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

Ladies and gentlemen, thank you for standing by, and welcome to Charter Hall Retail REIT 2022 Half Year Results Briefing. [Operator Instructions] It is now my pleasure to introduce Retail CEO and Executive Director of CQR, Ben Ellis.

Good morning, and welcome to the Charter Hall Retail REIT Half Year Results Presentation for the period ending 31 December 2022. My name is Ben Ellis, and I am the Retail CEO for Charter Hall and an Executive Director of CQR. Joining me this morning is Christine Kelly, Head of Retail Finance and Deputy Fund Manager of CQR. I'd like to commence today's presentation with an acknowledgment of country. Charter Hall is proud to work with our customers and communities to invest in and create places 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. Now turning to Slide 5 and our portfolio highlights for the period. The operating and financial performance of CQR has remained strong throughout the first half of FY '22. Operating earnings per unit were up 8% to $0.1422 from the first half of FY '21 and distributions per unit were up 9.3% to $0.117. The REIT's strong net property income growth was driven by our continued focus on active asset management and our recent off-market acquisitions of Butler Central in Western Australia and the BP New Zealand portfolio. These off-market acquisitions are aligned to our strategy to partner with major convenience retailers, providing a resilient income stream for our investors. For the first half of FY '22, we again achieved positive leasing spreads of 1.8%, with renewals up 1.9% and new leases up 1.4%. This activity translated into portfolio occupancy of 98.4%, up from 98.3% at June 2021. Additionally, as you will see later in the presentation, our rent outstanding for the first half of FY '22 is only $670,000 or 0.5% of portfolio billings for the period. Valuation growth across the portfolio was strong, increasing by 8.4% or $312 million in the half, reflecting the attractive nature of the portfolio and the benefit of active portfolio curation towards higher-quality assets. This drove a significant lift in net tangible assets, up 13.2% to $4.54. Looking forward, we expect to see continued strong demand for convenience and long WALE retail assets as investors see the value associated with resilient income streams and inflation-linked rental growth as characterized in the CQR portfolio. As a result of these strong operating metrics, today, I am pleased to announce upgraded earnings guidance for FY '22 earnings per unit of no less than $0.284 and distributions per unit of no less than $0.245. Turning to Slide 6 and the REIT's strategy. CQR strategy to be the leading owner of property for convenience retailers remains unchanged. This is achieved through Charter Hall's strong tenant customer relationships, strategic portfolio curation to improve asset quality, active asset management to drive rental growth whilst maintaining a prudent capital position. The result of our strategy is that we will continue to deliver a high-quality, resilient, and growing income stream for our investors. Slide 7 outlines our strategy in more detail. the REIT's portfolio of convenience-based assets are dominant in their respective catchments and provide essential everyday goods and services to the communities in which we operate. We partner with our major convenience retailers to facilitate omnichannel servicing through last-mile home delivery, Click & Collect and more recently, contactless pickup and direct to boot. We've benefited from Charter Hall's deep tenant customer relationships through a new strategic partnership with Ampol, increasing our exposure to market-leading convenience retailers and long WALE triple net leased assets benefiting from CPI-linked rental growth. We will continue our focus on all segments of the convenience retail market that provide essential goods and services as part of our ongoing portfolio curation strategy. Turning to Slide 8 and our most recent acquisition. In December, and as previously mentioned, we were pleased to announce the off-market acquisition of a 49% stake in 20 high-quality Ampol sites on an attractive 5% cap rate in partnership with Ampol. This off-market acquisition was a direct result of Charter Hall's existing relationship with Ampol and demonstrates the market-leading ability of Charter Hall to unlock attractive off-market sale and leaseback opportunities. Importantly, it introduces another major convenience retailer to CQR's portfolio, increasing the funds income from major tenants to 53.9%. Following settlement, Ampol will be CQR's eighth largest tenant customer and represent 1% of portfolio income. This transaction has a positive impact on CQR's portfolio given the capital-efficient triple net lease structure, ensuring no income or capital leakage for CQR investors, an average WALE of 15.6 years, and CPI-linked annual rent reviews. I'll now hand over to Christine to talk through the financial results for the period before moving to the operational performance in more detail.

