to achieve target range following completion of 2018 market rent review

• 2003 investment of $1.00 in ALE has a current accumulated value of $14.72 or an annual total return of 21.8% p.a.

  Results for Year Ending 30 June 2017

  A summary of the results is provided in the table below:

  Millions	June 17	June 16	Change
  Revenue from Properties	$57.0	$56.2	$0.8
  Other revenue	$1.3	$1.1	$0.2
  Borrowing expense	($21.8)	($20.7)	($1.1)
  Management expense	($5.2)	($4.9)	($0.3)
  Land tax expense	($2.2)	($2.1)	($0.1)
  1 Distributable Profit	$29.1	$29.6	($0.5)
  Distributable Profit (cps)	14.87c	15.11c	(0.24c)
  Distribution (cps)	20.40c	20.00c	0.40c

  The difference between the distribution and distributable profit for the period was paid from capital and existing cash reserves. Distributable profit excludes non-cash accounting items.

  Distributable Profit

  A number of factors contributed to a distributable profit of $29.1 million for the year to 30 June 2017.

  Property income increased due to the annual CPI based rental escalations. Borrowing expenses increased due to an increase in borrowings and some non- recurring items relating to the refinancing completed in March 2017. Management expenses were higher but ALE's management expense ratio remains one of the lowest in the AREIT sector.

  The distribution of 20.40 cents per security will be 100% tax deferred.

  Accounting Result

  ALE's reported net profit after tax (NPAT) of $130.0 million for the year to 30 June 2017 includes non-cash adjustments for the increments to the value of the properties and interest rate derivatives. The NPAT also includes other non-cash items including amortisation of pre-paid financing costs and CIB accumulating indexation. A full reconciliation of accounting profit to distributable profit has been provided in the Directors' Report.1

  Statutory Property Valuations

  During FY17 property revenue from ALE's 86 properties grew by 1.5% on the previous corresponding period (pcp) to $57.0 million. This increase in property revenue was driven by the annual CPI rent increases across the portfolio.

  The statutory valuations of ALE's properties increased by 9.1% to $1,080.2 million at 30 June 2017. This was based upon independent valuations of a representative sample of 33 of ALE's properties conducted by CBRE and Herron Todd White. Consistent with the increase in valuations, ALE's weighted average capitalisation rate reduced from 5.53% to 5.14%.

  Directors' valuations of the remaining 53 properties (also independently valued over the previous two years) are supported by advice from the valuers that it is reasonable to apply the same percentage movement in the weighted average capitalisation rates, on a like-for-like basis, that they determined would apply to the 33 properties they valued at June 2017.

  The property valuations were also positively impacted by the annual CPI based increases in rent. The land tax expense for the Queensland portfolio was substantially unchanged.

  The valuers applied both traditional capitalisation rate and discounted cash flow (DCF) methods in determining the valuations.

  In applying the DCF method to the representative sample of 33 properties, the valuers made an independent assessment of the tenant's current level of EBITDAR and also adopted industry standard market rental ratios. The valuers also used a range of assumptions they deemed appropriate for each of the properties. The weighted averages of these assumptions were as follows:

• Tenant's EBITDAR Growth Rate: 1.0% p.a.

• 2028 Terminal Capitalisation Rate: 6.9%

• 11 Year Discount Rate: 7.3% p.a.

ALE noted in particular that the valuers' assumed EBITDAR growth rate of 1.0% represents a declining EBITDAR in real terms, which is significantly lower than the rates that have been historically achieved by the tenant. It was also noted that ALE's average capitalisation rates during each of the last 10 years have been materially lower than the terminal capitalisation rate of 6.9% assumed by the valuers.

Based upon the above assessments and assumptions made for the 33 properties, the valuers' DCF valuations were equivalent to a weighted average capitalisation rate of 4.48%. This compares to a rate of 5.14% which was derived using a combination of the DCF and capitalisation rate methods.

The statutory valuation results reflect the combination of these methods but, as indicated below, continue to place significant emphasis upon the capitalisation rate method:

Cap Rate Method

Cap Rate Adopted

Cap Rate on DCF Method

5.44% 5.14% 4.48%

Over past ten years ALE's capitalisation rates have reduced by around 1.0%. This is relatively modest when compared to a 3.6% reduction in long term Australian government bond rates over the same period.

The chart below shows that, while the spread remains high, movements in ALE's average capitalisation rates are currently being driven by factors beyond movements in bond rates:

ALE's capitalisation rates

6.07% 6.20% 6.45% 6.60% 6.44% 6.57% 6.59% 6.42% 5.99%

6.26% 6.45%

5.52%

5.10%5.21%

5.53% 5.14%

Australian 10 year bond rates

3.04%

3.76% 3.54%

3.01%

2.00%

2.66%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Rents are expected to take a small step increase towards market levels at November 2018 as the market rent reviews for each property are capped and collared within 10% of the 2017 rent. Rents are expected to take a much larger step increase at 2028 as the rent for each property is able to fully revert to market levels. Individual hotels' outlook, their EBITDAR results in the years leading up to reviews and market rent parameters will be important to market rent review outcomes.