Charter Hall Long WALE REIT (CLW) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for being here. On behalf of the Board of Directors of CLW, it is my pleasure to welcome you all to the 2022 Annual Securityholders' Meeting of Charter Hall Long WALE REIT. My name is Peeyush Gupta, and I'm the Chair of the Charter Hall Long WALE REIT Board of Directors. It's now just gone past midday. And as the necessary quorum is present, I declare this meeting properly constituted and open. I'd like to commence today's presentation with the acknowledgment of the country. Charter Hall is proud to work with our customers and communities to invest in and create places -- and create places assets on lands across Australia. We pay our respects to the traditional owners, their elders past and present and value their care and custodianship of these lands. This afternoon, I'll provide a brief overview of the REIT's strategy and some commentary on performance and growth over FY '22. The Charter Hall Long WALE REIT Fund Manager, Avi Anger, will then provide an update on the operational and financial performance for FY '22. We will then move to the formal business of the meeting and the resolution for your consideration. There is one resolution for consideration today, and that involves the reelection of myself as Chair to the Board. I'll say a few words at that time providing some personal background and reasons why I believe I should be reelected. Now I'd like to spend some time discussing CLW's achievements, and then I'll hand over to Avi, as I mentioned. Since CLW's listing on the ASX in November 2016, the management and Board have been focused on executing our strategy while providing investors with stable, secure and growing income and capital growth. Today, CLW's Australia's largest diversified long WALE REIT included in the ASX 200 and is the top 10 listed AREIT by market capitalization. CLW has a best-in-class $7.1 billion diversified real estate portfolio consisting of 549 properties with a long-dated average lease term of 12 years. 52% of the income of the REIT comes from triple net lease properties. This is an important feature of CLW's portfolio, given that under a triple net lease structure, the tenant is responsible for all outgoings, maintenance and capital expenditure. In addition, 80% of the CLW's portfolio is now located in markets on the Eastern Seaboard of Australia. These factors enhance the security and continuities of CLW's income. When we compare CLW to the large and mid-cap passive AREIT peers, CLW's operating earnings per share and dividends per share, CAGR or compound annual growth of 3.8% across the past 5-year period since listing, is the strongest amongst our peer set, reflecting the quality of the portfolio and attractive lease structures in place. CLW's portfolio continues to be diversified by tenant, industry, geography and property type, which contributes to the stability of its cash flow. CLW has a high-quality income stream generated from blue chip tenants with 99% of our tenants, consisting of government, ASX listed, multinational or national businesses. Our largest tenants are the Endeavour Group, government, Telstra and British Petroleum, who collectively account for 59% of the REIT's income. CLW's properties are leased to 81 tenants across Australia and New Zealand and diversified across long WALE retail, office, industrial, social infrastructure and agri-logistics sectors. All the leases in our portfolio have either annual rent increases, providing strong year-on-year income growth consisting a mix of fixed or CPI linked annual increases. That income growth benefits from increases in inflation, 49% of our rent increases across our portfolio are linked to CPI. This is a material increase, up from 40% last year, which is particularly attractive in the current inflationary environment. With a forecasted weighted average income -- increase in income across our CPI-linked leases of 6.3% in FY '23. The average fixed increase across the portfolio is a high 3.1%. 52% of the income of the REIT now comes from triple net leases. This provides CLW investors with a portfolio that requires a relatively low level of capital investment to maintain, thereby improving returns. The Board is also committed to ensuring CLW retains a prudent capital management position. Balance sheet gearing as at 30th of June was 29.9%, within our target gearing range of 25% to 35% and with a weighted average debt maturity of 5.2 years. The Board also remains focused on implementing sustainability initiatives across CLW's portfolios and consider ESG as a driver of long-term value for investors and tenant customers. CLW has achieved an approximate 50% reduction in emissions under operational control because of our office and industrial sectors now being powered by 100% grid supplied renewables in FY '22. Additionally, CLW is proud to partner with our tenant customers having agreed to install an additional 5.6 megawatts of on-site solar in the next coming year. We have leveraged our green credentials to execute sustainable finance transactions, including at our property at 242 Exhibition Street, Melbourne. We achieved 72 in the 2021 GRESB assessment, which is one of those surveys of your environmental sustainability. That was an increase of 10 points compared to the prior period, again, evidence of our commitment to continuous improvement in this area. Good governance is an important element of sustainability, and that's something that your Board of Directors is keenly focused on. One of our roles as directors is to ensure that management adheres to the strategy of the REIT. The independent directors maintain oversight of the services that are provided by the Charter Hall Group to CLW, ensuring a level of service that is consistent and appropriate for the fees charges. Within this capacity, we regularly engage external consultants to benchmark these fees to ensure that they are appropriate and consistent with market standards and that CLW security holders are receiving value for money. We also appoint the external auditors to audit the accounts and then it is the responsibility of the directors to approve the REIT's financial statements. In fulfilling these duties, I would like to assure securityholders that your directors are ever mindful of their responsibilities to act in the interest of all security holders, and we endeavor to ensure CLW continues to provide investors with stable and secure income and the potential for both income and capital growth through an exposure to a portfolio of high-quality properties and tenants with a long WALE. The Board remains committed to aligning with best practice frameworks to support transparency and disclosure. Finally, I would also like to acknowledge the achievements that I've outlined today have all been achieved as a result of the management of the REIT by the Charter Hall Group. Investors in CLW received the benefit of the quality and experience of Charter Hall's capabilities, including acquisitions, asset management, property management, development, finance, legal and treasury services. Thank you for your ongoing support and interest in CLW. I will now hand over to Avi Anger, who is the Fund Manager for CLW to review the year's financial and operating performance and to discuss the outlook for FY '23. Avi?

