Charter Hall Social Infrastructure REIT (CQE.AX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Charter Hall Social Infrastructure REIT 2020 full year results briefing. [Operator Instructions] Please note that this conference is being recorded today, Tuesday, 11th of August. I would now like to hand the conference over to your host today, Mr. Travis Butcher, Fund Manager, CQE. Thank you, sir. Please go ahead.

Good morning, and welcome. I'm Travis Butcher, and I'm joined today by Scott Martin to present CQE's FY '20 full year results presentation. Well, I did not think that I ever have to be doing a results presentation from my [ own ] room. However, 2020 has been a year unlike no other. I'll commence the presentation with CQE's key metrics and discussion on the impact of COVID-19 on both the childcare industry and CQE. Scott will provide an update on the financial metrics, and then I'll return to cover our portfolio activity and update on the childcare industry, followed by a summary of CQE's outlook. Commencing on Slide 4. Despite the COVID-19 pandemic, which has provided significant challenges for the childcare industry and CQE's operators, CQE is well capitalized and reduced the resilient performance throughout the year. Key metrics for the year are as follows: Operating earnings for the year was $0.165 per unit, and the annual distribution was $0.16 per unit, which were both unchanged from FY '19. One of the key highlights during the year was the strong leasing activity. This included 40 new 20-year leases agreed with Goodstart and a renewal of 48 to 5-year options. This has resulted in CQE's WALE increasing by 28% to 12.7 years, up from 9.9 years as at 30 June 2019. Fee elections from the childcare market have held up during the COVID-19 period, and we've seen an increase in portfolio valuation of $44.2 million in FY '20 or 4.4% from the portfolio valuation as at 30 June 2019. The portfolio yield also continues to be healthy at 6.2% as at 30 June 2020. The valuation increase as well as acquisition and development activity, net of disposals, have seen gross assets grew by 8.9% to $1.3 billion. From a capital point of view, which Scott will talk to in more detail, during the second half of FY '20, we raised $100 million through an institutional placement and upsized the debt facility to $500 million, which leaves CQE well positioned from a balance sheet perspective, where gearing at 16.4% and available liquidity of $289.6 million. This improved capital position leads us well placed to withstand any ongoing COVID-19 impacts and to take advantage of opportunities as they arise. Moving to Slide 5. And the impact of COVID on the childcare industry. Throughout the entire pandemic period, the federal government has always seen childcare an essential service and childcare centers remained open all this year. During March 2020, as the COVID-19 pandemic began to escalate in Australia, attendances at childcare centers significantly dropped, anecdotally reducing to 25% to 35% for many centers. Highlighting the essential nature of childcare economy, on 2nd of April 2020, the federal government announced the early childhood education and care release package, which, combined with the broader JobKeeper scheme was provided in order to support operators and ensure that centers remained open. As attendance has improved, the government announced the recommencement of CCS in July and the return to parents paying again for childcare. JobKeeper has ceased for the industry and has been replaced for the transition payment for the September quarter to enable operators to transition back to a pre-COVID trading environment. As can be shown in the graph on the right of the page, government funding in both the June and September quarters is in excess of $2.5 billion, highlighting the importance and the essential nature of the industry. More recently, the Stage 4 restrictions in Melbourne will result in significantly reduced attendances at centers as childcare is limited to those parent who work in a permitted industry and have obtained a permit. The government has acted quickly to provide additional support to operators in Melbourne during this period while increasing the number of allowable non-attendances and increasing the transition payment. Moving to Slide 6 and the financial impact of COVID on CQE. During the COVID-19 period, CQE has been actively partnering with its operators to support them to trade through the pandemic period and ensuring sustainable long-term outcomes. Rental relief provided to operators as a result of COVID-19 has amounted to $5.4 million, noting $2.7 million have been provided in FY '20 with the balance of $2.7 million to be provided in FY '21. The $2.7 million provided equates to 14% of the invoiced amount during the June quarter. In relation to our non-SME tenants, which amount to 82% of CQE's income, we have agreed mutually beneficial outcomes on 40 leases, providing cash flow relief of $3.8 million in exchange for 6.2 years in lease extensions. SME operators account for 18% of CQE's income, and we have been supporting tenants in accordance with the National Code of Conduct, which was subsequently legislated in each state. An allowance has been made for $1.6 million with $1 million forecast to be provided as an abatement and $0.6 million to be deferred and paid back over its 2-year period. Scott will talk in more detail about the accounting for these arrangements. It's important to note that all rental relief has been short-term in nature, and there has been no change to ongoing rental levels. Moving to Slide 7 on CQE's strategy. CQE's strategy is to provide investors with stable and secure income and capital growth through exposure to social infrastructure property. We believe that the existing income stream derived from childcare can be enhanced with greater sustainability and resilience from assets in other social infrastructure subsectors with stronger tenant covenants. CQE is well positioned to capitalize on attractive long WALE social infrastructure opportunities that may arise as a result of COVID-19, in particular, in the government and tertiary education areas. We continue to look to grow income and capital values through active asset management, by leasing, development and portfolio curation. Where we see opportunities for acquisitions or developments, our goal is to fund these through the sale of noncore assets within the portfolio. Ultimately, our investment approach would be to remain disciplined and focus on assets with the following attributes: specialist use with limited competition and low substitution risk; strategic locations with high underlying land bases; predominantly triple net lease structures with minimal CapEx leakage; and assets that improved tenant covenant quality. I'll now pass on to Scott to discuss the financial results for CQE.