Thanks, Ben. Now turning to Slide 10 and the financial impact from COVID-19 over first half FY '22. The chart at the bottom of this slide shows that COVID-19 tenant support continues to progressively reduce as government-mandated restrictions ease, and specialty sales and traffic rebound strongly and quickly. Over the period, CQR provided $7.6 million as COVID-19 tenant support. This support was concentrated to New South Wales and Victoria. Support provided in Q2 FY '22 of $2.5 million reflects improved trading conditions as restrictions eased in those states. Our rent collection over the period continued to be strong and demonstrates the proactive approach taken by the Charter Hall team in working with our tenants to administer support. As of today, rent outstanding for first half FY '22 is only $670,000 or 0.5% of portfolio billings. Notably, only 25% or $1.2 million of COVID-19 rent deferrals provided over FY '20 and FY '21 remain outstanding. Our expected credit loss provision reflects our strong rental collection and considers the ongoing uncertain operating environment. As a result, we have increased our expected credit loss by only $0.7 million compared to 30 June 2021 to account for the additional $2.6 million of deferred rent provided over the period. Our operating earnings and distributions can be found on Slide 11. We delivered operating earnings of $82.1 million or $0.1422 per unit and distributions of $67.7 million or $0.117 per unit for the 6 months to 31 December 2021. This reflects growth of 8% and 9.3%, respectively, on PCP. Our operating earnings payout ratio of 82.3% accounts for adjustments to operating earnings for COVID-19 support and capital expenditure during the period. Absent of COVID-19 support, the payout ratio would have been 91% in line with pre-COVID-19 payout ratios of 90% to 95%. Total net income has risen 9.7% to $102.9 million. This income growth has been driven by same-property NPI growth of 3.2% and our recent off-market investments in Butler Central, and the BP New Zealand portfolio. The 3.2% same-property NPI growth reflects strong specialty performance, delivering a reduction in loss rent and continued positive leasing spreads, coupled with the solid performance of our major tenants resulting in both base rent and turnover rent increases. Annexure 4 provides further details on the impact of these movements on the total portfolio composition. Finance costs and other expenses have increased, reflecting the net portfolio growth through off-market acquisitions, capital spend and valuation growth. Consistent with prior reporting periods, our operating earnings includes recognition of income from those tenants that were provided COVID-19 tenant support. The $5 million of rent-free incentives agreed are included in operating earnings and have been capitalized. The $2.6 million of rent deferrals, offset by a $0.7 million increase in expected credit loss, has been included in operating earnings and recognized in property income. For the period, the primary impact as change in statutory profit is due to the positive valuation movements. A reconciliation of statutory profit to operating earnings and distributions can be found in Annexure 2 of this presentation. Turning now to Slide 12 and the balance sheet. Our total property portfolio value increased by $363 million over the 6-month period, with positive valuation movement of $312 million and the $51 million off-market acquisition of Butler Central in Western Australia. Borrowings have increased $68 million, primarily due to the off-market acquisition and capital investment offset by the DRP. The primary impact on assets and other liabilities is the movement in derivatives. The 13.2% or $0.53 growth in NTA from $4.01 to $4.54 predominantly reflects the strong valuation gains over the period. Our key valuation metrics are shown on Slide 13. 100% of the portfolio was revalued externally as at 31 December 2021, with the portfolio value increasing from $3.6 billion to $4 billion. Of the $312 million or 8.4% positive portfolio valuation movement, $235 million was due to the shopping center portfolio, including $37 million of capital expenditure, and $77 million from the long WALE portfolio. Both segments experienced cap rate compression with 46 basis points compression in the shopping center portfolio and 32 basis points in the long WALE portfolio, resulting in a total portfolio cap rate of 5.38% as at 31 December 2021. The 12.8% or $455 million portfolio valuation movement over the last 12 months demonstrates the quality and resilience of the portfolio and our continued commitment to active asset management. Slide 14 shows key highlights of our capital management. Our liquidity sits at $287 million, placing the REIT in a strong position to execute on strategic opportunities should they arise whilst managing any future uncertainties. The weighted average debt cost over first half FY '22 was 2.6%. Over the past 6 months, we have refinanced $220 million of debt and increased facilities by $50 million, extending FY '24 maturities to FY '27 and taking the weighted average debt maturity to 4.1 years. Our interest rate hedging is 65.1% and recent derivative transactions will ensure our hedging remains consistent over the next 2 years, minimizing the impact of interest rate rises over this period. Our balance sheet gearing remains low at 25% and look-through gearing is at the lower end of the 30% to 40% range at 31.9%. The gearing levels will increase approximately 1% following the off-market acquisition of the 20 Ampol sites expected in Q3. We are comfortably within our gearing and ICR covenants. And during the period, Moody's reaffirmed our Baa1 issuer rating with a stable outlook. With over 50% of our portfolio income growth linked directly or indirectly to inflation, high levels of interest rate hedging, and strong liquidity, we are well-positioned in the current environment to continue to deliver a resilient and growing income stream. Now back to Ben to present the operational performance of the fund and our outlook.

