Scentre Group (SCG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Scentre Group 2021 Full Year Results Update. [Operator Instructions]. Please note that this conference is being recorded today, Wednesday, the 23rd of February 2022 at 9:00 a.m. Australian Eastern Daylight Savings Time. I would now like to hand the conference over to your host today, Mr. Peter Allen. Thank you, sir. Please go ahead.

Good morning, everyone. Before we start the update, I'd like to acknowledge the [indiscernible] people of the organization of the traditional custodians of the land I'm on this morning. Recognizing that many of us are on different lands of different traditional custodians, I'd like to pay my respects to each of their elders, past, present and emerging. Welcome to Scentre Group's full year results briefing. I'm joined today on the call by our Chief Financial Officer, Elliott Rusanow. Today's results demonstrate our proactive approach to generating long-term value for our security holders. We have delivered better results in 2021 than 2020, even with more COVID-19 restrictions. Operating profit was $845.8 million, up $0.109 per security, and net operating cash flow was up $0.248 per security on 2020. The strength of our cash flow was reflected in our distribution of $738.7 million for the year, equivalent to $0.1425 per security, exceeding guidance and representing growth of 103.6% on 2020. We are focused on the customer, leveraging the strength of our leading platform and pursuing our ambition to grow by becoming essential to people, communities and the businesses that interact with them. I want to thank our team for delivering these fantastic results. We continue to drive strong demand for space in our Westfield Living Centers from existing and new businesses. We are focused on growing their customer engagement and optimizing their most productive stores with us. During the 12 months to 31st of December 2021, we completed 2,497 lease deals, including 1,090 new merchant deals. We welcomed 267 new brands to the portfolio, including a number of first-to-market brands. As a result, occupancy has increased to 98.7%. Our leasing spreads improved to minus 5.9% in the second half of the year and lease incentives remain in line with prior periods. We continue to maintain our standard lease structure with fixed base rent and annual escalations. All Westfield Living Centres remained open during the period and operated with COVID safe protocols. We've been agile in our strategy to drive visitation to our Westfield Living Centres, and we see more customers spending more time in their destinations. Despite more COVID-19 restrictions than 2020, we achieved annual customer visitation of 413 million people. Total sales across the regions that had less government restrictions in 2021 than 2020 being Victoria and Queensland grew by 9.3%. We're confident customer engagement and visitation will continue to grow, reflecting the increased confidence we are seeing across the broader economy. During 2021, we continued to support our SME retail partners to mitigate the short-term cash flow impact of the restrictions on their business through rental abatement and support. Given this ongoing and significant support, we're again, very disappointed with the additional financial burden and red tape placed on our industry as a result of extending the code of conduct in Victoria and New South Wales. We maintain the view that governments effectively forcing the transfer of the retirement savings of ordinary Australians by their superannuation funds to benefit businesses that generate millions of dollars in revenue is poor policy. Our purpose is creating extraordinary places, connecting and enriching communities. It is crucial to the delivery of our plan and the way we lead our business. The actions our team have taken positions the group for growth for many years to come. We have an ambition to grow by leveraging the strength of our core business to become essential to people, communities and the businesses that interact with them. We want to be the first choice where people spend their time. We will achieve this ambition by expanding and enhancing our platform, diversifying the businesses we engage with and continuing to invest in the customer experience we deliver in our destinations. We have continued to make significant progress on customer initiatives that create opportunities to expand and enhance the Westfield platform. Westfield Plus, our membership platform, has grown its membership to 2.2 million people, an increase of -- sorry, 1.6 million in the last 12 months. During the year, we launched Westfield Direct, our aggregated click & collect service as an extension of our in-center experience. This means our customers can experience Westfield wherever they are. Through Westfield Direct, our business partners can leverage their store networks to increase productivity and reduce the cost of fulfillment. We have more than 150 business partners on Westfield Direct with more joining every week. We're pleased to see more than half of Westfield Direct orders are taking advantage of aggregated click and collect from their local Westfield center. We're also encouraged to see that Westfield Plus members account for half of all orders on Westfield Direct. Our focus on customers is integral to our development pipeline and creating destinations for the future needs of people and communities. The group commenced the $355 million investment in Westfield Knox in Melbourne, Victoria. The strategic investment will enhance the customer experience and offer a diverse mix of premium fashion and lifestyle brands. The former Myer store is being replaced with a range of new retailers, including Woolworths and Aldi as well as a new fresh food market, new [ lottery ] and other community users. It will open in stages between the end of this year and 2023, and will be the destination of choice for the Knox community. Our experience and success of Westfield Carindale and other centers in rightsizing and repurposing department store space has resonated strongly with our customers. Our investment in Westfield Mt Druitt in Western Sydney is progressing well with a $55 million rooftop entertainment, leisure and dining fully leased and on track to open next month. Works on behalf of Cbus Property to design and construct 101 Castlereagh Streets on the corner of Market and Castlereagh Streets in Sydney are progressing well with completion expected in 2023. The group continues to make significant progress on its responsible business initiatives across community, people, environment and economic performance. The group's 2021 Responsible Business Report and 2021 Modern Slavery Statement will be released next month. Since the group was established in 2014, we have reduced our emissions by 30%. We are on track to achieve at least 50% of our net 0 target by 2025. We are accelerating energy efficiencies, on-site solar and the procurement of renewable electricity. We've commenced new on-site solar projects at Westfield Fountain Gate and Westfield Knox, which together will generate an additional 6,200 megawatt hours. Our New Zealand portfolio has moved to 100% renewable electricity. We have diverted 54% of operational waste from landfill, an increase of 1% on 2020 levels. Water usage has decreased by 2% on the previous year with estimated savings from early loss detection via [indiscernible] network of 190 -- sorry, 189,000 kiloliters of water. We continue to make good progress on our integrated energy, water and waste plan. I'll now hand over to Elliott to take you through the financial results.