Thank you, Travis, and good morning to everyone. A summary of CQE's FY '20 financial performance can be found on Slide 9. CQE delivered operating earnings of $51.1 million, an increase of 15.6% on FY '19. Operating earnings per unit was $0.165, which is unchanged from FY '19. Distributions per unit for FY '20 was $0.16, also unchanged from FY '19. Key drivers of the increase in operating earnings include a $6.4 million increase in lease income, comprising $1.6 million of organic rental growth, $4.3 million from net property acquisition activity and $0.5 million from land rent on development sites; a $1.9 million share of operating earnings from the Brisbane Bus Terminal joint venture; and a $1.7 million reduction in finance costs due to lower levels of borrowings and a lower cost of debt. These items were partially offset by a $0.6 million increase in nonrecoverable outgoings primarily relating to land tax; a $0.5 million increase on the New Zealand income tax payable on the properties which CQE owns in New Zealand; a $0.4 million increase in valuation fees due to the increase in third-party valuations completed in FY '20; and a $1.6 million increase in operating expenses, comprising funds management fees and fund administration costs due to portfolio growth and new acquisitions. As touched on by Travis earlier in the presentation, rental relief provided to tenants in respect of COVID-19 has not impacted CQE's operating earnings as all incentives provided or expected to be provided to tenants have either been capitalized or expensed as a nonoperating cost. A summary of CQE's balance sheet position at 30 June 2020 is presented on Slide 10. CQE has a strong balance sheet with low gearing of 16.4% and available liquidity of $289.6 million. Investment properties have increased $94.3 million compared to FY '19, representing an increase of 8.6%. The increase in investment properties has been driven by net property revaluations of $44.2 million, an increase of 4.4% on FY '19 values; acquisition of 11 operating properties for $67.8 million, inclusive of acquisition costs; $39.0 million of expenditure incurred on CQE's development pipeline; and $56.5 million of property divestments. Other assets of $9.2 million include $4.1 million of accrued property settlement proceeds; $2 million of distributions receivable from investments in financial assets and interests in joint ventures; and $1.7 million of trade receivables, net of the provision of rent relief for SME tenants. NTA per unit has decreased by 1.4% from $2.96 at June 30, 2019, to $2.92 at 30 June 2020 with the impact of the increase in property revaluations being offset by the impact of the May 2020 equity raising. A summary of CQE's debt and hedging position is presented on Slide 11. In March 2020, CQE secured an increase to its facility limits with ANZ and HSBC, increasing total limits from $397 million to $500 million. CQE also extended the maturity date of these facilities from September 2021 to March 2023 and from September 2023 to March 2025. CQE has diversified funding sources with no debt maturity until March 2023, weighted average cost of debt of 3.1%, including amortization of deferred borrowing costs and a weighted average debt maturity of 4.1 years. As at 30 June 2020, CQE has cash reserves and undrawn debt capacity of $289.6 million, providing it with capacity to pursue new social infrastructure opportunities together with funding committed to childcare acquisitions and development expenditure. Balance sheet gearing was 16.4% at 30 June 2020, and look-through gearing was 18%. And the difference in balance sheet and look-through gearing representing CQE share of the Brisbane Bus Terminal joint ventures debt facility. The reduction of balance sheet gearing from FY '19 to FY '20 was as a result of the May 2020 equity raising and the utilization of these proceeds to initially pay down debt. In May 2020, CQE restructured its balance sheet interest rate swaps, reducing the hedge rate from 1.75% to 0.55% and reducing the amount hedged from $255 million to $160 million as a result of the reduction in drawn debt following the equity raising. CQE has a staggered hedging profile through to December 2025 with an average 50% hedged at a hedge rate of 0.55%. I will now pass back to Travis to provide an operational update and childcare industry overview.

