Region Group (RGN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SCA Property Group SCP HY '22 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Mellowes, CEO. Please go ahead.

Thanks very much, and welcome to the first half FY '22 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 CFO; and also in the room with me is Michelle Tierney, our COO; and Erica Rees, our Company Secretary and General Counsel. I'm pleased with this set of results, and it reaffirms that we continue to remain true to our core strategy of investing in and managing convenience-based centers weighted to the nondiscretionary retail sector. Firstly, let me take you to Slide 4, which sets out our first half highlights. Our net profit after tax of $432.4 million was an increase of 320% over the same period last year. Our FFO per unit of $0.085 was up by 27.5% over the same period last year. And our distribution of $0.072 per unit was up by 26% on the same period last year. Our gearing was at 32.5% at 31 December. Our NTA has also increased to $2.84 per unit, up by 12.7% against 30 June 2021. Our portfolio weighted average cap rate is now 5.45%, and convenience-based assets are still in strong demand from investors, particularly high net-worth individuals as well as some new institutional investors. Investors continue to seek long-term defensive cash flows in a low interest rate environment. Our weighted average cost of debt has improved to 2.4%, with 5.8 years weighted average debt maturity. And our portfolio occupancy is 98.1%, and our specialty vacancy is 5%. And we acquired $347.5 million worth of assets during the period. Moving to Slide 5, which sets out some of the key achievements that demonstrate how we continue to deliver on our strategy. The 3 key highlights for the period are the resilient performance of our portfolio, our progress on sustainability and our new funds management JV with GIC. Going to a bit more detail. With respect to optimizing the core business, the resilient performance from our convenience-based centers is underpinned by the tenant sales that are now above pre-COVID levels. Specialty tenant MAT sales growth was up by 5.5% despite lockdowns in New South Wales and Victoria. Our supermarket MAT sales growth was flat compared to the elevated levels in the previous year, and our leasing spreads and cash collection rates were impacted by lockdowns in New South Wales and Victoria, but improved towards the end of the half year period. Our sustainability strategy is progressing well, and our progress towards Net Zero continues with the rollout of solar panels on WA properties commenced. Our New South Wales and Victorian governments unfortunately extended the Code of Conduct to March 2022 despite there being no further lockdowns. With respect to our growth opportunities, funds management was a big period for us. We commenced to do with, GIC called the SCA Metro Fund, which is an 80/20 joint venture with GIC. It is all agreed and is expected to commence during the second half of FY '22. SCA will be the manager of the fund and has agreed to sell 7 seed assets into the fund for $284.5 million. As well, SURF 3 was wound up, and that was our final SURF fund and that was completed during that half year and achieved an IRR of 11% after fees for unitholders. Acquisitions. It was very busy for us. We acquired 7 convenience-based centers for $347.5 million in that first half. And we also divested Ballarat, which is a Big W and Dan Murphy's, and that was contracted during the period for $23.1 million and settled in January. This was 12% above our June book value. With respect to capital management, we had a valuation like-for-like uplift of $350 million or 8.7% during that first half. Our balance sheet remains in a strong position. Our gearing at the 31st of December was 32.5%. Our weighted average cost of debt is 2.4%, and our weighted average term to maturity is 5.8% (sic) [ 5.8 years ]. We currently have cash and undrawn facilities of $177 million, and Mark will talk more about that later. And finally, our funds from operation per unit of $0.085 represents an increase of 27.5% against the same period last year, and our distribution of $0.072 per unit represents an increase of 26% against the same period last year. I would now like to hand over to Mark to present the financial results.