Thank you, Peeyush. I'd like to start briefly discussing the financial performance of the REIT in FY '22 and some of the highlights from that year. I'm pleased to report that we achieved strong operating performance over the year in FY '22, delivering EPS of $0.305 per security, which represented a 4.5% growth over FY '21. Consistent with the FY '21 results, there was a negligible impact on the returning as a result of COVID-19 given the very small exposure to tenants entitled to rent relief. Our exposure to major national tenants in non-discretionary and defensive industries means CLW was well insulated against the mandated COVID-19 shutdowns. Our NTA, net tangible assets per security at 30 June 2022 was $6.17, up 18.2% from $5.22 the year before. Over the year, we achieved $670 million of net valuation uplift for our investors, demonstrating the quality and resilience of the portfolio. And this valuation uplift was achieved across our entire portfolio of indicating our focus on long WALE real estate. CLW has a long weighted average lease term of 12 years providing security and continuity of income for our investors. 49% of our lease reviews annually are CPI-linked, which this year we're forecasting to achieve a strong 6.3% weighted average increase in FY '23 and 52% of our income is from triple net leases. Balance sheet gearing at the moment is 29.2%, within our target gearing range of 25% to 35% -- and at 30 June, we had a weighted average debt maturity of 5.2 years. We also completed a number of significant capital management achievements in the past year. We completed $1.7 billion of debt initiatives, which included a successful refinance of $1 billion of existing facilities with an average loan term extension of 1.5 years as well as increasing $357 million to our existing facilities. We secured new facilities of $355 million with an average term of 6.1 years to partially fund the activity during the year. In total, these debt initiatives represent close to 50% of the REIT's debt platform and provide the REIT with secure long-term financing. The REIT currently has $2.1 billion of its debt hedged, which reflects a hedged position of 77% for FY '23 with a weighted average hedge maturity of 2.9 years. Turning to Slide 11. The portfolio value is now $7.1 billion. Occupancy is 99%, and the portfolio has an average cap rate of 4.35%. During the year, we further enhanced the portfolio with $923 million of acquisitions. These acquisitions have increased the number of properties of the REIT to 549. During the year, CLW completed the acquisition of 50% of the ALE Property Group, together with our investment partner Hostplus, one of Australia's largest super funds. The national portfolio of 78 high-quality pubs and bottle shops is located predominantly in metropolitan locations along the East Coast of Australia. The property features triple net leases to best-in-class ASX-listed tenant Endeavour Group with the portfolio featuring uncapped annual CPI reviews and an open market review in 6 years' time. The large landholding and significantly under-rented portfolio provides the opportunity of income and capital growth in the future. Pleasingly, the portfolio of pubs was externally revalued after our acquisition, and we achieved an uplift of $99 million. Turning to Slide 13. An important part of our strategy is to grow and enhance our portfolio through accretive acquisitions. In addition to the previously mentioned 50% of the ALE portfolio during the year, we also acquired 3 modern industrial and logistics facilities for a total consideration of $88 million. The acquisitions include one of Australia's largest waste-to-energy facilities in Sydney leased to a joint venture between Cleanaway and ResourceCo. The property was acquired off market with an average lease term of 15.9 years. The Modern Star Distribution facility in Brisbane is leased to Toyota and the Toyota Material Handling distribution center in Brisbane were other acquisitions acquired in the year. The ALE acquisition and those industrial acquisitions demonstrate our focus on transactions offering attractive long-term risk-adjusted returns, but also mindful of downside protection. Investing in properties that are strategically important to our tenants with strong tenant credit and favoring large companies and properties with high underlying land value. All properties acquired in the year were independently valued since acquisition, materially higher than the purchase price that was paid for those assets. On Slide 14, we cover some portfolio leasing highlights over the year. And whilst the benefit of a long WALE portfolio is the long-dated nature of our lease expiries. We are focused on proactively extending our leases ahead of their expiry dates. We recently announced that CLW had executed a long-term extension with Metcash at our Canning Vale distribution center in Perth. As a result, this expiry, which was to occur in FY '24 has been pushed out by further 10 years to FY '34. The agreement with Metcash includes expansion of facilities on the site and installation of significant rooftop solar system. The lease extension demonstrates the active and collaborative approach of CLW to achieve mutually beneficial outcomes for investors and tenant customers and was made possible as a result of the deep relationships across the Charter Hall business with Metcash and highlights the significant benefit we receive from being part of the Chartable platform. CLW also recently entered into a 10-year lease with Emeco at our office property at Osborne Park in Perth, which takes this building to 100% leased with an average lease term in the building of 10 years. Slide 15 and our portfolio of long WALE properties is leased to high-quality tenants, including Endeavour Group, government, Telstra, BP, Inghams and Coles, and provides CLW with tenant diversification to best-in-class tenant register. The acquisitions completed during the period further increased our exposure to Endeavour Group, whilst the introduction of new tenants in the period further diversify our tenant base. CLW's portfolio has a long-dated lease expiry profile, reflecting a low-risk position relative to our peers in the sector. Our portfolio WALE, quality of tenants and proportion of triple net leases provides better downside protection and more resilient income streams to our investors. On Slide 26 (sic) [ Slide 16 ], we're pleased to reaffirm our guidance for FY '23. And based on information currently available and barring any unforeseen events, we reaffirm our EPS guidance of $0.28 per security and distribution per security of the same amount. Based on yesterday's closing price, this represents an attractive yield of 6.8%. In closing, I'd like to thank the directors of CLW for their ongoing guidance and support in the running of CLW and you our securityholders for your trust and support. We remain focused on delivering a long WALE resilient portfolio leased to high-quality tenants and providing investors with both income and capital growth over the long term. I would now like to hand over to the Chair, Peeyush, to conduct the formal business of the meeting.