Thanks, Scott. On Slide 13, we have CQE's portfolio summary. As detailed earlier in our strategy, we are focused on continued portfolio improvement and enhancement of tenant covenants. This is achieved through portfolio curation, including acquisitions, developments, disposals and leasing activities. Portfolio WALE as at 30 June 2020, has increased by 28.9% (sic) [ 28.3% ] to 12.7 years as a result of the number of activities. This has included the following: agreement on 40 new 20-year leases for Goodstart and 5 new 15-year leases with other tenants; agreements during the COVID period with our non-SME tenants to provide cash flow relief in exchange for lease extensions, which resulted in an average extension of 6.2 years on 40 leases; and finally, 48 of 52 5-year options renewed, which extends their expiries from FY '25 to FY '30. Importantly, this has resulted in a reduction of lease expiries within the next 5 years from 18.9% to 4.4%. The remaining lease expiries within the next 5 years include only 2.9%, where the tenant does not have options to extend the lease. In relation to tenants, we are focused on improving the overall portfolio tenant covenant, and our focus is on tenants that are well capitalized, ASX listed, that have a strong parent entity backing. Moving to Slide 14. Fixed annual reviews continue to increase from 43% to 54% in FY '21, predominantly due to the completed Goodstart transaction on 40 leases. We continue to look for opportunities to increase the percentage of fixed reviews through new lease negotiations and completion of new developments and acquisitions. There was 4 market rent reviews completed during the year with an average increase of 3.4% achieved. It's important to note this is a small sample of the portfolio with outcomes influenced by the underlying market conditions and circumstances in these localized areas. Year-on-year rental growth achieved was 2.8%, which was driven by the increased proportion of fixed reviews, which on average 3%. CQE's portfolio rent revenue analysis highlights the under-rented nature of the childcare portfolio. Based on existing operating metrics for the 2019 calendar year, the portfolio remains below the industry benchmark of rent to revenue. The CQE portfolio averages 10.5% on a rent revenue basis compared to an industry average of 12% to 14% on a good average management basis, leaving CQE well positioned to capture future rental growth. In terms of CQE's current portfolio, 75% of CQE's income is underpinned by the top 5 tenants who are all larger operators, and the Australian eastern seaboard states comprise 83% of the portfolio. Turning to Slide 15 on acquisition and disposal activity. During the year, we have settled 11 existing acquisitions totaling $64.8 million, with a further 3 acquisitions totaling $12.8 million contracted and expected to all settle in the first half of FY '21. New acquisitions have an average WALE upon acquisition of 16.2 years and with annual rent reviews of 3% or more. Consistent with improving the portfolio's tenant covenant, 10 out of the 14 acquisitions have leases to listed ASX operators. The average yield of center acquisitions was 6.3%. As part of assessing acquisitions, we're strongly focused on the location, in particular higher socioeconomic areas. These attributes support childcare businesses as well as land value growth in the long term. This is measured by a SEIFA rating with 10 being the most advantaged. Our average SEIFA rating was 8 across the new locations. In relation to disposals, during the period, we've sold 40 properties, for a total value was $59.4 million at an average selling yield of 6.3%. The major transaction during the year was a disposal of 26 properties in New Zealand, the sale of portfolio consisted of the smaller New Zealand properties that CQE owned, which had a WALE of 5.7 years at the time of sale. Our disposal strategy is based on a number of criteria, which includes properties with low underlying land value and low SEIFA ratings as evidenced by the sales completed during the year, where the average SEIFA rating was 4. The average value of CQE's acquisitions was $5.5 million compared with disposals of $1.5 million, highlighting the improvements to the quality of the portfolio. Turning to Slide 16. CQE undertook 348 valuations during the year that saw an increase of 5.8%. All of these have been completed at 30 June 2020, with valuations completed earlier in the year, refreshed since COVID-19. In terms of the 5.8% valuation increase, 2.1% was attributable to the re-leasing transaction with Goodstart and the balance predominantly attributable to rental growth. As can be seen from the bottom-right graph, the value of market transactions was down during the last 12 months, to $305 million, primarily as a result of the reduced sales activity in the last 6 months due to COVID-19, with sales of approximately $100 million for the half. Since the COVID-19 pandemic, transactions of $43 million have occurred in June and July 2020, had average yields of 5.9%, reflecting the resilience in the childcare property market. Turning to Slide 17. During FY '20, CQE completed 5 developments with a total valuation upon completion of $27.5 million and a yield on cost of 6.7%. A further 2 developments have been completed since 30 June, and we are forecasting a further 9 completions, resulting in a forecast completions for FY '21 of 11. The