Edited Transcript of ALPL.MZ earnings conference call or presentation 29-Apr-20 8:00am GMT

We are now 77% industrial at the end of the year. We’ve reduced our retail exposure to one single asset and around the 1%. And that is quite a positive number, given that the retail sector is probably more exposed than anything else. And I think one of the pleasing numbers is given our asset activity over the year, we were able to reduce our gearing at the year-end to 40%. And again, Mark will go into that in a bit more detail when he covers the financial section.

So looking at the results for 2019 and 2020 on Page 6 of the presentation, our adjusted earnings were up 13%, that is — that did benefit from some capital profits that we made, especially on the sale of the Runcorn asset. We are very pleased to be in a position to declare a second dividend for the year. And when we go through our cash, you will see that we are comfortable that we can do that. The dividend is slightly lower than perhaps we had predicted some time ago, but still a positive position to be in to be able to declare and pay a dividend, and the dividend should be paid during the month of May.

The sale of the Runcorn asset was timely. We made a GBP 4.3 million capital gain, and it had an IRR over the life span of close to 16%. And I think more importantly, it put us in a very strong cash position because we had not yet invested any of — or reinvested any of the proceeds from that sale. And I think correctly, we are holding off on that, and we are really using that — the cash to strengthen or to reduce the LTV and to effectively derisk the balance sheet.

The impact of COVID-19, I think that is obviously a very topical conversation at the moment. For us, it was a post balance sheet event in that the lockdowns mainly occurred, especially in the U.K. where all our assets are, after February. We had a very strong cash position at the year-end with GBP 26 million of cash available. All our valuations were confirmed as at the 28th of February by independent valuers. Clearly, there is greater uncertainty in the markets now. And as we move forward, and there still is uncertainty as to when different industries will come out of lockdown or to a degree when countries will come out of the lockdowns that have been imposed.

And I think — but we have been pleased with the first rental collections. And in the U.K., most rents are collected quarterly in advance. And we — the March to June period was very positive. We collected 85% of rent in full, 4% of the tenants, a further 4% are paying monthly in advance, and we have agreed or in the process of agreeing payment terms with the balance. So all in all, quite a positive outcome in terms of our rent collections through to the end of June.

Clearly, the next collection is at the end of June, and a lot will depend on how the economy and how the different businesses are coming out of various lockdowns by then. And we certainly hope that there will be more freedom to operate or more businesses will be back fully operational by that stage.

So very importantly, is our cash position. If I move on to Slide 7, as I said, if you look at our balance sheet, we had cash of GBP 26 million, and we had available revolving credit facilities or undrawn credit of close to GBP 1.6 million, so close to GBP 28 million of cash available. As a REIT, we need to declare 90% or distribute 90% of our property income, and against that background, we’ve declared a final dividend of 4.5p, bringing our total dividend to the year of GBP 9 million — 9p. The amount declared is GBP 8 million. So even after the dividend, we would have GBP 20 million of cash available.

Shaun will go into more detail on spending on the Peterborough multi-let conversion, but that cost will be GBP 3 million. And really, even after that, we are comfortable that we have sufficient resources to continue as a going concern for the 12 months and to meet our commitments. And therefore, we were comfortable in declaring that final dividend. So I’m going to hand over to Mark Pryce, our Financial Director to take us through a bit more detail on the financial results for the year. So thanks, Mark?

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Mark Pryce, Atlantic Leaf Properties Limited – Financial Director, Head of Finance & Operations and Executive Director [3]

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Thank you, Paul. If we just look at Slide 9, Slide 9 summarizes some of the key metrics for the year. Our net rental revenue has increased to nearly GBP 27 million and the adjusted headline earnings grew to nearly GBP 20 million for the year, which equates to around 10.5p. Most — all of these earnings have been supported by solid and consistent cash rental collections over the course of the year.

As Paul mentioned, a positive outcome is that we’ve reduced our LTV to 40%, this was assisted in part by the sale of the Runcorn asset before year-end. But we think that it’d probably be prudent to try and maintain this lower LTV level going forward. As a result of the current level of uncertainty, Atlantic Leaf has suspended, currently suspended any acquisitions of investment properties in the short term. And therefore, we wouldn’t expect to see this LTV move up in the short term.