Thanks, Avi. And is it possible to go back to Slide 5? My apologies. I slip -- skipped over this slide, and I'd like to introduce my fellow directors and other management that are present here today. And so firstly, and welcome also to my fellow board members, Glenn Fraser, who is the Non-Executive Director and Chair of our Audit, Risk and Compliance Committee; Ceinwen Kirk-Lennox, one of our independent nonexecutive directors; Carmel Hourigan; Executive Director in Charter Hall Group's CEO Office; and David Harrison, the Charter Hall Group's Managing Director and Group CEO. Also present at our meeting today is Avi Anger, who you heard from our Fund Manager for the long WALE REIT; Darryl Chua, who's the Deputy Fund Manager for long WALE REIT; Scott Martin, who is the Head of our long WALE REIT Finance; and Mark Bryant, our Company Secretary. Ryan McMahon is our auditor from PricewaterhouseCoopers, who is also here and available to answer any questions about the audit or the financial statements from security holders. So with those introductions, I'm happy now to take any questions from the floor. And then after that from any online questions and to address those before we move to the formal resolution of the -- in front of the meeting. So if you could perhaps just introduce yourself and then your question. Thank you.

David Kingston, K Capital. Look, nice presentation, but let me perhaps ask a few more focused questions. Chair, you said you are seeking long-term capital growth. In the last 4 years, you've achieved none. Share price was $4 4 years ago, 2018. It peaked at about [ $5.80 - $5.90 ], it's back to where it was 4 years ago. So I think your comment is not quite accurate. Secondly, Chair, stocks trading at a 35% discount to NTA. Now that's huge. Now we all understand that REITs are under pressure, but this one has some attraction with its long WALE, nice and nice properties, but a 35% discount to NTA is totally notably unacceptable. My question is, why don't you do a buyback? Thirdly, Chair, I think your comment about gearing is technically correct, but also misleading in your own documents. You declare the look-through gearing is 37%. And yet in the presentation today, you keep on talking about 29% or 30%. Look through is a very important statistic. I just think you're putting a glass on this. Next issue, Chair, cap rates. You just bought an office block for over 7% yield. I think from memory, your average cap rate is about 4.9%. We all know that cap rates are about to go through the roof. That's going to have a huge impact on your gearing ratio, which will take the look through from 37% up to maybe 45%, 50%, which might even mean you need to do an emergency equity issue. You might be in breach at LTV debt covenants. You might be in breach of ICR once the hedging runs out. I appreciate what you say and well done, you've got some hedging, you've got 77% hedging, a weighted average hedging of 2.9 years, but your interest rate is going to go through the roof once that hedging expires that may lead to a breach of your interest cover ratio. Again, it may lead to an emergency rights issue. So then my -- just a few questions, Chair. I think the presentation was very glossy, very positive, but the truth is, and not just for this company, for every REIT today, the truth is the outlook is bleak. And that's why the market is rating you at a monstrous 35% discount 28. I appreciate comments on those points.