total development pipeline has reduced to $149.2 million across the remaining 24 sites. We've increased our utilization of third-party developers. And moving forward, it is our strategic preference to enter into agreements with third-party developers to provide CQE with assets paid for upon completion. This derisks the development of new centers for CQE by shifting planning, completion and licensing risk to the developer. Uncertainty created by COVID-19 has resulted in delays to some projects, and we are closely monitoring the impact of the Stage 4 restrictions on the Melbourne developments. Moving to Slide 19 and an update on the childcare industry. Given the current COVID-19 pandemic and change in the economy, it's important to highlight the 2 key drivers of growth in childcare demands. Firstly, is an essential labor supply mechanism which has been demonstrated in the COVID environment by the government assistance provided the operators to remain open. This has allowed Australians to work through the current pandemic and allow workers to return to a normal pace of work post the pandemic. Secondly, the significant learning benefits of children obtained from attending childcare. The quality of childcare is measured against the national quality framework with the overall rating of the services provider continuing to improve. The number of children utilizing long day care has grown by 3.6% or approximately 28,000 children in the 12-month period to 31 December 2019, and has increased by 14.8% since the CCS was introduced in July of 2018. Unfortunately, the government data has not been updated since December 2019. Participation rate has also trended upwards and has now increased to 50.9% and with approximately 800,000 children utilizing long day care services. This has increased from 38.1% 10 years ago. The impact of COVID on the tenants was significant. And anecdotally, attendance has dropped to 25% to 35% during the height of the pandemic in April and now subsequent recovered to 55% to 70%. The recovery in attendances does vary between operators and more dependent on how the centers were managed during the April to June period when childcare was free. The Stage 4 restrictions in Melbourne have again significantly reduced attendances as during the forecast 6-week period, childcare is limited to those parents who work in a permitted industry and have obtained a permit. The federal government has relaxed the activity test through to October 2020, which allows parent stacks as 100 hours of subsidized care per fortnight were unable due to COVID to meet the activity tests. Turning to Slide 20 and supply. Net center supply levels for the year grew by 3.8% or 291 centers, with 8,035 centers at 30 June 2020, with the strongest growth occurring in South Australia with 5.8% growth; and Victoria and Western Australia, both with 4.9% growth. Growth in New South Wales and Queensland was 3.3% and 2.8%, respectively. The impact of COVID pandemic can be seen in the bottom-left graph, with only 46 centers opened in the April to June quarter due to licensing restrictions with a catch-up occurring in July with 28 new openings. We expect to see supply moderate as operators and developers are more cautious in a post-COVID environment combined with more restricted bank lending to the development of new centers. Supply of childcare is linked to operator demand for new centers with minimal speculative development. It is estimated that across Australia, the vacancy rate at a property level is circa 1%. The graph on the bottom right shows the annualized growth in both supply and demand over the last 5 years. In terms of demand, the impact of the CCS can be seen in the blue-shaded area, which saw a strong increase in demand during the first 12-month period with growth now returning to the average historical rate. Over the last 4 years, the growth in supplies averaged 3.8% premium, which is consistent with the growth in the number of children of 3.8% per annum over the same period, demonstrating an equilibrium level of demand and supply. However, childcare catchments are very localized, and there will be outliers of both under and oversupply. Quality operators who invested in their care offering, staff and premises are best positioned to maintain and increase market share. Moving to Slide 22 and the outlook. The COVID-19 pandemic has provided significant challenges for the childcare sector with significant reductions in attendances. However, the adapting government support mechanisms to the industry have demonstrated the essential nature of the industry. The industry is transitioning back to the pre-COVID funding regime with attendances expected to recover as Australians return to their workplaces. We're continuing to pursue opportunities in the social infrastructure market that can provide greater sustainability and resilience to CQE's income stream with stronger tenant covenants whilst matched to CQE's existing property attributes. CQE confirms that based on information currently available including with respect to the COVID-19 pandemic, continued tenant performance and barring any unforeseen events, the FY '21 forecast distribution guidance is estimated to be $0.15 per unit. CQE will continue to pay quarterly distributions. That concludes the formal component of our presentation. I'll now hand back to the operator and open the line for your questions. Thank you.

