Charter Hall Retail REIT (CQR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Charter Hall Retail REIT 2020 full year results briefing. [Operator Instructions] Please note that this conference is being recorded today, Thursday, August 13. I would now like to hand the conference over to your host today, Mr. Greg Chubb, Retail CEO. Thank you, sir. Please go ahead.

Good morning, and welcome to the Charter Hall Retail REIT full year results presentation for the period ending June 30, 2020. My name is Greg Chubb. I'm the retail CEO for Charter Hall and an Executive Director of CQR. Joining me this morning is Christine Kelly, Head of Retail Finance and the Deputy Fund Manager of CQR. If we can start this morning on Slide 4. The COVID pandemic has created unprecedented challenges for the industry, our communities, our tenant customers. Over the past 5 months, our teams have done an exceptional job managing daily uncertainty, operating challenges and increased tenant customer support requirements. Additionally, they've played a pivotal role in continuing to safeguard the health and well-being of the communities in which we operate. As we move through this pandemic and to the other side, I'm confident that the focused and hands-on team that we have and the way that we actively partner with our tenant customers and manage our centers will ensure our shoppers continue to have ongoing access to essential goods and services and everyday needs. Against that backdrop, the CQR portfolio continues to demonstrate resilience. We generated operating earnings of $0.3056 per unit and delivered a distribution of $0.2452 per unit. Supermarkets are the foundation of the CQR portfolio. For our supermarkets, MAT sales growth was 5.2%. And supermarkets in turnover across the portfolio increased to 61%. Total comparable MAT sales growth across the portfolio, when we include specialty sales, was 3.9%. majors WALE increased to 11.5 years. Over the year, we completed 345 specialty leases, delivering positive leasing spreads of 0.9 of 1% demonstrating the sustainable basis of CQR rents and their resilience despite the backdrop. More recently, an additional 69 lease extensions were completed as part of COVID-19 tenant support negotiations and these averaged 19 months. Despite the challenges this financial year has directed at us, the focus on partnering with the leading nondiscretionary convenience retailers has delivered sound operational performance from CQR's assets. Turning to Slide 5 and the REIT strategy. I'd like to take some time over the next couple of slides to review in detail the CQR Convenience strategy. Our strategy is on being the leading owner and manager of property for convenience retailers, and we achieved this through active asset management enhancing asset quality and maintaining a prudent capital position. The result of our strategy is that we deliver a resilient and growing income stream for our investors. Now moving to Slide 6. Our focus on partnering with the leading convenience retailers has seen the portfolio evolve through time. At its core, the CQR portfolio of convenience centers are the dominant in their catchments and provide essential everyday goods and services to the communities in which they operate. We align our capital works alongside our major tenant store refurbishments to provide the latest store formats. We proactively enable our major convenience retailers with the facilitation of omnichannel servicing through last mile home delivery, click and collect and, more recently, contactless pickup. These initiatives continue to ensure CQR centers maintain their position as the most dominant convenience centers in their catchments. More recently, we've expanded that convenience focus to capture the growing fuel and convenience market. Through the BP partnership, we've added another market-leading convenience retailer to the portfolio and expanded our reach to include a strong network of 225 fuel and convenience locations across the country. Convenience comes in many forms. And this segment of the market continues to evolve and grow as a channel for essential goods and services. Post balance date, we've also extended our partnership with Coles to include their South Australian supply chain facility. This is essential infrastructure, central to the servicing of their supermarkets and, ultimately, CQR's customers. Throughout CQR's strategic evolution, we've looked to partner with the leading convenience retailers, growing with them to further meet their property needs. Now Slide 7. We proposed changes to the CQR portfolio back in FY '15 and FY '16. At that time, the portfolio consisted of 74 centers that included 76 supermarkets. There was a large number of smaller assets, heavily biased to smaller markets in regional Australia with only 30% of the portfolio in metropolitan markets. Through time and extensive portfolio curation, we've improved the composition to enhance the resilience and security of income. We sold lower growth assets in small regional markets and increased exposure to larger metropolitan markets. Convenience focused centers in these major metropolitan markets have capacity for 2 or, in some cases, 3 supermarkets. And by virtue of their weighting towards these supermarkets results in them dominating their catchments as the most convenient place for shoppers to access their everyday needs. And these qualities have been evident during the COVID-19 period to date. By FY '17 and 18, we'd significantly reduced the number of centers in the portfolio from 74 to 58, but we'd only reduced the number of supermarkets in the portfolio to 70. Importantly, during this time, we actively increased the number of ALDI supermarkets in the portfolio to strengthen the diversity and resilience of our major tenants across the portfolio. As we've gone through FY '19 and FY '20, we've continued this evolution. And following the divestment of West Ryde Marketplace in July, the number of centers has now reduced to 50 across the portfolio. Importantly, supermarket sales across our portfolio have grown to over $3.3 billion and represent some 2/3 