Scentre Group (SCG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Scentre Group 2022 Full Year Results Update. [Operator Instructions] Please note that this conference is being recorded today, Wednesday, 22nd of February 2023, at 9 a.m. Australian Eastern Daylight Time. I would now like to hand the conference over to Mr. Elliott Rusanow. Please go ahead.

Good morning, everyone. I would first like to acknowledge the Gadigal People of the Eora Nation as the traditional custodians of the land I am on this morning. Recognizing that many of us are on different lands of different traditional custodians, I pay my respects to each of their elders past, present and emerging. Welcome to Scentre Group's 2022 Full Year Results Briefing. I'm joined today on the call by our Chief Financial Officer, Andrew Clarke, together with Lillian Fadel, Group Director of Customer, Community and Destinations; John Papagiannis, Group Director of Businesses; and Stewart White, Director of Developments. 2022 was a great year for Scentre Group as we demonstrate the value of our strategy to create the places more people choose to come to more often and for longer. Our FFO increased by almost 21% for the year, ahead of guidance. Customer visitations increased by 16%. We completed a record number of leasing deals. Occupancy continues to increase and we collected a record amount of cash. Our business partners achieved the most ever sales in the history of the Westfield brand in Australia and New Zealand. And I would like to thank the Scentre Group team for their dedication and contribution in achieving these great results. Our 42 Westfield destinations located in close proximity to 20 million people throughout Australia and New Zealand welcomed 480 million customer visits during '22, an increase of 67 million visitations on 2021. This was driven by our in-center activations. We hosted more than 15,400 events across our portfolio, creating more reasons for people to come to our destinations and spend their time with us. We have seen the growth in customer visitations continue in 2023, where we have welcomed approximately 70 million people -- visitations in the 7 weeks so far this year, representing more than 20% growth over the same period in 2022. We remain focused on driving visitation. Today, I am pleased to announce our collaboration with Disney to help celebrate their 100th anniversary through special events and activations across our portfolio during the remainder of this year. By focusing on having more people come to our destinations, we provide our business partners a unique opportunity to interact with customers. Our business partners achieved sales of $26.7 billion in 2022, representing a record level of sales through Westfield in Australia and New Zealand. These sales were 21% higher than 2021 and 9% higher than in 2019, excluding cinemas and travel. The efficiency of our platform for our business partners has continued in 2023 with January sales up 21% on '22 and 11% higher than 2019. We have seen strong demand from businesses to partner with us by leasing space and accessing customers in our destinations. The group completed a record 3,409 lease deals during the year, an increase of 912 on the prior year. This included 2,232 renewals, 1,177 new merchants, of which 288 are new brands to our portfolio. Portfolio occupancy increased to 98.9% at 31 December, up from 98.7% at the end of 2021. We continue to maintain our standard lease structure with fixed base rent and annual escalations, the vast majority of which are linked to inflation. The average lease term has also continued to increase to 6.9 years. Our leasing spreads on new leases signed during the year were minus 3.6%, and lease incentives remain in line with prior periods. On average, specialty rent escalations during the year was 6.8%, and average specialty occupancy costs are now 16%. During the year, we invested $48 million in strategic customer initiatives. With the dynamic changes experienced in the technology sector, we decided to bring forward investment into '22 that were planned for later years. As a consequence, we expect the level of further investment to be significantly lower in 2023. The objective of our strategic customer initiatives is to drive a greater level of engagement so that more people come to our destinations more often for longer. In 2022, our Westfield membership program welcomed 1 million new members, and our total membership now exceeds 3.2 million people. Being a responsible and sustainable business is important to our business because it is aligned to what is important to our customers and their communities. During the year, we continue to invest and support our local communities. And over the past 4 years, our support has totaled approximately $21 million. We are well on the pathway to achieve net zero by 2030, and we have reduced our emissions by 38% since 2014. In early '22, we entered into agreements to power our New Zealand portfolio entirely from 100% renewable electricity, and our Queensland portfolio will move to 100% renewable electricity in 2025. Investing in our destinations to ensure they remain the places where people choose to spend their time is fundamental to how we will achieve our strategic growth ambition. Stage 1 of the $355 million investment in Westfield Knox opened in December and is trading well. The remaining stages of the development will be open throughout this year, transforming the center for our customers through new and innovative community users. During the year, we completed the $55 million investment at Westfield Mt Druitt, including a new rooftop dining, entertainment and leisure precinct. The upgrade has driven significant improvements to visitation and dwell time, with visitation up 36%. The $33 million investment at Westfield Penrith was completed late in the year and includes the introduction of new casual dining experiences, cold supermarket and an entertainment precinct. We have seen visitation increase by 22% compared to the corresponding period in 2021. We completed the $33 million investment in Westfield Parramatta in December, including the new fresh food precinct featuring Coles, Aldi and a Tong Li supermarket. We have already seen visitation increase by 41%. Our future development pipeline of opportunities is in excess of $4.5 billion. Since our last update, we have received approval for our projects planned at Westfield Booragoon and Westfield Albany. This year, we plan to commence the retail component of the 101 Castlereagh Street development, which will bring an expansion of our luxury retail offer to Westfield Sydney. It has been a significant year for us as we successfully delivered our leadership transition. On behalf of our people, I would like to thank our former CEO, Peter Allen, who stepped down in September of 2022 after 8 years as our inaugural leader. Personally, I would like to thank Peter for his leadership and guidance. I will now hand over to Andrew Clarke to present the financials.