[Operator Instructions] Your first question comes from Nira Sonah with Evans & Partners.

Just got a couple of questions. Firstly, just on rental relief. Sorry, you mentioned so far, you've negotiated about $5.4 million of rent relief. Does that include any sort of negotiations with regards to what's happening in Melbourne as well?

It's Scott here. Look, that $5.4 million has been negotiated sort of as at 30 June, so it hasn't been taken into account the current Stage 4 lockdowns in Melbourne. However, based upon the recent government announcements that we've seen, we expect that the Melbourne-based operators will be supported by the government through this period. So -- and the level of support that they get should mean that they won't need further rental relief. Travis, is there anything else you want to add to that?

No, I think that's an important point around what the government is trying to do and the federal government acted really quickly in respect to the Melbourne lockdowns, is really trying to get the operators back to 80% to 85% of their pre-COVID revenue levels. And the way they're doing that is interesting. They're using the -- adjusting a transition payment to do that. And they're also allowing operators to waive the gap payment that parents are required to pay. So by allowing children when children aren't coming, the CCS funding is still flowing, supplemented by the transition payment to get up to that sort of 80% to 85% of pre-COVID levels.

So are you reasonably confident then that still like high probability that you wouldn't be providing rent relief for the Melbourne operators just because they're being helped by all these government policies.

At this stage, I think it's -- it won't be material, any material relief we need to give. However, we're sort of in week 1 of Stage 4 lockdown. It really depends on how long that does go for. Fingers crossed. It's been 6 months now working from home. I'm hoping that it does cease after 6 weeks. But yes, I think if it was only a 6-week lockdown with that government support, I think any rental relief provided would be immaterial.

And just next question, just on your property valuation. Can you please clarify how much of it like was independent property valuation and the director ones?

