Region Group (RGN) Earnings Call Transcript & Summary

Thanks very much, and welcome to the first half of our FY '24 financial results for Region Group. My name is Anthony Mellowes, I'm the Chief Executive Officer. Presenting these results with me today is Evan Walsh, our Chief Financial Officer; and also in the room with me is Erica Rees, our Chief Legal and Investment Officer. Firstly, let me take you to Slide 4, which sets out our first half interim results. Our funds from operations or FFO per security was $0.076 per security; our adjusted funds from operations or AFFO per security was $0.067; and our distribution per security was $0.067, paying 100% payout of AFFO. We have a statutory net loss after tax of $35 million for the 6 months to December '23. Our operational metrics remained strong. Our portfolio occupancy at 98%. We completed 207 leasing deals versus 195 in the same corresponding period last year. Our tenant retention rate improved to 87% and our comparable MAT growth remained very resilient at 4.1% per annum. With respect to capital management, we have divested $77.2 million worth properties through the year. Our NTA per security is now $2.45. Our pro forma gearing is 31.6% and we have hedged debt of 97.7%. Slide 5, our strategy, and it is to provide defensive, resilient cash flows to support secure and growing long-term distributions to our security holders. Region will continue to focus on convenience-based retail centers with a strong weighting to the nondiscretionary retail segment. We'll be seeking long-term leases to quality anchor tenants, and we'll continue to explore growth and value creation opportunities that we will remain disciplined with respect to our capital recycling program that meet all of our investment criteria while maintaining an appropriate capital structure. Moving to Slide 6, which I'll go through fairly quickly because we talk in more detail about the individual items there. But we are continuing to focus on our convenience-based centers. Our portfolio performance is underpinned by the resilience of our nondiscretionary tenants. As I mentioned before, we did 207 specialty leasing deals. We have growth and value creation opportunities with our targeted $200 million capital recycling program. It has also well progressed and redeploying into some accretive opportunities. We do have an appropriate capital structure, which is assisting us navigating beyond the peak cost of debt, while we will also be maintaining a conservative and secure balance sheet. Slide 8, our portfolio overview. We have a strong weighting towards our nondiscretionary tenants. We have 93 owned retail properties with nearly 2,100 specialty tenants with a portfolio value of $4.3 billion. We have nearly 800,000 of gross lettable area over nearly 2.5 million square meters of land area. Our weighted average lease expiry is 5.3 years. 47% of our gross rent is attributable to our anchor tenants and 53% is attributable to our specialty and mini majors with a heavily focused on food and liquor, retail services, pharmacy and healthcare. And finally, we have a good geographic diversification across Australia. Slide 9. Our NOI resilience is driven by that nondiscretionary focus. Our consistent FFO growth reflects the quality portfolio. 84% of our gross rent is derived from anchors and nondiscretionary tenants. Our low tenant arrears of 1.1% of billings. We had first half comparable NOI growth of 2.2% and we expect the second half to be closer to 3%. You can see from the slide, our consistent comparable NOI growth drives our FFO growth being a 3.5% average comparable growth versus an average 2.5% of our FFO growth per security. On Slide 10, our rental income security. Our occupancy has improved slightly with a manageable lease expiry profile and predictable specialty income. Our specialty vacancy improved slightly to 4.9%. 