of total portfolio center sales. And now more than half the portfolio is located in major metropolitan markets. Through the addition of the BP portfolio and the Coles demerger from Wesfarmers, CQR now has exposure to 5 major market-leading convenience retailers, and this further enhances the resilience and security of our income. The BP portfolio has also seen us broaden our convenience focus to encompass the large and evolving fuel and convenience market. Additionally, continuing to evolve our partnership with our major tenants has delivered the opportunity for CQR to expand into the retail supply chain with our investment in the Coles Adelaide distribution center. Guiding this portfolio curation and evolution has been a result of strategically partnering with leading convenience retailers to further their property needs. Now moving to Slide 8, and we'll look at the fuel and convenience sector in some more detail. This fuel and convenience retail sector is a large and evolving market. Convenience sales, excluding fuel, generated through this channel was $8.8 billion in sales for the calendar year 2019. And interestingly, food component through this channel grew by 6% over calendar year 2019. The nondiscretionary nature of this market is consistent with CQR's existing shopping center portfolio. The strong locational attributes and the embedded land values also underpin the value of these investments, providing optionality and alternative uses in potential future years. Our investment in the BP portfolio allows CQR to participate in this important and growing channel of convenience retail. It's also a highly capital-efficient investment. The attractive triple net lease structure provides exceptional tenure with nearly a 20-year WALE to BP with predictable and growing cash flows. BP is an industry leader in this sector and has now expanded its partnership with David Jones Food from 10 to 31 locations, 26 of which sit within the CQR-owned portfolio, and this provides increased exposure to this growing segment. Globally, BP is also a leader in fuel alternative investments and in the provision of fast charging infrastructure for electric vehicles. And moving to Slide 9 and capital management. Along with the evolution of the portfolio, CQR has also refined its capital position through time. With growth in the portfolio, it's been appropriate to also manage our liquidity position, increasing the available undrawn debt the REIT can call on, particularly as we deal with the uncertainty, the COVID-19 pandemic has introduced. We've also refined the gearing as it applies to different parts of the portfolio. More recently, we've reduced the gearing in the shopping center portfolio, whereas the high underlying land values, strong covenants and triple net leases that underpin our long WALE retail investments lend themselves to differentiated gearing. Collectively, we have not changed the CQR portfolio gearing policy range of 30% to 40%, but we've looked to refine how the different component parts of the portfolio have come together to generate this. Similarly, we've also looked to extend our capital partnerships to access larger, better quality assets for the portfolio whilst maintaining the benefits of diversification. I'd now like to turn to Slide 11 and look at the operational impacts from COVID-19. As touched on earlier, our priority during the pandemic has been on safeguarding the health and well-being of our tenant customers, our team and our communities, whilst ensuring shoppers continually have access to essential goods and services, which is core to CQR's portfolio. As the charts on this slide show, the portfolio has demonstrated resilience throughout COVID-19. All of our major tenants remained open and traded positively through mandated closure periods and trading restrictions with our supermarkets and discount department stores achieving increased monthly sales growth as people shop closer to home. Specialty retailers were impacted by mandated closures or trading restrictions during April and May, with approximately 30% of specialty stores closed as of April. As a consequence, specialty MAT for FY '20 was negative 2.6%. Additionally, portfolio footfall declines were approximately 30% throughout the most impacted closure periods in April. As stores have reopened, trading and footfall has also recovered and as at June 30 was largely back to pre COVID-19 levels. Post June 30, we've seen additional negative impacts in Victoria, with 2 centers in the portfolio under Stage 4 restrictions and a further 2 centers in Stage 3 restrictions. Currently, closed shops across the 4 centers represent 2.5% of annual portfolio income. Now turning to Slide 12 and the financial impacts from COVID. During the fourth quarter, CQR provided $10.7 million of COVID-19 tenant rental support. 70% of this support was provided as rent-free incentive and all tenant rental support packages have been negotiated on a case-by-case basis. The majority of this support was provided in April at the height of the mandated closures and trading restrictions. Importantly, as stores reopened and trading and footfall improved, the level of support provided has progressively diminished on a month-by-month basis. Tenant support equaled approximately 15% of rent for the fourth quarter of FY '20 or 4% of CQR's annual income. 60% of COVID-19 tenant support arrangements had been agreed as at June 30. And in July, over 50% of outstanding negotiations have subsequently been agreed, totaling now 85% of those arrangements being resolved. And looking at fourth quarter rents, 6% of rent due for Q4 was unpaid as at June 30. Pleasingly, post balance date, we've now collected 50% of that outstanding Q4 rent, that now leaves 3% of rent collections outstanding for that quarter. While the impacts of COVID-19 are still uncertain, in particular in Victoria, the CQR portfolio has demonstrated its resilience throughout this challenging period. I'll now hand over to Christine to run through the financial results for the period before discussing the operational performance in more detail. Thank you, Christine.