Yes. No, I also there was 227 independent valuations, which were conducted throughout the year. Any independent valuation that we do have done earlier in the year, we got refreshed to reflect the post-COVID environment. So approximately 67% of our properties were independently valued with the balance being director's valuations, which largely just reflected rental increase since the last independent valuation was completed.

[Operator Instructions] Your next question comes from Jeffrey Pehl with Goldman Sachs.

So the first one is just commenting around operator attendance. Obviously, it got pretty low during April, and then it's since rebound to about 55% to 70% excluding Melbourne. I just curious, are there any operators or locations that are still lagging kind of near that lower end on a relative basis. And any of those locations, giving you a cause of concern as we come out of this pandemic?

I think, Jeff, with that question, it's one of the things to remember with childcare is you've got 8,000 centers located all over Australia. It's interesting. I think I've spoken to numerous operators through the last -- through this whole pandemic, but just getting -- some operators actually come out of this with 100% occupancy impact. Obviously, some of them sort of falling in that 50% to 60% bracket. Largely, it's coming down. So a lot of it came back to how operators manage their business through COVID and when childcare became free as well, which was a tough time for the operators and that effectively, their revenue was peaked at 50%, however, they had to. Childcare was free. So some of the operators took a longer-term view and didn't try and reduce the number of children attending, came out the other side with their attendances picked up a lot quicker than ones that weren't actively taking on enrollments during the COVID period. So Jeff, it's sort of a hard one to answer when you've got -- we've got 370 operating centers. It's a hard one to answer across the board. But I think, as we've always said with this portfolio, our focus is on the quality operators in a particular location. If there's 4 centers, you want to make sure that we're leasing our premises to sort of operator #1 or #2 to be best positioned for the recovery when it comes.

And I guess -- I mean maybe just along those lines, I mean you do provide your Victoria exposure. That's just a little over [ one -- ] like 20%. I guess if you could maybe tell us what the split of maybe Melbourne, Greater Melbourne versus the rest of the state by income, if you have that?

Yes. No. That's fine. So of the 23%, 17% of that is in Melbourne metropolitan area.

Got it. And then just turning a little bit to your portfolio. Obviously, your balance sheet right now is one of the strongest in the sector. Yields remain pretty strong for childcare at [ sub-6 ] more recently. What opportunities do you see in social infrastructure over the next 12 months?

Yes, I think the -- I really see 2 key areas, Jeff, there. It's one, you look at the amount of fiscal spending by the government both federal and state that they've had to really throw at this COVID-19 pandemic. So I think their balance sheets will be stretched. And one of the options there is whether they take some real estate off their balance sheet. I think being part of the Charter Hall Group with the sale and leaseback transactions that we've done puts us well positioned there. I think probably the other industry, which has seen a significant impact through the COVID-19 period is tertiary education. There's been significant pressure there based on number of students, in particularly, overseas students and enrollment declines. So they're under significant pressure as well. So I think there's a really good opportunity for us there. And similarly, Charter Hall has good relationships with the tertiary institutions and really whether we can partner up and provide them with some real estate solutions, whether it's looking forward or whether it's taking some of their assets that are on their traditionally they've had on their balance sheet and taking them off their balance sheet. So I think they are the two key focus areas for us. And I think what this -- what the COVID-19 pandemic has really shown us is and sort of the focus on social infrastructure is to get that tenant covenant stronger and really get more resilience into CQE's income stream.

Your next question comes from Gareth James with Morningstar.

Are you able to give any kind of indication of the profit margin impact on operators? So kind of rough indication of kind of what margins were like before COVID? What happened during the nationwide lockdown and kind of what's happening in Victoria at the moment?