If we move to Slide 10. There were several key events during the year on the sales side. This included the sale of our interest in the DFS joint venture in April 2019, which virtually eliminated all of our direct retail exposure. We also had the sale of the 2 Booker properties in Leicester and Barnsley in October last year and the sale of our Runcorn asset just before year-end. The proceeds from the sale of the joint venture was reinvested into 5 industrial assets around midyear.

And at the same time, a new debt facility was entered into with Lloyds. The new facility with Lloyds increased our funding diversity in the group to 4 lenders at the time, although this has subsequently been reduced back to 3 at year-end with the sale of the Runcorn asset. Aviva had originally funded the Runcorn asset. And even though we no longer have facilities with them, we believe they remain a supportive partner to Atlantic Leaf going forward. During the year, the swap curve also dropped materially in the U.K. and the company took the opportunity to increase the hedging of its variable rate debt. And now our debt has — debt hedged has now increased to close to 90%.

If we move to Slide 11, Slide 11 just illustrates the adjusted headline earnings waterfall. The adjusted headline earnings does include the net capital gains realized during the year. And also just to highlight that the finance costs does include the swap interest, any debt costs that are amortized as well as any non-utilization fees.

If we move on to Slide 12. The following slide breaks down the capital gains realized during the year. All 3 investments sold generated really strong positive IRRs. With the Runcorn asset generating an IRR of 16%, the Booker assets around 10% and even though the sale of the DFS JV on the income statement is reflected as a capital loss in the current financial year, it still generated a positive IRR of 9% over the term of its investment.

If we move on to Slide 13, the following slide, really, it just breaks down the fair value and other cash flow items for the year. All of our properties have been valued by independent valuers at year-end and have been signed by our auditors. During the year, there’ve been positive and negative valuations on our investment properties. The office properties decreased slightly during the year, and that’s primarily due to the vacant portion of the office previously let to Thomas Cook, but this was offset by an uplift in the value of our industrial properties.

Acquisition costs of around GBP 2.6 million were also incurred during the year on the 5 new acquisitions, and those have been absorbed within these fair value movements. As Paul mentioned, we think at year-end, there was no evidence of any adverse impact of COVID-19 on these valuations. And COVID-19 for Atlantic Leaf was considered a non-adjusted post balance sheet event. And again, as mentioned by Paul, we don’t think that COVID-19 can be reliably — the impact can be reliably determined at this stage, but obviously, there’s a clearly a high degree of risk and uncertainty in the current market.

If we just have a look at the swaps, the material drop in the swap curve did result in an increase in the mark-to-market liability on our, in particular, our older swaps. Most of the — all of these swaps were designated as cash flow hedges and the effective portion of the mark-to-market movements are not actually included in the statement of comprehensive income, they are sitting in other comprehensive income. The new swaps that were entered into during the current year were not designated as cash managers, and therefore, there is a small mark-to-market movement in the statement of comprehensive income relating to these swaps. All of these swap liabilities that we — that are currently negative will unwind over the term of the swaps and are included in the average cost of debt.

If we have a look at the impairments, on the slide, the impairment relates to the APIL loan, the APIL loan is the loan to the company’s — relating to the company’s share incentive scheme. APIL owns 5% of the listed shares in Atlantic Leaf and funds the payments of interest in capital on the loan from the dividends it’s received from Atlantic Leaf. And whilst Atlantic Leaf’s dividends continue to support these repayments, there has been a decrease in the value of the list — the JSE listed share price. And that has meant that the market value of the shares backing this loan has decreased. And so in terms of IFRS 9, the company has impaired this loan. There’s also a small fair value adjustment on our right-of-use assets. As we account for our investment properties in terms of IAS 40, the amortization of the right-of-use asset is disclosed as a fair value movement and not as depreciation.