Thanks, Greg. Our operating earnings and distributions can be found on Slide 14. For the period, the main impact to change in statutory profit is due to valuation movements. A reconciliation of statutory profit to operating earnings and distributions can be found in annexure 2 of the presentation. We delivered operating earnings of $142.7 million or $0.3056 per unit and distributions of $121.4 million or $0.2452 per unit for the 12 months to June 30. This represents an operating earnings payout ratio of 80.2% for the year and, most importantly, 100% operational cash flow coverage of our distributions. Over the 12 months, we have divested 8 wholly owned and 1 joint venture shopping center convenience asset and reinvested into 2 new joint venture portfolios, being Bass Hill and Pacific Square convenience plus shopping centers and the BP portfolio. Despite the net divestment of our wholly owned assets, we have achieved stable net property income of $146.4 million with the reinvestment into our joint venture assets resulting in a total net income growth of 6.7% to $181.3 million. Finance costs have reduced primarily due to the continuation of the lower interest rate environment and deleveraging following the $304 million equity raise in April 2020. The net portfolio growth has resulted in a slight increase in management fees. Our operating earnings includes recognition of income from those tenants that were provided COVID-19 tenant support as all incentives agreed or expected to be agreed have been either capitalized or expensed as a nonoperating cost. This is consistent with the REIT's previous period's calculation of operating earnings and accounting for rent-free incentives. Accounting for COVID-19 tenant support is varied depending on if and when agreements were reached and the nature of these agreements. The provision of COVID-19 tenant support has impacted operational cash flow during this period. Therefore, we have provided a reconciliation from operating earnings to net cash flow from operating activities. For the 3 months to June 30, $10.7 million of COVID-19 tenant support was provided across the portfolio. Of this, $7.6 million was in the form of rent-free incentives and $3.1 million as rent deferrals. Provisioning has been made against the deferred rent component in the property income of $700,000 or 23%. This is approximately 3x our usual provision levels. Therefore, a $10 million adjustment has been made to operating earnings. Most importantly, our distribution of $57.1 million or $0.10 per unit for the second half takes into account the cash flow generated during the second half and represents a 68% payout ratio for the second half of FY '20 operating earnings. Turning now to Slide 15 and the balance sheet. Our total property portfolio increased by $270 million over the 12-month period. This is due to the net impact of acquisitions and divestments of $284 million and a valuation decline of $14 million. Similar to the impact on income, the reduction in wholly owned investment properties, primarily due to divestments, has been offset by the investment into joint ventures. We continue to invest in our assets through capital spend aligned with our major tenant lease extensions and associated refurbishments, improving convenience and amenity for our customers. In addition, we invested in our infrastructure relating to our energy and waste management strategies, mitigating forecast cost pressures and delivering sustainable outcomes. Borrowings have decreased $196 million, primarily due to the impact of the equity raise in April 2020. The cash of $80 million decreased following the acquisition of the Coles Adelaide distribution facility in July. The primary impact on other assets and liabilities is the movement in derivatives. NTA of $3.75 was predominantly impacted by valuation movements and the $304 million of equity issued in April 2020. Our key valuation metrics are shown on Slide 16. Over FY '20, we revalued 99% of our portfolio externally by value, with 67% revalued in the second half of FY '20. Focusing on the movements in the second half of FY '20, the shopping center portfolio valuation declined by $70 million or 2.4%, with cap rate expanding 4 basis points on a like-for-like basis. Shopping center valuations have taken into account the impact of COVID-19 with values including forecast tenant support, reduction of renewal probability, decrease of market rents for existing or pending vacancies and increasing leasing incentives. Over the second half of FY '20, we also revalued the BP portfolio, resulting in a 6.2% or $26 million valuation increase. The net valuation impact on the second half of FY '20 of these movements was the decline of $44 million or 1.3%. The limited revaluation movement for June 30, 2020, reflects the quality and the resilience of our portfolio and reinforces the ongoing active asset management strategy. Slide 17 shows the key highlights of our capital management. We continue to have no debt maturing until 2022, and the recent refinancing post June 30, has now resulted in reducing the debt maturing in FY '22 to $155 million and the weighted average maturity extending from 3.9 years to 4.3 years. The weighted average debt cost over FY '20 was 2.8%, with current debt cost of 2.6%, which we expect to continue into FY '21, whilst the current interest rate environment endures. Our hedging levels of 77.5% and the average tenor of 4.6 years reflects a reduction and extension of our hedges over the period. Following the equity raise in April 2020 and post the acquisition of the Coles Distribution Center and divestment of West Ryde Marketplace in July, our shopping center leverage has reduced to 25.3% and long WALE retail leverage is 45.5%. The total portfolio leverage of 32.2% remains at the lower end of the 30% to 40% target range. The leverage of each of the shopping center and long WALE segments reflects the resilience of the income generated from these assets. We are comfortably within our gearing and ICR covenants and, during the period, Moody's reaffirmed our Baa1 issuer rating with a stable outlook. Our liquidity sits at $434 million, placing the REIT in a strong position to manage any future uncertainties plus execute on strategic opportunities should they arise. And back to Greg to present the operational performance of the fund and our outlook.

