Region Group (RGN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Shopping Centres Australasia FY '20 Results Investor Briefing. [Operator Instructions] And just please be advised that today's conference is being recorded. But I will now hand the conference over to your first speaker today, Mr. Anthony Mellowes. Thank you, and please go ahead.

Thank you very much for the introduction. Welcome, everybody, to the FY '20 financial results for the SCA Property Group. My name is Anthony Mellowes, and I'm the Chief Executive Officer. Presenting these results with me today is Mark Fleming, our Chief Financial Officer; and also in the room with me is Mark Lamb, our Company Secretary and General Counsel. Firstly, let me start by saying that COVID-19 has had a direct impact on all of our retail centers. And as I speak today, I feel for our friends in Victoria, who are currently facing some very difficult circumstances. As you know, we withdrew our guidance on the 25th of March 2020. And on the 23rd of June 2020, we announced our distribution of $0.125 per unit for the year ended 30th of June 2020. Our teams have been working extremely hard during these unprecedented times, and I'm personally pleased with the results that we've been able to achieve in the last 12 months, particularly the last 6 months. This has been achieved by remaining true to our core strategy of investing in and managing local convenience-based centers weighted to the nondiscretionary retail sector in Australia, with a strong focus on everyday need, particularly grocery, food and the medical categories. At SCA, our brand position for the last 5 years has been to love local, shop local and act local. This has never been as important as at present. Firstly, let me take you to Slide 4, which sets out our FY '20 highlights. Our FFO per unit of $0.1465 per unit and distribution per unit of $0.125 per unit is a decrease of 10.3% and 15%, respectively, on FY '19. AFFO was $140.8 million, a decrease of 0.7% on the same period last year. Our NTA decreased to $2.22 per unit, a decrease of 2.2%. Our portfolio occupancy is 98.2%, and our specialty vacancy is 5.1%. This has remained stable compared to June 2019. We made $78.4 million of acquisitions and $21.5 million of divestments during the year. And finally, our weighted average cost of debt declined to 3.5% with a 5.1-year weighted average debt maturity. Moving to Slide 5, which sets out some of the key achievements that demonstrate how we continue to deliver on our strategy. Our supermarket-anchored local convenience centers continue to be resilient. Throughout the COVID-19 pandemic, our anchor tenants have experienced strong sales growth, and turnover rent has increased. We've continued to conclude leasing deals with 75 renewals and 55 new lease deals completed during the COVID-19 period of March to June 2020. Our specialty vacancy is stable at 5.1% as well as the specialty occupancy cost of 10%. Approximately 92% of tenants are now open and trading. At our lowest point in April 2020, we only had 76% of tenants open and trading. COVID-19 has impacted many of our specialty tenants. Sales performance has been very mixed, with many experiencing sales declines and some experiencing sales increases. We have provided rental assistance to over 600 tenants in accordance with the Mandatory Code of Conduct, and rental collection rate was 77% during the COVID period of March through to June. We will continue to actively pursue payments from tenants for all outstanding rental not covered by waivers or deferrals. Our absolute focus is on rent collection and continues to be to improve our tenancy mix towards nondiscretionary categories. We maintain high retention rates on renewals and a lower specialty vacancy rate by proactively working with our tenants in these challenging times. This will ensure that we have sustainable resilient tenants paying sustainable rents which reinforces our strategy of generating defensive, resilient cash flows to support secure and growing long-term distributions to our unitholders. We continued our strategy of consolidating a fragmented market. This year, we acquired Warner Marketplace in Brisbane for $78.4 million in December 2019, and we divested Cowes in Victoria in February 2020 for $21.5 million, which was 9.7% above our June 2019 book value. We completed our Shell Cove Stage 3 for $4.8 million in December '19, and also completed the sale process for SURF 1 for $69.3 million, achieving an 11% IRR for unitholders since the fund commencement in 2015. The balance sheet is in a strong position with gearing of 25.6%, well below our range of 30% to 40%. And this was due to the cash proceeds from the $250 million institutional placement in April and the $29.3 million unit purchase plan in May 2020. Our weighted average cost of debt is 3.5%, with 91% of the debt being either fixed or hedged. Cash, term deposits and undrawn facilities are $623 million. Mark will talk you through this in more detail. Finally, our funds from operation per unit of $0.1465 decreased by 10.3%, and our distribution of $0.125 decreased by 15% all over the same period last year. I'd now like to hand over to Mark to present the financial results.