87% of our expiring tenants were retained and we also reduced our holdovers to 3.2% from 3.7% at June 2023. WALE decreased by 0.2 years to 5.3 years, however, with some increased leasing activity that has mitigated the natural expiry of the leases. We also managed to achieve 3.9% average annual rent reviews. This increase is due to the deals that we completed in the first half being at an average of 4.3% and these are applied across 90% of our specialty tenants. Our specialty -- average specialty gross rent increased from $818 to nearly $860 per square meter. On Slide 11, our portfolio sales performance. We continue to have really consistent and resilient sales growth. Our 4.1% comparable MAT growth is driven by our supermarkets at 4.2%. Our Discount Department Stores at 2.1%, Mini Majors at 1.3% and our Specialties at 2.5%. And this has driven our average comparable MAT growth since FY '19 being prior to the pandemic to be a relatively consistent 3.6%. Slide 12. We are capital partnering with our anchor tenant to drive sales turnover and value to all the stakeholders. We have 127 anchored tenants contributing 40% -- 47% of our gross rent. We've got 61 Woolworths and 31 Coles stores, and we are the largest and second largest supermarket landlord respectively. Supermarket sales turnover is significant being in excess of $5 billion worth of annual sales. We now have 77 direct-to-boot and e-commerce facilities. 6 of those facilities were completed in the first half with 3 more due in the second half. 96% of our stores have online sales included in the turnover rent calculations. Now -- and the MAT growth is roughly 0.5% higher for centers where an e-commerce facility has been installed. The supermarket comparable MAT growth of 4.2% exceeds the average 3.6% growth since FY '19. We had $3.2 million of turnover rent that was generated from 53 anchored tenants with a further 21 and within 10% of their turnover thresholds. And our MAT growth from supermarkets is generating turnover rent is roughly 0.4% higher than the total portfolio. Slide 13, our specialty sales performance. We do have sustainable growth in our nondiscretionary tenant sales. 4.6% nondiscretionary specialty sales growth, which makes up 76% of our specialty gross rent and 2.5% is total specialty sales growth. Our specialty occupancy cost has increased to 9% from 8.7% at the 30th of June, while -- that's a really good result. Our specialty sales productivity has also increased to nearly $10,500 per square meter. Slide 14, our leasing activity. It has driven a record number of deals for us with growing leasing spreads. We did complete 207 deals being 126 renewals at an average leasing spread of nearly 4.5%. And 81 new leases with a relatively flat spread with an incentive of 10 months for a 5-year deal. On all of these deals, we achieved an average annual 4.3% fixed rent review. Turning to Slide 15, the highlights of our sustainability program. We are on track to deliver our full year commitments and targets. With Energy & Carbon, we have commenced the construction of a further 1.2 megawatts of solar projects across 5 locations. And we have reduced at least 2,500 tonnes of CO2 electricity emissions in that first half. And we have had nearly $800,000 of electricity savings resulting from our solid PV rollout. With respect to climate risk, we have commenced climate change impact assessments at 6 sites with scenario analysis of impact for temperature increase from 1.5 to 2 degrees centigrade. And we have also had a GAAP assessment for the Australian sustainability reporting standard is also underway. With respect to our essentially local, we're now in our fourth year of supporting The Smith Family, and we've launched our local community engagement programs that supports our initiatives that positively impact our local communities. With respect to diversity and inclusion, we do have equal gender representation across our nonexecutive directors, which means we do have 43% female directors. And we do have 60% female representation at both our senior leadership team and the overall business. With respect to our progress to Net Zero, we are on track to reach our interim net zero target against our FY '24 portfolio for Scope 1 and 2 by FY '30. We spent $31.3 million to date. There's 23.3 megawatts of solar installed or under construction at the end of FY '24. 100% of these energy savings needed to achieve our interim net zero target is generated from our portfolio. Also in calendar '24, we will be reassessing our net zero target for our current portfolio and also investigating our Scope 3 requirements. I'll now hand over to Evan for the financial results.