Thanks, Anthony, and good morning, everyone. I'll start on Slide 7, which shows the sales performance of our tenants and our cash collection rates during the COVID pandemic. On the top right-hand side of this slide, you can see that our specialty tenants recorded strong sales growth compared to the prior year, with MAT of 5.5%. But anchor tenant MAT growth was lower compared to the elevated levels in 2020. However, importantly, the sales for all tenant categories are significantly above the pre-pandemic levels. Compared to 2019, supermarket sales are higher by 8%, discount department stores are 10.8% higher, Mini Majors are up by 7.3%, and specialty tenants are up by 7.9%. Anecdotally, many specialty tenants have experienced a weaker start to the current half year due to virus outbreaks across Australia. However, we've consistently seen that when restrictions ease and when the virus subsides, specialty tenant sales rebound quickly, and we expect to see that again in the second half of this financial year. In terms of cash collection, it's a similar story. You can see that cash collection rates were relatively weak in the first quarter of the financial year during the lockdowns in New South Wales and Victoria. However, cash collection rates rebounded in the second quarter when restrictions eased. We expect cash collection rates to improve again once the current COVID wave subsides. Overall, we're in a relatively strong position compared to pre-COVID, and we expect to record greater earnings per unit this year than ever before. Turning now to Slide 8, profit and loss. Our statutory net profit after tax was $432.4 million, which was up by 320% compared to the same period last year. The primary reason for that increase was an increase in the fair value of investment properties during the year. Stepping down the P&L. Net property income increased by $24.1 million or 27.3% due to acquisitions and reduced COVID impacts compared to the prior year. Funds management income represents disposal and performance fees associated with the successful conclusion of SURF 3. Corporate costs increased due to lower management incentive accruals in the prior period. Fair value of investment properties increase was primarily due to cap rate compression, and fair value of derivatives increased slightly due to the impact of a weaker Australian dollar on our USPP cross-currency swaps and there was an unrealized foreign exchange loss for the same reason. Finally, interest expense was up slightly due to a higher level of debt, partially offset by a reduction in the weighted average cost of debt. Moving to Slide 9, funds from operations. To get to 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 $94.3 million is up by 30.4% on the prior year primarily due to acquisitions, reduced COVID impacts and lower cost of debt. AFFO of $80.9 million was up by 29.6% on the same period last year, slightly less than FFO because of an increase in maintenance CapEx, and AFFO per unit of $0.0735 per unit was up by 26.7% for the same reasons. Distributions were $0.072 per unit, representing a payout ratio of 99% of AFFO. Turning now to Slide 10, which shows our summary balance sheet. The book value of our investment properties has increased to $4.426 billion due to $347.5 million of acquisitions and a $386.5 million increase in the valuation of investment properties. The valuation increase is primarily due to cap rates tightening by 45 basis points, from 5.9% at June 21, to 5.45% as at December 21. Net debt has increased due to the acquisitions completed during the period. And net tangible assets per unit increased to $2.84 per unit due to the investment property fair value increase. Finally, our management expense ratio has reduced to 38 basis points due to the increase in assets under management. Moving to Slide 11, which deals with debt and capital management. As at 31 December, our gearing was 32.5%, 57% of our debt was fixed or hedged, and we had $177 million of cash and undrawn facilities. During the half year, we issued $250 million of new 8-year medium-term notes at a fixed rate of 2.45%, and we used the proceeds to cancel an expiring bilateral facility. We now have no debt expiring until June 2024. Following the sale of assets to the SCA Metro Fund, the group's pro forma gearing will be less than 29%, 70% of our debt will be fixed or hedged, and we'll have cash and undrawn facilities of over $450 million. Finally, as you can see, we are well within our banking covenants. Thank you, and I will now hand back to Anthony for the operational performance overview.