Thank you, Peter. Operating profit for the 12 months to 31 December was $0.1632 per security, an increase of 10.9% over 2020. Funds from operations, or FFO, for the 12-month period was $863 million or $0.1664 per security, which grew by 12.7%. Included in FFO is $17 million of project income after tax, primarily associated with the completion of the Archibald Residential project at Bondi. Our net operating cash flow after interest, overheads and tax was $914 million or $0.1762 per security, growing by 24.8% compared to 2020. Our focus has always been on cash flow. Since June of 2020, our net operating cash flow has exceeded our FFO. For the 2021 year, net operating cash flow was $51 million higher than FFO. The group announced a distribution above guidance of $739 million or $0.1425 per security for the full year, of which $0.0297 per security is fully franked. Since the start of 2020, the group has distributed $1.1 billion to security holders and has also retained $527 million of earnings. During 2021, net operating income grew by $120 million or 8.2%. Included in this as an expense is an expected credit charge or ECC of $169 million relating to the financial impact of the COVID-19 pandemic on rental income during the 12-month period. This compares to the $304 million charge booked in 2020. The ECC was $45 million in the first half of the year and $124 million in the second half of the year. Given the impact of the government-imposed lockdowns being more pronounced in the second 6 months of 2021. It is also worth noting that the ECC represented 7.7% of our gross billings in 2021 compared to 13.9% in 2020. Our results do not include any reversal of prior period ECC provisions. The lockdowns also impacted other revenue items, such as car parking and ancillary income and extended the downtime for opening our new merchant sites. This equated to an impact of approximately $35 million for the year. Excluding the impacts of the ECC, the ancillary income and the extended downtime, our underlying NOI grew by 1.1%. For the year, gross cash rental collections were $2.3 billion, representing an increase of approximately $200 million compared to 2020. This was achieved notwithstanding the SME code restricting our ability to collect rent. Included in the $2.3 billion of cash collections was the full recovery of the 2020 debtor position at 31 December of 2020 of $193 million. Net of the ECC, the group collected approximately 93% of the 2021 gross rent billings. Gross rent cash collections for January 2022 was $200 million. Trade debtors after the expected ECC provision at 31 December were $186 million. Of this, $45 million relates to GST, and we have already collected $40 million of the total debtor owed at the balance date. During the year, we spent $106 million in operating and leasing capital and $23.5 million on our strategic customer initiatives. Westfield Plus and Westfield Direct. Overhead for 2021 were $81.7 million compared to $77.2 million in 2020. During the year, the group repaid $1.4 billion of debt. At period end, we held $980 million of cash on deposits. We expect to utilize this cash on deposit to retire upcoming maturing debt with $780 million already having been used to fund the early redemption of the GBP 400 million bond that was due to mature in April of 2022. In addition, we redeemed the $243 million of property linked notes for Westfield Parramatta earlier in early January. At year-end, the group had $5.6 billion of available liquidity, sufficient to cover all debt maturities to early 2024. The average net interest cost for the year was approximately 4.2%. This rate excludes the impact of the cash held on deposit during 2021. As at 31 December, the group had hedging of our interest rate exposure of approximately 50%. This compares to the 71% hedge position at the start of the year. We have been deliberate in allowing our hedging position to reduce in the short term as contracts matured during the year in order to take advantage of the lower floating interest rates. At the same time, we have entered into $1.5 billion of forward hedge contracts that extend out the duration of our interest rate hedging in order to continue mitigating the risk of future interest rate rises. This has increased our weighted average hedge maturity from 3.7 years to 4.4 years. In simple terms, while we reduced our level of hedging in the short term, we have continued to extend the length of our hedging cover for the longer term. We retain our single A or equivalent rate credit ratings from S&P, Fitch and Moody's. During the period, all 3 rating agencies upgraded Scentre Group's rating outlook to stable. The statutory result was a profit of $888 million, which includes the unrealized noncash increase in property valuations of $81 million. All properties were externally valued during the year. The average capitalization rate was stable at 4.88% at December 2021. We have provided on Slide 30, a summary of the values by property. The accounting stated net assets of the group is $3.66 per security and is $4.29 per security when the implied value of our property management income is included. Both amounts do not include any value for our brand, platform or other income-generating activities such as development, design and construction. They also ascribe no value for our strategic initiatives such as Westfield Plus or Westfield Direct. I will now hand back to Peter to conclude.