Right. Thanks, Anthony, and good morning, everyone. I'll start on Slide 18, where we show our financial results. Our funds from operations for the half was $0.076 per security, which is down around 9% compared to the prior corresponding half. And our adjusted funds from operations came in at $0.067 per security, which is in line with the distribution that we paid back in January. We had previously flagged that our earnings would be negatively impacted by an increase in cost of debt. We saw a $9 million increase in our like-for-like interest expense with a weighted average cost of debt moving by 1% to 4.4%. Given we are 98% hedged, we expect that our cost of debt for the second half to be in line with the first half. We also expected that higher inflation levels would flow through to increased property expenses. Despite this inflation headwind, we did manage to increase our comparable net operating income by 2.2%. Now with regards to our property expenses, we are currently recovering around 50% of the total that is allocated to our tenants. With our higher exposure to anchor tenants, the recovery rate is skewed a bit lower. However, we are recovering over 75% of expenses that are allocated to our specialty tenants. We are looking to maximize this recovery rate through leasing activity that is focused on reducing vacant space and also by structuring deals where we can recover all the costs. We continue to control our management-related expenses with these costs representing approximately 0.3% of our total assets under management. This compares favorably to our externally managed peers that charge an average cost of around 0.7%. With the focus on executing on new leases during the half, there has been an increase in leasing incentives versus the previous period. We expect that this will reflect stronger income growth in the future. Also, we do expect that the leasing activity in the second half to be focused more on renewal deals, which generally attract minimal incentives. On to Page 19. And on this page, we have provided a chart that steps through the key drivers of our earnings growth. Our underlying FFO has grown by around 3.5%, which is above our long-term average. Key drivers of this were the comparable NOI growth that I've mentioned earlier and our reduced management expenses helped to offset the majority of a 5.4% increase in net property expenses. There was also a small earnings dragged with a reduction in our funds management income as no transaction fees were booked during the half. Moving to Page 20 and our balance sheet. Our total assets under management of $4.8 billion is down around $120 million. The majority of this reduction reflects the disposals of Collingwood Park and Mount Warren Park in Queensland and the mark-to-market revaluation of our portfolio. Post balance assets under management has reduced by another $20 million with the disposal of Drouin Central in Victoria. The proceeds of the property sales have initially been applied to repaying debt, which resulted in our pro forma gearing being 31.6%. This is at the lower end of our target range of 30% to 40%. We prefer to have a more conservative approach to gearing at the moment, given the uncertainty around market movements. However, at this level, this also provides us sufficient capacity to quickly jump on any investment opportunities that may come up. Pleasingly, our tenants continue to be in a position to pay their rent with the net amounts that are outstanding from our tenants, reducing to $5.6 million. On Slide 21, this shows some further information around the change in the valuation of our portfolio. On a like-for-like basis, our valuations reduced by around 2%. A half yearly increase in market income of 1.4% managed to mitigate a large part of the effect of the expansion in income rates. We remain conservative and appropriate with our approach to our valuations. Our cut rate for our portfolio is a little bit over 6%, which has increased by 61 basis points over the past 18 months, which is a larger movement compared to our peer set. Moving to Slide 22. This points to some of our key debt metrics. We have total debt facilities of $1.8 billion, with around $390 million of funding available for us to draw on. This is larger than normal as we have allocated bank debt capacity to repay the $225 million of medium-term notes that are expiring in June. However, we are actively monitoring the debt capital markets. And if conditions are favorable, we may issue new notes to refinance these expiring ones. By doing this, we would continue to remain our preference to have 2/3 of our debt funded from the capital markets and 1/3 provided by the banks. Once these notes have been repaid, we will have no further debt expiries until FY '26. We have already commenced negotiations to extend these facilities expiring in FY '26 and have significant interest from both new and existing banks. We remain comfortably within our debt covenants and have recently had Moody's reaffirmed our credit rating at BAA1. On to Slide 23, we talk to our hedging position and what that means to our cost of debt going forward. During the half, we undertook a no cost restructure of our hedging book. As part of this, we were able to crystallize some value in our debt book that was previously unrealized. This value relates to the period from FY '29 onwards. We were able to bring forward this value to provide benefit in FY '25 and FY '26, where we implemented new swaps to provide more hedging certainty and lock in lower fixed rates. We added another $300 million of interest rate swaps that saw a hedging levels in FY '25 increase to 78% and in FY '26 to 64%, and that's based on our current debt levels. As I mentioned before, our debt is already close to fully hedged for FY '24. This restructure also reduced some of the earnings headwinds that we were previously expecting in FY '25 and FY '26, especially with some of our existing in-the-money hedging rolling off. Post this zero cost transaction, we expect that our weighted average cost of debt will be around 0.6% lower in FY '25 and 0.3% lower in FY '26 versus what it would have been had we not done this restructure. I will now hand back to Anthony to talk through some of the value creation opportunities that we are focusing on.