If we move on to Slide 14, which is a statement of financial position. The slide really just illustrates the strong cash flow position of the company at year-end. The statement of financial position also includes the right-of-use assets and corresponding long-term lease liability, which has been included for the first time with the adoption of IFRS 16 and relates to the long head leases on 12 of the Booker leasehold properties.

If we move on to Slide 15, at — our NAV at year-end is GBP 1.04, and is stable year-on-year. The movement in the NAV has been broken down into its constituent parts in the table. And the retained earnings — the movement in the retained earnings has also been split out to show the breakdown between the adjusted earnings and the fair value adjustments.

If we move on to Slide 16, Slide 16 illustrates the key debt metrics of the company. During this period of uncertainty, the funders, in particular, have been kept fully informed of all of our rental collections, and we are constantly communicating with them. We’ve maintained good relationships with our funders and to date, they’ve indicated that they remain supportive of Atlantic Leaf, specifically given the fact that the strong cash flow that Atlantic Leaf is generating and our ability to cover any interest payments.

As you can see from the slide, our interest ratio remains extremely strong, and all of our debt covenants during the year have been met. The funders have not indicated that they would be calling for bank valuations outside of the scheduled valuation cycles. And a large proportion of our properties have been recently valued by the banks in 2020 and are now only due for scheduled bank valuation in January 2022. And just to highlight the cost of debt. Our cost of debt is calculated as the weighted average cost over the year. This increased during the financial year, specifically as a result of the debt refinance done in October 2018, when the debt maturity profile was increased to 4 to 5 years.

We will now move on to just an overview of the asset management, and Shaun will take us through that.

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Shaun Fourie, Atlantic Leaf Properties Limited – CIO [4]

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Thank you, Mark. And maybe just to touch on the property market at the moment. Obviously, there is quite a bit of uncertainty with the COVID-19 causing some sort of challenges within the market. What we’ve experienced or seen within the underlying asset space is that certain asset classes have held up better than others, in particular, the industrial sector with retail continuing to be put under pressure. Paul alluded to sort of the start of the year was very much Brexit focused. We started seeing some activity in the early part of January, but obviously, with COVID sort of taking over, it has impacted sort of the transactional evidence.

And although there hasn’t been firm pressure applied to any landlords at this stage by the funders, I think it has sort of assisted in not seeing any material movements in property valuations. As the full effect of COVID-19 is playing out, I think with rentals being put under pressure and tenants continually sort of being challenged with regards to operating, we will start seeing potentially some softening coming through. But at this stage, we’re pretty comfortable with the asset class that we have and the exposure in the industrial sector and space that we operate in.

If I look at Slide 19, it’s just an overview of our asset base. The key difference there between the direct assets is, as was mentioned earlier, the disposal of the JV arrangement with the DFS assets that we had. We did redeploy that into further industrial assets, which was very positive. And then as just prior to the end of year-end, we disposed of the DHL property. So overall, we still feel we’re well placed within the sector and the industrial overweight element is proving a good sector to be in.

If we were to look at Slide ’20, just some of the asset management initiatives during the course of the year as well as what’s ahead, as mentioned, was the sale and the reinvestment. We also sold 2 of our smaller Booker assets at the end of last year or late last year. This was positive in the sense that it did reaffirm the asset valuations and also the desirability of the asset class with Booker being a tenant. And then one of the bigger sales or more material sales was the disposal of DHL, which we felt was the opportune time. It had just gone through its 5-year remaining term on the lease. And there was a lease negotiation that would have been embarked on, but we felt that exiting the asset at that stage was a good opportunity to realize some positive revaluation. It also assisted or warranted the valuations of our underlying assets as we did achieve reasonable uplift from our existing holding value. So that was quite a positive outcome.

On the operational side of the asset management initiatives, obviously, we had 2 key leasing initiatives, was the ex Homebase space, and we concluded a lease with B&M for 15 years, which was a very good outcome, and they’re trading and operating well out of the unit. And then we relet the ex Palmer & Harvey industrial warehouse to Law Distribution. That is also fully occupied and sort of in full use and seems to be performing well for the occupier.