Thanks, Christine. Now turning to Slide 19 and the portfolio summary. The CQR portfolio continues to deliver defensive and dependable performance. We have a well-balanced geographic spread of assets, predominantly weighted to the Eastern Seaboard of Australia. During the year, we increased this weighting through the acquisition of interest in Pacific Square at Maroubra and Bass Hill Plaza, both in the Sydney metropolitan region. During the year, we also invested of 9 lower growth assets at a consolidated 1.9% premium to book values. It's important to note that these assets have delivered a weighted average IRR of 12% to CQR unitholders since acquisition. This ongoing portfolio curation is a hallmark of CQR's active asset management and is focused on delivering investors a resilient and growing income stream. Portfolio WALE increased from 6.5 years at June to 7.2 years during the period and majors WALE increased to 11.5 years, largely as a result of the investment in the BP portfolio. Continuing to increase WALE across the portfolio remains a key strategic focus for the fund, improving the resilience and defensive nature of CQR's income. The chart on the bottom left-hand of this slide, demonstrates this increase over the last 5 years. At an operational level, total MAT sales growth was 3.9%, up from 2.8% a year ago and largely driven by our major convenience retailers. Portfolio occupancy has fallen from 98.1% to 97.3%, with COVID-19-related closures, largely from travel and apparel-related categories. Now moving to Slide 20. The defining characteristic of the portfolio is our focus on leading nondiscretionary convenience retailers. During the year, we've increased the number of major tenant retailers to 5 with the addition of BP to the portfolio and now being our third largest major tenant. More than half of all our rental income is now derived from our major tenants, namely Woolworths, Coles, Wesfarmers, ALDI and BP-related businesses. During the period, we also grew our partnership with ALDI, increasing from 9 to 11 stores across the portfolio. The number of tenancies with Wesfarmers is expected to reduce over the next 12 months as we convert a number of target tenancies into alternate uses. Post balance date, our investment into the Coles Adelaide distribution center will further increase our weighting to Coles group with them becoming the largest tenant in the portfolio. Importantly, when we look at our exposure to any one specialty retailer, it remains limited, and we retain a clear bias towards everyday needs and convenience-based retail, food and services. Now turning to Slide 21 and supermarkets. And supermarkets remain the foundation of our convenience-based retail portfolio with 70 supermarkets across our 50 centers now generating approximately $3.3 billion in annual retail sales. Supermarkets across the portfolio delivered very strong MAT sales growth of 5.2% over the period. Demonstrating the quality of our portfolio, the number of supermarkets in turnover increased to 61% and a further 17% of supermarkets are within 10% of their respective thresholds. Our portfolio of supermarkets, including those in turnover, continues to be evenly balanced between Coles and Woolworths, coupled with an increasing exposure to ALDI. We continue to partner with our supermarket tenants in the rollout of their omnichannel offerings. During the period, we completed 5 supermarket new lease extensions and Coles and Woolworths refurbished 7 stores. Our Click & Collect installations are underway or complete at 47 of our Coles and Woolworths supermarkets across the portfolio. And in response to COVID-19, we've also rolled out contactless pickup at 23 of our retail centers. These ongoing initiatives ensure that supermarkets within our portfolio continue to provide the best level of customer convenience and, in turn, is reflected in the strong sales performance. Now moving to Slide 22. Our specialty tenants are the most COVID-19 