Great. Thanks very much, Evan. So just on Slide 25, it's all about our recycling of our capital to drive earnings growth and we are really looking to deploy into accretive opportunities, both at an income and an NTA perspective. We've previously said we have identified approximately $200 million of properties for a potential divestment. We have already completed $77 million worth of these over 2023 at an average cap rate of 5.25%. The potential use of these proceeds are initially used to pay down debt and/or we can use as a portfolio reinvestment into investing in our centers in sustainability initiatives. We're investing with our anchored tenants or center repositioning and development but also, if there is accretive acquisition opportunities. And dependent upon where we do trade up, there could be capital management initiatives such as a buyback. Slide 26, Evan, over to you.

To drive our portfolio performance and to unlock some of the inherent value in our properties, we have a targeted strategy to drive yields and long-term returns that are earnings and value accretive. We currently have $65 million spend allocated for FY '24 to some of these initiatives, and they are across sustainability, investing with our anchor tenants and center repositioning and developments. Across these investment strategies, we expect that they will generate stabilized yields of at least 6% and 10-year IRRs of at least 7%. Anthony is now going to talk further on these growth initiatives.

Great. Thanks a lot, Evan. So with respect to center repositioning, we have already committed $30 million across 3 assets, and we're currently assessing a further 20 properties for investment opportunities. With respect to committed developments, we do have our $31.5 million Delacombe Town Center Stage 2, which is currently under construction and due for completion prior to Christmas 2024. But we do have some fairly significant uncommitted development opportunities, which we are focused on. They are in Greenbank in Queensland, West of Brisbane, North Orange in New South Wales and also Newcastle market down in New South Wales. There are a number of other pad sites across our portfolio. Just going to Slide 28. Also with respect to acquisitions, we are still positioned to acquire in this fragmented market. We are the largest owner with an 8% share of the market and we do have really strong relationships with both Woolworths and Coles. We also have a proven transactional track record, having acquired on average 6 properties per annum, which is for more than in excess of $200 million per annum. As Evan said, we do have the funding capacity to quickly execute on these accretive buying opportunities if the market is there. Slide 25 (sic) [ 29 ], our fund management. Our Metro Fund does offer a platform for funds management growth in the medium to longer term. It is with a JV with GIC from Singapore and it has an initial fund size of $750 million, and we invest primarily in Sydney and Melbourne Metropolitan neighborhood shopping centers. I'll now hand back to Evan to talk about our AFFO growth target long -- medium- to longer-term growth target.

So to sustainably drive our medium- to long-term earnings growth, we are focused on generating an increase of at least 3% in our comparable NOI on a yearly basis. We will do this through further investment in our centers that aim to increase sales performance, and this should result in higher rents. Our specialty leasing strategy will also focus on targeting spreads greater than 2%, with annual fixed rent reviews of at least 4% to be built into these leases. Our property expense growth is expected to moderate from the heightened levels this half and fall back in line with income growth levels. Through our value creation initiatives, we aim to add another 1% to our growth rate. Our work around increasing our hedging levels should mitigate some of the earnings volatility that is generated from interest rates, and we expect that the impact of interest rates will be limited going forward. Based on all of this, we are targeting medium- to longer-term growth in our AFFO of at least 3% to 4%. Anthony will now provide the outlook and earnings guidance.

Great. Thanks a lot, Evan. So just turning finally to Slide 32. So our real key priorities. We are targeting that comparable NOI growth in the second half of 3%. A bit of a skew on our leasing activity, much weighted more heavily towards renewals in the second half. We're going to continue on with our capital recycling program, subject to obviously the market conditions. And we will continue to diversify our funding sources with the upcoming MTN expiring in June 24. Finally, our earnings guidance is reaffirmed at FFO of $0.156 per security and our AFFO of $0.137 per security with a target payout ratio of 100%. That's obviously for FY '24, and we give guidance at our results in August for FY '25. We'd now like to invite any questions. Thanks very much.

[Operator Instructions] Your first question comes from Caleb Wheatley with Macquarie.

A couple of questions from me. The first one, just on property expenses. So that they grew at about 5% over the half. You were previously speaking to a potential 8% increase in FY '24. Is this more of a timing issue? Is that rate of property expense growth running a little bit lower than your initial expectations?

So we're expecting that the property expenses, this is sort of our peak in terms of our growth that we guided to. Some of the statutory costs came in a little bit lower than we expected. So that's sort of pointing to why that net expense growth is sitting below 6%.

Great. And so clearly, that's going to be a benefit to our FFO and AFFO. Is it just not material enough to impact your earnings expectations for FY '24? Or was there another offset through the half that potentially remove that benefit?

Yes. Look, there is still some issues out there but we're still concerned about security at shopping centers is still one of the major ones that we're sort of focused on. So -- and there is a lot of just recently, this weekend, there was a lot of talk at publicity about a tragic accident in Redbank Plains. So security is still an issue. So we're still making sure that we get there to the end. But there is some overall net savings to where we thought, but it could be offset with some other larger increases that we don't yet know about.

Sure. That's clear. My second question, just around the restructuring of the hedge in FY '25 and FY '26 and the benefit that comes through there. Just wondering if you could step through maybe in a bit more detail the exact mechanism of how that restructuring worked. And feels like there needs to be some sort of offsetting factor as well on the other side, exactly how that's worked, please?