That's a good question, Gareth. I think what you saw was the during that COVID period, the JobKeeper was the -- there are 2 elements of the government's response to COVID to childcare. JobKeeper was one. And secondly was the ECECRP, which was the 50% of the pre-COVID revenue. Where profitability did vary between operators was around eligibility for JobKeeper. The government's recently come out and estimated that there was up to 1/3 of employees at childcare operators that weren't entitled to JobKeeper. And that was because they were either working for less than 12 months or they're on temporary work basis. So as you can see, moving forward, then now the government's JobKeeper's stop in the childcare industry, now is really being replaced by the transition payment. And as you can see what the government has done in Melbourne is they're using -- they're altering that rate, the transition payment to help and assist operators rather than using a JobKeeper, which, as I said before, was only 5 to 2/3 of the staff. So the hard one to answer, Gareth, in terms of -- because everyone has different circumstances across the tenant base. Some operators, if you had all of your employees eligible for JobKeeper, you had high attendances at the end of February when the reference period was. Some operators were probably still making a small profit whereas on the other end of the scale, you had operators that were having higher fees because the government was only providing an up to the cap of $130 a day. And for example, if they had low eligibility for JobKeeper, that was making it harder for them. So it's really a little bit does vary, Gareth, depending on circumstances. Similarly now with Melbourne, I think the government, to their credit, has come out and said they want to provide that 80% to 85% of revenue. So then it's a little bit then how the operators manage their cost base through this period, knowing that I think as part of the transition payment the government said and the additional support they've [ set is ]. They want to ensure that all employees, permanent employees are kept, and they're not being stood down. So with all of these businesses, they're all -- those 8,000 small businesses operating throughout Australia, it's all about how you manage that individual center in order to get the best outcome to that center and make it the most profitable if you can.

Okay. And then just another question on the kind of the broader market demand and supply. You've obviously got that chart on Page 20 on the right-hand side, which focuses on demand and supply, but it seems to focus on supply in terms of new LDC centers as opposed to new places being added. I'm thinking new places, it's not as an attractive picture as that. And I guess I'm just curious if you think there is still an oversupply of [ places ]. And if so, what you think is going to stop that? Because, I guess, for a while, a number of people in the market have been talking about lenders pulling back and preventing new supply. Doesn't seem to have happened even with the pandemic. So yes, just kind of, care to get your thoughts on that.

Gareth, So, it's interesting. There's only 46 new centers opened in the second quarter for the calendar year '20, noting that there was restrictions on basically the licensing restrictions were put on hold. You've seen further 26 centers opening in July. I think it's going to be a combination of a really, take speculative developments out of the market and that people do not want to develop them without having an operator signed up. I think the operators especially when you see Melbourne, the second wave coming, touch wood that doesn't happen in the rest of the country. But I think operators are cautious at the moment. I know you've touched on the bank funding is harder. But I think that will really -- I guess, typically, there's an 18-month lead time for these childcare centers to be built. So you're still seeing what's happening now is really decisions that were made sort of the start of 2019. So I think we'll see that come back. I think what you'll also see, Gareth as well is it just given the amount of changes and challenges that have applied during COVID, I think you'll see sort of a flight to quality, and that those 8,000 centers across Australia, will there be the 65 closures in the last 12 months? I'd expect that to probably increase over the next 12 months, just in the centers that may have been -- may have closed over the next 5 years. COVID may have brought that forward just because why are they closing? They might be too small. The supply/demand in those individual catchments is not working and sort of that competitive landscape. If you're not providing what parents want in a particular area, parents are very choosy. As a significant part of their budget, they're spending on childcare, everyone wants their best for their children. So I think the best centers and the best operators. So I think that's the and sometimes with these graphs as well in the analysis, it is such a macro-level analysis that you're always going to have pockets of oversupply and undersupply because parents don't typically go very far from their home when looking for childcare. So if there's an undersupplied area in Western Australia, does that affect someone in Victoria? No, it doesn't. So I think you need to be a little bit careful sometimes with these numbers in interpreting them. But I think on an overall basis, we think our sort of view is that supply will moderate. And on a sort of macro basis that we are sort of in that equilibrium with that 3.8% growth in demand and supply over the last 4 to 5 years.

Sure. Just one last quick one, if I may. You gave some attendance data which is great. Is there a big difference between the attendance data and the occupancy data?