Thank you, Anthony, and good morning, everyone. I'll start on Slide 7, which sets out the impact of COVID-19 on our FY '20 earnings. The major impact of COVID-19 has been an increase in rental arrears. By way of context, we invoice gross property income of around $25 million per month or $300 million per annum. The cash rent shortfall between invoiced rent and cash rent collected during the financial year was $26.8 million, of which $22.7 million relates to the COVID period of March to June. And that equates to a collection rate of 77% during that period. Of this amount, $4.5 million was or is expected to be granted to tenants as waived rent, and $4.3 million was or is expected to be granted to tenants as deferred rent under the Mandatory Code of Conduct. The direct impact of COVID-19 on earnings is $20.5 million or $0.0213 per unit, made up as follows: Firstly, over the March to June period, we spent an additional $1.6 million on extra cleaning and security in the centers. Secondly, the $4.5 million of waived rent is excluded from rental income. And finally, we've taken an expected credit loss provision against the remaining unpaid rent, which reduces FFO by a further $14.4 million. So the net effect of this is that of the $26.8 million cash shortfall, only $7.9 million has been included in FFO. Of this amount, approximately $4 million has already been recovered in July. In addition to this direct impact, the equity raisings that we completed in April and May diluted earnings per unit by $0.36 per unit, and there are a range of other impacts that were indirectly related to COVID that we haven't quantified in this analysis. Moving to Slide 8, profit and loss. Our statutory net profit after tax was $85.5 million, which is down by 22% compared to the prior year. The primary reason for this decline is that the fair value of investment properties decreased by $87.9 million this year compared to a decrease of only $40.5 million last year. The decrease in valuation this year was largely directly or indirectly related to the COVID-19 pandemic and the associated weak retail environment. Stepping down the P&L, you can see that gross property income has increased by 9.6%, and this is because, in FY '20, we have the full year benefit of the FY '19 acquisitions and the Warner acquisition, partially offset by the sale of Cowes and the $4.5 million of waived rent that is excluded from rental income. Property expenses includes the $14.4 million of incremental expected credit loss allowance and the $1.6 million in extra COVID-related expenses such as cleaning and security. Distribution income has decreased as we've gradually been selling down our CQR stake. Corporate costs have increased slightly, primarily due to an increase in directors and officers insurance costs. Fair value of derivatives has increased due to an increase in the mark-to-market value of our cross-currency interest rate swaps, with both the depreciation of the Australian dollar and the flattening of the yield curve contributing to this valuation increase. Finally, interest expense is lower than the prior year, primarily because the prior year included a $17.7 million swap termination expense. So turning now to Slide 9, funds from operations. To get the funds from operations, or FFO, we reverse out the noncash and one-off components of our net profit after tax, including fair value adjustments. FFO of $140.8 million is down by 0.7% on the prior year, with the direct COVID-19 impacts of $20.5 million offsetting the contribution from acquisitions. As I pointed out earlier, this year, our FFO includes $7.9 million of noncash rental income that we expect to collect during FY '21, of which we've already collected approximately $4 million in July. FFO per unit of $0.1465 per unit is down by 10.3% on the prior year, a larger percentage increase -- sorry, decrease than the FFO due to the dilutive effect of the equity raisings in April and May this year. AFFO of $124.3 million was down by 2.4%, slightly more than the FFO because of an increase in maintenance CapEx and leasing incentives. And finally, distributions of $0.125 per unit was down by 15% on the prior year due to the second half impact of both COVID-19 and the equity raisings. The DPU payout ratio was 99% of AFFO. Moving now to Slide 10, which shows our summary balance sheet. Cash has increased due to the equity raisings in April and May 2020, which raised gross proceeds of $279 million. $180 million of that is currently being held in term deposits, and the balance was used to pay down revolving bilateral debt facilities. The book value of our investment properties has decreased slightly to $3.138 billion with the value of acquisitions and developments completed during the year, being offset by the $87.9 million or 2.8% decrease in the like-for-like valuation of investment properties. $27.4 million of that decrease was directly related to the COVID-19 pandemic being the assumed negative cash flow impact of COVID-19 during the FY '21 financial year. The remaining $60.5 million decrease was due to a range of assumption changes, many of which are indirectly related to the COVID-19 pandemic and the associated weak retail environment, including a 3 basis point softening of cap rates, a decrease in valuation net operating income and various assumption changes in the DCF cash flows, including more conservative let-up assumptions and lower market rent growth in the future. Other assets has increased due to the mark-to-market valuation of our cross-currency interest rate swaps, as discussed earlier. Debt has decreased due to proceeds from the equity raisings, offsetting acquisition and development CapEx. Units on issue have increased due to the equity raisings. And the result of all of the above is a decrease in our net tangible assets per unit to $2.22 per unit, down from $2.27 per unit last year. Finally, our management expense ratio has increased slightly due to the increase in corporate costs. Turning now to Slide 11, which deals with debt and capital management. Like many companies, we've had a busy last 6 months in capital management. In March, we completed an institutional placement, raising $250 million at $2.16 per unit. And in April, we completed a follow-on unit purchase plan, raising $29.3 million at the same price. The proceeds of these equity raisings were used to pay down revolving bilateral debt facilities, and the balance is held in cash or term deposits. We also raised our total debt facility limit by $200 million to $1.457 billion. As a result of the above, as at 30 June 2020, we had $622.8 million of cash and undrawn debt facilities, and our gearing had reduced to 25.6%, which is below our target range of 30% to 40%. Our next debt expiry is the AUD 225 million medium term note, which expires in April next year, but can be repaid early from October this year, 2020. Our current intention is that this note will be repaid in October, using our excess cash and undrawn facilities. Finally, as you can see, we are well within our banking covenants. Thank you. And I'll now hand back to Anthony for the operational performance overview.