Yes. So what we looked at is some of the value that we had in the debt book from FY '29 onwards. Now that was sitting in some of our medium-term notes that we had not -- we hadn't accounted for that in the accounts. So we looked at bringing that forward, and we have put in some swaps -- we use that value to put in some swaps to assist some of our interest expense for '25 and '26. So we didn't pay anything for that. So we took the value from that and we put it back in upfront.

Okay. So there was some very long-dated MTNs that were in the money and you effectively have released that benefit and replaced it with the swaps, is that a fair way to understand it?

FY '29 onwards.

FY '29 onwards, yes.

Your next question comes from Simon Chan with Morgan Stanley.

First question is just on Slide 31. For as long as I've covered the stock, you guys have always been 2% to 4%. It looks like today, you've moved it to 3% to 4%, which is great. What's the key assumption change, I guess, in this slide that made you move up the bottom end of the range?

Thanks, Simon. Look, I think it's more about our comparable NOI growth, more about our anchor rents being percentage rent than they have been in the past because of just the age of moving into higher turnovers is one part of it. It's a major part. And then we've always had our value creation opportunities of one sort of plus percent, but most of it's in that comparable NOI growth, also with our specialty leases getting 4-plus percent and also that being off a slightly higher proportion. It's just those smaller changes equate to that 3-plus percent in our comp growth as opposed to just under 3%.

And actually, it's not all variable that you're aiming to get 4-plus percent. Are you confident that you can get the 4-plus percent like tenants will agree to it? Like reality and aspirations are 2 different things.

Well, our renewals were getting 4 -- plus 4%. And on our average annual spreads within those leases for 5, we're getting 4.3% of all of the deals that we've done this year. So yes we do believe that, that is achievable and that's what we are going after. They're not linked to CPI. It's fixed. We've got a lot of moment ads. It's known. So yes, we do believe that is achieving.

Great. My second question is just on Slide 37 in the appendix, the profit and loss statement there. The second line there, specialty rental income percentage change up just 1%, which seems a bit low, given occupancy is up. You've got your fixed bumps, leasing spreads were positive for the renewals. Why has it changed just 1%?

There's a few different moving parts there, but most of it would be related to some of the noncomparable aspects of in there. And there's sort of been a bit of a move around between some of the recoveries in the rent. So that's a little bit of rebasing there as well. So I'd look at both the specialty recovery rental income and the recoveries together.

And also [indiscernible].

And also [indiscernible].

Okay. Cool. My final question, I think on the capital deployment or redeployment slide, I think Slide 25. Plenty of options there. Is there -- I guess, is there a one that is a higher priority than others at this point in time because you're pretty much covered off every option, right, debt, by staff reinvestment, capital management. What's the preference?

It's really interesting. I think as you as an analyst, I would love me to say the highest returning, but sometimes we have to do things that aren't necessarily always the highest returning. Look, sustainability initiatives, they do give a good return and we're very happy with those. Our anchor tenants are really important. So doing the direct boots and getting them refurbished is also really very, very important because that really drives our centers. We do have a real opportunity to reposition some of our centers due to their age. So we think there's some opportunities there. And although we haven't been active in acquisitions, should cap rates and everything get equalize out and I think they're getting there. We may be in a position where we can get back to accretive acquisition. So it all depends on a number of factors for each of them. And likewise, capital management with the buyback, that depends on really where we're trading. So I've got to make a judgment call of which is the most important taking to all of those factors. We don't have unlimited capital, but certainly, that's one of the key reasons why we have identified to sell or divest approximately $200 million at relatively low cap rates into higher-yielding opportunities.

Your next question comes from Sholto Maconochie with Jefferies.

Just one on from Chinese questions with the targets on the comp NOI. Like the results are pretty good on the supermarket turnover spreads still positive, but things are moderating in retail land in sales, especially discretion were weaker. So just thinking on that indicative NOI growth, like if sales and modern supermarkets on a 3-year view, it's hard to push price with -- as you will see inquiry plus spreads turn a bit slower. How confident is that 3% to 4% can be hit over the medium term given some of the tail headwinds retail facing for the next sort of 12 to 24 months?