impacted part of our portfolio, with MAT over the year negative of 2.6% due to mandated store closures and trading restrictions. As highlighted on our COVID-19 slides, MAT growth reflects store closures in the fourth quarter and is recovered with stores reopening. We've included the specialty MAT mix by category and geography in an extra 9. Over the period, we completed 345 specialty leases with a leasing spread positive at 0.9 of 1%. This consisted of 149 new leases with an average positive spread of 0.5% and 196 renewals with a 1.1% positive leasing spread. But the arrival of COVID-19 saw leasing activity significantly slow as retailers waited to assess the impacts and delayed leasing decisions. At the same time, we deployed senior management and our leasing team to negotiate COVID-19-related tenant support and facilitate rental collections. Associated with this, we did complete a further 69 lease extensions as part of COVID-19 tenant support negotiations. Pleasingly, these extensions averaged 19 months and do improve the portfolio WALE and income security. We continue to actively monitor tenant trading conditions, and I'm pleased to say over the past 6 weeks, we've seen specialty leasing activity improve. Now turning to Slide 23. Sustainability remains a critical part of enhancing our portfolio quality and is central to Charter Hall's approach to property management. As part of our ongoing solar power purchase agreement or PPA, 15 our 27 asset solar installations have now been completed or nearing completion. The energy generated from the PPA program will represent some 46% of CQR's energy needs. We also continue to target Scope 1 and Scope 2 net 0 carbon emissions by 2030 across the platform. We also aim to ensure our centers provide support and engage with the communities in which we operate. During the year, the Charter Hall Retail team volunteered some 2,000 hours as part of our ongoing partnership with The Two Good Co and supported an additional 22 local community initiatives and also donated $1 million in community space across our retail portfolio. Now to Slide 24. Our tenant customers are at the heart of our business and core to our decision-making. Our engagement, service levels and dialogue with them is critical to achieving our strategic objectives. As part of our ongoing focus of continuous feedback, annually, we undertake the industry-recognized center stat survey with Monash University. For 2020, pleasingly, our tenant customers have stated they are highly satisfied with their relationships with the Charter Hall team. And the key drivers of this satisfaction is that our people are committed to the long-term relationship, are trustworthy, effective and easy to do business with. During the COVID-19 pandemic, it's the Charter Hall team and their commitment to maintaining strong tenant customer partnerships that's been critical in the ongoing delivery of CQR strategic objectives. Now finally to Slide 26 for our summary and outlook. Our focus on partnering with market-leading, convenience-based retailers will continue to deliver long-term resilient and sustainable growth in earnings for our investors. It's our expectation that supermarket and convenience retail sales will continue to be strong, driven by customers' preferences to shop closer to home and focus on everyday needs. We've seen visitations normalized in most regions, highlighting the essential needs associated with convenience retail. Going forward, we will continue to focus on improving the income resilience and growth of CQR through portfolio curation and partnering with the leading nondiscretionary convenience retailers. This is central to the REIT strategy. In light of current COVID-19 uncertainty and associated impacts, CQR will not provide FY '21 earnings guidance at this stage. Distributions will continue to be paid with reference to operating cash flow. Now that ends the formal remarks. And with that, I'll now invite any questions.