Thanks, Elliott. The group is focused on driving customer visitation, engagement and occupancy in order to deliver earnings growth in 2022 and the future years. Subject to no material changing conditions, the group expects to distribute at least $0.15 per security for 2022, representing at least 5.3% growth. Distributions are expected to be more than covered by operating profit, less operating and leasing capital expenditure. And we expect our earnings to grow at a higher rate than distribution in 2022. I'm pleased with today's results. The group is well positioned to grow. The group's operating culture and strategy is in a strong position. After more than 7.5 years as CEO, I believe the time is right for new leadership to accelerate our growth ambition and take advantage of the many opportunities ahead. This morning, the Board announced that I've decided to step down as CEO on the 30th September and retire from the group in 2023. I'm very pleased the Board has appointed Elliott to the role of CEO to be my successor effective the 1st of October. Elliott has a deep understanding of our business and culture, and will continue to strengthen our performance culture and pursue our growth ambition. I will continue to be committed to the long-term success of the group. Elliott and I will be working together on the leadership transition over the coming months to deliver the best outcome for the business. I'll now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Richard Jones.

Just in relation to the revaluation they were flat in the second half. Maybe Elliott, can you just comment, we've seen pretty decent transactional evidence. So just wondering what the values have taken into account in relation to those valuations. And I guess why there perhaps wasn't some positive movements in the second half?

Thanks, Richard. I think like we've said in previous periods, the value has taken -- continued to take a relatively conservative approach with regards to their forecast net operating income growth assumptions within the valuations and continue to do so in this 6-month period. So effectively, very limited growth or no growth in the next 3 years, call it, and then more growth in the 7 -- 3 to 10 in the discounted cash flow analysis. I think what we've seen is probably what you're alluding to is transactional evidence, which has been at or better than book values that have been -- or values have been described by external valuers, that has probably given them more comfort with the valuation process. But we haven't seen that manifest through into an increase in valuations at this point. But as income continues to improve, our outlook would be more positive.

Okay. And you -- sorry.

Yes. As I noted as well, our NOI, as you saw, grew by 8% in totality and on a comparable basis, excluding the impacts of the ECC and the ancillary income by 1%. So our income is growing at a higher rate than what's probably assumed in those valuations.