Great. Thanks, Mark. Now looking to Slide 13 and the overview of our local convenience portfolio. In our portfolio, we now have 75 neighborhood and 10 convenience subregional assets, comprising 675,000 square meters, with approximately 1,800 specialty tenants and 111 major tenants. Our weighted average cap rate is 6.51%. And as you can see, our geographic diversification is well balanced across all states in Australia. 48% of our gross rent comes from Woolworths, Coles, Wesfarmers or ALDI. And of the other 52%, there is a heavy weighting towards our core nondiscretionary categories being food, retail services, pharmacy and medical. Slide 14 describes our portfolio occupancy. Specialty vacancy is stable despite the COVID-19 challenges. Our target occupancy level continues to be maintained at 98.2%. The total specialty vacancy is 5.1%, which is slightly above our target range of 3% to 5%. The long-term stability of portfolio occupancy illustrates the resilience of our portfolio. Specialty tenant monthly holdover has been a particular focus for the team, and that has remained stable at just over 1%. We have 4 anchor tenant expiries in FY '21. Terms are agreed on 3 of these, and there is -- and 1 is an exercise of option that came out in New Town, Tasmania. Slide 15, our sales growth and turnover rent. Our sales growth has been strong despite the specialties that have been impacted by COVID-19. Our supermarket MAT has increased to 5.1%, with both Coles and Woolworths showing positive growth, particularly during the COVID-19 period as a result of panic buying and shopping and living locally, which our centers are ideally placed for. Our discount department store sales had strong growth of 7.6%, and Big W's performance continues to be very positive. Our Mini Majors sales growth has strengthened to 2.9%, primarily from discounters and pharmacies within our portfolio. Our specialty sales decreased by 1.1%, which includes retailers that were closed due to COVID-19 restrictions. Our nondiscretionary categories MAT growth was positive 0.9% versus the discretionary categories that decreased by 7.9%. Our convenient neighborhood centers were flat, outpacing our convenience subregionals at minus 3.1%. If we exclude the retailers that were forced to close due to COVID-19, our specialty MAT actually increased by 2.5%. And turnover rent continues to increase. We now have 39 anchors, or approximately 35% of our anchors, which are now contributing turnover rent, with a further 14 supermarkets within 10% of the turnover threshold. There was 5 anchor tenant turnover rents, which were captured in a base rent review during the year. Our specialty key metrics for our existing centers are outlined on Slide 16, and we continue to execute our strategy in a challenging retail market, which has been exacerbated by COVID-19. We are focused on sustainable rent for sustainable tenants. With the specialty sales growth decline of 1.1%, our sales productivity has actually increased to $8,230 per square meter, and our gross rents remain the lowest in the sector. Our occupancy cost ratio reduced slightly to 10%. We concluded 232 specialty tenant renewals during the period with an average rental decrease of 1.1%. We completed 146 new deals, which is in line with our expectations, with an average rental decrease on those replaced tenants of 7.7% and an incentive that has increased to 13.8%. Clearly, as a result of the softer retail market, our leasing strategy remains on maintaining a high renewal retention rate of 76%, reducing the longer-term vacancies and also increasing our deal count, which is 68% higher than the previous year despite 4 months of COVID-19. Slide 18 outlines the 1 acquisition, 1 development and 1 disposal that occurred during the year. In July 2020, we agreed terms to acquire the Bakewell local convenience center in Darwin, Northern Territory, which is anchored by Woolworths, for $33 million, representing an implied fully let yield of 7%. We expect this to settle in September 2020. Slide 19 highlights the fragmented ownership in our sector, which provides SCP with further acquisition opportunities. SCP is now the largest owner by number of local neighborhood centers, and we will continue to consolidate by utilizing our funding and management capability to execute acquisition opportunities. Since listing, we have now acquired 50 convenience centers for over $1.7 billion in aggregate. There have been continued demand for investors for local neighborhood centers during the year, particularly during the COVID-19 period. We will continue to be disciplined with respect to acquisitions, notwithstanding our excess funding capacity following on from our recent capital raises. We could debt fund approximately $300 million of acquisitions and still keep our gearing below 32.5%. The demand for quality, local neighborhood assets remained strong with recent transaction cap rates of less than 6%. Slide 20 outlines our indicative development pipeline over the next 5 years. In summary, we've identified and working on 31 potential small developments, with total CapEx spending in excess of $125 million, and we settled the Stage 3 development of Shell Cove in FY '20. Slide 21 outlines our retail funds management business. This business does continue to have the potential to deliver additional earnings growth for us in the future. SURF 1 was launched in October 2015, and all of those assets have now been sold for $69.3 million. This represented an IRR of 11% for unitholders, which allows us to generate an additional performance fee for SCP of approximately $400,000. This will be realized when the fund is wound up in FY '21. SURF 2 and 3 are performing in line with our expectations. Assets have been sold from both funds to reduce the gearing of those funds while maintaining the yield to investors. Both funds' balance sheets are in a strong position. There are no new funds forecast for FY '21. However, we will continue to monitor the retail and institutional market appetite for new products. The fee structures are identical for all funds with one-off establishment fees of 1.5%, annual management fees of 0.7% and the performance fee if reached at the end of that fund. I'd now like to talk about our key priorities and outlook. Turning to Slide 23. Despite the impacts of COVID-19, our core strategy remains unchanged. In fact, as a result of COVID-19, we believe that our strategy is even more resilient to the current impacts facing the retail industry. We will continue to seek and deliver defensive, resilient cash flows to support growing, secure distributions. We will focus -- continue to focus on the local convenience-based retail centers with a strong weighting to the nondiscretionary retail segment. And we will be seeking long-term leases to quality anchor tenants such as Woolworths, Coles and Wesfarmers, which is again demonstrated by our latest acquisitions. And we will continue to explore both our core business growth opportunities as demonstrated in our development pipeline acquisition opportunities within our sector and potentially some further fund management opportunities. I'd now like to hand over to Mark to discuss the future impact of COVID-19.

