• Occupancy Rate: Maintained at a healthy 97%.
• Weighted Average Lease Expiry (WALE): Approximately seven years.
• Capital Recycling Program: $119 million of assets sold with an average ticket size of $11 million.
• Gearing: Remains around 35% post transactions.
• Net Operating Income (NOI) Growth: Comparable growth of 3.1% on a like-for-like basis.
• Weighted Average Cap Rate: 6.04%.
• Funds From Operations (FFO): $10.9 million.
• Distribution: $0.025 per unit for the first half.
• Interest Coverage Ratio (ICR): Comfortable level of 2.3.
• Net Tangible Assets (NTA): $0.81 per unit.
• Acquisition Pipeline: $124 million worth of assets under exclusivity or advanced contract.
• Annual Rent Review: Fixed weighted average rent review around 3.5%.
• Supermarket MAT Growth: 2.4%.
• Distribution Yield Guidance: 8% with almost all income being tax deferred.

• Warning! GuruFocus has detected 3 Warning Signs with ASX:REP.

Release Date: February 27, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• RAM Essential Services Property Fund (ASX:REP) reported strong leasing activity with 17 deals completed, extending the weighted average lease expiry (WALE) to seven years.
• Occupancy levels remain robust at 97%, supported by major retail and healthcare tenants.
• The fund has successfully executed a capital recycling program, selling $119 million of assets and acquiring high-quality assets like the Cairns Surgical Center.
• The portfolio's weighted average cap rate has stabilized at 6.04%, indicating a stable valuation environment.
• The fund delivered a healthy distribution of $0.025 per unit for the first half, with funds from operations (FFO) at $10.9 million, aligning with the capital recycling strategy.

Negative Points

• The fund's gearing remains at approximately 35%, which is above the target range, potentially limiting financial flexibility.
• There are concerns about the sustainability of rents in the healthcare sector, although management reports no current issues with arrears.
• The fund's AFFO (Adjusted Funds From Operations) is not disclosed, raising questions about the sustainability of distributions.
• The buyback program is set to conclude, which may impact the fund's ability to manage its share price and liquidity.
• The market remains cautious about tenant issues in the healthcare space, despite management's reassurances.

Q & A Highlights

Q: Is the interest rate covenant reduction to 1.5% a temporary or permanent change to your facility? A: Peter Granato, Director, Fund Manager: It was part of the syndicated facility negotiation from some time ago and is not a permanent reduction. It was included in previous presentations and is not driven by any specific background factor.

Q: Can you explain the skew to the second half of the year in your financial results? A: Matthew Strotton, Executive Director of Real Asset Management: This year, the skew is approaching 45% in the first half and 55% in the second half, primarily due to a significant number of rent reviews occurring in the second half. Last year was an outlier, but typically, we expect a 45/55 split.

Q: How do you plan to manage gearing while executing a buyback and pursuing acquisitions? A: Scott Kelly, CEO: Our ability to access liquidity allows us to manage gearing effectively. The divestments will help maintain gearing around 35%, and we plan to cease the buyback at the end of March to focus on more attractive acquisitions and value-add opportunities.

Q: Are there any tenant issues in the healthcare sector affecting your portfolio? A: Matthew Strotton, Executive Director of Real Asset Management: We are not experiencing any tenant issues. The media portrayal of healthcare financial health issues is isolated, and our engagement with tenants ensures sustainable operations. We have a fine-tuned understanding of our tenants' operations, and no significant issues are emerging.

Q: Can you provide statistics on rent coverage to assure the market of rent sustainability? A: Peter Granato, Director, Fund Manager: We are not experiencing arrears with major healthcare tenants and are working closely with them to understand their operations. The healthcare operators are focused on cost control and productivity improvements. We do not foresee issues with our current tenancy base.

Q: Why don't you provide AFFO, and how sustainable is your distribution? A: Matthew Strotton, Executive Director of Real Asset Management: There is no reason not to provide AFFO, and we can provide that information. The 8% yield is real and consistent, and we are committed to maintaining sustainable distributions.

Q: Why not prioritize a buyback over portfolio recycling given the high yield? A: Scott Kelly, CEO: We have been executing a buyback when the math justified it. However, the size of the REIT is a determinant of performance, and we aim to balance the buyback with the need for liquidity and growth. We will cease the buyback at the end of March to focus on more attractive capital uses.

Q: How do you plan to grow the fund given the current discount and other healthcare strategies? A: Scott Kelly, CEO: We have no plans to raise equity at the current discount. Our other strategy targets higher risk and capital growth, which benefits the REIT by providing a broader team and deeper relationships with operators. There is no overlap in assets, and the REIT benefits from synergistic opportunities.

Q: How do current valuations compare to your acquisition targets? A: Matthew Strotton, Executive Director of Real Asset Management: We sense cap rate stabilization based on valuer engagement. Valuers determine cap rates independently, and we anticipate cap rates to remain stable, which should keep NTA roughly stable.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.