The 2019 year was dominated by intensive preparation of our submissions for the November 2018 rent reviews. This is obviously an important step in confirming the interpretation of our leases and gaining increased transparency over the likely future rental streams of ALE’s hotels.

We look forward to finalising this process and setting our path toward the open market rent reviews in November 2028.

ALE once again delivered positive results for all key financial metrics.

Distributions increased to 20.90 cents per security, 81.32% tax deferred. This represents a 0.5% increase on the prior year.

The property valuations increased during the year to around $1,163 million and gearing reduced to a historic low of 41.5%.

While the total return to securityholders over the past year underperformed other indexes, the average return over the past 16 years since ALE’s listing has been around 20% p.a.

During the 2019 financial year, ALE’s first major rent review commenced on 79 of ALE’s 86 investment properties.

ALH accepted a 10% increase for 36 properties while the rent for the remaining 43 properties may increase or decrease by up to 10% following determinations by independent valuers. The determinations are currently expected later this calendar year.

ALE remains confident of a positive result but notes it may not receive a full 10% rent increase for all 43 properties. The rent determination results will be back dated to 4 November 2018.

On 3 July 2019, Woolworths Group, ALH’s majority shareholder, announced that it had entered into an agreement to merge the Endeavour Drinks division with ALH. Woolworths has announced that shareholder approvals for the merger are expected in late CY19 and the merged entity is to be named Endeavour Group. This will create Australia’s largest drinks and hospitality business with sales of approximately $10 billion and earnings of $1 billion. While ALH currently operates around 550 retail liquor outlets, following the merger this will expand to more than 1,500 outlets.

Following the merger and as a second step, during CY20 it aims to separate Endeavour Group from Woolworths by demerger or value accretive alternative. In the event of a demerger, the Group’s capital structure is targeting an investment grade rating.

ALE will continue to monitor any developments in relation to the future control and ownership of ALH.

After nearly 16 years in the role I recently advised ALE’s Board that I will look to pursue new executive challenges outside ALE. I intend to remain fully committed to my role until the 2018 rent determinations are completed, a new CEO is appointed and an effective transition is completed. The new CEO should look forward to working with a high quality property portfolio and a very capable Board and executive team.

First, I wish to thank Andrew for his significant and consistent contribution to the Group since 2003. I note that during his tenure Andrew has overseen a growth in ALE’s market capitalisation from $91 million to more than $1.0 billion delivering a total return of around 20% per annum. On behalf of the Board I wish to thank Andrew for his contribution to the Group.

We will work with Andrew to confirm the optimal timing of his departure and to ensure a smooth and orderly transition process to a new CEO, to lead ALE in its next phase of growth. ALE will commence a CEO search process in August 2019.

Robert Mactier
Non-Executive Chairman

Andrew Wilkinson
Managing Director

Results for Year Ending 30 June 2019

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

The difference between the distribution and distributable profit for the period was paid out of capital and funded from existing cash reserves. Distributable profit excludes the non-cash accounting items including changes to investment property and derivative values.

Distributable profit

A number of factors contributed to a distributable profit of $28.3 million for the year to 30 June 2019:

• Property income increased by 3.7% to $60.2 million due to rent increases of 10% for 36 of the properties from November 2018, and CPI or fixed rent increases for seven properties, that are not subject to the 2018 rent review process;
• Borrowing expenses remained largely unchanged;
• Management expenses were higher due to $3.1 million of additional costs of preparing rent review submissions for determination; and
• Land tax expenses increased based on increased land value assessments and the higher rates now applicable in Queensland.

The distribution of 20.90 cents per security will be 81.32% tax deferred.

Accounting profit result

ALE’s reported net profit after tax (NPAT) of $26.6 million for the year to 30 June 2019 includes non-cash changes 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

The statutory valuations of ALE’s properties increased by 2.4% to $1,163.2 million at 30 June 2019 based on independent valuations of a representative sample of 34 of ALE’s properties conducted by CBRE and Savills. Consistent with the increase in rents and stable market yields for pub properties, ALE’s weighted average adopted yield increased from 4.98% to 5.09%. The portfolio’s passing gross rent (or annualised gross rent as at 30 June 2019) increased 4.28% during the year to $61.04 million.

For further details please refer to the ASX Announcement made by ALE on 15 July 2019.

Capital Management

ALE’s debt capital structure was characterised by the following positive features at June 2019:

• Investment grade credit rating of Baa2 (stable)
• Next debt maturity in August 2020
• Debt maturities diversified over the next 4.4 years
• 100% of forecast net debt hedged over the next 6.4 years
• All up cash interest rate of 4.26% fixed until August 2020
• Gearing at historical low of 41.5% (41.6% at June 2018)²
• Interest cover ratio at 2.5 times (2.6 times at June 2018)

ALE’s debt facilities include a number of market standard covenants. ALE currently enjoys significant headroom to all of them. The total value of ALE’s properties would need to fall in value by 32% (around $370 million) before meeting the nearest gearing covenant.