And just another question just in relation to guidance, you've obviously provided dividend guidance, but not FFO specifically. Just wondering if you can kind of work through some of the key moving parts from an FFO perspective. I assume abatements or is kind of a bit of an unknown as we sit here today, but the trajectory obviously was very strong through November, December, January. Just wondering whether you can be a bit more specific about the top of range that FFO might sit in.

Yes, Richard, I think that in some respects, if you go back to last year, where we did have a distribution guidance and we stuck to that guidance throughout the whole year, I think was a positive thing, and we certainly see that distribution is really important to our security holders, and that's why we're focused on that as a guidance. As I said in my notes, we expect that growth in distribution to be overly covered by our leasing and capital and operating capital expense as well as additional retained earnings. And when you look back at the last couple of years, I think we paid out distributions around $1 billion, and we've retained over $500 million of earnings. And so as you said, there's a lot of unknowns out there, and we're still in an area where there's probably more unknowns out there today than where we were 6 months ago. But we're confident in terms of being able to provide a distribution guidance and given where we see the market at this point in time.

Okay. Just one final one. You called out January cash collections. Can you touch on January sales and visitation?

I haven't got the January sales information, Richard, at all. But visitation was a bit patchy. I think that what we saw particularly with regards to Omicron and where customers were feeling their confidence. And I think what we're seeing from an economic point of view, particularly given the way that our schools have gone back fairly successfully across Australia that we're able to see that traffic is continuing to improve, which is a positive thing. And I think that customer sentiment is improving, as I said in my remarks.

[Operator Instructions] Your next question comes from the line of Simon Chan from Morgan Stanley.

I just want to pick up on one of the points you made Peter about, last year, you retained $500 million of cash on balance sheet, et cetera. I'm just trying to think about that in the context of how we should think about your strategy going forward. Is the dividend -- should investors think about the dividend going to become a function of FFO or a function of operating profit pre-project income as a world normalized. Is that the right way to think about it? Or should we think about, okay, Scentre Group is going forward, going to retain $500 worth of cash and then pay everything out to shareholders. I'm just trying to think of what sort of benchmark should we be using?

I think it's going to be very difficult for you, Simon, unfortunately, because the benchmark we're using is we're going to set a distribution and a guidance on an annual basis. We want to see that we have a distribution that is continuing to grow and see that continue. And for us to be able to facilitate that, we need to have earnings grow hopefully at or in excess of the distribution growth. So the Board sets out a forecast distribution based on where we believe we have a level of comfort to be able to provide certainty to our security holders on what we expect to be able to deliver for this year, knowing that we have some flexibility between the difference between what our earnings growth is and our distribution growth. So I think end -- I think we mentioned last year that we've moved away from allocating a distribution towards earnings of FFO and what we're going to be doing is we're going to be setting the distribution based on an assumption that is going to continue to grow.

Okay. That's very clear. Project income stepped up a bit in the second half. I assume that's due to Market Street. Can we think about -- is this a normalized run rate going forward for project income, this second half?

So it's Elliott here. It was actually, as I called out, principally due to the completion of the Archibald Residential project at Bondi. It didn't include any material amounts relate to Market Street. But I think to your question, you can assume that the run rate for the next couple of years, if not beyond, is staying to tick up at similar levels. So as we do start seeing recognizing profits related to Market Street, we talked about Mt Druitt, [indiscernible] and Knox, obviously, which is the big project that we started in the second half of this year. So that kind of work is ramping up and stuff becoming recognized in the project income line.

That's very good. And just one more for me. Your trade debtors balance that you're carrying, what's the average number of days or number of months outstanding that the tenants are like by in that balance?

Yes. So it's the -- so basically, it's less than 90 days. And as I said in the -- in my remarks, we collected all the trade debtor that we had at a balance date last year. As you know, we've been reporting our cash flow on a monthly basis, continue to do so in the presentation today. You can see the strength of our cash flow well in excess of our earnings and so you can get a great level of comfort of our ability to effectively recover the debtor that we hold. As I also said that we've already recovered $40-odd million of that debtor in the first 6 weeks of this year and continue to make traction in reducing the debtor.

And just to clarify, this is a net debt balance you are referring to, right?

Net debtor, yes, correct.

The next question comes from Sholto Maconochie from Jefferies.