With regards to some of the other initiatives, clearly, the Peterborough asset and the sort of repositioning of that asset into a multi-let conversion has been quite critical, and I’ll take you through a bit more of the thoughts further later in the presentation. But this is a vitally important initiative for the coming year. And then as we’ve communicated previously, the Booker rent review is quite a critical or important rent review. And with Booker representing about 34% of our overall rental exposure, the attractive rental increase of 2.5% compounded 5 yearly meant that it was always going to contribute quite materially to our earnings. So we’re busy in negotiations with them.

As previously communicated, the intention was always to find leverage off the lease to remove the breaks. So just to remind everyone, it was a 10 break, 5 still remaining on the term. So essentially, there’s 5 years terms certain. And the process or the approach was to look at the rent reviews in conjunction with trying to remove breaks across the whole portfolio or at least across a large proportion of the assets, which then will move that lease term back up to a 10-year or 9.5 years by the time we conclude it. So that is currently underway, and negotiations are in progress with Booker.

If I were to move to Slide 21, just to give a bit of a general categorization of our tenants, sort of splitted into some of the core or sort of sectors of operation. Essentially, 66% of our occupants or tenants are deemed essential services. And this has bode well for us with regards to, as communicated earlier, our positive rent collections that we have achieved, sort of the non-essential tenants that have remained operational and trading is around 19%, and there’s 14% that have actually did close up their shop during the sort of reduced period of operations. So we’ll touch on that quickly.

The 2 tenants or the 2 sort of sectors, the one was the automotive sector and Koito & Gestamp, both large international companies, relatively strong cash flows, and we’re confident that they would come back to full steam once the COVID-19 restrictions are lifted. And then on the home improvement side, we’ve got Epwin, who do manufacturing and distribution of windows and frames. And Cassellie, who’s a bathroom supply company and both of them have also closed during this period of the COVID-reduced operations.

But as mentioned, overall, we feel we’re quite well placed, industrial asset sector has performed well during this time period. We continue to have very strong relationships with our underlying occupiers. And we engage with them continuously to understand their operations and the current environment that they’re facing. We have had some discussions on the rent payment plans, which was communicated earlier, and I think both from our side and from the occupier’s side being quite receptive to trying to come to suitable sort of terms that work for both parties. And we’ll continue to work with our tenants going forward to ensure that we sort of get through this challenging period.

If I were to move to Slide 22, I think just looking at the valuations, it’s important to note that the portfolio was independently valued for the year. Valuations increased by GBP 4.4 million on a like-for-like basis. Obviously, this did have to absorb the write-down of the Peterborough asset, which is the ex Thomas Cook space. We have written that down by GBP 4.3 million. I think the pleasing element is, obviously, the industrial assets that have performed well. And I suppose that’s also supported by the fact that we were able to sell some of our assets late last year and early into the new year at attractive levels. And we feel that the existing portfolio is well placed and should hopefully weather this current environment relatively well and remain resilient in the space.

Looking at sort of the COVID impact, obviously, the independent valuer guidance suggests that there’s no immediate impact as positioned earlier, there has been quite limited transactional volume in the market to really suggest or warrant any write-downs at this stage. However, there is sort of the emphasis that we are in a bit of uncharted territory, and there needs to be a degree of conservatism approach to the underlying investments. But overall, we feel that we have gone through a robust valuation cycle, and we sort of remain conservative in our approach with regards to the valuations.

If we were to move to Slide 23 with regards to Peterborough Westpoint. So when we look at this asset, obviously, with the exiting of Thomas Cook, which vacated the property at the end of January, we approached it in sort of 3 phases, all running concurrently, just due to the time that it takes to essentially get to the multi-let conversion phase. We did consider day 1 exit, and we approached market participants sort of informally to try and solicit a suitable potential interest in the property. Obviously, with the vacancy, it was never going to be a desirable acquisition at that stage. But at the same time, we proceeded with a single occupier campaign as well as exploring the multi-let conversion.