Thanks, Christine. Turning now to Slide 16 and the portfolio summary. Whilst COVID-19 disruptions continued in the first half of FY '22, the resilience of CQR's assets remains evident as we continue to benefit from our strategy of aligning with major convenience retailers. As mentioned in our portfolio highlights, our occupancy improved from 98.3% to 98.4% during the period. Portfolio MAT growth was positive at 0.6% and up 7.8% for the 2-year period. Portfolio WALE remained stable at 7.3 years, reflecting strong specialty leasing activity and majors lease extensions. As Christine has outlined, strong valuation growth, coupled with the off-market acquisition of Butler Central in Western Australia, has seen the portfolio value increased 10% to $4 billion. The characteristics of the resilient income growth, high proportion of major tenant income, and the quality locational attributes of the portfolio remain attractive to the broader investor market, resulting in the portfolio cap rate compressing from 5.81% to 5.38%. Importantly, the portfolio is well-positioned to take advantage of a high inflationary environment with over 50% of rental growth directly or indirectly linked to inflation. Moving now to Slide 17 outlining our tenant customer composition in more detail. As mentioned earlier, we are pleased to add Ampol to our portfolio as a major tenant, and post-settlement, Ampol will be the REIT's eighth largest tenant customer representing 1% of portfolio income. This increases our total portfolio income from major tenant customers to 53.9%, strengthening the resilience and certainty of CQR's income stream. Across the major supermarket providers, we remain well balanced between Coles and Woolworths, and continue to partner with ALDI to expand their footprint within the portfolio. Additionally, our target remixing strategy will be finalized with the completion of Target Rosebud converting to Woolworths and Dan Murphy's, and I'll touch on this in more detail later in the presentation. Following the off-market acquisition of Butler Central, our fifth largest tenant customer is now API, who are currently subject to a proposed scheme of arrangement with Wesfarmers, which would further increase our weighting to this major convenience retailer. Importantly, when we look at our exposure to any one specialty retailer, it remains limited, and we retain a clear bias towards everyday needs in convenience-based retail, food, and services. Turning now to Slide 18 and discussing our supermarkets in more detail. Supermarkets remain the foundation of CQR's shopping center portfolio. During the period, supermarkets delivered MAT growth of 1.5% and 2-year MAT growth of 10.9%. Importantly, over the same 2-year period, we had a number of supermarkets complete their base rental reviews with $1.9 million of turnover rent converting into base rent across 19 supermarket leases. This represents a 9.4% increase in their respective base rentals that has been captured permanently for CQR unitholders and equates to approximately 50% of the turnover rent previously paid during the corresponding period. In addition to these major tenant rent reviews, the number of supermarkets in turnover remains high at 62% with the number of supermarkets within 10% of the turnover threshold at 18%. In an ongoing and elevated inflationary environment, turnover rent and CQR's high percentage of stores paying or within 10% of turnover thresholds provides a valuable earnings growth and exposure to inflation. This is unique to CQR and not as readily available in less mature portfolios. Finally, we completed 6 new supermarket leases and term extensions and now have 53 Coles and Woolworths Click & Collect facilities across the portfolio. With 2 further Click & Collect facilities underway, the portfolio will have 95% coverage, and this ensures we capture online sales as part of our partnership with Coles and Woolworths. Turning now to Slide 19 and our specialty tenants. Our specialty tenants traded well with MAT growth of 2.3%. Whilst our New South Wales assets continue to experience disruptions associated with COVID-19, they still recorded positive MAT growth of 0.3%. When excluding these New South Wales assets, the specialty MAT growth was strong at 4.8%. The desirable nature of our centers saw continued strong leasing activity, with 219 leases completed, achieving leasing spreads of 1.8%. 65 new leases were transacted during the first half of FY '22, delivering a positive leasing spread of 1.4%, and 154 renewals achieving a 1.9% positive leasing spread. Our retention rate increased from 80% to 88% as retailers continue to see the attraction of our centers and their dominant positions within their respective catchments. Specialty productivity was moderately impacted by mandated store closures and trading restrictions, but still remains strong at 9,822 per square meter. Similarly, occupancy costs remain sustainable at 11.5%. And when adjusted for COVID-19 rental support, the occupancy costs normalized to a very sustainable 10.8%. Our specialty tenant sales and customer traffic continued to rebound strongly and quickly as restrictions were eased. The portfolio's strong sales productivity, sustainable occupancy costs, positive leasing spreads, and high tenant retention demonstrates the ongoing defensive and resilient nature of CQR's income. Now turning to Slide 20 and our asset enhancement projects. Charter Hall's focus on active asset management ensures we proactively invest in our centers and maintain their position as the dominant