Thanks, Anthony. We've included this slide, Slide 24, to help people think about the potential impact of the COVID-19 pandemic on our FY '21 results. As in FY '20, the primary near-term impact is expected to be a shortfall between contractual rental income and cash rent received. The size of this shortfall will depend on a number of factors, including restrictions imposed by the various state governments on retail trading. At the moment, for example, we have Stage 3 and 4 restrictions in Victoria. And you can see from the table that Victoria represents rental income of $4.2 million per month or approximately 18% of our monthly gross property income. In terms of retail categories, you can see, for example, that apparel retailers represent $1.1 million per month or approximately 4% of our gross monthly property income. Given the uncertain outlook, we can't accurately forecast these impacts at this time. But hopefully, this slide is useful for those who want to run their own scenarios. Anthony, back to you.

Thanks, Mark. Now Slide 25 outlines our priorities and outlook for FY '21. We'll continue to deliver on our strategy and also to love local, shop local and act local, our core marketing positioning statement. With respect to our core business, our primary objective is to ensure that our centers emerge from the COVID-19 pandemic in a strong position with sustainable tenants paying sustainable rents. We continue to improve the tenancy mix towards more local nondiscretionary tenants. We will look to maintain high retention rates on our renewal, maintain below specialty vacancy, continue to collect our rent. This may mean offering or continuing to offer further waivers and deferrals to specialty tenants and that the leasing spreads remain -- and that leasing spreads may remain negative and incentives may also remain slightly elevated. Our absolute core focus is to collect the rents payable from our tenants. We do have excess capacity to fund acquisitions. However, we will remain disciplined and true to our strategy, and we will continue to explore value-accretive opportunities and also divestment opportunities that are consistent with our strategy. We'll progress our identified development opportunities. And finally, we'll continue to monitor the funds management opportunities as market conditions allow. With respect to capital management, as Mark said, it is our intention to repay the $225 million medium-term note in October this year. And we'll continue to actively manage our balance sheet to maintain diversified funding sources with long weighted debt -- average debt expiries and a low cost of capital consistent with our risk profile. Our gearing is to remain well below 35% at this point in the cycle. As Mark said, due to the uncertainties related to COVID-19, we will not provide FY '21 guidance at this time. But it is our intention to continue to target a distribution payout ratio of approximately 100% of AFFO. In conclusion, I'd like to say that during these difficult times, we'll continue to deliver on our clearly stated strategy and objectives. We'll continue to focus on and optimize our core business, taking into account the impacts of COVID on our tenants and with a particular focus on rent collection and continued deal flow on renewals and vacancy to meet the market. We've built strong foundations to enable us to continue to seek out and execute on the growth opportunities that are consistent with our strategy and risk profile. FY '20 was a particularly challenging year for our team. However, we strongly believe in our strategy and see no reason to deviate from it. In fact, COVID-19 impact has reinforced our belief in our strategy. Remember, love local, shop local and act local. I'd now like to invite any questions.

[Operator Instructions] Our first question comes from the line of Andrew Dodds from Jefferies.

