Oct 23:

Both divestments have fallen over which won't impact my long term forecast for cashflow too much however gearing is somewhat of a concern. That being said, the passing yield of most assets in the fund should be above the marginal cost of debt, so WALE and occupant is worth keeping a really close eye on. If the assets keep performing ok, there's plenty of yield to compensate for the risk.

Sep 23:

I've done some investigation post the FY23 results and think the below still looks pretty good. There are a few things worth pointing out:

1) The Harris Street Investment has been a disaster, they've taken an absolute bath and are getting close to the LVR covenant (65%).

2) FFO is such a deceptive indicator of what the underlying cashflows of the fund are. Completely ignoring capex ($8 mil) and rent free incentives ($4 mil) means distributions will always be well under FFO. Even with the target 85% payout ratio, I think ECF has had to top up this year distribution with some debt. The cashflow statement sums it up:

Capex has been $8mil for two years running, but I expect this to roll off somewhat in FY24. I also expect rent free incentives to roll off as well, so maybe the 85% payout is achievable going forward.

3) If the two recently announced divestments proceed, the fund will be significantly de-risked from a leverage standpoint, but something will need to be done about Harris Street to make sure no covenants are breached.

I've done some analysis and come up with a distribution figure that I think would be sustainable once interest expenses normalise to current market levels. Somewhere around $0.07 per unit is doable. On this basis I think somewhere around $0.80- $0.85 is fair value.

May 23:

Recent update was encouraging, the announcement of a big lease renewal with a government tenant is a good outcome. Directors have also bought on market.

Depending on how much of the FFO/Distribution gap is made up of genuine capex and up front lease incentives, there is a possibility that the yield at current prices could still be around 10% on a forward looking basis.

Despite this, my concerns mentioned below still exist. Going to value on an estimated 9% FY24 Distribution yield of $0.082 p/s.

March 23:

It's very hard to see where earnings will sit in 2-3 years time. Interest expense is going to increase dramatically unless the RBA decreases rates significantly.

It's also hard to ascertain what % of FFO is going to be eaten up by incentives and capex. ECF's reporting doesn't really give much insight into this.

Given I have low confidence in my ability to forecast future distributions, I'm happy to sit out for now and see what new information comes to market.

10% yield today could easily become 5-6% once hedging roles off.

Gearing of 37% today can easily become >55% if the market deteriorates (and I'm pretty sure their covenant is 45%).