Through the single-let occupier campaign, I think the building could be suitable. Obviously, it was suitable for Thomas Cook, but to find the single occupier is sort of — it’s not just naturally available for sort of space of 115,000 square feet in Peterborough. And that’s still an exercise that is continuously ongoing with our agents that we’ve appointed to market the property. But to sort of mitigate the risk, we’ve had to proceed with a multi-let conversion approach. This would incur sort of reconfiguring the space into multi-let units probably more conducive for the general sort of occupancy requirements in Peterborough. This work has progressed.

We’ve proceeded with appointing contract or going through a tender process, soliciting bids for sort of the scheme of work that needs to be done. We’ve then had an evaluation of that and have come to the final stage of appointing our preferred contractor for this project. A lot of work has gone into time value engineer the redevelopment of the multi-let approach, in particular, focusing on the mechanical and engineering aspects of the building to try and accommodate a multi-let while still sort of looking at making smaller pockets, but ensuring that we still keep the nice open fresh look of the internals because it is quite a vibrant and sort of attractive offering once you enter the building. We also felt that the multi-let conversion would probably lead or achieve higher headline rental. And we feel that this is the most appropriate approach at this stage to proceed with.

As mentioned, we have appointed the main contractor being Overbury. They’re well experienced in office conversions and actually are active in the Peterborough area as well. And we’ll be splitting the units up into 10 lettable new zones, which will be a lot more sort of effective within the Peterborough market from an occupancy point of view. So we — looking through this process, we feel quite confident with the product that we have. But obviously, COVID-19 would have a slight impact. We haven’t been able to take people around to view the property in preparation of the work from a leasing perspective. But a lot of effort has been going on with regards to the online marketing of it and trying to keep the interest active.

Just looking at Slide 24, if you look at some of the initiatives, I mean, it will be completely refurbished, the gym and sports halls that are existing there. Currently, they will be refurbed as well. There will be attractive street entrance with a lot of spill out sort of recreational relaxation areas for the different office occupiers to — for their staff to go relax. We have also acquired a bit of the furniture. So there is the opportunity that someone can sort of just arrive and start being operational with all the desks and the chairs and that already in place. And essentially, it’s — the intention is to try and create a nice community environment where sort of the tenants and its staff are of — feel quite vibrant and excited to be in the building.

And then some of the other positive attributes is the parking ratio is quite attractive. And it seems to be quite a key factor with regards to the call center environment as it is a commuter town. So we will continue to work through this process. The — in the — as mentioned, been awarded, and we hope to have this completed by the first week of September from a completion — repositioning point of view. And the intention would hopefully be try and get tenants signed up to start occupying it as quickly as possible.

And I’d like to hand over to Paul just for the closing and summary.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [5]

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Thanks, Shaun and Mark. I think if I do look at Slide 26, I mean, Shaun has finished off the 2. I think the 2 major asset management objectives is the redevelopment of Peterborough so that we can start getting income from that asset again. And the other value unlock, as he mentioned, is the key rent review process around Booker is to unlock value. We’ve already got a minimum uplift there, but is to use that rent review to achieve a greater benefit out of that Booker portfolio.

On the LTV, we’ve lowered our LTV levels. I think the 40% is a much more acceptable level of loan-to-value in this environment. And likely, we would want to keep it around these levels going forward. It does also — will help reduce any debt amortizations going forward in that we can — by having a lower LTV, we will not have to reduce or have annual debt amortizations. And overall, just improves the risk profile, especially in this market.

Clearly, a big focus is now on cash flow. The focus on rent collections, we’ve been through that. We are very fortunate that the majority of our tenants are operational, and they are paying the rent as and when due. But we do know that from time — with time, we’ll have to provide certain tenant assistance. And we will look at that and try and structure it to make sure that the tenant and ourselves share the burden during this tough period.

So I think the conclusion right now is that we’re in a very strong cash position relative to our size. We’ve got a lot of cash available, and we are very pleased to be able to distribute our final dividend in this market and to be able to continue to be an active dividend-paying property company. So that is our story for the year gone by. We certainly do hope that it’s not too long before we’re back to normal. We — there are some questions that I see have come through, which I’ll start to answer. And also, obviously if any anybody would like to contact us individually, we can do so separately. But I think — shall I go straight into the questions? There are some tough questions. I’m not sure if we want to…

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Questions and Answers

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Operator [1]

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(Operator Instruction). At this stage, there’s no questions from the online attendees. I would like to hand over for questions from the webcast.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [2]

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Okay. Thank you. So the first question deals with the dividend being GBP 17 million and the net cash generated being slightly lower than that.