Just a follow-up on the guidance. So the $0.15 seems to be conservative. I mean I just want to understand what you're assuming in a sort of ECC charge this year. I know it's mainly that COVID kind of hit in March, but sort of can you give a bit of color on what you sort of assume what we know at the point in time now in that guidance?

Sholto, in terms of we haven't looked at an assumption as far as ECC because we don't know what we don't know. So I think what we've done is we've got a level of comfort that we're going to be able to distribute at least $0.15, as I said, which is up 5.3%. We know that it's going to be fully cash covered. And we're going to be able to be in a position that will also cover our operating and leasing CapEx. And then hopefully, depending on where we are, we'll also have retained earnings as well.

And then what was -- I missed on the call, the total operating leasing CapEx in '21?

It was around $106 million.

$106 million. And what do you forecast in '22?

Probably similar levels. It might pick up. Historically, we have run around $115 million. It will probably be at a similar level, obviously, with the ability to spend kind of, call it, maintenance CapEx was impacted by lockdowns during the year, which we are assuming there's no lockdowns in 2022, we return back to a normal run rate, I suppose, of that maintenance CapEx spend.

Yes. So I'm just trying to get because if you look at the recovery in the FFO, the NOI is improving, operating [indiscernible] is improving, you get the benefit of CPI coming through and obviously a bit more CapEx. But the distribution is still grow a little bit more, but is it set conservative on that number, the $0.15. Yes, I know it's early in the year, but is it a bit of conservatism in that number?

We'll start, as I said, it's at least $0.15. And as you say, we're really early in the year. And I think that we need to have a bit of credit in terms of providing a forecast last year in terms of tough times. And again, we've still got a long way to go in terms of 2022 to be able to do that. And even last year, as you would have seen, we paid out $0.1425 compared to $0.14 in terms of our forecast distribution. And I think even last year, we've said at least $0.14. So...

Yes. Understood. And then on the [indiscernible] do you have -- will the [indiscernible] at June versus December? Do you have a number on that? .

Well, December was around 3.3% of GLA, and that was about 4% of GLA in June. So they've reduced.

Okay. And then just on the hedging...

And also, you would have -- occupancy is up 20 basis points as well.

Yes, I saw that. And then just on the debt book, you've got -- what's your cost to expected for this year all-in on a gross basis?

Well, probably, as I said, with 4.2% if you exclude the impact of the cash on deposit. That cash is probably reducing -- well, it's basically now gone. So you would expect it would be in that low 4% range. Obviously, we're making a big assumption of what floating rate does, but assuming that floating rate is -- remains at low levels. I would expect that, that 4.2 would be a very similar number this coming year.

And then in the pack, you've got the profile you got some bonds. I think senior bonds just under looks like 800 million or so bonds expiring this year. Would they be at a higher rate than we could refinance. Would that be correct? So you -- because they were issued several years ago.

So we've effectively used the cash to early redeem those bonds. Those bonds are no longer outstanding. So that effectively retire that debt. So as I said, the 4 points to exclude the impact of holding cash on deposit, that cash is being redeployed into maturing those bonds. So that's why I think a that 4.2 would be a similar number, all other things being equal in 2022.

And then on the [ Parramatta ], what was the motivation between Were they at the end? Or you -- I know you have the option to redeem, but what was the motivation behind redeeming the [indiscernible]

Yes, you're right. Those notes actually matured on that...

Yes, yes. Okay. And they don't want to roll them forward or is there was no option for them to roll the most out of fixed life?

That had a fixed life.

Your next question is from Adrian Dark from Citigroup.

Elliott, congratulations on your respective moves. My first question is actually a follow on in relation to the [indiscernible] as I understand it, that's effectively an acquisition from Scentre Group's perspective of an interest in that center. Could you talk about the group's appetite to acquire at this point, given some of the other transactions that have come to market and the recent acquisition activity being focused on Parramatta please?