convenience centers within their respective catchments. We do this by investing alongside our major tenant customers and aligning our capital works with their store refurbishments that in turn helps to secure lease extensions and drives center MAT. We also proactively unlocked additional development opportunities on surplus land where site coverage is low and adjacent usages can generate additional income. Our capital works program future-proofs our assets through sustainability and asset management initiatives that generate real benefits for our tenant customers, communities, and CQR unitholders. Now turning to Slide 21. I'd like to talk through examples of this in more detail. In October 2020, we successfully converted a Target store at Dubbo Square in New South Wales to a Kmart tenancy. As part of the strategic asset enhancement, we invested $2 million of capital into the center, upgrading shopper amenities, common areas and installing a 500-kilowatt solar system. Our capital investment was critical in securing a new tenure lease with Kmart and mitigating a significant potential vacancy in the center. Post investment, we have seen a 13% increase in footfall, 21% increase in center MAT, and achieved an occupancy of 100%. At Campbellfield Plaza in Victoria, a center we acquired in 2019, we actively partnered with Coles securing their commitment to undertake a full store refurbishment and enter into a new long-term lease. As part of this upgrade and new lease, we invested in enhancing the center's ambience and amenities. With a total investment of $2.6 million, we have achieved increased MAT, 100% occupancy, and a new 10-year lease to Coles. Finally, at Secret Harbour in Western Australia, we identified the opportunity to leverage the low site coverage and underutilized land to build a new childcare center. Taking advantage of Charter Hall's cross-sector capabilities and relationships, we partnered with the social infrastructure team to access a leading national childcare provider and secure a new 15-year lease. In total, across these 3 assets, the investment of $7.9 million assisted in driving substantial valuation growth and demonstrates how Charter Hall's active asset management results in significant value for CQR investors. Looking forward, I'm pleased to say we continue to see good opportunities to drive further growth in value and earnings for CQR unitholders through ongoing portfolio curation and active asset management, including further pad site opportunities. Now turning to Slide 22 and our Target store conversion program. I'm pleased to announce today that following the completion of Target Rosebud's conversion to Dan Murphy's and Woolworths stores, we will have finalized our Target store conversion program. Utilizing Charter Hall's strong tenant relationships, we replace 8 Target stores with 10 high-quality tenant customers. In doing this, we have minimized downtime and mitigated lost rent. Additionally, the new leases we have entered into have resulted in a 17% uplift in rent received and a WALE of 8.5 years. As shown on the previous slide and using Dubbo Square as an example, this tenant remixing has also delivered increased center MAT footfall growth and positive valuation comps across the portfolio. Now turning to Slide 23 and our ESG highlights. Sustainability initiatives continue to be central to CQR's management and operations. We continue to make positive progress on our commitment to net-zero by 2025. We now have 19.9 megawatts of solar installations commissioned across 40 centers, and we continue to partner with our major and specialty tenants to address Scope 3 emissions. Our continued focus on NABERS Energy and Water ratings has seen the expansion of our NABERS footprint to 27 assets. Our ESG commitments also extend to recognizing the important role our centers play in their respective communities. Over the period, we continue to undertake a range of localized community initiatives and delivered on our 1% pledge commitment. These initiatives support social value outcomes to build resilient, healthy, and happy communities. Finally, turning to Slide 25 for our summary and outlook. CQR's strategy remains consistent and is focused on being the leading owner of property for convenience retailers to deliver a resilient and growing income stream for our investors. As I've outlined today, we continue to enhance the portfolio through curation and active asset management, and this is central to how we deliver growth. Our expectation is that strong MAT growth, positive leasing spreads, and high occupancy levels will continue as market conditions normalize. We also expect our portfolio to benefit from direct and indirect inflation-linked rental growth and that investor demand for CQR's high-quality nondiscretionary convenience-based assets will support further valuation growth. CQR's previous earnings guidance as at 1 December 2021 was for FY '22 earnings per unit of no less than $0.282 per unit and distributions per unit of no less than $0.243 per unit. Today, I'm pleased to upgrade CQR's earnings guidance. Barring any further unforeseen events or a further deterioration in the COVID-19 environment, FY '22 earnings per unit is expected to be no less than $0.284 per unit, representing growth of no less than 3.9% on FY '21 earnings per unit. FY '22 distributions per unit are expected to be no less than $0.245 per unit, representing growth of no less than 4.5% on FY '21 distributions per unit. That ends the full presentation. And with that, I now invite questions.