Just firstly, on rent collection, 77% was collected during the COVID impact period. I was just hoping if you could give us a split of what it was in the first quarter versus the second quarter? And then how that's trended heading into July and August?

Yes. Thanks, Andrew. Look, we haven't split that down, but the one point to make here is that we never collect 100% of the rent in the month that it's due. Our normal collection rates would be around 99%. But in terms of the month that it's due, it's more like 90% because there's always some rent that's not collected within 30 days. So when we're thinking about these numbers, we need to keep that in mind. As we went through the period, we bottomed out in April and May in the low 60s. June, we were back at high 70s, and July we're in the mid-80s. So that sort of gives you a feel for the path we've been on.

No, that's great color. And then switching gears a little bit, just on the leasing side of things. You've called out 75 renewals and 55 new deals were done in the COVID period, March to June. I was just hoping if you could give the split of what spreads were on those deals and how they sort of compare to the minus 1.1% and minus 7.7% for the group in FY '20.

I would have to come back to you on that. I don't think there was a stark difference during the period maybe being slightly different but there wasn't anything of any material nature, so we'll just continue to do the deals at similar levels.

Yes. So the -- in the first half, for example, we announced renewal spreads of also a negative 1. There hasn't been a material change in the renewal spreads. In relation to the new lease spreads in the first half, the number that we announced was, I think, minus 3.9% for new leases, and we're now at minus 7.7%. So in the new leases, we have had more negative new lease spreads during the COVID period.

That's perfect. And then just a final one for me. Just on the balance sheet, it's obviously in pretty great shape after raising equity. And you've called out about $300 million of acquisitions would keep gearing below 32.5%. Is this the type of, I guess, level or quantum of acquisitions that we should be assuming? And then a follow on is, what type of time frame can we expect that capital to be deployed over?

Look, no, look, the reason we've included the $300 million is just indicatively to say, look, we do have excess capacity on our balance sheet. We're not saying that because we intend to spend $300 million in the next 6 or even 12 months. And as Anthony said in the presentation, we'll be monitoring the market in a very disciplined way. We've entered into an agreement to acquire 1 center so far, which was Bakewell in Northern Territory for $33 million. But as Anthony said in his speech, the recent deals during the COVID period have actually been sub 6%. So if anything, the market evidence suggests that cap rates have tightened during the COVID period, not expanded. Given that, we're not in any particular hurry to go and spend $300 million. We'll just continue to monitor the market.

Your next question comes from the line of Ben Brayshaw from JPMorgan.

I was wondering if you could shed any more light on the performance of Coles versus Woolworths in terms of sales growth.

They're both doing exceptionally strong. The one thing I will say is not so much about Woolworths and Coles differently, but certainly we've seen Woolworths and Coles continue to be really strong in the smaller, more local convenient-based centers, particularly when they're in the shadow of a larger center. And that holds for both Woolworths and Coles. But look, there's no discernible gap between the two as there normally is over history. They're both performing very well.

And so obviously, COVID has been a catalyst for strong sales for supermarkets. Do supermarket sales come off the boil over the next 12 months? Or do they remain at around current levels?