Yes. So Adrian, in terms of our business, I think what we want to do from a strategy and ambition point of view, is to be close to where the customer is. We're very fortunate that currently our 42 centers are within roughly half an hour of 20 million people. And there's 31 million people in Australia and New Zealand at this point in time. So what we'd like to do is we'd like to be able to have a physical location close to a number of those people who we don't have that representation. So there was some opportunities last year with regards to the Northwest Sydney and as well as the Southern Gold Coast centers being available -- potentially available, which we were not successful with, there certainly would be of interest. But you look at where our representation is and where we see population growth, we're very happy to expand our investment in markets like a Parramatta for example, looking at Western Sydney, Northwest Melbourne, Southern Gold Coast, the particular markets where we're underrepresented and where we see opportunity. And I think that the growth of Parramatta is something that we're very keen on. We've just started the addition in terms of full-line supermarket, new fresh food market, improving that upper level towards Woolworths, bringing new Aldi, et cetera. So that will be a great opportunity, again, to reinforce Parramatta as the key city center. So there's certainly -- we certainly have the appetite to be able to invest into those locations. We certainly want to make sure, but we're going to invest in those better locations and better centers. We certainly are not going to be investing in secondary assets.

And second question relates to some of the development projects that are underway. Could you talk about the economics of those, please, in terms of the yield on cost that we should anticipate and any downtime we should be mindful of, please?

Yes. So the projects which are underway at present, so particularly Knox, which is a major stage project. As you know, we've got vacating this -- we have vacated the store. We're redoing the whole center though. It's not just a replacement of Myer in terms of a number of retailers. So there will certainly be some downtime, but we are expecting to get a yield on cost in excess of 6% as far as the business is concerned. That should, in theory, be able to give us an IRR probably in around that 15% level going forward in terms of the revaluation and where we see rental growth and our leasing. So -- but again, there will be some costs involved, particularly with regards to lost rents during that project, which was kind of included in the overall cost of that project, that $355 million we talked about.

Just to confirm, is that yield on cost of the reduced income base post Myer's exit or on the prior...

Yield on cost, incremental yield on the extra $355 million we're investing in that. And we've already taken into account the lost rent on Myer going as well as the other stores in that kind of key mall that leaves out from Myer, which doesn't work, never work.

And final question for me relates to incentives. Could you just confirm what the average level of incentives was for FY '21, please?

Yes. So I think I mentioned that they're kind of in line where they've been previously. So it's around 7%, okay? So -- and as you know, incentives are only for new leases. We don't have incentives for renewals at all.

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

I just wanted to clarify some of your comments you made. Are you able to just articulate what the impact of ancillary income from unusual run rate is for this period?

Yes. So if you recall, in 2020, we called out a number of $50 million. In 2021, we called out a number of $35 million. It principally relates car park income and temporary, what we call the brand space retail income. So they are the 2 main drivers. There was also some downtime, as I said, in terms of opening of new shops, obviously, during lockdown, it's hard to open a new shop. But the principal impact of that $35 million was on those other line items that I mentioned.

Okay. Great. And then if we go to Slide 12, your future developments, are there any of those that would be that would be kicking off, say, late this year, say, into '23?

Yes. So we're working very hard on Booragoon. So we're looking at Booragoon in terms of being able to be in a position to be able to start that later this year or early next year. Likewise with Westfield Tea Tree Plaza in Adelaide. And then we're looking at -- I think we've got Albany in there, but that will be a 2023 start.

Okay. And then just on Booragoon and Tea Tree Plaza can you just give an idea of the size or scope of those developments?

Yes. So Tea Tree Plaza is relatively small in terms of dollars because it's in a vector, a refurbishment of the key mall taking back space from Myer. It's around $50-odd million in terms of that project. And as I said, we're taking back the lower level of Myer, replacing that. We're doing some more of the fresh food. And then on the upper level, replacing the Skylight areas and then remixing the retailers on the fashion run there. Booragoon is going to be roughly around $300 million.

Your next question is from Ben Brayshaw from Barrenjoey.

Just a couple of quick questions. There's been an increase in project income in the second half in the order of $20 million for the 6 months. I was wondering if you could comment on the next 12 months, please, just in the context of, obviously, Castlereagh reaching tactical completion until 2023. You're talking about Knox as well. So would you suggest that the $20 million is a sustainable run rate for 2022?