[Operator Instructions] Our first question comes from the line of Lourens Pirenc with Jarden Group.

Question on the guidance. I mean it's kind of flat half-on-half and kind of flattish on last -- the second half of '21 as well. So I just wanted to kind of see where the headwinds are against your acquisition of Ampol, the acquisitions you did in the previous 12 months, the COVID impact probably being less in the next 6 months. What am I forgetting here?

Thanks for the question. I think the best way to answer that looking at half-on-half is that not everything is lineal across a 12-month period, but the most important thing to call out in the second half is that as we mentioned in the portfolio guidance and highlights, we're converting our Rosebud Target store to Woolworths and Dan Murphy's during the second half. Whilst that's going to be a long-term positive outcome for the vehicle in respect of income growth and obviously adding attractive tenants, it does come with some downtime as we made that conversion roll through. So that's the main impact.

Great. And then can you just talk generally about the outlook for retail acquisitions?

Yes. Sure. Look, obviously, you've seen highly competitive bidding on high-quality assets in the back half of the calendar year, and we expect that to continue going forward. The characteristics of high-quality covenant tenants, convenience retailers, which have got high exposure towards inflation-linked growth is going to be something that's going to continue. So whilst we haven't got anything planned from an acquisition perspective at this point in time, we remain optimistic about the performance of the sector through the second half of the year.

And our next question comes from the line of Mollie Urquhart with Barrenjoey.

Ben and Christine, just one for me on the supermarket. So the percentage in turnover has come back a bit since June. And today, you mentioned that you've converted some of that turnover rent into base rent. Is there a performance component to this number coming off as well?