ALE has two types of fixed rate debt instruments: Capital Indexed Bonds (CIB) and Australian Medium Term Notes (AMTN) with diversified maturities.

2018 Rent Review

During the 2019 financial year, ALE’s first major rent review commenced on 79 of ALE’s 86 investment properties. Of the remaining seven properties, four properties have later review dates, including two that have received CPI increases in the current period; and three properties have non-standard leases.

On 3 August 2018, ALE issued rent notices to its tenant, ALH, advising that the rent on each of the 79 properties subject to the current rent review should increase by 10%. ALE and ALH had already agreed that two properties’ rents would increase by 10%. ALH accepted the rent notices on 32 of the properties and rejected the remaining 45 notices. ALH has subsequently accepted two additional properties. 43 properties remain subject to independent determination.

The 36 accepted rent notices and regular CPI and fixed rent increases on six other properties increased ALE’s total passing gross rent as at 30 June 2019 to $61.04 million, an increase of 4.28% on the prior year. Queensland land tax is the only deduction included in ALE’s total net passing rent.

The passing gross rent for the remaining 43 properties may increase or decrease by up to 10%.

The following table provides additional information around the types of leases and timing of the rent reviews:

• June 2019 gross passing rent amounts before deducting land tax for QLD properties. 79 of ALE’s 86 properties were subject to 2018 rent reviews
• Standard leases review to market between Jun 2019 and Jun 2024 and may increase or decrease by up to 10% from preceding year’s rent. The first of four 10 year options for ALH to renew standard leases occur between 2028 and 2034. The three non-standard leases are Balmoral, Brass Monkey and Pritchard’s.
• Property adjoining Miami Hotel, QLD receives a rent of $0.08m which is excluded from the above rent amounts.

ALH and Endeavour Group

On 3 July 2019, Woolworths Group, ALH’s majority shareholder, announced that it has entered into an agreement to merge its Endeavour Drinks division with ALH. Woolworths’ shareholders approvals for the merger are expected in late CY19 and the merged entity is to be named Endeavour Group. This will create Australia’s largest drinks and hospitality business with sales of approximately $10 billion and EBITDA of $1 billion.

Following the merger and as a second step, during CY20 it aims to separate Endeavour Group from Woolworths by demerger or value accretive alternative. In event of a demerger, the Group’s capital structure will target an investment grade rating.

ALE will continue to monitor any developments in relation to the control and ownership of ALH.

ALE’s Performance

As indicated by the chart below, ALE has underperformed both the S&P/ASX 300 AREIT index and the S&P/ASX All Ordinaries Index over the past one and three years. However over the past five, 10 and 16 years to 30 June 2019, ALE has delivered total returns that have outperformed both those indexes.

A $1.00 investment in ALE at the time of the ASX listing nearly 16 years ago, with reinvested distributions, would have grown to $17.44³ as at 30 June 2019.

This is equivalent to 20.1% p.a. total return since the ASX listing.

FY20 Outlook

Non-recurring FY19 rent review submission costs of $3.1 million reflect the commitment of time, resources and external experts to the process.

ALE’s current view is that the total passing rent is materially less than the uncapped rents. That said, the extent of the difference between passing and uncapped rent is not evenly spread across the portfolio.

Rents may increase or decrease by up to 10% for the remaining 43 determinations. The range of gross passing rent for the portfolio of 86 properties is as follows:

• Worst case $58.5 million (no change)
• Best case $63.7 million (+8.9%)

Note: Changes are in comparison to the gross passing rent before any November 2018 rent increases are applied. Best case is less than +10% as seven of the 86 properties are not included in CY18 rent reviews.

ALE remains confident of a positive result but notes it may not receive a full 10% rent increase for all properties. The remaining 43 rent determinations are to be handed down at the same time and are currently anticipated late CY19. The rent determination results will be back dated to 4 November 2018.

Further Notes

• ALE has a policy of paying distributions which are subject to the minimum requirement to distribute taxable income of the trust under the Trust Deed. Distributable Profit is a non-IFRS measure that shows how free cash flow is calculated by ALE. Distributable Profit excludes items such as unrealised fair value (increments)/decrements arising from the effect of revaluing derivatives and investment property, non-cash expenses and non-cash financing costs. The reconciliation between Operating Profit before Tax and Distributable Profit has not been audited or reviewed by KPMG.
• Gearing relates to AMTN covenant being (Net Finance Debt – Cash) / (Total Assets – Cash – Deferred Tax Assets) of ALE Direct Property Trust. This ratio is considered, in the opinion of the Directors, most relevant to securityholders as it is the debt covenant that is most relevant for assessing the headroom available.
• Accumulated value includes security price of $5.10 at 30 June 2019 plus reinvestment of all distributions and renunciation payments since ALE’s 2003 listing.