Thanks very much, Mark. Just turning to Slide 13. We continue to be focused on ensuring that our weighting of categories continue to be within the nondiscretionary sectors, being primarily food, medical and retail services. Our occupancy is 98.1%, and the number of our specialties has now increased to over 2,100 tenants. And 48% of our gross rent comes from Majors such as Woolworths, Coles, ALDI and Wesfarmers, and of the remaining 52%, a heavy weighting towards those key nondiscretionary categories. Slide 14 describes our portfolio occupancy, and our specialty vacancy has still remained stable despite the COVID-19 challenges. Our occupancy level increased slightly to 98.1%, and the vacancy reduced marginally, from 5.1% to 5%. And our specialty tenants on holdover for our entire portfolio has increased to 3.9%. Slide 15 talks about sales growth and turnover rent, and our turnover rent continues to increase. And as Mark outlined, our centers continue to perform strongly. Our supermarket MAT sales growth was flat for the year but primarily due to the exceptionally strong sales of last year. However, when compared to the pre-COVID sales, 2019, we are up 8.2%. Similar story with our discount department store, the sales MAT growth has declined by 4.2%, but again, very strong against pre-COVID periods. Mini Majors increased 1.4%, and specialty sales have increased 5.5%, with nondiscretionary, again, outperforming those discretionary categories within our portfolio. Our turnover rent increased. We now have 45 anchors contributing turnover rent, with a further 16 anchors within 10% of the turnover threshold. And we had 2 anchor tenant turnover rents were captured into base rent during the period. Our specialty key metrics are outlined on Slide 16. Our sales productivity and occupancy costs remained stable across the portfolio, and our sales productivity is in line with the prior period at $9,842. And our average rent per square meter has increased slightly to $795. This means our occupancy cost increased marginally to 8.8% compared to 8.6% at June. Our leasing strategy was to allow increased number of holdovers during the period. And in total, we did 131 leasing deals with improved leasing spreads of 0.2%, with average 4% rent reviews and terms of 5-year -- in excess of 5 years. Our renewal leasing spreads improved to negative 0.4%, with a considered approach on holding tenants over. The retention rate increased to 82%, and we continued to remix towards those key nondiscretionary categories. And an average of 3.9% fixed rental increases are applied across 89% of our specialty tenants. Sustainability is outlined on Slide 17 and 18. And since launching our sustainability strategy in August '20, we've made a great start to achieving our 42 sustainability commitments by moving forward with clear pathways and targets. Now Net Zero by 2030 despite COVID. We are on program to install 25 megawatts of solar by 2025, with works commencing on site across 6 West Australian shopping centers and site-specific investigations commencing across sites in Queensland, New South Wales and Victoria. Our other sustainability highlights include the commencement of an energy-efficient pilot at Marketown Shopping Centre using a data-driven approach to improve the mechanical and electrical efficiencies; the consolidation of our portfolio electrical metering to improve our data analytics to increase our efficiencies; the introduction of building management systems to Emerald, Lavington and West End Shopping Centres; and our continued strong partnership with The Smith Family. Our GRESB score increased from 71% to 75% in 2020. And this means we do perform above the average scores of Asia, Europe and the Americas, with a GRESB average. And we also achieved our 6-star NABERS rating in FY '21 for our corporate head office. Slide 20 highlights our new JV with GIC and the successful conclusion of our SURF business. Our GIC Fund or will be known as the SCA Metro Fund was announced on the 2nd of December, with a start date expected during the second half of FY '22, probably around in the 1st of April. FIRB approval has been received for the seed portfolio, and the debt funding package negotiations are progressing well. The key features of the fund are the assets, they are metropolitan neighborhood centers, initially seeded with 7 assets from SCA for $284.5 million. These were sold on a cap rate of 4.84%, which was a 9.3% premium to our June '21 book values. The initial target fund size is $750 million. The capital structure, it is an ownership of 80% GIC and 20% SCA, with a target gearing of 50-plus percent. And management, SCA is to be the property manager and the investment manager. This positions SCA to access the relatively lower-return metropolitan neighborhoods, in partnership with a high-quality and globally recognized partner, while growing asset-light management fee income. With respect to our SURF funds, they are now all wound up. SURF 1 was successfully concluded in October '20, with an IRR of 11%, were generating a performance fee of $0.5 million. SURF 2 was successfully concluded in May '21, with an IRR of 12% and a performance fee of $700,000. And SURF 3 was -- successfully sold its 3 remaining properties in November '21 and finished in December '21, with an IRR of 11% and a performance fee of $400,000. Turning to Slide 21, our acquisitions. We acquired 7 centers during the period for $347.5 million, being Raymond Terrace in New South Wales; Drayton Central in Queensland; Delacombe Town Centre in Victoria; Moggill Village in Brisbane, Queensland; Moama Marketplace in New South Wales; Warrnambool Target in Victoria; and Woodford in Queensland. Slide 23 outlines our indicative development pipeline over the next 5 years. In summary, we have identified and are working on more than 30 potential developments, with total CapEx spend in excess of $250 million. And our Soda Factory development was recently completed with a total project cost of $16.5 million, and it is expected to have an IRR of 15%. Our key priorities and outlook. Our core strategy, outlined on Slide 25, remains unchanged. We will continue to seek and deliver defensive, resilient cash flows to support our secure distributions. SCP will continue to focus on the convenience-based retail centers, with strong weighting towards that nondiscretionary retail segment. We'll be seeking long-term leases to quality anchor tenants such as Woolworths, Coles, ALDI and Wesfarmers, again, all demonstrated by our latest acquisitions. And we will continue to explore the core business growth opportunities as demonstrated in our development pipeline, our acquisitions and our fund management business, but we will remain disciplined with respect to those acquisition and disposal opportunities. I would now like to hand over to Mark to talk about our longer-term growth targets.

Thanks, Anthony. Slide 26 sets out our indicative medium- to long-term target, which is to grow AFFO per unit by 2% to 4% per annum. This earnings growth will come from a combination of comparable NOI growth, supported by supermarket turnover rent and specialty rental increases, developments, acquisitions and funds management, all underpinned by a disciplined control of our operating expenses and our capital expenditure. Anthony, back to you for the closing comments.