Thank you very much for those series of questions, Mr. Kingston. So let's take them in turn. There are things that we can control and then there are things that we don't control, the market's control. So your first question was you observed that our share price growth has been disappointing. And frankly, we would agree with you. We are a bit perplexed. This is an industry or sector-wide issue, as you well know. When we talked about income and capital appreciation, I guess I was referring more on the capital side to the things that we can control, which includes NTA growth. That is the appraised value of the properties that we've purchased and so on, and that we have grown very handsomely from initial NTA of $4 to $6.17 today. Yes, that is not reflected in the current share price. We operate in a -- we are part of a subsector, which is a proxy for bond yields -- and/or rather very sensitive to bond yields. And so with interest inflation rising and as a consequent central banks tightening interest rates, the equity markets are running scared and we have seen declines right across the market, but particularly for interest rate sensitive stocks, of which we are one. So we empathize greatly with our investors. As directors, we are all also investors, I might add. And so we too would like to see some recovery in our share price. But we have grown NTA very successfully and strongly over the time that we've been listed. Buybacks. Buybacks have been an issue on our mind or more particularly balance sheet management, of which buybacks is but one option. There is -- that reduction could be another option in this environment, et cetera. And I think also another issue in our mind has been to be concerned or to monitor our distributions over time because our fundamental promise really to our investors is security of the capital and security of their income streams and hopefully, a growing income stream over time. So buybacks are on our mind as well as capital management generally, and we'll continue to discuss those, although we haven't made any -- we have not as the Board reached any decisions on those at the moment. Your third question, Mr. Kingston, was around gearing. And yes, there is a distinction, which we have been very transparent about, right since inception between gearing at the headstock aggregate level and gearing on a look-through basis. Now some of our assets are leased are -- I'd call them specialty assets for one of a better phrase. They typically are leased to a major tenants, such as Telstra, such as Inghams, such as Endeavour Group and typically on very long-term WALE, well in excess of the average WALE that we have, so these might be 20-year leases and so on. They're typically housed in an SPV, a special purpose vehicle, and we can and do one higher gearing within those vehicles, which is why our look-through gearing is higher than our headstock hearing. But -- these higher levels of gearing in the SPVs are not recourse to the main entity, the listed entity. So the nonrecourse. And we believe that the quality of the counterparty tenant and the length of the leases allows us to have safely higher gearing levels. So we do have a weather eye to look through gearing, but we also have a weather eye to the nature of the legal arrangements to look through and recourse as well as what our policy position is on our headstock gearing level, and we are within our policy balance. Part of gearing obviously is to monitor your exposure to run stress tests on the various covenants that we have. We do that regularly as a Board. Yes, rising interest rates mean that we -- today, we have less headroom than we had before. But on the major covenants that we have, we still have ample headroom. That's not to say that we are oblivious and not mindful to further rights and interest rates and so on. But we're not panicked by any structure of the imagination. We think we are able to comfortably be within our covenant across a very rare range of scenarios and -- although who knows what the future will hold. If we knew that, I'm sure with the benefit of hindsight, we will all do things differently, but with the benefit of no hindsight, you need to be prudent and manage the competing trade-offs that exist. Finally, on cap rates. You're processing a major rise in cap rates. It is very true that there is a discontinuity between what the listed markets are saying for REITs and what appraised values are saying for REITs. That is definitely true. One of them is either very wrong or both are slightly wrong. Probably both are slightly wrong. That is to say the listed market is overestimating any expansion in REITs and the appraised unlisted market is one exhibiting the typical lag that occurs in unlisted markets. Suffice it to say, we have good headroom on our debt covenants with respect to cap rate expansion. And we have a range of other initiatives that we could enact should we ever feel that those limits were being briefed. So I think those were the 4 questions you asked, Mr. Kingston.