[Operator Instructions] Your first question comes from Andrew Dodds with Jefferies.

[indiscernible] above the line rather than an AFFO adjustment?

Andrew, you broke up there at the start of your question. Could you please repeat your question?

Apologies about that. Just [indiscernible] -- is that better?

Sort of.

I'll just pick up the handset. [indiscernible] outline on Slide 30, just curious as to why you decided to take this above the line rather than an AFFO adjustment.

I'm assuming you're wanting to understand why or how we've accounted for our tenant incentives and why we've included to support our operating earnings. So as Greg mentioned, we have completed 60% of our agreements with our tenants prior to 30 June in the form of rent incentive. So that's treated as a lease modification. So it's capitalized and amortized. And that's consistent with how we've treated lease modifications and lease incentives in our operating earnings to date. In addition, there's another $3 million that we've taken as an expense, which was representing the portion that hadn't yet been agreed, and we've treated that as a non-op expense as well. But we realize that others have taken varying views depending on how far they've progressed with their lease negotiations. We were well progressed. So there were lease modifications. But to provide a clear reconciliation to the fact that our distribution is fully cash covered, we've said -- we've shown that $10 million, which was the noncash component, reflects then our net operating cash flow.

That's great. And then I'm just keen to get your thoughts on, I guess, the sustainability of specialty rents going forward. I mean this period, we saw rents going up as well as occupancy costs, all the while productivity and occupancy has declined. Do you think your specialty rents need to come down?

Andrew, so a lot of the impact there is just from -- with regards to productivity, relates to the closure period of our specialty retailers. So we've provided that information unedited, and it's actual. I still look at our occupancy costs, even with that impact in the mid to high 11% range, which should come back once we've got full months -- full 12 months' worth of trade as being sustainable. Probably still the main measure for us is the very strong specialty productivity that we have in the mid $9,000 meter range. And again, that's being impacted by the closure period. So certainly, look, there's pressure in the specialty leasing market. We've focused our efforts in the last quarter on providing the COVID support and negotiations with our retailers rather than acting on new lease and renewal activity. So our activity was very subdued for the second half. But I do see, given the productivity, the positioning and the focus of our assets that there is long-term sustainability in our income.

Great. And maybe just on offline. Just on the acquisition strategy, I mean, there's no doubt there's a bit of a change over the past 12 months. I'm just curious as to kind of what we can expect going forward I guess, post-purchase of the Coles [indiscernible], it's obviously a bit of a drift away from the convenience and Convenience Plus sale assets that you previously bought. I'm just wondering what we can kind of expect over the next sort of 12 to 24 months?

Sure. So that's obviously why we spent some time at the commencement of the presentation this morning, just going through our strategy in detail. So we see the acquisition of the Coles Adelaide facility being very much an extension of our relationship with Coles. We continue to focus on growing our partnership with our major tenant customers in Coles, Woolworths, ALDI and, more recently, BP. And it's that clear link to those tenant customers and the convenience retail market, that's our focus.

Your next question comes from Adrian Dark with Citi.

Greg and Christine, a couple of questions, potentially just picking up from what Andrew was asking about, if I can, please. So if I'm correct the [21% ] of quarter 1 wasn't collected in that period. [indiscernible] recognized in FY '20, please?

Sorry, we just had troubles hearing you as well, Adrian, I'm terribly sorry. Could you please repeat your question?

As I understand it, 21% of quarter 1 wasn't collected in that period. How much of that was recognized in FY '20 earnings, please?

Again, struggled to hear you. But I think what your question was with your outstanding rent, how much of it was before the COVID period, is that right?

[indiscernible]

Sorry, Adrian, we're really having troubles hearing you.

Your next question comes from Stuart McLean with Macquarie.

All right. Are you able to hear me okay?

Yes. Thank you, Stuart.

So slide -- if we just go to Slide 12, and it might actually be a similar question to what Adrian was asking. So 21% of your rent hasn't been collected today. Is the 15% equal to the $10.7 million? So that would be tenant?

Yes, it is. Yes, it is.

Yes, so where is the other 6% recognized? Has that been taken already in operating earnings, i.e. lowered operating earnings? And then the delta between operating earnings and cash flow was only $10 million. So where is this other 6% sitting in the P&L and in cash flow?

So as per usual, any normal debtors that you have at the end of a period during the receivables. But for both the contracted deferred rent and also the uncontracted debtors, which sits in the 6%, both of those have had significant expected credit losses put against them. So as I mentioned before, for the deferred rent, that was about 23%, and we've done the same for the other outstanding debtors. So there's already been a provision put against any unpaid rent that we expect to collect in the future.

And just to add to that, Stuart, post balance date, that 6% of rent that was outstanding at June 30 has reduced to 3% for the quarter.

And also just to clarify, so there was the $0.7 million that was put against the contracted deferred rent. There's an additional [ $0.8 million ] put against the debtors at the 6% number.

So that 6% number equates to closer to $5 million. Does that mean you've taken kind of almost $4 million, an additional $4 million in noncash items in AFFO?

Yes. So as a provision. So you have 3.1, which has had a provision of 0.7 against it, and you have 4.5, which has had a 23% provision put against it as well.

Okay. So there's additional noncash items sitting in AFFO above the $10.7 million, is this how to think about it?

Yes. however -- yes. Yes, there is. But we've put -- compared to a normal period, we've put significantly more provision against it.

Okay. Okay. And as a result, why is operating cash flow lower again. There must have been some positive impacts coming through operating cash for it to only be circa $10 million down and not more of the full call it $15 million down versus operating earnings.

Yes. And that's true. And so there's timing differences within operational cash flow versus operating earnings. But as we said, the material difference is that $10 million.

