Transcription of Finance News Network Interview with ALE Property Group Managing Director, Andrew Wilkinson
John Treadgold: ALE Property Group is Australia’s largest listed freehold owner of pubs with some 86 establishments all over the country. I’m John Treadgold and joining me today at the ASX Investor Series is the Company’s Managing Director, Andrew Wilkinson. Andrew welcome to FNN.
Andrew Wilkinson: It’s my pleasure and I’m pleased to be here.
John Treadgold: Your interim distributable profit was $14.4 million. What drove the growth?
Andrew Wilkinson: The first point to be made is the $14.4 million hit the market’s expectation and all the guidance we provided. The moving parts are very few, we receive rent. That rent increased by about CPI (consumer price index); the other major part is interest expense. We saved significantly off the back of a refinancing that we completed in May 2014, some $7 million per annum in interest cost reduction, so off the back of that refinancing. We’ve now got a very secure position and that delivered that $14.4 million to our 5,000 security holders, on a 100 per cent tax deferred basis.
John Treadgold: The key revenue source for ALE is rent from the leasing of pubs. Can you help our viewers understand the Company structure a little better?
Andrew Wilkinson: As you introduced, we own 86 pub properties all round Australia. If you go back to 2003, Fosters owned a very large pub property portfolio and pub operating business. They were spun into two different IPOs (initial public offerings), the properties into ALE and the operations into ALH (Australian Leisure & Hospitality Group Limited). ALH was subsequently taken over by Woolworths Limited (ASX:WOW), it is 75 per cent owned by Woolworths today.
So in essence there was a long term lease established between the two organisations, such that we ALE receive rent monthly. It increases annually by CPI, it’s very straight forward and in the future there are market rent reviews in three years’ time, where it can increase or decrease by 10 per cent. And in thirteen years’ time 2028, it can increase or decrease by an unlimited amount.
John Treadgold: The Australian property sector is a bright spot in the business landscape. How has the pub sector specifically performed?
Andrew Wilkinson: Perhaps if I go back to 2007 just before the Global Financial Crisis, our cap rates were in the mid-sixes or our yields and through the GFC; they were pretty much unchanged through that time of extraordinary volatility. If you look to other sectors like office, retail and industrial they all spiked up in response to that volatility. But we with the long term leases to a very secure tenant were very stable all through that period.
So when I look at the property valuation space for pubs today, in our part of the investment grade pub space, it is still very stable off the back of the very stable cash flows we had. If you look to other types of pubs, they’ve improved in value. Again the non-investment grade pubs increased in cap rate or reduced in value during the GFC, but they’ve now started to recover. The overall story for ALE or investment grade pubs is stability through all cycles of the economic cycle.
John Treadgold: Looking at gearing. What sort of levels are you at and what do you see as the optimum level?
Andrew Wilkinson: ALE is gearing to around 50 per cent. Now that’s higher than other property trusts, no question. But it has regard to the very long term secure income streams that we have, and the high quality properties we have throughout Australia. Our pubs have been operating for more than 60 years in their current locations, and many of them are icon hotels. So we’re at 50 per cent, we’re probably at the lower end of our range at 50-55 per cent and we feel very comfortable about that. Particularly off the back of a refinancing we’ve just done, which sees our funding term at around six years today. And we’ve got our base interest rates on all of our debt hedged for the next eight years. So our overall capital structure is now very sound indeed, long term hedged and low cost.
John Treadgold: You talked about the value of stability in the organisation. Do you see that continuing into the future?
Andrew Wilkinson: The essence of the ALE model is that we receive 12 rent payments a year, paid to interest payments and paid to dividends. That’s the essence of the model. And our challenge is to keep that very simple and secure model in the space it’s in today, and that requires discipline. With interest rates falling to the levels they are, we are starting to witness others overpaying for assets. But ALE’s trade mark has been its discipline and its focus on absolute quality and security. That’s where our future will go and we believe that will be the best way to protect our security holders’ position.
John Treadgold: For investors interested in the Company, what should they focus on for the next 12 months?
Andrew Wilkinson: The current positon to ALE is the distributable profit forecast we’ve given, the distribution forecast we’ve given, yields around five per cent on the current security price. That’s around 100 per cent tax deferred and that’s very attractive for individual investors. But over the last 11 years, we’ve turned $1 including reinvested distributions into more than $10, or a 22 per cent return per annum each year compounded over that 11 year period.So that’s seen us outperform many other property trusts in the sector. The challenge for us will be to continue that performance. And we’ll be doing everything we can as a management team and Board to ensure that outcome is repeated year after year.
John Treadgold: Andrew, thank you for joining us on FNN.
Andrew Wilkinson: Thank you, I appreciate the opportunity.
