ALE’s PROPERTIES

The statutory valuations of ALE’s 86 properties were formally upgraded to $900.5 million at 30 June 2015, an increase of $78.8 million over the year. This is based upon independent valuations of 38 properties by CBRE. ALE’s weighted average capitalisation rate reduced from 6.42% to 5.99%.

The valuations excluded any portfolio premium or discount. Additionally, CBRE indicated that an investor’s view of market rent prospects and value may be positively influenced by full disclosure of the tenant’s operating profitability at each of the properties.

The property valuations were also positively impacted by the annual CPI based increase in rent. The land tax expense for the Queensland portfolio was largely unchanged due to a range of successful objections by ALE.

Following discussions, ALE and ALH agreed to restructure $1.1 million of rent (representing 2.0% of current net rent) over a limited number of properties. ALE’s current net passing rent of $53.98 million will remain unchanged. At eight properties the combined annual rent will reduce by a total of $1.1 million, improving those properties’ profitability. At five other properties the combined annual rent will increase by the same amount. CBRE has advised that the overall impact of the rent restructure was positive to ALE’s statutory valuations.

The rent restructure increases the probability of improved future market rent review outcomes for ALE. ALE considers that for the five properties where the rent has increased, they will continue to be significantly under rented and continue to be likely to gain the full 10% benefit of the 2018 market rent review.

Over and above the existing portfolio, ALE continued to evaluate a wide range of both small and large scale investment opportunities with the appropriate level of discipline required in the current market.

CAPITALISATION RATES AND BOND RATES

Over the past 10 years long term bond rates have fallen by around 280 basis points, compared to a fall of around 60 basis points in ALE’s capitalisation rates. While it is generally accepted that the two markets will rarely be closely correlated, it is noteworthy that the difference in rate movements is highly material.

ALE considers that the current lower levels of long term bond rates will act as a positive influence on the stability of ALE’s capitalisation rates in future years.

FURTHER DEVELOPMENT

ALE continues to work constructively with ALH towards agreeing a range of developments that are potentially value enhancing for the properties. One example is the Crows Nest Hotel in Sydney’s lower North Shore, which is currently undergoing a significant refurbishment with ALH funding the works. Over the past 12 years ALH has funded and constructed at least 30,000 square metres of additional improvements on ALE’s properties.

CAPITAL MANAGEMENT

The refinancing completed in June 2014 reduced ALE’s annual interest expense by around $7.0 million, substantially offsetting the benefits previously accruing from the counter hedges that fully amortised in FY14. Accordingly, for FY16 and FY17 the normalised interest expense on the current borrowings is expected to be fixed at $21.0 million.

During FY15 the Board and management continued to explore a range of debt funding solutions in both the domestic and offshore capital markets with a view to positioning ALE for debt refinancings and implementation of any additional debt funded acquisitions. This included meetings with major equity and debt capital market investors throughout Asia and New Zealand. Meetings were also held with major US Private Placement investors who visited Australia during the year.

ALE‘s debt capital structure is now characterised by the following positive features:

• a simplified debt structure with just two types of fixed rate bonds;
• maturity dates are diversified over the next eight years;
• low base interest rates and simplified hedging arrangements for 7.8 years; and
• a total interest rate of 4.35% p.a. that is fixed until the next refinancing in FY18.

RETURNS TO SECURITYHOLDERS

The value of ALE securityholders’ $1.00 investment at the time of ALE’s listing nearly 12 years ago, with reinvested distributions, grew to $10.58 by 30 June 2015. This has delivered a total securityholder return of 22.5% p.a. over that period.

A total securityholder return of 33.4% p.a. was delivered for the 12 months ending 30 June 2015.

DISTRIBUTION PAYMENT

The June half year distribution of 8.45 cents per stapled security will be paid on 7 September 2015 to stapled securityholders. The FY15 distributions will be 100% tax deferred.

FY16 OUTLOOK

ALE continues to anticipate a positive outlook for future market rent increases based on the significant under renting currently inherent in the portfolio. As the market was advised in November 2013, a portfolio value analysis that includes the 2028 open market rent reviews provides a range of value outcomes that may exceed the statutory valuations. This is expected to be progressively reflected in the statutory valuations as we draw closer to the 2028 review date.

In a market where low interest rates and strong equity prices prevail, ALE will continue to assess potential acquisitions that align with our disciplined capital management strategy and meet our previously announced investment criteria.

OVERALL

ALE’s highlights for FY15 included guidance being exceeded for both the quantum and tax deferred component of distributions. Additionally ALE’s property portfolio saw a significant increase in statutory valuations to more than $900 million.

The year was marked by ALE enjoying the full benefits of prior year capital management initiatives. Falling interest rates and an increased availability of debt funding pushed property market valuations to levels that strongly favoured vendors.

Today, ALE remains well positioned to withstand any future property and capital markets volatility with strong leases, profitable and well located properties and a secure financial position. Accordingly ALE remains confident of its ability to continue to deliver dependable and growing distributions to its securityholders.

ALE’s PROPERTIES

Following an independent assessment, ALE’s 86 properties were valued at $900.5 million at 30 June 2015. This represents an increase of $78.8 million or 9.6% over the year.

The result was driven by a reduction in the average capitalisation rate from 6.42% to 5.99%. Other factors included the annual CPI increase in rental income, a small increase in Queensland land tax and a rent restructure for a small number of ALE’s properties.

CAPITAL STRUCTURE

As a result of the $78.8 million increase in property valuations ALE’s net gearing fell from 51.7% to 48.0% and net assets per security increased by 17.6% to $2.27.

Annual interest expense has been reduced by around $7 million following the completion of the major refinancing in May 2014. This largely replaced the benefits previously arising from the now expired counter hedge arrangements.

ALE’s market capitalisation increased by more than 27% or $155 million to $722 million during the year.

Today ALE continues to enjoy a low risk capital structure characterised by debt maturities spread between FY18 and FY24, long term interest rate hedging and an all up interest rate of 4.35% until the first maturity date in August 2017.

ALE’s average debt term remains long at 5.5 years and the average hedging term on 100% of the net debt also remains long at 7.8 years.

GOVERNANCE

The process of Board renewal that has been outlined in previous announcements continues. John Henderson retired after the 2014 Annual General Meeting following Paul Say’s appointment in September 2014. Nancy Milne joined the Board in February 2015 as Helen Wright has advised that she intends to retire following the 2015 Annual General Meeting. There will be further changes over coming years as the renewal process continues.

LOOKING FORWARD

The outlook for both the 2018 and 2028 rent reviews remains positive given the increase in ALH’s operating profitability across a large number of ALE’s properties.

The Board has previously advised that it was considering various capital management options to maintain appropriate levels of gearing for ALE in the years up to and beyond the 2018 market rent review. As at 30 June 2015 gearing was 48.0%.

Following consultation with larger and smaller securityholders, the Board has decided to restore gearing to the target range of 50-55% by:

• Increasing the current distribution guidance for FY16 to at least 20.00 cps;
• Continuing to grow subsequent annual distributions by CPI; and
• Making a single capital return payment following the conclusion of the 2018 market rent review.

It is anticipated that further distribution guidance will be provided by the Board at the Annual General Meeting later this year.

All the above guidance assumes the existing property holdings, hedging and capital structure remains unchanged.

We again thank ALE’s securityholders for their continuing support during the past financial year.