No, not at all. Thanks, Mollie, for the question. What we're seeing, as you quickly pointed out, is we've had 19 supermarket leases over the last couple of years go through a base rent review mechanism. We've obviously been able to achieve that during quite a high watermark in terms of sales for supermarkets, which has achieved a $1.9 million increase in base rent. Along with that increase in base rent, obviously, there's a reset of thresholds. And some of the supermarkets will then sort of come back down towards a breakeven point. And as supermarket sales continue to increase, we expect that number to come back up to the normalized levels we talked about previously.

Great. And then maybe just following on that in light of Woolies coming out today and saying prices were up over the half and the inflation will likely drive prices forward more. Do you have a view of where this number would go over the next 6 to 12 months?

It's hard to predict. Obviously been a pretty rocky period and the way through. But what we've seen in the first couple of months of this year has been continued sales growth amongst our supermarket and specialty retailers, and we expect that to be strong and continue the strong momentum that has been delivered throughout FY '22 for us.

Great. And then just one last one actually on the rent relief over the quarter. So the code is up at the end of March. Can you give us a number as to what you've paid out so far for the third quarter?

We forecast, for the third quarter, we'll be delivering between $1 million and $1.5 million of tenant support. We are well progressed. But obviously, that's the number that we're looking to for the end of the code in March.

Our next question comes from the line of Stuart McLean with Macquarie.

Just had a question in regards to uses of capital and saying that acquisition market is quite hot at the moment. Your own share price is trading at a material discount to NTA, and is that a potential option for capital?

Thanks, Stuart. Look, obviously, when you are trading at a discount to NTA, it does make raising capital difficult. We'll continue to look at the quality of our portfolio and the curation that's been undertaken previously has included measures being recycling of our lower-growth assets into higher-growth properties and accessing the ability of the Charter Hall [ capital insurance ] team to secure off-market transactions. And equally, we have got some available liquidity within the vehicle now to look at accretive acquisitions to the portfolio, so we'll utilize all those measures.

Yes. So more in terms is that a potential capital deployment opportunity in terms of buying back your own stock at a significant discount to NTA as opposed to competing in what's quite a tight transaction market?

So look, buybacks are a capital management measure that has been enacted upon and considered by the CQR Board in the past. You're correct, and whilst you are trading at a discount to NTA, it's a measure that the CQR Board will consider at an appropriate time, but nothing is planned at this point in time.

And why is now not the appropriate time?

Look, it's a matter to be discussed with the Board as we work through. And hopefully, the positive earnings guidance we've delivered and continue to grow our earnings going forward will help to drag the share price up.

Okay. So there's no reason being provided why a buyback is not the best use of capital?

It will be something that will be considered by the Board at the appropriate time.

And what is an appropriate time? What is a -- what would you say, are there kind of bars that need to be hit in order for an appropriate time to be -- for there to be an appropriate time?

Look, Stuart, it's hard to answer. We'll look at it over a long period of time. We'll make an appropriate assessment with the Board as we get through the results and see how the performance of the share price moves.

Okay. Second question is just around occupancy costs. I think it was mentioned that they fell to around 10.8% once the centers were open and trading more fully. What do you think is a sustainable op cost going forward?

Look, 10.8% is incredibly sustainable. And you've seen by the positive leasing spreads, which the vehicles delivered year-on-year for as long as I can remember, they've delivered positive leasing spreads. It goes to show that they are sustainable and they are growable. So we look at anything in that sort of 11%, 12% very sustainable for this vehicle, and as sales grow, so can rents.

Our next question comes from the line of Alex Prineas with Morningstar.

Just a quick question on the turnover rent. Thanks for the information that you've already provided. Is a base rent review really the only sort of reason that a supermarket would come off of a turnover arrangement, that once they're locked into that, they're typically locked in. Is that right?

Yes. So the base rent review mechanism locks in the $1.9 million we talked about as permanent base rent. That can't be changed. To answer your question directly, there might be some circumstances where supermarkets are impacted by competition or there's a period of time when they go through refurbishment and they have to shut down for or slow down their sales momentum, but that generally picks up. So there are very few circumstances other than those, under which certain market sales will be impacted.