I think there's been a lot of headwinds and variabilities that have come in over the last 10 years. And the retail supermarket retail sales have always been pretty consistent. They've gone up and down a little bit, but they've always been consistent in that 3% to 4%, and that's what they have been. I believe that's where they will continue to be. Yes, there's going to be a lot of inquiries with respect to supermarkets, but also the bottom line is if it starts getting harder for the economy out there for -- I'm talking generally for people. They pull back on spending and their discretionary and they focus more into their nondiscretionary. And I think we'll be a net positive for us in that respect. So I think the supermarkets will be focused very heavily on maintaining their competitiveness in the entire market. Lower prices could lead to higher volumes. So we'll see. But we're pretty confident, if you go the long term, supermarket sales are very, very resilient. They don't really jump around all that much. And I don't expect a lot to happen. They're not going to go to 10. They're not going down to 0. It's just on the edge. But it's nondiscretionary, it's the everyday spend that is really important.

Make sense. And then just on the debt, to clarify you got the benefit, you're in the money in the later years and you put that towards the swaps. So the net cost was 0, correct?

Correct.

Okay. And then you talked on the asset sales. Obviously, you've been successful to date on a good chunk of the $200 million. What sort of -- if you are looking -- I know you talked about alternative use of capital. But if you were to look, you've got the GIC JV for that metro and hasn't deployed. But where would you sort of look, what sort of asset types and locations that would meet your hurdles and targets in this market? Now it might be early, but what sort of things you're looking at?

No real change to what we have looked at in the past. So if it's in Sydney or Melbourne, we looked for the Metro fund, if they don't particularly want to do it, we like the asset, we will continue there. But I wouldn't say we're going to large sub-regionals. We will always -- have always looked at the smaller subregional or others used to call it, convenience plus and also just the general convenience neighborhood sector. We think there is -- with that really good exposure to nondiscretionary supermarkets. So I don't think anything has really changed there for us and that's where we look at pricing has been the issue in the past 18 months. But if that starts to change this year, we'll be certainly analyzing everything as long as it meets our investment criteria, we would look at it.

That make sense. Just finally, on the asset sales have been good price achieved and things are stabilizing cost of debt and yields are sort of moderated to all right levels. What's the demand like on the remaining sort of assets that you're marking? How's the demand? And what sort of -- where is that demand coming from?

Most of the assets that we have sold have been sold to privates. There's a very strong depth of private owners, investors in this neighborhood convenience space comes down to that lower dollar value. Average price of sort of $30 to $50 million, $20 million is a lot easier to move than something that is $100-plus million because you generally start getting into institutions. So mostly private high net worth that own the vast majority of those types of centers in the market already.

Your next question comes from Lou Pirenc with Jarden.

Three questions from me. Just on your Slide 26 on investing in the portfolio. That $65 million that you're planning to spend in '24, is that kind of something that we should expect going forward? Or do you think that there's opportunity to ramp that up further for more development, more sustainability initiatives? Or how should we think about CapEx there?

Yes. Well, sort of we've taken away sort of a guide that we had in there for developments. But I would be thinking a similar amount to that each year. Whether it -- whether the mix is slightly different or not, but it's going to be around that sort of level in the medium term. But the bigger issue is some of our bigger developments could be a bit lumpy and -- but we'd give certainly good forewarning of those.

Great. And then Evan, just on the debt margins, I mean, have they changed much? I mean you clearly carry more undrawn debt than the normal and that may change. In the next 6 months, but where are your debt margins? And what are you seeing in the markets in terms of what you're paying on your all-in debt group?

Look, I think we aren't seeing any material change to debt margins. Certainly, there's -- from the banks, they're competitive, and we have a lot of demand from the banks to lend to us. Also, what we're seeing in the sort of debt capital markets is the margins are coming down. So that's starting to sort of getting more in line with what we're seeing from bank debt. So we're not seeing any major change certainly from a -- where we expect margins -- average margins going forward.

It's still about 1.8, 1.9 ?

It's a bit lower than that.

And the final question, Anthony, just on occupancy cost and rent kind of for some time, you've been highlighting that your city cost or rent specialties are lower than your peers. What is the opportunity realistically to kind of close the gap? Or is that just the nature of your portfolio? Or do you think that we're spending more money into the portfolio, you can kind of bring that more in line with your peers?