Yes, it's Elliott speaking. I think as I answered before, the $20 million or the number that you're referring to for the second 6 months related to the completion, principally the completion, 17 of it to the Archibald Residential project. But as you correctly pointed out, there are a number of projects that are in flight, Knox in particular, which we've spoken about on this call is the largest of the projects got 101 Castlereagh Streets which is well underway. And Penrith, Mt Druitt and then the projects are better was talking about in the previous question. So we would expect that, that run rate probably is of the similar level in 2022 and probably beyond. But it's obviously very hard to predict the -- what is a sustainable run rate with regards to project income given the nature of that income stream.

Yes. And just on the ECL balance of $290 million that you're holding in December. Are you able to comment on, I suppose, the composition of that in relation to rent that's been or is expected to be waived versus rent that is forecast to be provisioned? Just any comments on the potential to write back some of that $290 million over the next 12 months?

Yes. Our -- we expect that all to be waived, and that's why we look it as a charge. So effectively, you book the charge before you process the actual -- the change. What we've been very focused in doing since the start of the pandemic is trying to get that number as accurate as what we think is possible, bearing in mind that it's 7% -- 7.7% of gross billings to material reduction on last year's number as a percentage of gross billings as well. But we haven't been attempting to [indiscernible] provision and write back. What we've been trying to do is align where we see the charge will be, and we have a great level of confidence, I suppose, in that charge based on our cash collection, the fact that our income is more than cash covered, and we're not increasing our trade debtor. We're actually reducing it.

Yes. And I think that's really highlighted in terms of our debtors for 2020 that we're able to basically collect them all, which highlights that in terms of really allocating in terms of what we believe is lost to what we believe is something that can be collected.

Your next question comes from the line of Stuart McLean from Macquarie.

First question is just around potential uses of retained earnings. Just what do you think those uses are? Should further payout ratio kind of come down if you hit that $0.15. So what are those users, please?

Yes. So I think that what we want to do is we want to continue to invest in our portfolio and our platform, whether that's from a digital point of view or whether that's from a physical point of view. So being able to retain those earnings and to be able to reinvest them into projects such as the ones we just talked about earlier, where we get fairly decent returns is really important for us, also by maintaining and improving the strength of our balance sheet allows us to have greater flexibility in the future to take advantage of further opportunities to expand our business from a physical point of view into those of those locations, which we're currently underrepresented.

Okay. So just picking up on that then. In terms of the development such as Westfield Knox or future developments, are you looking to fund those via retained earnings or looking to fund those via -- by debt.

The way I look at it is that is fungible. So to understand what's retained earnings and what is debt, but we'd be looking to ensure that we're maintaining a single A credit rating as far as our business is concerned, making sure that we've got the flexibility that we're able to commit and to fund these projects, which are really customer-driven projects, but also to ensure that we have sufficient [indiscernible] capacity, but when opportunities do come about, we've got the capacity to do that. So we don't look at it as an individual project in terms of debt and equity. We look at it as a project and look at the debt and equity stack as far as the group is concerned.

Okay. Great. And then just a comment around on the balance sheet and continue to have that flexibility. Do you believe that you have that flexibility today? Or is the comment you need a little bit of retained earnings to continue to improve the balance sheet?

I think -- Elliott speaking. We -- our balance sheet is in a very strong position. We've maintained our single A credit rating. We were upgraded from an outlook to stable throughout the year. We introduced in 2020, a new form of capital into the capital stack, which further strengthened our balance sheet. We have $5.6 billion of -- $5.3 billion of available liquidity. So I think we're in -- our balance sheet is in a really strong position. And as Peter said, we're a high cash flow generating business, and we're utilizing that cash to pay out a good level -- a growing level of distribution to our security holders at the same time as retaining cash on balance sheet to fund our strategic objectives.

Okay. So you say the balance sheet is not having any issues, but you might need to retain a bit of earnings. I'm just struggling to marry up those 2 comments.

I think, Stuart, what we want to do is we want to maintain flexibility in terms of being able to operate the business. So there's no handcuffs on the business when there are opportunities coming about. As you know, opportunities don't come about every day in terms of being able to expand and to be able to invest in terms of our business. And so maintaining that flexibility, I think, is prudent, but also trying to get the balance right in terms of what is retained, but also providing going -- growing distribution to our security holders. But also importantly, what that shows is that we're going to retain earnings where we don't see an opportunity where we can reinvest capital. If we don't see an opportunity where we can get a return on that capital that we're retaining, we'll certainly rethink in terms of what our distribution policy is going to be. But at this point in time, we see that as prudent to be able to ensure that we, at Scentre Group be able to be making ourselves more essential to our communities and our customers and our businesses.