Thanks, Mark. Look, Slide 27 just outlines our key priorities and outlook for FY '22. We're going to continue to drive the performance of our centers. We're going to continue to make further progress on our sustainability initiatives and also grow the SCA Metro Fund. As such, for our core business, our focus continues to be on serving our local communities for their everyday needs, partnering with our supermarket anchors to provide a convenient supermarket offer, and this includes working with Coles and Woolies to improve their online offer. This supports our strategy of generating defensive, resilient cash flows. Our growth opportunities. We will continue to grow the -- or look to grow the SCA Metro Fund, and we'll also continue to explore and acquire accretive neighborhood centers in a disciplined and measured way for our own balance sheet. We'll progress our identified development opportunities, including all of our sustainability initiatives. With respect to capital management, we'll continue to actively manage our balance sheet to maintain diversified funding sources with long weighted average debt expiries and a low cost of capital, consistent with our risk profile. And our gearing is to remain below 35%. With respect to our earnings guidance, our FY '22 FFO per unit guidance is to achieve at least $0.175 per unit, which is 18.5% above FY '21, and our AFFO per unit guidance of at least $0.152 per unit, again, 20% above FY '21. This assumes, obviously, no further major outbreaks of COVID and no significant new government restrictions and no further acquisitions. I would now like to invite any questions from...

[Operator Instructions] Your first question comes from Sholto Maconochie from Jefferies.

Just a quick question on the guidance. The COVID impacts, I think you had an ECL of $10.4 million and the rentals, $3.1 million. What are you assuming in the second half? I think you said there was a bit softer trade in the first part of this year from the nondiscretionary tenants, and so what sort of COVID charge on the rental systems you're assuming in the guidance because it was upgraded?

Thanks, Sholto. Well, the upgrade was primarily actually driven by the first half. So you'll see that when we first gave guidance in August, our first half guidance was 7.1, and we've come in at 7.35. And the main reason for that is that if you think back to August, we were in the depths of the New South Wales and Victorian lockdowns. And we took a fairly conservative view, I guess, of what the COVID impact might be in the first half. As things turned out, it wasn't as bad as we expected, and that's why the first half has come in a little bit stronger than we -- the guidance we gave in August. In terms of the second half, it's around about the same guidance, implied guidance as we gave back in August. There's an up and a down there. So the up is that, as we said on the call, we've delayed the start of the GIC Fund, which is a positive because we keep the assets for a little bit longer. The negative, and getting to your specific question is, we've allowed an extra $1 million, so $1 million of COVID impact in the second half, is what's implied in the guidance.

Okay. So $1 million in that second half. And then just on the -- I noticed your holdovers increase of 3.9%. Were they more of the nondiscretionary-type tenants, and that 3.9% went from 1.3% to 3.9%?

No, no. Straight across the board. Basically, we just made the decision, if we're happy to hold on holdovers, it's increased slightly. It's still well below our peers. So we're very comfortable with the position, but it wasn't any one particular group.

And do you think they'll normal -- would you intend to retain the increase from June when they renew?

Well, I hope so. Yes, that's the plan. That's why we haven't renewed them because we believe the space is worth more than what they're willing to pay at that time, which again was in the depths of lockdown in New South Wales and Victoria.

And then just on the gearing, obviously, it decreases [ sub-29% ], the GIC sale. Obviously, your hedging will probably increase as a percentage of debt given you're paying down debt. What hedging you're targeting for the year?

Well, after the sale of the -- the assets to the SCA Metro Fund, our fixed or hedged percentage will be 70%, just a little bit over 70%. We're pretty comfortable at that level. Our policy is to be more than 50% hedged. So we're well within policy. What we'll probably look at in this half is whether we want to extend out the weighted average maturity of those hedges a little bit. As at 31 December, our average fixed maturity was 4 years. So we'll have a look at that. But overall, we're pretty comfortable with where we're sitting. We did, as we said in the presentation, issue an 8-year fixed medium-term note back in September last year at 2.45%. So that sort of helped us in terms of that hedging percentage and the duration. But we'll probably do some playing around the edges over the next few months just to make sure we keep an appropriate duration in our hedging. But we're very happy with sort of 70%, which is the level we'll be at.

And then the cash collection for the full half was about 96%, was the average of the 93% and 98%. Is that right for the full half?