Yes, there is. So -- and I think what the government has been trying to do is make sure that people stay enrolled. And I think that's been another tool they've been using is that allow [ absences ]. So I think in that gap, I think you saw the biggest gap happening in that late March, early April period when the gap between attendances and enrollments were significant. I think when they made the announcement on the 2nd of April, the government really encourage people to -- if they had pulled their child out, go back to their operator, reenroll their child, given it was free. So I think that gap is definitely closing. I think Melbourne's made that gap increase again from a Melbourne point of view. But I think over time, that gap will close. I think one of the important -- just look at childcare and the importance of the economy. If you look at the Melbourne news articles in the last probably week around who gets permits, who doesn't, what does that demonstrated? That without childcare, it's just that labor supply mechanism. I think that's really important that people, if they don't have access to childcare, they aren't -- both parents aren't able to do their job effectively. We think through this whole COVID-19, I think employers have been fantastic, being flexible with people. However, I think just shows that long term, just the benefits of childcare in that labor supply mechanism. There's an interesting article came out. A report came out yesterday from the Grattan Institute that have mandated that the government should put an additional $5 billion into the sector. And based on their calculations, they've estimated that would provide an additional $10 billion of GDP just by enabling people to work and the GDP that gets created from that.

[Operator Instructions] Our next question comes from Krzysztof Kaczmarek with JPMorgan.

Just in terms of your rent relief in FY '20, can I just clarify that? Effectively, that's being excluded from operating earnings [ earnout ] which you're taking it below the line. Is that sort of the right way of thinking about it?

Yes.

Okay. And so therefore, all of that has been recognized in your net property income in FY '20. Is that consistent with how you're going to be treating in FY '21 as well?

Yes, that's correct. Look, yes, so all rental revenue earns on tenancies that have been provided with rental relief have been included in our rental income for FY '20, and that's consistent with our accounting treatment for lease modifications or rent-free incentives provided in the ordinary course of business. So we've got deals that have been documented, and those have been treated as lease modifications and amortizing that cost over the remaining lease term. And then where we haven't documented some agreements at 30 June. The recent asset guidance said that those must be provision for as at 30 June. So we've made that provision. However, we've treated that as a non-operating item.

Okay. Right. And just how are you trading rent relief in terms of your distributions as well? Are you thinking about that?

Yes. So we did say when we did the May 2020 equity raising and that the Q4 distribution would be determined with reference operating cash flows. And I suppose, what we had in the period to 30 June was approximately $2.7 million of relief in the form of incentives and deferrals provided. So we did take that into account when sort of arriving at a $0.03475 per unit. And so that was all factored in. Reduce the operating earnings for that noncash item. And then in respect of moving forward, as we sort of touched on earlier, we feel that the SME tenants and the non-SMEs are sort of back to normal trading conditions now. So we expect the rent relief to be immaterial at this stage in respect of FY '21. We've obviously done those deals with the with non-SMEs with some of those incentives to be provided up until October '20, we're treating those unlike just like any other incentive that we provide in respect of an extension of a lease term, i.e., it's not going to impact operating earnings and the distribution that we pay.

Right. Excellent. And just in terms of the high proportion of fixed rent reviews now, what is your weighted average rent review on the fixed rent review leases?

It's typically 3%, Krzysztof.

Okay. Okay, great. And then just last question from me. How has value or assumptions change sort of pre-COVID, post-COVID? Has there been any sort of material changes in what the values are assuming?

No, not at all. So I think it's been -- and this is sort of highlighted the resilience to the sector. And I think the important thing for us, this people going into COVID was having that passing rent, which was less than market. And so it hasn't really been the valuation point of view. The valuations held up with that $44 million increase. So yes, no key change from the values. And I think that's really to come through as well with the evidence in June and July as well where we saw sort of the cap rates around 5.9% on those assets that were sold.

There are no further questions at this time. I will now hand back for closing remarks.

Thanks, everyone, for dialing in today. Much appreciate it and look forward to speaking to you a lot of you over the coming weeks. And anyone on the call, feel free to reach you out and get in contact with us. We're happy to have a chat with you. Thanks, everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.