Yes. Look, I've always said for neighborhood convenience-based centers, the occupancy ratio sits between 9% and 11% for sub-regionals. It goes from 12% to sort of 15% and then regional 15% plus. So we were the beneficiary through COVID. And just post-COVID, where our sales increased to a faster rate than our rent because our rent continued to increase. And this period, our rent increased at a faster rate than our sales growth, which also increased quite well these 6 months as well. So that's why it's moved from 8.7% to 9%. Look, I'd like to get it into the 10% to 11% range. And that, I think, is the very sustainable rents. They're not being pushed to the max. It allows us to do some remixing when the opportunities come up. So -- but it all comes back to the productivity, the sales productivity and how resilient those sales in that nondiscretionary sector really are. That's where we are. We want to be more resilient as opposed to really maximizing and being a bit more volatile.

Your next question comes from Howard Penney with Citi.

Well done for the results. Just the first question on cap rate outlook. I can see that you're one of the first to push through the 6% range. And that seems a bit prudent relative to the market. And what's your outlook looking forward? And maybe just marrying that question with -- you mentioned potential accretive acquisitions. Are you seeing any deals that could be above those kind of levels?

Thanks, Howard. Look, we are an internally managed fund. We don't need to push the valuations to drive fees to anyone. So we put in what we think realistic cap rates, and that's why we probably moved early and we've -- I think others will be sort of catching up to us in that respect over the next 6 to 12 months as well. The forward outlook, look, as rates -- interest rates are stabilizing, clearly, cap rate should then stabilize. I think cap rates will still move out a little bit. But as you can see from our results, we've got good income growth. So the dollar value, I'm not expecting to change all that much, but the cap rates may move out. So it's a function of do you have that income growth to what the actual dollar value is. But I think it's moderating. I still think there's probably a little bit more to go, how much that is, I'm not sure. But I think we prefer to be in a realistic position as opposed to holding values at unrealistic levels.

That's fair. And then an interesting point you guys made just on your capture of the online -- online sales and the large percentage that you've returned into the leases now. What's -- how do you guys manage that? Do you -- is it more of a trust level? Was there an audit on that? And how does it just practically work?

No, no. It's obviously both Woolworths and Coles, a large listed companies. They have their own audit practices, processes. They provide us with figures. Within our leases, we have a right to audit. I've been doing this for 12 years coming up now. We've never audited one. I was at Woolworths for 11 years. I'm struggling to remember the time somebody actually ordered it. So it's not something that happens. They're very large, reputable companies, and we take what they tell us, but it is also verified from their external auditors as well.

Okay. Great. And then just one more from me. With all the population growth in Australia, we're seeing that space per capita reducing over the next few years with limited retail development that's going on. Are you guys thinking about investing into development opportunities and looking at opportunities on that front?

Well, I think that's where we tried to outline. There are a number of development opportunities that we do have in our portfolio and the center repositioning, but most importantly, that partnering with both Woolworths and Coles for whether it's refurbishments, expansions of their stores to take into account online or general that's direct-to-boot or online facilities within the supermarkets. So yes, all of those is where what we are focused on because you got to be on top of it and also specific acquisition opportunities in certain areas are also subject to having really good returns, accretive returns would also be very interesting as well.

Your next question comes from Richard Jones with JPMorgan.

In relation to the guidance for NOI growth, you said the second half will be closer to 3%. I just want to clarify, is that saying 3% for the second half? Or what the tax says in the presentation, which was 3% for FY '24, which implies close to 4% for the second half?

Yes. So it's 3% comparable NOI growth for the full year. So you're right, the second half will be stronger than the first half.

Okay. Perfect. And just in relation to the insurance payments lease more, can you just clarify how that is recognized in the first half earnings? And is that an ongoing payment? Or is that asset now back normalized?

Yes. So we're just -- we're sort of finalizing off the insurance claims. So we only recognized about $400,000 in our earnings for this half. And that's sort of a little bit more of sort of lost income from some of those vacant suites. We're not expecting any or very, very minimal of that going forward. The rest of the proceeds from insurance income is really going towards some of the capital that we spent both on redevelopment and also for [indiscernible] feed out again.

Okay. So is that a normalized income producing now?

Pretty well. Yes. There's very little -- there's 2 parts of the insurance, capital replacement and the income. And we had a little bit of income protection in this year, but basically, that's done. We're tidying up on the building insurance still.

Your next question comes from Steven Tjia with Barrenjoey.

Just a couple from me. Corporate overhead is trending down relative to second half. What cost management initiatives have you on the team employed here.

There's been a few things in that. We did have a look at our overall corporate team in terms of employee base and looked at rightsizing at that. So there's a bit of our savings in there. We also had entering new lease, which is a new lease on our corporate premises, which is significantly lower rent than what were previously paying. So that's the main 2. It is a little bit lower than normal for this half. And I think for next -- going forward, it would be a little bit higher, more like in the long-term average.