I think my personal view is, I think, supermarket sales will continue to be performing well. I think my personal view is COVID may continue in lots of different waves, as we see, or ripples in different geographic areas, I think, is what's going to happen. I think people are staying at home more as opposed to eating out. And that means that they shop more at supermarkets. I personally think that's going to continue for some time until COVID-19 has actually been -- an antidote has been found. So I think that's going to happen for some period of time.

And can you remind us, please, do you track footfall at your centers? Or do you have a view on footfall, say, over the last 6 months in terms of how that would compare to what -- during COVID as to how that would compare to pre-COVID?

Yes, we've seen it come off a little bit, but it has been increasing from the low point in April, where generally only 1 or 2 people were shopping from a household. That certainly appears to be happening in Victoria at the moment, where restrictions are that only 1 person from the household can go out. So normally 2 or 3 might go out to do their grocery shopping. So it has had an impact there. But it hasn't been hugely significant for our types of local convenience centers.

And in terms of online, has that affected reported sales for the period? If there's been an increase in online, does that, in effect, dilute the sales growth that you report? Or do you capture that in the leases for your existing assets?

Yes. So in our -- there might be 1 or 2 exceptions, but the vast majority of our leases include online sales that are generated from the store in the sales number, and we don't get a breakdown from Coles or Woolworths of online versus in-store.

Okay. And I was wondering, could you talk about the performance of the VCX-acquired assets, just broadly in terms of sales growth, occupancy and things like re-leasing spreads. And the reason I ask is it's 16% to 18% of the portfolio. I'm interested as to whether that has been, on balance, a contributor or a detractor from the portfolio metrics that you've reported this period?

Yes, we've actually got that in the appendix, so Slide 31 and 32. So you can go down and see what's happened there. There's some ups and downs, but we actually don't talk about them separately now. For us, they're fully integrated. They're just part of the portfolio. We did include this breakdown because we said we would. This will be the last time we include it, but happy for you to look at Slides 31 and 32. I don't think there's anything really discernible there. The sales growth from the Vicinity centers was a bit lower than the existing centers. That partly probably reflects what Anthony was talking about, which is the smaller centers are generally performing more strongly than the larger centers. The vacancy of the FY '19 acquisitions of Vicinity centers is a bit lower actually than the portfolio now. So that's been a great result in terms of leasing up. And the -- so the uplift, the renewals are a bit softer, but the new lease spreads are a little bit better than the existing portfolio. So I don't think there's any major discernible difference between the Vicinity assets and the rest of the portfolio at this point.

And in terms of gearing, do you think there's potential or do you see potential for the target gearing range to be revised at some point in the future? 30% to 40% is a reasonable range, and I'm just wondering, gearing is well below the low end of that range, and you're saying that you would have a preference to remain below 35% insofar as leverage is concerned. So in terms of that formal target gearing range of 30% to 40%, is that something you may revise in the future?

No. We've had that range since the very beginning. And the idea of that range is that it is a very long-term range. So there may be market conditions in the future where we're happy to go up towards 40% again. But this is not that time. So at the moment, we're actually quite comfortable sitting below 30%, sitting on our excess capacity, as I said earlier, sitting on potentially $300 million of debt-funded acquisitions. We're very comfortable at this point in the cycle and with all the uncertainty to just wait and see and be on the conservative side there. So no real change in terms of the preference being below 35% at this point, and very happy to sit below 30% for now.

But you're happy to gear up to 40% in the next 12 months?

No, not in the next 12 months. As I said, we've had this 30% to 40% range for 8 years, and the idea is that it will still be 30% to 40% in 8 years' time. But in different market environments, which is not the next 12 months, we may consider going higher than 35%. But as we've said pretty clearly, for now, which I'd include the next 12 months, we want to stay below 35%.

Your next question comes from the line of Grant McCasker from UBS.

Mark, just firstly, on the COVID impact on earnings. Are you able to talk through how you arrived at your estimated credit loss of $14.4 million or what you've taken into account there? But then also highlighting your comments, you're still looking to track down unpaid rent. What's the process that you're undertaking to actually chase that rent unpaid?