We’ll ask Mark to deal with the cash flow statement. Mark, as you’ve got those numbers with you.

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Mark Pryce, Atlantic Leaf Properties Limited – Financial Director, Head of Finance & Operations and Executive Director [3]

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Sure. Thank you, Paul. So the difference between the operating activities of cash flow from operating activities of GBP 15.5 million and total dividend of GBP 17 million really relates to two things. The first one is that cash generated from operating activities increased movement in working capital. There was a small timing difference in terms of when we paid a debt payment this year. It was paid beginning of March normally, and I think it went through a few days earlier at year-end. So that resulted in about GBP 1 million being reflected there. The other GBP 500,000 really relates to the question is to what degree our noncash income has been distributed. We received a very large proportion of cash rental income. There is a small proportion from rent [freeze] that we do regard — we do include in our adjusted earnings, and that amount is around GBP 450,000 for the current year.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [4]

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Okay. Thanks, Mark. Then there was a question, I think we have answered — further in the presentation is how many of our tenants are operating. I think Shaun did cover that. There was also a question regarding that we received 85% of the second quarter — was that 85% rent was received in advance, have any of these quarterly clients started engaging you with restructuring going forward? Shaun, maybe you can pick that one up.

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Shaun Fourie, Atlantic Leaf Properties Limited – CIO [5]

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Thanks, Paul. Yes. I mean, predominantly, all the rentals have been received quarterly in advance. There were 1 or 2 tenants that were paying monthly in advance, and there has been a request to restructure that the half rental monthly in advance, but that’s about 4% of the ratio. So at the moment, the full quarter, I mean, it has been paid, and they haven’t come back as yet to try and negotiate for the next quarter period. Bearing in mind that sort of that is only in July. So we are pretty confident, hopefully that the COVID arrangement would have abated, and they would be more operational. Maybe just to answer the industrial properties that are on lockdown, it’s 14%, as mentioned, was Cassellie, Epwin and Gestamp and Koito. So that equated to about 14% of the industrial properties that are not operational right now.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [6]

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There were 2 questions on the APIL loan provision. One is would it be written up again if the ALP share price recovers?

Yes, absolutely, it would be.

And the second was, could we provide the total amount of the loan receivable? Mark, have you got that number?

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Mark Pryce, Atlantic Leaf Properties Limited – Financial Director, Head of Finance & Operations and Executive Director [7]

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Sure. So at year-end, the total loan to APIL was GBP 2.9 million, and the guarantee that was provided was GBP 5.6 million. Does ALP have recourse against these loans, currently, no, they don’t.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [8]

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They obviously have the shares as collateral. So — and the full dividend gets applied to servicing the loan in that, but if there would — if there are more questions on that, we’re quite happy to do it offline.

The long-term LTV target, I think we’re comfortable at the 40% given the length of our leases that are in place. And I think that gives us a lot of comfort around that. And especially given the high level of interest cover that we have on our loan book. So I think around the 40% mark. But again, it’s very difficult to — we would need to have a look forward to see what happens over the next few months with the whole market.

There is a question on the Thomas Cook rental. The Thomas Cook rental was GBP 12 per square foot. We do definitely think that if it’s broken into smaller units, the market rate for smaller units of the quality that we will provide, should be higher than that, but it’s something we’ll have to test as we go along.

The other one is to — it was about some of the Booker rents relative to markets. Shaun, maybe you can comment on that?

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Shaun Fourie, Atlantic Leaf Properties Limited – CIO [9]

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Yes. So currently, we’re going through the exercise for the rent review. As indicated, there’s a minimum uplift of 13.1% across the portfolio. So that is contractually in place. As it stands, we have 7 of the 28 assets in this portfolio that we believe could have a potential higher rental than the fixed uplift. And that’s the work that we’re currently doing to try and assess how confident we can be with regards to pushing that through onto Booker. With regards to the current rentals relative to market, there will be some that will be slightly over rented post this uplift, but keep in mind that it doesn’t change for 5 years. So typically, over the next course of 2 to 3 years, that rental, sort of market rental will catch up if not pass the existing rental level that it would be reset to. So yes, hopefully, that answers that question.