Yes. So we should expect normalized growth from this figure?

Yes.

Great. And just on the Delacombe Town Center, what's your expected yield on cost here? And how much of the center has been pre-leased?

So it's -- the yield is just over 6%. So I think we'll do a little bit better than that. And in terms of pre-leasing commitments, look, I think there was only 20-odd percent. It was bulky goods that's right next door to our existing center, which is really strong. The 20% was basically Woolworths doing an online distribution facility. And I think we're well, well, well advanced on leasing. We're probably 60%, 70%, 80%, I think, for this right, I'm not getting told by anyone that we've got issues on leasing that particular site. So it's very strong.

Your next question comes from Cody Shield with UBS.

Just a question relating to the tech project expenses and other expenses on Slide 37. What are these related to? And then do you expect those to be ongoing?

So the technology expenses are -- we're putting in Yardi, which is a property management, the city industry standard property management and unit management system. We're expecting that we're sort of getting towards the later stages of that. So we should expect that to be sort of lower from next year onwards. The rest of those are really around some of the costs that we had around when I said, looking at our corporate centers and some of that rightsizing there's some expenses in that relating to that.

Okay. That make sense. And just regarding the GIC JV, where the returns need to be here for acquisitions to resume on that? And has that changed in the last 6 months?

No. Look, I think it's fair to say there is a disconnect between the return requirements and what the market actually is at the moment in terms of the yields it is debt funded at about 50% as well. So the debt costs have gone up. So look, that's why we say medium to longer-term growth opportunity. I don't expect that would be -- provide much growth in the next 12 months. It could do, but I don't think so, from those hurdles at the moment.

Your next question comes from Alex Prineas with Morningstar.

Just on Slide 12, there's a number there, good to see 96% of stores have online sales included in turnover rent. Can you just comment on the 4% of stores that don't have online sales included? What were the sort of factors that resulted in those stores not having it included?

Yes. We purchased those stores and they didn't have online sales included in the lease. And it was -- they were generally part of a portfolio purchase that we purchased. So it's only -- is it 3 stores? I think it's 3 stores overall and it's very, very small. But they're part of a portfolio that we -- or portfolios that we've purchased and the relatively new stores. So both Coles and Woolworths, when they sell centers now that they develop, they try and sell with zero online sales included in that turnover threshold.

Okay. And then just on the gearing. You sort of variously described it as things like preferring to maintain a conservative balance sheet at the moment. It sounds like the disposals that you're looking at, you definitely want to do versus the developments and acquisitions are still a maybe. So is it -- can I take out of that, that we shouldn't expect any significant increases in gearing subject to no significant devaluation that some might occur. Is that how you're thinking about gearing at the moment that you don't really want to increase it until conditions improve.

Yes. So we prefer to be down at lower level than the lower level of our target range. It's pretty consistent in what we did 6 months ago. And that's really -- so really with the disposal program that we're talking about with the $200 million, that's what we're using to reinvest into some of these initiatives rather than increasing our debt.

[Operator Instructions] Your next question comes from Carlos Cocaro with Renaissance Asset Management.

So I'm going to harp on about a question that Howard and I think Steven asked as well in terms of cap rates and acquisitions. So the cap rate has gone from 5.5% to 6% or thereabout. How much higher do they need to be? How much further devaluation do you need in the market before you are an acquirer?

Well, Carlos you've been with us for long time. We have gearing between sort of 30% and 40%, but we've always been around that 30%. And if you look at that debt cost, that's sort of around sort of 5.7%, 6%. And then if you look at our equity cost and you look at that total cost of capital. So it really needs to be above 6.5% to 7% for it to be accretive for us. So that's the bottom line at the moment. It changes obviously every day, but we do take a longer-term view as opposed to when it was -- we were able to buy accretively a couple of years ago in the 5.5% range. So it's gone out to at least 6.5% plus, about 6.5%, it's not all that accretive, but that's sort of where you're at.

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

Excellent. Thank you very much, everybody. Looking forward to seeing you all. We always like to be one of the first out. We get good feedback from you. We have lots of analyst questions on the call. It goes for a bit longer than a few others, but thank you very much for your time and really look forward to seeing you all over the next 2 weeks. So thanks very much and I hope you have a good day.