Okay. I appreciate it's nothing certain. But with American 10-year bonds at 4.15%, which is pretty mind-boggling. Australian market is expecting 90-day bills to move up towards 4%. If we just conceptualize, if that is true, if the market is true, when your hedging expires, 77% for 2.9 years, that's going to have a huge impact on your interest cover ratio because your borrowing cost if the market is correct, we'll move up to about 5.5%, that's going to make a monstrous impact. It will also make a monstrous impact on your NTA because your cap rates -- if the market is correct, the cap rates will go through the roof, which will have a huge impact on your gearing. So in my view, you've done a lot of very good things. You've got some great properties. The concept of long WALE is great, so plenty of ticks, the big challenges for this REIT are the interest rate environment, which, in my view, once your hedging expires and once the value is catch up, we all know that values are lagging [ group of people ]. There's also some reluctance by valuers to adjust to the market is seeing valuations, they like to see real-world transactions. But there's nothing sure that valuation cap rates are going to go through the roof, and that's going to snack your NTA. And I think it's going to have a big impact on your FFO once your hedging expires.

So you've raised fair things for those 2 observations. You talked about our hedge ratio at 2.9 years and cap rate expansion, again. On the hedge ratio, 2.9 years is a long time in markets, as you would well know, Mr. Kingston, right? The consensus at the moment across many economies seems to be that the Fed has clearly signaled its policy intent, which is to tame inflation, and therefore, it is likely that at least the U.S. Fed will continue to raise rates for a while. The last RBA move was less than anticipated. Absent any other considerations, [ Mr. Loh ] is probably indicating that he believes that they've done sufficiently now to observe the effects come through in the real economy over time. However, Australia is not an Ireland immune from other forces. So it's probably the case that the RBA can't afford to get too far behind where the Fed and other central banks code because it impacts our exchange rate too much. So there's quite possible scenario that we will continue globally to see further tightening -- raising of interest rates by central banks. It is equally the case though that the world is highly indebted. And that the market consensus is that rates may well start coming down in 2024, not 2023, but 2024. In any case, all of those things are but speculation and within -- well within the 2.9 years. Another point worth making is hedging is not costless. We are currently 77% hedged. We could try and lay off more risk, expand the hedge duration, but there's no such thing as a free lunch. Everything involves a trade-off. Our best judgment, given the cost of laying off further risk relative to what our forecast is for how we think the scenarios will play out, most likely, we are comfortable with where we are at the moment. Of course, we will continue to monitor what happens to interest rates, what happens to the cost of hedging, what happens to the duration of the hedging and also of our debt stack. On your assertion, Mr. Kingston, that cap rates are necessarily going to expand. We would not fully agree with that. At the moment, albeit there have not been a lot of market transactions. In the industrial market, there is a scarcity of stock, and there is very strong forecast for rental income growth. Across the Charter Hall Group, in the past 3 or 4 months, there actually had been several smaller assets admittedly in the industrial sector that have sold well above book value, well above book value. No evidence there or cap rate expansion there. Now the office sector, yes, the whole work from home, et cetera, the tussle between staff and executives trying to bring people back, that's a bit of an unknown. In that segment of the market, though, the nuanced discussion would be around prime assets versus secondary assets. Historically, what -- when we've been through such cycles before. It's the secondary assets that get impacted most and there is a significant cap rate expansion. But primary assets tend to not suffer the same amount of declines. Across our office portfolio, we're mainly prime, not exclusively, but mainly prime. That gives us some insulation, but not all. So yes, cap rates might expand, but I -- we don't buy the thesis that they will necessarily universally expand across all subsectors. And I should have also turned the reference our specialty assets. The Telstra exchanges, with Indian house in many of them, will cap expense for those with 20-year leases, CPI-linked? Your guess is as good as mine, but we're not persuaded that necessarily there will be a great expansion there. So it will be a mixed story across the subsectors. I'm happy to come back to Mr. Kingston if you have further questions, but let's see if there are any other questions from the floor.

Mr. Chairman. My name is Julian Walter, I'm a private investor who came over from ALE Property. Again, on subject cap rate. I'm also a stockholder in Growthpoint Properties, which has a portfolio which is comparable in quality to your own portfolio, long WALE and very good tenants. They said June last year, they had a cap rate of -- overall cap rate of 5%. Your cap rate average -- weighted average was 4.3%. At 30 June last year, the 10-year government bond rate was 3.76% and a 20-year bond rate was 3.94%. According to IFM, your cap rate at 4.3% to be somewhat aggressive. Currently, the 10-year bond rate of 4%, the 20-year bond rate of 4.35%. Can you seriously state that you -- that the cap rate of 4.3% is maintainable?