I think there was another Booker question if I’m not mistaken. The general rent reviews for the year. Just looking at our portfolio, obviously the 2 key ones for last year was McBride’s, which is under rent review with sort of under arbitrator review. And we have pushed to try and increase that rental more than just keeping it flat for the year. Obviously, the tenant is sort of trying to contest that. We’re pretty confident with our review on that and we believe the rental can be increased to between GBP 5.20 square foot and GBP 5.40, which will generate about GBP 50,000 to GBP 60,000 of additional revenue out of that property and be roughly about a 12% or 11% increase on passing rent.

And then DHL had a fixed increase up to GBP 3.20, it was the higher off, obviously we got the benefit of that for the 2 months between December and January — over December, January and then when we sold it in February. So we got the economic benefit of that increase. And those are the only 2 real material increases for the — any ’19, ’20 financial year and with Booker, obviously, falling into this financial year more so than last.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [10]

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Yes. Okay. So some of the other questions. The question, have we amended our expectations on the Thomas Cook building?

I think we have, in that we have amended the sort of take-up time in terms of when we think tenants would start to come into that building. I think that’s the biggest amendment that we’ve made. But the space still remains fairly desirable and fairly well-priced against the market.

Mark, there’s a question on, have the banks changed our debt covenants? And how does the 85, 89 compare to the pre-COVID numbers? But maybe you could just answer that question on the debt covenants?

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Mark Pryce, Atlantic Leaf Properties Limited – Financial Director, Head of Finance & Operations and Executive Director [11]

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Sure, I will do. There’s also a subsequent question on what the current debt covenants are. So I’ll cover both of those together. So the banks haven’t changed our debt covenants at all. Again, we’re in constant communication with the banks. And I think from an overall perspective, I think we are low risk on their radar, just given our cash collection that we currently have. So they’re very comfortable with the existing covenants. Our LTVs on approximately — our LTV covenants on a hard REIT level are approximately around 60%. And our ICR covenants normally sit at around 2 — on average, about just over 2x. So we’ve got a 4x cover ratio, and our covenants are sitting around 2x on the ICRs.

There is a question, how does the 85 compare to pre-COVID numbers in terms of collection rates? In the past, we’ve never had any bad debt apart from, again, someone like Thomas Cook that have vacated the building. So in the past, we’ve always had 100%, effectively, collection rate. And again, I think this collection rate at 90%, there is still — we are still negotiating with the tenants, and we still expect that rent to come in. There are — again, 1 or 2 of the ones that haven’t paid yet are fairly big clients with fairly big balance sheet. So we are expecting those still to be collected.

There is just what decrease in rentals have you factored in as a stress test for having sufficient resources?

We’ve done a number of stress tests on the rental collections. Given the cash position that we currently have as well as the — our operating expenses, in theory, we wouldn’t need to receive any cash flow from rental in order to have sufficient resources to cover the next 12 months. But again, we do run stress tests on a number of the rental — on the rentals. And I think we’d be comfortable at any level.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [12]

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Thank you. The other question as to when we expect to provide distribution guidance for 2021?

I think really the challenge around that is when the businesses we now — when there is a normal operating environment, and we feel more comfortable to look at forward-looking numbers. Whereas right now, we just don’t feel comfortable to look at forward numbers, and I think with the high level of uncertainty. But I’m sure if things do return to a bit of normality, we would attempt to do so.

There was a question about the Booker — Booker is fully operational at the moment, and they are actually very busy. So in fact, sometimes they’ve been too busy to even engage with Shaun and his team on the rental discussion. So we see them as a very important tenant of ours and very strong tenant. So — because there’s another one that says, what is the time scale?