Okay. Understand. My second question is just on the balance sheet, please. So you mentioned that open for strategic opportunities as they arise and partnering, et cetera. Just with gearing on a pro forma basis at 32%, uncertain macro backdrop, how do you think about funding such acquisitions?

So Stuart, as you correctly noted, we're currently at about 32.3% on a look-through basis. We have also $434 million of liquidity on the balance sheet at the moment. So depending on the nature and style of that acquisition, we'll take into account the level of liquidity and also sitting within that 30% to 40% range.

Yes. So part of the reason for the equity raise was to shore up the balance sheet. It seems like you're comfortable enough with the macro backdrop as it stands to [ re-gear ] as opposed to keep gearing relatively muted given the uncertainties?

I'd like -- in looking at the impact of the equity raise, that was to delever the convenience or the shopping center side of the business materially. So you can see that from June 19, that has fallen almost 10%. So that's at 25.3%, and that is something that we'll be obviously conscious of in this environment because there's more expected -- there's a greater risk of valuation movement on that part of the portfolio. So we'll be watching that also in the context of the look-through leverage number.

Okay. But you're happy at more of long WALE gearing at circa 45%, which would increase your target range, by the sound of things, that you're kind of happy to run almost 35% to 45% as opposed to 30% to 40%?

I mean it's still subject to the opportunity, Stuart. But the portfolio gearing range, which is a long-term range of 30% to 40% has not changed. It's been the stated gearing range for some time. And at the current point of the cycle, we're at the lower end of that range. We'll continue to assess the market for opportunities, and we'll manage the balance sheet very prudently.

Okay. And then maybe a last one again, just on acquisitions. How do you think about acquiring distribution centers in mid 5 sort of cap rates versus what's potentially on offer with your own CQR portfolio trading at a material discount to NTA and a better earnings yield?

Again, it all comes down to the opportunity, and we'll assess the opportunities on a case-by-case situation. We're very happy with the acquisition of the interest in the Coles Adelaide facility. It's a very, very well-located facility. It's core to Coles operating infrastructure in South Australia and the northern territory. And again, we'll continue to assess the market for opportunities and assess them on their merits.

Your next question comes from Richard Jones with JPMorgan.

Just also just on Slide 12. My reading the chart on the bottom right, is that saying 45% of the $10.7 million is paid in April. Is that how you read that?

That's the level of support. So of the $10.7 million, you're right, the 45% percent number, but it relates to the support number that was negotiated of the $10.7 million.

And can you say what proportion of tenants by income had some support in Q4?

Yes. So it was approximately -- well, for April, at the heart of the pandemic, and as we've noted there, we provided approximately 45% of the overall support in that month. At the height of April, we were providing support to about 900 of our 1,600 specialty retailers. And that's reduced subsequently as trade and traffic has improved and shop openings have come back into force towards the end of June.

And can you give a rough quantum of the average proportion of rent that was supported?

So it depends on the category and the asset. So it's very quite well. In some situations, tenants have received 100% support. And in some instances, it's significantly lower than that. So it's -- again, the way that we've provided the support has been on a month-by-month basis in accordance with the code of conduct, so it looks at the impact of the individual tenant and then support has been applied in that manner.

So the code of conduct kind of talks about the risk-sharing being a 50-50, but that's obviously not what you're doing if you're providing 100% support.

Yes, exactly. So some retailers who are smaller businesses that have been mandated to close, we've negotiated more significant outcomes for them. So it's been on a case-by-case situation. And then at the same time, as we've discussed earlier, we've taken the opportunity with those retailers, in some instances, to negotiate lease extensions as well.

Okay. Okay. Just in terms of your retail -- traditional retail portfolio, how -- is there much in that, that you would look at as noncore or have you come through the bulk of the asset sales in that portfolio?

Yes. Look, I've said before that we've sold the assets that we had to sell. We'll continue to look at the bottom 5% or so of the network on a regular basis to look and try and improve the returns from those assets. And if we can't, and we can deploy capital into other opportunities, we'll look at that at that point in time. But the portfolio of 50 centers that we hold today is a very good portfolio, and it's performing well in the current market conditions.

Okay. And then just any comments, Greg, to make around the outlook for valuations of your retail portfolio?

Yes. I mean we've spoken to the valuation outcomes for the second half. We've seen our shopping center portfolio decline by approximately $70 million or 2.4%. And that's largely driven by the assumptions made by the valuers on letting up probability, incentives, rental growth and the like. So it's a very good question. And I guess it will be driven now largely by how much support continues to be needed to be provided to retailers. And if there's any transactional evidence, that then shifts cap rates in the market.