Okay. Well, thank you for your question, Mr. Walter. I think the first point that I'd make is that we don't really set the cap rate in that sense. We have our -- all of our properties independently valued, at least annually and most generally twice a year. So this is as best as we can do to get independent valuers assess and opine on what they believe is the appropriate valuation for the property and with their underlying assumptions for cap rates and discounts and terminal values and the like. And that's where our weighted cap rate figure comes from. It's from these independent valuations. In response to Mr. Kingston's questions earlier, right, I think I did cover a little bit of the subsectors that we hold and what our view is as to how cap rates might perform over the period ahead. But look, it is very highly sensitive to what the economies, the real economy as well as central banks and interest rates do, no doubt. But we are where we are and the current cap rate that we have is a reflection of the independent valuations that have been done.

Just on growth point. I think you would find -- there are -- their portfolio is predominantly office I think you'd find -- yes. I think -- okay. Potentially, I think it's more heavily way to office. In any event, I think if you look at the cap rates, comparable cap rates across office is probably similar to what theirs as well. I think some of our cap rates on the more specialized assets, as [ Avi ] talked about like our pups Telstra exchanges there -- yes, well, the old cap rates have moved down over recent years, it's right. So we see that. But that's what's -- that's bringing down the average.

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So I hope we've answered your question as best as we can, Mr. Walton. Are there any other question? Yes.

[ Doris Patrick ], long-term shareholder. I'm just -- I would like to have a look historically when we go back 14 years ago to global financial crisis. How would you characterize this compared the 2 situations now and 14 years ago? And what are the strong points at the moment?

Thank you for your question, Doris. I was just reflecting on -- every down cycle in markets has different drivers in a different context. I think the context 14 years ago under the GFC was a particular set of events. Liquidity drained out of the market and central banks responded aggressively, et cetera. This time around, it's a different confluence of factors. We had 15 years of ultra easy monetary policy, virtually 0% interest rates, in some cases, negative around the world. In recent times, we've had COVID. And then most recently, we've had geopolitical events like the Ukraine Russian war. So the backdrop of all of those factors, COVID has impacted supply chains in the first instance. That initially drove up inflation. Central Bank's initial view was that, that inflation would be short shop, but it would decline as supply chains came back into existence and production resumed. That turned out not to be completely accurate. That wasn't the only factor that was driving inflation. There was perhaps success liquidity that was also driving certainly asset inflation and maybe consumption inflation as well. There was a decoupling just starting on the global order, supply chains may well be kind of -- and particularly in some industries, chips comes to mind. So it's a more complex set of factors at the moment. You also had contradictory policies. Central banks are trying to obtain inflation. Governments, particularly in the U.K., you can see this play out. And different arms are sort of trying to juggle different interests. The government is trying to protect populations from austerity, from cutbacks and so on, independent central banks are trying to attain inflation. Ideally, you'd like all arms of institutions aligned in their intent, at least directionally. And so in some countries, we observed that -- maybe that hasn't been the case. So it is slightly uncertain times, particularly at the geopolitical level. I think that's the wildcard out there in all of these things. I think we can probably see absent the geopolitical things, how these things will likely play out. Governments could take away independence from central banks. Remember, that's only a relatively recent phenomenon in the past 40, 50 years. But so long as central banks largely remain independent, I mean they're mindful of political consideration, but so long as it remain largely independent, their current trajectory ought to at least halt the rise of inflation, whether it will cause inflation to come down to a 2% number or thereabouts, maybe not, maybe inflation will come down somewhat, but stabilize at a higher number. And the big question impacting asset prices is what's the terminal value for cash for the risk-free rate 12, 18 months hence. People thought it might stop with the 3 today, they're being saying it might start with a 4. We'll just have to see. What we can do in amongst all that uncertainty and what we do, do at CLW is and unlike the GFC for the REIT sector to go to your question, we are mindful of our debt and how it's layered and added. So in terms of expiry of debt, we try and make sure that not -- that it's spread out over time, so that we don't have one particular branch point. Longer-term debt in the Australian markets, it's hard to get competitive debt much beyond 5 years. So we diversified our funding sources. A portion of our debt now is longer than that access in U.S. and overseas markets. So we try and do the sensible things like that to layer and ladder our debt. We try and lay off risk, noting that it costs dollar at risk. So currently, we're sitting at 77% hedged. So that's the way we -- you can't, unfortunately, in this world, remove risk entirely. You can try and be resilient and to manage it proactively, which is what we have been trying to do, and we'll continue to try and do. Other questions? Mr. Kingston?