That's right. About 96%. Obviously, as we say, first quarter was weak, particularly in New South Wales and to a lesser extent, Victoria. We've had a good January in cash collections. So we're at 89% collections in the month of January, 90% overall, including prior month collection. So the trend is still continuing as we would expect, which is that when we're in lockdowns or when there's virus outbreaks, the cash collections dip, but we do, with a very focused effort, improve those cash collection rates when things go back to more like normal. And we would expect the same thing will happen in the second half again.

Okay. And then just finally, just back to the guidance, is obviously, you get a pickup from the acquisitions' full period effect of that and then later, GIC. So you've got the FFO and AFFO both increase in the second half, sort of 4% and 7%. Is there less maintenance leasing CapEx assumed in the second half as it did tick up in the first half? Or is it broadly the same?

Yes. In the second half, we do have a little bit less maintenance CapEx. So sometimes, we've made -- because these are basically cash numbers. Sometimes, you can have some timing differences between halves. And we are expecting the maintenance CapEx to be a little bit lower in the second half than in the first half. Leasing CapEx, we'll have to say, it will depend on what we spoke about earlier in terms of the market environment and whether we're comfortable to resume doing a higher number of deals. So we'll see what happens on leasing CapEx. But in our forecast, we've got it fairly flat in the second -- a slight increase in the second half on maintenance -- yes, leasing -- a slight increase in leasing CapEx in the second half, but a reduction in maintenance CapEx.

Your next question comes from Simon Chan from Morgan Stanley.

The first question just in relation to your funds management initiative. Can you highlight what, I guess, what other stuff you've got planned outside of GIC? Or is GIC the first and last initiative you're looking to do on that side of things?

Yes, Simon. Thanks for that. Look, our SURF Funds were our first, our GIC Fund is our second, but it's -- I don't think it's going to be our last, but we've got a lot of work to do with, one, bedding it in and then, two, growing it. We like to get a track record before we move on to doing different things and -- but that's really where we're at, at the moment.

And again, have you thought about bringing back SURF or as in these sort of retail funds because the fees are pretty good, right, 150 bps on the way in and I think, from memory, 70 bps of fees on AUM going forward. I guess why don't -- with the wind-up of SURF 3, why don't you do more of them because just the fees are super good?

The fees are good, but there's also a lot of other risk factors and time. Look, we're very pleased with what we've done with SURF 3, and we're very pleased with where we're heading with the SCA Metro Fund as well at this stage. So that's -- we're fine with where we're heading.

So at this point in time, you probably don't have much of a target external AUM number yet that you're prepared to disclose to The Street?

Correct.

Actually, are you on mute?

No, I said correct, that we don't have a target.

Yes. No target.

No target.

Right. Next question is probably more for Mark. I see the accounts receivable number has kind of increased somewhat, I mean, pre-COVID is a very small number. Last time, it was $13 million, it's now sitting at $18 million. I guess can you clarify as to what's in the $18 million that you've booked as revenue but you haven't collected the cash flow yet?

Yes. So that receivable has all been booked as revenue. And then what we do is we book a provision against that, which is the ECL, which goes through property expenses. So waivers never get into revenue and never get into receivables. So waivers are just -- don't appear in the financial statements. But deferrals and unpaid rent, we do count them as revenue at the time they're due -- they would have been due. And then we, every 6 months, make a decision around what provision we want to set out against that receivable. So at June, we had a $13.4 million receivable, and we had a $9.8 million provision against that. Obviously, now we've got an $18.1 million receivable, and we've got a $10.4 million provision against that. So in terms of P&L, the full increase in receivable goes to revenue, and the increase in ECL goes to expense. Now why has it increased so much? I guess that's sort of the underlying question. It's really about those cash collection numbers in the first quarter. And that, as I said, is primarily about New South Wales. So we did have lower cash collection rates in New South Wales during the half, and particularly the first quarter, and zeroing in even further, it's Sydney that's the main issue. So we'll see how that goes over this 6-month period. But as I said, it will be a key focus of the team to collect as much of that $18 million as we can over the next 12 months.

Great. And my last question, I think Anthony touched on Code of Conduct being extended in his prepared remarks earlier today. I guess what percentage of tenants are actually qualifying under the Code of Conduct now? Because I understand the threshold's actually decreased dramatically as to what's in SME, right? So what percentage of your tenants are actually qualified now?

We'll have to get back on the exact percentage, but what I will say is that you're 100% right, it does keep changing. There's a whole lot of red tape that you got to deal with. There's been 27 changes of Code of Conduct since it was introduced in different states across the board. So it's very difficult to keep up. And they also -- it was originally done for lockdowns, and now, the government -- relevant governments, particularly in New South Wales and Victoria, are extending it without any basis of any lockdown either. So it's a very difficult situation for all landlords, and we have all put in a lot of work and committed a lot of money into this area, of which the governments just continue to hand out other people's money. So it is difficult, it's clumsy, and we are the ones that have to deal with it.