Okay. Can you just sort of compare and contrast the -- so it looks like a lot of the service station rental arrangements are more kind of CPI-focused. Is that -- presumably that's just a preference from the service station landlord. But are there -- is there a sort of potential for different more turnover-based arrangements on service station properties or is the CPI-linked model the more prevalent one there and likely to remain the case?

Look, our leases are locked in with the service stations. They're incredibly long WALE triple net leases with CPI inflation-linked increases. So they are locked and loaded going forward.

Yes. And in terms of sort of other transactions or sort of assets that you might have looked around on the market, is that typically the way service stations are set up in terms of sale and leaseback? Or -- yes, are you able to comment on that at all?

Yes. There's an incredibly huge volume of individual service stations that get transacted every year, which gives great valuation evidence for the values and great line of sight for us in respect to where the broader investment market sees them from a value perspective. From our perspective, what we've been able to do is once again access Charter Hall's leading sale and leaseback activity to access off-market transactions with BP and now with Ampol to be able to drive growth for CQR unitholders through those attractive opportunities.

[Operator Instructions] And we have a question from the line of Peter Davidson with Pendal.

Ben, Christine. Just a query on the servo CPI resets. When do they actually reset? What reading do they take and what...

Sorry, Pete. Look, most of our service station CPI reviews have occurred in the first half of the year because both the transactions of the BP Australia and BP New Zealand occurred in December. So they've been locked and loaded. And then obviously, when Ampol settles in Q3, that will be the state at which we'll start comping out CPI reviews going forward.

Okay. And it's just the annual number, you have the annual CPI resets once a year?

Yes. Correct.

Yes, it doesn't bump every quarter, for instance?

No, no, it's an annual CPI number, Pete.

Okay. Good. And just also clarifying, Click & Collect, which is sort of background strategic issue for the supers. Can you just confirm that for your supermarket portfolio of 71, how many collect rent on Click & Collect sales?

We've been very active in partnering with Coles and Woolworths in respect of online sales and online sales contribute to our turnover rent in all our supermarket leases. And pleasingly, as we're bound to work with them to increase our coverage of direct to boot Click & Collect, we're up to 95% coverage across our portfolio. Now from that perspective, what we've seen through research we've undertaken and just pure store sales is by offering those additional services and providing omnichannel opportunities for our clients and customers, the actual catchment of our shopping centers have increased. Sales have increased. And we actually generate higher sales by people coming from outside the catchment into the physical shopping center itself. So it's a really positive impact for the portfolio.

Okay. Good. I'll call your attention to Slide 40, which is an interesting one. It looks like a pretty good report card. You mentioned the 10.8% as your op cost on a sort of a few reset for COVID, so sales were restored to where they were. So that's pretty good. Is there any headroom in that 10.8%? I mean if you cast your eye along the bottom line there, you can see you do get into the 11%, sometimes 11.8%. So is the headroom -- is there any degree of sort of under-rentedness when you spec rent? So I know, for instance, that you've had positive leasing spreads. Actually, you got a very good report card there. It looks like it's all positive. So is there any headroom for rent growth there?

Thanks, Pete. So definitely, the answer is yes. And you've seen, as you correctly pointed out, that whilst the occupancy costs have crept up, we have an impact of mandated store closures during the COVID-19 pandemic and some shadow lockdowns, but maintain a very healthy percentage going forward. Positive leasing spreads once again, we've been able to achieve this year. I think for as long as I can remember, CQR has continually printed positive leasing spreads, which goes to show the quality of the portfolio. And probably the final point I'd add on that is under the portfolio curation strategy undertaken by CQR over the last couple of years has effectively work through moving on lower growth, lower opportunity type assets and reinvest into high-quality properties. And with those high-quality properties come higher quality sales and the ability for us to continue to grow rent. So we do see headroom in our ability to continue growing rent going forward.

And I'm showing no further questions at this time. So with that, I'll turn the call back over to Ben Ellis for any closing remarks.

Thank you all for joining in today. I look forward to catching up with many of you in one-on-ones in discussions in the near future, and enjoy the rest of your day. Thank you.