Chair. Just one final one for me. Look, potentially, this could be a perfect -- potentially, this could be a perfect storm for REITs. Certainly, some of the European REITs are trading at 60%, 70% discounts to NTA, it's so scary. But look, there's a threefold impact of the current environment. Number one, as interest rates rise, and I think it's clear what the market is saying that 10-year bonds are now above 4%. So it's not going to be a short-term hiccup. It could get a lot worse because interest inflation rates are 8%, 10% in different places. But the first impact is cap rates go up. Now your 4.3%, if it happens to below to 5.3% you lost 20% of your gross asset value overnight. But it's actually worse than that share because with your gearing at 37%, all it needs is your 4.3% to blow to 5.3% on and you've lost 35% of your NTA because of the gearing impact. But it's actually worse than that, you potentially quite likely, I appreciate you've got cover at the moment. But if that scenario played out, which is not a draconian scenario, I think it's a very likely scenario that your cap rate will blow from 4.3% to 5.3% because the 10-year bond rate has gone out so much. But the second aspect is you're gearing LTV cover and your interest cover ratio once the hedging runs out, you're probably going to be very, very close to covenants. The third impact clearly, when your gearing -- when your hedging runs out, it's got a big impact on your free FFO because you're paying a hell of a lot more interest. My guess is your interest rate may well double once your hedging runs out. So question, if I may, to David Harrison. Look, fantastic comments on the recent AFR property scenario. I love the comment with [ Darren Steinberg ] that's -- that we're not in the toughest environment in 2009. Western Australian offices, they can only pay their outgoings. But do you see, David, you have been around for a long time. You've built a fantastic company. Congratulations at what you've done from scratch, well done. But do you see a scenario where back in 2009, GPT had an emergency equity raising at $0.60. Greg Goodman nearly went bankrupt, literally on the door of bankruptcy. That's why he's got a very low gearing now because he was pretty sensed in that period. He's done a phenomenal job. But no one knows, but life is all about playing the percentages. And in my view, your gearing is too high at the moment. In my view, your NTA is misleading. In my view, your cap rates misleading. And I think that's why the market is rating you at a 35% discount to NTA.