Yes. I will say, just to add to that, and I sort of mentioned it earlier that, so during the first half, we gave $3.1 million in rental assistance, roughly split between waivers and deferrals. We're expecting around another $1 million to be given in the second half. So that sort of gives some quantums around it. So it has tailed off a lot, but there will still be some in New South Wales and Victoria.

Your next question comes from Murray Connellan from Moelis Australia.

Mark and Anthony, just given that the pro forma gearing is now below 29%, does your full year guidance assume any additional acquisitions in the second half? And then just following on from that, what, I guess, are your expectations on balance sheet deployment in the current direct market as you see it?

Well, on the first question, no, there are no acquisitions assumed in the guidance. The second question will -- is it depends. So it depends on the market environment. It depends on the opportunities that arise. But we're certainly -- there's no change in strategy when it comes to acquisitions. So we have, as I said, $450 million of cash and undrawn facilities. We could deploy pretty much all of that and still stay below 35%, which is our preferred gearing range. So there's plenty of balance sheet capacity for acquisitions. As to what will happen, as I said, it will depend on the market environment, it will depend on the opportunities. We always say that we like to do $200 million to $300 million per annum as an average kind of run rate through the cycle. And you can see the slide...

Slide 30...

That we've got in the pack there, which is Slide 30, which shows what we've done historically. There's no real reason for us to depart from that sort of run rate. But as we said, in some years, as you can see on that slide, on that chart on Slide 30, some years, we do a lot and some years, we don't do much. And as I said, it just depends on the market and the opportunities that arise.

Sure. And then just with about 4% of specialty tenants, obviously, no holdover. What's the strategy around the executing of leases going into calendar year 2022? What's the backdrop looking like right now in terms of doing deals, and what's the expectation for that 4% currently in holdover?

Yes. Well, if we looked at what happened last year as we came out of lockdown, the second half of FY '21 was a lot stronger for leasing deals as opposed to the first half, which was during lockdown. We took -- the same view is going to happen this year. And so that's why we didn't do as many deals in that first half. And we believe that we will be able to do better deals in the second half as people do come out of lockdown, et cetera. And we're quite confident that what repeated last year will repeat again this year.

Your next question comes from Lou Pirenc from Jarden.

Just following up on the acquisition comments you made earlier. Given the strong demand for the asset class, are you finding it harder to find opportunities, particularly at the price that you're willing to pay? And maybe linked to that, Mark, in your kind of medium-term growth target at 1%, are you assuming that $260 million average that you've had over the last 10 years, or is it a lower number in this example?

Yes, Lou. It's Anthony here. Asset prices have been tightening. Cap rates have been tightening basically over the last 8 years. Certainly, in the last couple of years, they've tightened even further. And yet, we've still really done a lot more than our average of sort of $260 million a year last year. FY '21, we did $450 million. We've already done $350 million year-to-date, and we just have like 6 months to go or 5 months to go now. The key is remaining disciplined. Buying things is easy. You can pay $1 more than the next person is prepared to pay, but the key is buying good quality assets that you believe you can add value to, and we think we can. The majority of our acquisitions are off-market. They always have been. And I think that's going to continue to be as well as we've got this great opportunity with the SCA Metro Fund, where we can access a part of the neighborhood market that we haven't been able to access before, being predominantly metro in Sydney, Melbourne, Brisbane for that particular fund as well. So we're very confident that we'll be able to continue those acquisitions again but in a very disciplined manner that we add value to as -- or we see value as opposed to just buying for the sake of getting more scale. Mark, do you want to...

Yes. So Lou, in terms of the indicative long-term target on Slide 26, so the important thing, I guess, to note there is that this is an AFFO per unit target. So when we talk about acquisitions, we need to take into account the cost of capital as well. So yes, this includes about $200 million per annum of acquisitions. But obviously, we've got to fund that with debt and equity in accordance with our target gearing range. So that does lead to some variability in the outcomes, which is why we say 1%-plus.

Yes. Yes. Fair enough. And then just -- is there an opportunity to sell more assets, or do you have more assets that you would like to sell into this strong demand?