Okay. And just on the digital initiatives, Westfield Direct and Westland Plus, the strategic initiatives, how much do you think that will need to be funded in '22? I think it's going to maybe $20 million in FY '21. Just what's the size of that capital required for these initiatives?

Yes. Sure, we believe it's going to be similar levels in 2022.

And just a final one for me. Just maybe on to Elliott, on the hedging of 50%. Does that include or exclude the subordinated notes. So if you include the subordinated, it's actually much, much higher given that they're fixed.

So the way we hedge because most of our debt is in the public issuances sourced from offshore. It's raised in foreign currency. We swap it back to Australian dollars. When we do that, it all becomes floating, and then we separately hedge our floating rate exposure, including the subordinated debt. So the 50% includes both the traditional bonds that we have outstanding as well as the subordinate debt. What I was articulating was that the -- as those separate derivative hedges have matured, what we've taken advantage of is the kind of lower for longer curve that has been everything in the market and extended out the coverage into future years. So instead of having call it, 70% dropping down to 10% or 0% in 3 or 4 years' time, we have effectively put in place a 50% level but if that extends, call it, 3, 4, 5 years. So as I articulated in my opening remarks, our average duration of our hedge has extended out to, I think, 4.4 years on a weighted average basis.

Your next question is from James Druce from CLSA.

First is a really simple question. What kind of CPI you're running with this year in terms of what's sort of already been printed and will come through in the leases for the next 6 months?

Yes, we're basically when we looked at our CPI for a forecast for this year, we're assuming that it's somewhere between 2.5%, 3% in terms of that order. But again, it's kind of anyone's guess in terms of the longevity of that. And so that's kind of what we're utilizing, and we don't make up the forecast. We utilize where the -- basically the Reserve Bank is looking at things.

That's clear. And then sort of bang on about the distribution. But just wanted to get another comment from you guys on how focused you are on repaying that hybrid. I know it's just 1 piece of capital in the capital stack. But can again to hear your comments just on your attitude to that.

James, I think the -- the important part is that the hybrid is a 60-year maturity. So the need to repay it is well into the future. We have the option of redeeming it in 2 separate tranches that were -- 1 was a 6-year and 1 was a 10-year issuance. I think that they are completely different discussions that we're making with or comments that we're making with regard to our distribution going forward and the -- I think what you're pointing to, which is, are we using those proceeds to in effect, prefund the potential exercise of our option on the 60-year maturity at an earlier date of the subordinate note. So I think the other way to think about the subordinate note is that when we do have the option of redeeming those notes, there's plenty of -- if we choose to exercise that option, there is plenty of options available to us with how we would look to refine that those notes.

Okay. That's clear. Just on staff, I think the PLN is maturing in December this year, if I'm not mistaken. Where does that asset sit in your ranking of quality assets for center?

It's relatively high. Where we're at in terms of that location, [indiscernible] way, particularly with the new rail station, which has been in place, the new rail loop is going to commence there and go all the way around the city of Melbourne. So that -- the team has done a fantastic job in terms of working with the Victorian government in terms of the rail loop commencing there adjacent to Southland. We see it's got a unique opportunity in terms of being important to those customers of [indiscernible] Hampton, [indiscernible], Bentley, et cetera, around that area. So yes, we see it as fairly high and something which we want to retain. And we're looking to continue to invest in Southland. We've got an opportunity, particularly with regards to taking back some additional space from David Jones. So you would have seen if you go down there now, the fashion run in terms of that level has improved dramatically in terms of the new retailers going in. The [indiscernible] sports was went to last 2 weeks ago. So we're really happy with that investment in Southland, looking to continue to invest.

Okay. That's very clear. How much is that PLN for that specific asset outstanding?

About 100 -- about $200 million.

There are no further questions at this time. I would now like to hand back the conference to today's presenters. Please continue.

Yes. Thank you very much for joining the call this morning. We look forward to delivering a great 2022. And if you have any further questions, please don't hesitate to contact the team. So thank you. Have a great day. Thank you.

Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.