Okay, well, I'll deal with the first question, and then Anthony can deal with the second question. The best way to think about how we've come up with the ECL is actually to read Note 3 to the financial statements. So on Page 26 of the financial statements, we've set out in detail exactly how we've come up with that number. So just to be clear, it's a little bit confusing, but the ECL amount is actually 15.3%. But the -- because we had a starting balance of 0.9, the incremental impact on the P&L is $14.4 million. But the breakdown of the $15.3 million is set out there on Page 26 of the financial statement. So if I just briefly run down that, in relation to the deferred rent, the $4.3 million, we've allowed for 100% of that. So we've assumed we're not going to collect any of that from a financial perspective. The reason for that is that we're not able to start collecting that until the end of the COVID period and for a reasonable period thereafter. And even then, it's got to be spread over a minimum period of 24 months. So we've taken a conservative view there and provided the full $4.3 million. For the debt that's more than 120 days old, the pre-COVID period debt of $4.1 million, with -- $0.5 million of that actually relates to anchor tenants. So we've assumed that we will collect that. The remaining $3.6 million, we've provided 100% for that. In relation to the $13.9 million of remaining unpaid rent, we've provided for $8.1 million, which effectively means that we think we're going to collect 42% of that amount during FY '21. So as I said before, we've already collected $4 million in July. We're highly confident that we will be able to collect the noncash component that's been included in the FFO. You can also see on that notice -- on that note that we've netted off bank guarantees because we may be able to claim on bank guarantees as well in a lot of these cases.

Yes. Thanks, Mark. And certainly, the outstanding rents are rents that are contracted rents that is owed to us, notwithstanding that we may be providing for some of that, we will be chasing that down very rigorously. We look very hard at who the tenants are. Are they going to be a sustainable tenant that fits our tenancy mix? Do we work well with those tenants? And that determines how we deal with them moving forward. But certainly, if there is rent owed, we will be chasing that rent very vigorously. And although a lot of landlords in a lot of different geographies around the world that are impacted by COVID, some of these, you will go quite legal. Others, you will be less legal and come to more of a compromised position with those tenants, but we will not be holding back on chasing those rents at all.

Yes. I should say that there's a distinction here because just because we've provided for that amount in the accounts doesn't mean we're not chasing the rent. And asset guidance is that we need to set out in a lot of detail how we come up with our ECL. But in terms of chasing the rent, what we've provided for is kind of irrelevant to the asset management team. They'll just be chasing every dollar.

Excellent. That's very clear. I appreciate that. And then just a quick question on banks and their appetite for lending to the asset class. Are you able to talk about what you're seeing from a margin perspective and what sort of [ LBRs ], if there's been any change over the last 6 months?

Yes. I'll talk in general terms. Obviously, I think as everyone is aware, in March and April, everything tightened right up, and that's because everyone wanted debt all of a sudden, and the banks almost -- their process have seized up just from the volumes. But I think now we've really come out of that. And I would say that the bank lending appetite is pretty much what it was. They're probably being a little bit more conservative on terms and conditions. So I'd say a little bit more conservative on terms and conditions. Probably spreads are a little bit wider, but the appetite is still there. That would be my summary.

Your next question comes from Adrian Dark from Citi.

I was interested in getting a little bit more color, if I could, please, on your leasing approach. From what I understand, renewal spreads tend to be quite resilient, both in terms of the spread in incentives, but new leases, there's been a little bit more pressure. Could you talk about how you're approaching that, if you like, that trade-off between spreads and vacancy? Is that, I suppose, reflecting your view on the market? Or would you say that's the group's sort of typical approach to leasing? Any comments on that, please?

Yes. Thanks, mate. I think we are -- have always been very focused on maintaining a very high retention rate with our tenants in those certain nondiscretionary categories, and that's what we focus on, and we will continue to focus on and have been able to maintain that high retention rate of 76%. We also -- the number of tenants that we have on monthly holdover is still very relatively low at 1 -- just over 1%, and that's a key focus that we manage to. We believe in meeting the market. We won't put our heads in the sand and say that the market isn't -- that the market's wrong, and we're going to hold out, we believe, in meeting the market. As long as that tenant, we believe, is going to be a sustainable, long-term tenant, and their business is going to be sustainable long term, we will meet the market with them. That holds the same for new tenants. Again, we have a particular focus on new tenants that are in those core nondiscretionary categories. And we focus, quite heavily, on those. And again, we meet the market. Now how is the market? The market is definitely softer than what it has been. I'd love to sit here and say, we're going to get great rental increases, but the fact is the retail market has been under pressure. And I think COVID has probably accelerated a few of those issues. Again, we're fortunate in the fact that we've really target those nondiscretionary categories. We've got a high proportion of those. And ideally, that's where we're going to continue to be. The market is softer, but we will meet the market. You can see that by -- the rents have come off a little bit. Normally, there's 1 or 2 that stick out. That was actually a general trend across all of our deals that are slightly lower. And also the incentive level also crept up slightly as well. We've always said it's around that 12 months, but this period, it was up to around that 13.8 months as opposed to 12. So that has crept up a little bit as well. But that's where the market is. We will meet the market. It is about getting cash in the door for us and maintaining long-term -- or long leases with really good sustainable tenants, we'll meet the market.