[Operator Instructions] Your next question comes from Grant McCasker with UBS.

Just on the leasing, where you've done deal structure as incentive, did you alter any other terms of the deal, i.e. base rent?

No, we didn't. So they were effectively just extensions of term and all the other salient parts of the lease remained current, including the ongoing rent review structures.

Then if we look at the occupancy decline of nearly 100 basis points, how do you think about this in the coming quarters? And should we expect more or less occupancy over the next 12 months?

Yes. Look, I think the shift in occupancy in the second half was an aberration. Largely, we were unable to do much leasing transactional activity at all. Probably the busiest time for us from a leasing perspective in a traditional market are the months of April, May and June, and we effectively weren't active over those months. So we did have obviously pressure from COVID for some categories, some of those businesses elected to close. So we've seen about 40 extra shops come back at us. And in the normal course of business, we would have the ability to re-lease those tenancies. And up until recently, we really haven't been able to be active there. So I see that shift as being a temporary one. We've seen our leasing teams move back towards leasing -- traditional leasing activity in the last 6 weeks, and there is some promising signs in the transactions that have been concluded by our team. But still, the market is challenging. There's no two ways about it. And we will do whatever we need to do to meet the market with the right retailers for those particular assets that we'd be working on.

Okay. Excellent. And then finally, I think you -- there's been a few questions on this. But if you think of the 3 different asset classes, shopping centers, long WALE, retail and critical infrastructure for your key tenants, what would you see as the best opportunity across those 3 asset classes?

I see opportunity in all 3, I see opportunity in all 3. And again, it's a matter of what opportunities make themselves available and what we can get our hands on. But I see there being opportunity in all 3 of the sectors that you've just spoken to.

[Operator Instructions] Your next question comes from Edward Day with Moelis Australia.

Just following on from Grant's question. Have you seen a reasonable increase in tenants in holdover then just given leasing activity has been pretty subdued?

A little, and that's probably been at the mutual election of ourselves and the tenants. And there's probably been maybe an extra 20 or so tenants that have gone to holdover over the last quarter, and we're fairly confident that we'll be able to move through those transactions in the first half of this financial year.

And just the leasing deals that have been done recently, can you give an idea of the spreads you're seeing?

Yes. Look, so we had a very active first half for the year, both in volumes and the positive nature of the leasing spreads. The limited number of deals that we have done in the second half have been predominantly at negative spreads. And we've reassessed those positions. And look, we'll work through the leasing activity now in a more robust fashion, as in most markets have seen a reduction in the need for us to be providing COVID-related support. So we're able to move our leasing teams back to now more traditional activity.

Your next question comes from Lauren Berry with Morgan Stanley.

Just in relation to the second shutdown in Victoria. Do you intend to account for those rent relief in the same manner that you've accounted for the overall rent relief in the first -- sorry, the second half of '20?

Yes. Yes, we do, Lauren, yes.

Yes. Okay. Cool. And then just last one for me. Just in relation to the Target stores that will be closing what percentage of income does that relate to of your portfolio? What's the timing? And do you have any plan for those assets to be re-leased?

Yes. So Target comprises approximately 2.2% of our portfolio income. We have already seen Kmart announce to conversions across our portfolio, one of which we've negotiated a 10-year lease extension. We are well advanced on a significant amount of activity that will see us, hopefully, over the next few months, announce a number of supermarket conversions of some Target boxes. And then given a good number of our Target boxes at Target countries, they will be converted to mini major spaces, and we are very well advanced on the vast majority of those. So I would be hopeful that by the time we get to the half year, we'll be able to announce a significant amount of activity there.

Great. So should we expect that your incentive levels rise a bit on the back of that leasing activity into FY '21?

Potentially, with some of those Target boxes, there will be some capital required in the reassembly of those boxes. But in the normal course of business, I think our leasing incentives for the full year for FY '20 are about 12.8 months on average. And from the activity that our teams have been concluding over the last 6 weeks, that's remained fairly constant. But yes, there may well be some additional incentives given the works associated with those target tenancies.

There are no further questions at this time. I'll now hand back to Mr. Chubb for closing remarks.

Thank you, everybody, for joining us. And apologies, Adrian. We will get you on the phone straight away to try and get to answer your questions. I'm not sure what happened there with the technology. But thank you, everyone, for joining us this morning, and we look forward to one-on-ones over the next few days. Good morning.