Look, there's been a lot of questions, a lot of comparisons for the GFC and the circumstances are very different. All I would say is, we own over $70 billion of assets -- property assets in this country across most sectors. We're not novices. We are the largest property owner in the country. We have institutional capital, most major super funds, most many global pension funds that invest with us and in some cases, like the ALE portfolio we have super funds investing alongside CLW in high-quality portfolios. I think one of the things that's missed in this discussion and I was an AMA registered day or so I've just got to make a couple of comments. Valuers are not employed to estimate what an asset is going to be worth in 3 or 5 years. Analysts are not employed, even they try to do that to try to work out where the bond yield is going to be or where -- when and if we're going to have an inflection in interest rates. So one of the reasons why this portfolio has a balance sheet gearing covenant. And whilst your focus on long look-through gearing is relevant. GPT had 2 emergency equity raisings in the GFC because they actually had a look through balance sheet covenant, and they reached or nearly reached it, which is why they had to do their equity raisings. Nearly 50% of the income in this portfolio is unhedged CPI. So if you are looking at assets that have 5%, 6%, 7% rental growth, they're naturally going to justify a lower cap rate than something that might have a 2% or 3% growth rate that might be at a higher cap rate. I know growth point very well. So I've sold most their office assets and industrial asset to them. And there's a lot of other REITs that have bought from us. So I don't want to get into a [indiscernible] on comparisons that this portfolio is one of the highest quality portfolios in the country. Charter Hall Group has the biggest investment in this fund of any of our other investments, pretty big complement to CLW. So I personally have got over 1 million shares in CLW, another, in my opinion, complement the CLW. So I do know the market well. None of us know whether bond yields are going to top out at 4%, 5%. None of us know whether your proposition that the cap rates could go to 5.3%. What I would say to you is, when you have high-quality, long-leased assets that have the sort of rental growth with nearly 50% of the portfolio with CPI indexation, the chances of both the buyers in the market because with all due respect to listed investors, they don't actually set valuations and values are followers. What sets property valuations is willing buyer, willing seller. So the sales evidence is what will determine the future market value of assets. And our experience and the sales evidence that exists right now, even with rising bond yields suggest that assets with high-quality tenants with stronger rental growth are going to maintain attractive or low yield. And in some cases, some as is the case in industrial, the yields are more or less at bond yields. Now when you have double-digit rental growth in industrial with vacancy factors less than 1% in most major markets, lower than I've ever seen in my 35 years in this industry, of course, you're going to have sharper cap rates for those sort of assets. Now we don't need to get into a debate whether that market will maintain that sort of momentum. The reality is that the macro growth of e-commerce is going to continue to help industrial. And as you say, Greg Goodman has done a great job in playing that logistics market. So if we -- we're as big as Goodman in industrial and Australia. So if I think about the way we've cultivated the CLW portfolio, we have leveraged it to industrial. We've leveraged it to CPI-linked properties. We also have, in the case of ALE bought assets that are significantly below market rents. The reason why ALE has traded the way it has for many years is that it's passing rent is well below market levels. Now whether we extract that now or in 2028 when there's an open market review, we're still going to get that rental growth on behalf of CLW investors and our partner, Hostplus. So I do think there's a little bit of crystal balling going on in the conversation today as investors, you have the right to crystal ball. But as the manager of the biggest portfolio of real estate in this country, I think we have a pretty good grip on where market is going to go, what's the best way to position these portfolios in the context of our view of where bond yields are going, but more importantly, in the context of where rental rates going. And yes, I agree that we always need to maintain buffers. But I went through the GFC, the reason why we're 3x our IPO price and a lot of other large REITs are less than their IPO process 30 years ago is that we've been good custodians of capital. And I don't think there's any one of our funds that are going to get into that emergency rights issue scenario that you're talking about. We have a large portfolio of very liquid assets. And as Peeyush said, the Board will consider all of those capital management initiatives you've talked about. But there's no free lunch. You sell assets in your degear, you're going to lower your earnings per unit. I think investors have bought CLW because they want stability of income, stability of distributions. They want a low-risk portfolio with a combination of fixed rental growth with CPI growth, and that's what we're delivering. I'm not saying that we're not cautious about maintaining those buffers. Of course, we are. But we're not going to get into the situation, as you've suggested that occurred in the GFC, where some very good quality REITs had to do emergency equity raising. We weren't one of them, and we're not going to be presiding over any funds that are going to need to do that. So we're quite confident about managing this portfolio and managing the risk that you've articulated. I think the reality is none of us have any idea about crystal balling because if we did, we wouldn't be sitting here. The reality is that the direction of interest rates, the direction of the economy, whether we have a soft landing and midsized landing or a hard landing in different economies they are all questions that will unravel over the next few years. But to your earlier point, I do think we will continue to maintain those buffers. We have a board and a management team that's not oblivious to the risk. And all I would say to you is that from our perspective, as the largest investor in CLW at 11% of the register, it's a pretty important investment for the Charter Hall Group and we'll continue to cultivate the portfolio appropriately, having regard to risk, but also have in regard to, as the Chair said, we're ultimately there to provide stable distributions to our investors and provide some earnings growth. So I think your point is well made about rising debt costs, but we also have the benefit in this portfolio of a pretty strong indexation because interest rates can't run off in perpetuity unless inflation is running off. So if we're getting inflation as we did in June and most of the inflation-linked assets in this portfolio benefit from the September print. Whether or not it's above or below the June print, it's still going to provide pretty strong rental growth for our CLW investors.

There's another question.

Charlie Kingston, K Capital. Just don't mean to go on about it, but the cap rate issue. There is minimal private transaction evidence as has been discussed, but the most recent asset that you bought was on an initial yield of 7.4%, I think it was done at the occupancy or if it's under rented. But I think it was a 9-year lease. I presume it's pretty fully occupied, et cetera. But how reflective is that of the private market at the moment, that's sort of yield. David, again, I think you were quoted back a few weeks ago at the AFR Summit something along the lines of -- everything will be benchmarked against the 10-year as sort of the hurdle rate, which makes sense if you're buying on 7.4%, 10 years et cetera. So that 300 basis point buffer, which makes sense. But first question is how reflective is that cap rate of the current private market, which you've said does set the valuations? And then secondly, just looking forward in terms of growth, historically, you've grown through raising equity, sometimes at a premium. I think that was once a discount to NTA. But when you bought LEP, that was part script. But looking forward, just bearing in mind that recent purchase of a 7.4% sort of cap rate. Is that the sort of acquisition hurdle you'd be looking for? And how are you going to finance that? Because as we've spoken, debt costs are going up, I presume, 5-odd-percent to be borrowing today. So presumably, you want to hurdle. It's an industrial shore, there's plenty of rental growth to justify that potentially. But just looking forward, how are you going to be financing any growth, would it be an issue? And presume wouldn't be any further equity issuance or just any comments around that would be great.

Thank you, Charlie. I think there was 2 questions in there. One was sort of an outlook on cap rates and does that recent Geosciences acquisition [indiscernible] and real transactions. And then secondly, our intentions about balance sheet management and growth. I'll let Avi or David between you answer the first question, and I'll take the second one.