We sold Ballarat, Big W and Dan Murphy's this year as well. We've always sold assets. We sold New Zealand. We've sold a number of assets through -- since 2012. I would say we don't have many noncore assets at the moment. But when people come and they do offer you more than what you believe the value of that asset is, yes, we will sell. Likewise, we look to buy when we can -- we think it is good value. We will sell if we think that's good value as well. There's no difference there.

Your next question comes from Stuart McLean from Macquarie.

First question is just on the outlook for maintenance CapEx, [ then incentive ]. And I appreciate you touched on this, but given a lot of the portfolio at IPO was new and you're now up to 10 years old or so for those assets, do you expect to see any divergence between FFO growth and AFFO growth going forward? I appreciate Slide 26 has [ them ] growing in line, but is there a risk that AFFO is slightly below FFO growth?

Look, I think, as we say on Slide 26, longer-term, we would like to keep maintenance and leasing CapEx constant as a percent of asset value. It has been increasing as a percent, and it probably will continue to gradually increase as the portfolio ages. But we're not expecting any really sharp movements from 1 year to the next. Sometimes, I said before, you can get some timing differences between halves, but overall, I would say, in the next couple of years, you might see a slight increase as a percent of asset value, but longer-term, we would like to see that stabilize.

And then to [ transfer out ] some dollars around that. So 1/2 is $7.6 million in maintenance CapEx. By annualizing, that's circa $15 million. So would you expect that number to increase beyond $20 million or $25 million? Or should it be staying around that sort of $15 million mark?

Well, as I said, I think the $7.6 million has some timing elements in it. So I wouldn't place too much weight on the $7.6 million. We are expecting it to reduce in the second half. Last year, FY '21, we spent $9.7 million on maintenance in the whole year. This year, it will increase, but nowhere near $20 million, and it will certainly be less than $15 million, is what we're expecting.

More moderate increases rather than a significant CapEx [ program ]...

Moderate, gradual increase, yes, over time.

That's clear. And staying on CapEx being switched to development CapEx. I was looking at Slide 23, please. Just in regards to center expansions and the sustainability CapEx, what's the targeted yield on costs coming through from that circa $50 million spend per annum?

Look, we don't have a target yield on cost. Our target is an IRR. So we try and achieve a 7% unlevered IRR on our development spend. Sometimes, the yield on cost will be double digit, and sometimes, it might be low single digit. So it does vary quite a lot. And we get asked this question a lot because obviously, you guys want to put some numbers in your model. And generally, what I've said is if you assume a 5% yield on cost, you'll probably be -- that's probably a reasonable number. But it does vary a lot from project to project, [ have that yield on cost target ]. Yes.

And then just in regards -- the final question in regards to leasing spreads. You said that New South Wales and Victoria was a bit of a drag. And I'm assuming that also contributed to the higher holdovers. Do you have to give an idea of spreads outside of New South Wales, Victoria potentially?

No, it's pretty consistent for us. There's a lot of national retailers that are based in Sydney and Melbourne anyway. And so they're still not doing deals in other parts. So look, it's -- or not doing really good deals from a landlord's perspective. So yes, there's no material difference by state for us.

Your next question comes from Grant McCasker from UBS.

Can we just talk about some of the supermarket sales themes you're seeing more recently? And I guess, a few things I wanted to hear about is, one, is the view of shopping local versus the largest shopping centers and then how you see the recent step change online played out. I guess the bigger question is what's the implication for your specialties in the short to medium term?

Yes. Look, there is -- the first thing I would say, there is no doubt, and I'll talk Woolies and Coles, they have both spoken about the really strong growth in online. We're working very closely with both groups to improve the online offer as much as we can with click and collect and sort of drive-thrus. The key aspect for us is to make our center as convenient as possible. And if customers want online and click and collect or drive-thru, we want to make sure we can provide that, and we will work and continue to work closely with Woolies and Coles to do that. So online is still really, really strong. With respect to shift to local, I think there has been a shift to local for the last couple of years, and we're still seeing some really solid performance in those areas. We don't have many -- we don't have any in a CBD location, so I can't comment. None of our centers are really large. They're all those small local centers. We've got a couple of subregional centers, but there's no discernible difference between the neighborhoods and the subregionals for the supermarket sales. So yes, but most of ours are out in the suburbs, and they're performing well. Very pleased with it.

Then on the specialty, so it's a great result, but I don't want to drill on any negatives. Are you seeing any categories or retailers actually need the help at this point in time?

