Australia’s biggest pub landlord, ALE Property Group has made a strong case for its tenant, Woolworths-backed Endeavour Drinks to pay significantly higher rents from 2028 onwards, after valuers said its $1.23 billion portfolio was 33 per cent under-rented.
The disclosure came as ALE reported a 14.8 per cent rise in distributable interim profit to $17.9 million on higher rental income and lower borrowing costs and as it booked a $51.6 million valuation gain across its portfolio, where yields tightened 14 basis points to 4.94 per cent.
Endeavour, the country’s biggest pub operator following its merger with ALH last year, paid all the rent due to ALE over the six-month period despite weathering pub closures, higher operating costs and venue guest limits because of pandemic restrictions.
ALE is banking on 2028 uncapped rent reviews to boost its distributable income, after maintaining a policy of dipping into cash reserves to ensure it keeps growing distributions every year.
A 2018 market rent review capped at 10 per cent (increase or decrease) for 79 of ALE’s 86 venues, which concluded in September, resulted in the maximum annual rent increases across 36 venues while 43 venues’ rent remained mostly unchanged following determinations made by a panel of independent valuers.
Rent determinations for 19 Victorian pubs are now being challenged by ALE in the Victorian Supreme Court.
“We always knew there was significant under-renting, but it was difficult to disclose due to negotiations [with ALH/Endeavour],” ALE managing director and CEO Guy Farrands told The Australian Financial Review.
“Now that’s resolved, we can be more open about how we see things.”
The group will again dip into cash reserves to pay an interim distribution of 10.75¢ per unit, in line with guidance. It forecast a full-year distribution of 21.5¢, up 3 per cent on 2020 and said it expected future distribution to grow by at least CPI (inflation).
Mr Farrands, who took over as CEO from Andrew Wilkinson on October 1, said that ALE’s policy “for some time” of distributing more than it earned was based on the “positive view on how things might appear in 2028″.
He said the significant premium ALE shares trade at to the net value of its assets (45 per cent as of December 2020) reflected the market’s perception that the portfolio is under-rented.
“If you take NTA and increase it by 33 per cent you get $4.30. [The current trading price] suggests the market is a bit more optimistic then that,” said Mr Farrands, who also hosed down rumours that Endeavour Group, set to be spun out of Woolworths later this year, was looking to buy its landlord.
“There are not discussions at all going on,” he said.
ALE shares closed 2.4 per cent firmer on Wednesday at $4.77.
While the group did not make any acquisitions over the half year – it has not bought a pub in well over a decade – the value of its portfolio that includes venues such as Young & Jackson in Melbourne, Crows Nest Hotel in Sydney, and the Miami Tavern on the Gold Coast lifted 4.4 per cent, or $51.6 million, to $1.226 billion.
Statutory profit rose 232 per cent to $68.1 million as a result.
Analysts at Macquarie Securities said the ALE portfolio had been “resilient through COVID due to tenant covenants”
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