We’ve already — it is really — they’ve just been so busy. And — but I would hope that during the month of May, we’ll be able to start engaging with them more fully on the removal of any breaks or the changes to their lease terms.

There is a question. Maybe, Shaun, you can answer these 2 questions, the split between monthly and quarterly leases. And also, if social distancing in the workplace looks like it’s going to be an ongoing issue, would that have an impact on Peterborough?

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Shaun Fourie, Atlantic Leaf Properties Limited – CIO [13]

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Thanks, Paul. I don’t have the numbers offhand, but on the monthly to quarterly, I think it’s 78% is quarterly in advance, and around about 12% to 13% is on a monthly in advance basis. So — but we can confirm that afterwards if need be, but that’s the rough numbers if I’m not mistaken.

With regards to the offices, yes, I think there would definitely be a change in behavioral patterns from an office perspective. I think with regards to our 3 tenants that we have, they are quite big multinationals, and they would definitely adhere to all the rules and sort of best practice guidelines that have been put forward. Obviously, with EE, E.ON and Santander, they will be extremely conscious to not impact or put at risk any of their staff unnecessarily.

With regards to the overflow, some of the info leading up or during this COVID period, the service office environment seems to have taken a bit of a beating or been under pressure. But the latest understanding within the market is that that’s starting to pick up quite materially, especially sort of in sort of hubs where it’s supportive around big head office occupiers in neighboring buildings. And that’s basically to allow those head offices to split their staff between the existing floor space that they have available and other staff members working from the flexible office space just to try and ensure that everyone can still come to the same sort of head office precinct. So that seems to be a little bit of a trend happening in the market where people are trying to secure positioning for that. So that could bode well and for the flexible office space going forward. But with our portfolio, in particular, I think that tenants would manage that exposure within the guidelines.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [14]

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I think there are a couple of questions on the cash and LTV. So the reason we have cash is obviously to be prudent at this time around the potential of tenants not paying, et cetera, and to have that available to meet our different commitments. But I think there’s possibly a fundamental change in the market. So in all likelihood, we will look at a permanent reduction to LTV because I think there will be a new order for some time. So it is likely that we will try and get the LTV and maintain the LTV at these levels. It does have an impact on your earnings because with gearing at lower rates, I mean, you are able to earn more. But I think we will, in all likelihood, maintain the gearing at these lower levels for certainly a longer period of time.

There’s a question about whether we could take advantage of the lower interest rate environment. Well — unfortunately 90% of our debt is fixed. So there’s only a limited capacity to do anything in the short term. But certainly, we would look at seeing if the longer-term rates or maybe doing some extended fixes in due course.

Shaun, there’s a question on the B&M lease. This is a 15-year lease plan, [did it go], if you could take that one?

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Shaun Fourie, Atlantic Leaf Properties Limited – CIO [15]

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Yes. So I mean, obviously, when Homebase went into CVA, they initiated a rent reduction of 45%, which was roughly around about just below GBP 10 per square foot, and the B&M lease, we concluded at GBP 12. So it is above the CVA quoted number but was below Homebase’s original rental level. I think with regards to the valuation on that, that is obviously an attractive tenant covenant performing quite well in the market. And we do hope that we will start seeing sort of appreciation on that in the future. It does still benefit from a rent-free period. And as that rent-free period starts winding down, so the value will increase because there is less of a sort of 0 income aspect to it. But it is quite a small asset within our portfolio, just over GBP 5 million. So it’s something that, obviously, we will look at sort of possibly an appropriate time for that asset to realize some of the gains on it. But that’s the current status there.

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Paul Stanbrook Leaf-Wright, Atlantic Leaf Properties Limited – CEO & Executive Director [16]

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Thank you. There were a lot of questions. I do hope we’ve covered most of them. If we haven’t, please, could anybody send them direct to us and we will attempt to get back, but I do think we’ve covered most of the questions. And I don’t see any more coming up. So hopefully, it leaves — remains for me to just thank everybody for joining us today and for the interest shown in our results, and we really appreciate it. And look forward to communicating more in due course. But thank you to everyone for your participation today.

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Operator [17]

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Thank you very much. Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.