So we have the Code of Conduct that's enforced in New South Wales and Victoria, as we've spoken about, that's been extended despite no lockdowns. Our cash collection rates have been very strong. And as Mark spoke about in January, we have had 1 tenant out of in excess of 2,000 hand back the keys in the month of January. That is a lot lower than normal. And so we're -- our tenants are performing pretty well. There is some movement within some of those categories, which affect lockdown. Takeaway food is really, really positive. Some of our cafes and restaurants haven't been as positive because they've had restrictions placed on them. But there's nothing different to what has happened in the prior lockdown periods.

Your next question comes from Solomon Zhang from JPMorgan.

2 questions for me, probably first one just around the ECL provisioning. Just curious to understand the impact on first half '22 FFO in terms of the quantity. I can understand that there's a total provision of $10.4 million at the end of the period versus $9.8 million. But I guess, what was the gross increase and the impact on FFO?

Yes. So the way it works is the change in the provision goes through property expenses. So in this case, we've had an increase from $9.8 million to $10.4 million. So that's a negative $0.6 million impact on FFO from that movement.

Got you. Second question, just around IRR expectations of your acquisitions in the GIC Fund, can you talk to that versus your balance sheet assets?

Sorry, I missed that question. Can you repeat that, Solomon?

Yes. Can you repeat?

Yes. So just talking about IRR expectations of the acquisitions in the SCA Metro Fund.

So it is a different methodology. So we -- when we're assessing acquisitions, our primary methodology is an unlevered IRR. And depending on the property, we have different hurdles. But generally, we're looking for at least 6.25% unlevered IRR, and that's for the balance sheet acquisitions and we try to do better than that, obviously. The Metro Fund will be measured based on a levered IRR. And as we said in the presentation, the target leverage is actually 60%. So what that means -- and I don't want to go into the specific targets because that's confidential with GIC. But the whole design of it and the whole rationale for it is that this will enable us to access lower-yielding intercity metro neighborhood assets that historically we haven't been able to buy on balance sheet because we can't get that 6% to 7% asset level IRR on them. So we will be targeting lower yield assets, and the target return metrics are designed to allow that to happen.

[Operator Instructions] Your next question comes from Alex Prineas from Morningstar.

Just a question around the anchor rents and specifically around turnover rent, which is one of the sort of swing factor contributors there on Slide 26. Just wondering, with that 0 to 1% contribution to AFFO and FFO growth, is that more driven by new anchor tenants nearly hitting the turnover thresholds? Or is it more driven by existing tenants that have already hit the threshold just growing that turnover?

It's both. So obviously, when the -- once they've hit the turnover threshold, our rent, just to simplify it, I guess, our rent grows in proportion with their sales growth. So if they get a 4% sales growth in a particular year, we'll get 4% rent growth. That's sort of how it's designed. So -- and obviously, when a supermarket ticks over their threshold, they go from 0% growth to whatever their sales growth is, in my example, 4%. So it is a combination of both existing supermarkets that are already in turnover rent that met their thresholds and new supermarkets meeting or coming into turnover and if you like, achieving their thresholds and growing from there.

And is it reasonable to assume a bit of a sort of a flat period in that? Because obviously, we've had strong, as you mentioned, the switch to local and strong anchor tenant turnover in the last couple of years. Is it reasonable to assume a bit of a flat spot as we come out of lockdowns and restrictions in turnover growth?

And you're seeing that now. So if you look at Slide 15, and you can -- you sort of see the turnover rent trend there, you can see that it's flattening off now. And the reason for that is that the supermarket MAT growth for 2021 was basically flat. So we will see a flatter period because we're cycling really strong growth in the prior year. But we expect that when we're cycling this year, it will again be reasonable growth. So you'll see a flatter spot and then you'll see it increasing again.

And this is where inflation comes in.

Because obviously, it's based on the [ gross, right then, gross sales, yes ].

Just quick on the 0 to 1% longer-term, can you give us sort of some color around your thinking of what would drive it closer to 0% or closer to 1%?

Well, there's really 2 factors there. One, what percentage of our anchor tenants have hit their thresholds, that's the first factor. And the second factor is how fast are their sales growing. So if we had 100% of our anchor tenants growing at 4% -- that have met their threshold and they're growing at 4%, then our anchor rental growth will grow by 4%, which -- and because anchor is 50% of our total rent, that would be a 2% contribution to our revenue growth, for example.

Thank you. There are no further questions at this time. I would now like to hand back to Mr. Mellowes for closing remarks.

Great. Well, thank you very much, everybody. I really appreciate your time this morning and look forward to speaking with you all over the next couple of weeks. But thank you very much, and I hope you all have a safe period, with not too many COVID interruptions. So thanks a lot and speak to you all soon.