I was also interested in acquisitions. So part of the rationale for the equity raising, understand, was to be positioned for potential acquisition opportunities that come up. Could you maybe talk about how they're evolving versus your expectations? And I'm particularly interested in whether you see scope for portfolio deals in this environment?

Yes, Adrian. You're breaking up a little bit, but I think the question was, what's the acquisition market? And is there some portfolio opportunities. And the fact with our capital raise, we identified that we could have some acquisition opportunities. And we did say that time back in March when we -- or April when we did that, that we thought the acquisition opportunities may come in the second half of 2020. Clearly, what we've seen, as we pointed out earlier, there have been a number of transactions done during the COVID period. 4 local convenience assets would have been sub 6% for good quality assets, and that's what we would be looking at good quality assets. So I think cap rates have tightened in our sector, notwithstanding that we did moved them out a little bit with our [ vals ]. The evidence post suggests that the cap rates have, in fact, tightened for really good quality local convenience centers. I think that's going to continue because this sector is really resilient in the current climate. With respect to many portfolios, look, there's not a great deal of portfolios that are out there. There is a large number -- the highest number of owners of local convenience centers are high net worth individuals or families that normally own 1 to 2 or 3 to 4. They don't own 10, 12, 15. They don't own large portfolios. So the large portfolio deals for us aren't a huge focus. They're nice to do, but they're not a huge focus. And it's probably a question you should ask some of our peers as to whether they want to sell assets in this climate as opposed to us wanting to buy them. But we are disciplined. We're focused on the market. We think there is -- it's a really resilient asset class to be in. We're the largest owners in this sector. We want to get larger, but we're going to be doing that in a very disciplined way that meets our financial hurdles.

Your next question comes from the line of Edward Day from Moelis Australia.

Just a quick one on valuations. Mark, you made some comments around some of the changes in assumptions within the DCF component. Could you just briefly outline the key changes? And also whether you think they are sufficient in the context of further situations like Victoria?

Yes. Thanks, Ed. There's a -- it's really across the whole range of assumptions that in terms of DCFs that we were a little bit more conservative. So it's in renewal probabilities. It's in market growth rates. It's in incentives. It's downtime. So it's a range of things. And pretty much every one of those, we've softened them -- or the values have softened them in this latest round. Is it enough? If I give some examples, incentives, we used to have 12 months. We've now got 15 months in incentives. So as Anthony said, we've been running at 13.8% this period. Renewal probability, we used to have 80%. We've now got 65%. As you can see from our presentation, our renewal rate this year was 76%, so on and so forth. Market growth. We've actually got flat growth this year. And then generally -- and then gradually picking up over the next few years, back to 2.5% to 3%, which is what traditionally has been in the DCFs. So look, I think they're reasonable, they're appropriate. They've been externally checked, obviously, with our external valuers. I think they're appropriate in the current environment, yes. But obviously, we'll continue to assess that every 6 months.

Yes. Great. And then just secondly, on your new lease renewal spreads, given -- there's talk around job [ tickup ] rolling off, I guess, you're not giving guidance, but could you just talk around your expectations for the leasing environment going forward?

Yes. Look, I think I answered that a bit earlier. We will meet the market. Conditions are tough out there. The environment -- leasing environment is softer than it has been. And I think for the short term, it's going to continue to be softer. So as much as I said earlier, I'd like to say we're going to get strong rental growth. I think we've got to be measured in our thoughts on what that may be.

Are there any particular geographies that are holding up better than others?

Nothing in particular, no.

Okay. There are no further questions at this time. I'll now hand the conference back to your presenters for any closing remarks.

Great. Thank you very much to all of you. And again, I reiterate, I hope all the -- our friends in Melbourne are doing okay because it is very tough down there and certainly got my sympathies. But certainly looking forward to speaking with you all over Zoom, Skype, telephones, Microsoft Office, it's all going to be a very different results briefings going forward from here. But thanks very much for your time this morning. Really appreciate it, and look forward to speaking to you all. Thank you very much. Bye.