Thanks, Elliott, and good morning, everyone. Funds from operations for the 12-month period was $1.04 billion or $0.2006 per security, which grew by 20.6% and is above guidance. Our continued focus on driving more customer visits is fundamental to the strength of the group's growth and earnings, and our focus on driving cash flow has underpinned these results. Net operating cash flow after interest, overheads and tax was $1.18 billion or $0.2278 per security, up 29.3% compared to 2021. Once again, cash flow was higher than FFO. For the 2022 year, net operating cash flow exceeded FFO by $141 million. The group announced an increase in the final distribution to $817 million or $0.1575 per security for the full year, representing 10.5% growth on the prior year and also above guidance. Net operating income grew by 13.9% for the year. This includes a $14 million expected credit charge relating to the financial impact of the COVID-19 pandemic on rental income. There was no expected credit charge booked during the second half of 2022, and we do not expect to incur further charges going forward. Our results do not include any reversal of prior period expected credit charge provisions. Underlying net operating income, excluding the impact of the expected credit charge movements, grew by 3.7% for the 12-month period. This included an acceleration in growth from 2.3% in the first half of the year to 5.1% in the second half of the year compared to the prior corresponding period. Growth in net operating income was primarily driven by CPI-linked annual rental escalations and the continued recovery in ancillary income, which is now within $15 million of pre-pandemic levels. This growth has been partially offset by downtime on new merchant deal activity and project activity, including Westfield Knox, leasing spreads of minus 3.6% and growth in property expenses due to an elevated level of maintenance works that were deferred during the pandemic period and higher wage award rates and volumes for cleaning and security. For the year, $2.6 billion or 104% of gross rent billings were collected, representing an increase of $334 million compared to 2021. This has driven a reduction in net trade debtors of $102 million during the year. Included in the $2.6 billion of cash collected was the full recovery of the $186 million of trade debtors at the end of 31 December 2021. The net trade debtors, after the expected credit charge provision at 31 December 2022, were $84 million, all of which relate to 2022 billings. During the year, operating and leasing capital was $126 million. Overheads for 2022 was $87 million compared to $82 million in 2021. This includes the one-off impact from the inclusion of all amounts relating to the retirement of Peter Allen, our former CEO. During the year, the group repaid $800 million of debt, including the redemption of the 400 million sterling bond. In addition, we redeemed the $243 million Westfield Parramatta property-linked note in January 2022. Over the year, the group extended and raised new banking facilities totaling $2.9 billion. As a result, the group has $4.8 billion of available liquidity at 31 December 2022, which is sufficient to cover all debt maturities until the fourth quarter of 2025. The weighted average interest rate for 2022 was approximately 4.8%, and is expected to be approximately 5.6% for the 2023 year. The group continues to actively manage its interest rate hedging position, which has increased our hedge coverage to 85% in January 2023 at an average rate of 2.31%. The statutory result was a profit of $301 million, which includes the property revaluations of $79 million and the unrealized noncash mark-to-market charges of $716 million. The weighted average capitalization rate for the portfolio was 4.93% at December 2022 compared to 4.88% at December 2021. All properties were externally valued during the year, with the exception of Westfield Knox being under development. We have provided on Slide 27 a summary of the values by property. Thank you, and I will now pass you back to Elliott for closing remarks.

Thank you, Andrew. We are confident that the strength of our business and platform, the quality of our team and our customer-focused strategy will continue to generate long-term growth for our securityholders. Subject to no material changes in conditions, the group expects FFO to be in the range of $0.2075 to $0.2125 per security in 2023, representing 3.4% to 5.9% growth for the year. Distributions are expected to be at least $0.165 per security in 2023, representing at least 4.8% growth for the year. I'll now open the call for questions. Thank you.

[Operator Instructions] Your first question comes from Richard Jones from JPMorgan.

Just wondering, Elliott, if you could just talk through just the NOI and what we've typically seen pre-COVID was that skewed to the second half. So just wondering, there's obviously a range of factors that drive that historically. Just interested to see whether you expect that to continue in the future.

Richard, it's Andrew here. In terms of NOI and looking back into 2019, what we see in terms of how we look at things from a second half perspective is generally you see higher growth in the second half from the rental escalations and the timing of those coming through. And as I touched in my opening remarks is we saw an acceleration in NOI growth in the second half of the year to 5.1%, the underlying NOI growth compared to 2.3% in the first half. Primarily, that was driven by the cash flow impact of those rental escalations, and we're continuing to improve our levels of occupancy. And you'll see there in -- as Elliott discussed, we did more than 3,400 deals during the year. So that's helping us reduce -- improve occupancy.

Okay. And then just 2 other quick things. Just in relation to the ancillary income, the $15 million [ lower ], you called. Is that -- that's actually a full year number? So I think you said you were $30 million down on the first half. Is that correct?

Yes. So for the full year, we're approximately $15 million within where we were in 2019. We're looking at that on a -- you've got growth, both from a gross and net management income perspective. We continue to see good progress across the key lines within that ancillary income. There's car parking income. You see the volume of visitation is growing significantly. We're seeing much more demand coming back in terms of the casual more leasing on the back of the high visitation. And we've also seen our media business continue to recover as well. And as I said, we're within $15 million of where we were back in 2019. But the key is that we're continuing to grow, and we grew above where we were in 2021.

Okay. And just a final question. Just New Zealand cap rates look like they've moved 50 basis points, I think a quick check. Just wondering if you can comment on the move in New Zealand relative to, obviously, Aussie cap rates that broadly held flat.

Yes. Well, basically, if you look at what's happened in terms of where the central banks have moved the cash rates, New Zealand is now sitting at 4.25%. And so what you've seen there in terms of the external values around their assessment of capitalization rates on the back of that movement in interest rates. They are being more conservative. And we've seen them across the board generally, softened cap rates across the real estate sector and retail real estate sector.

Your next question comes from Lou Pirenc from Jarden Group.

I mean can you talk about the $4.5 billion development pipeline? And given how well things are going in retail, if we should expect any major project starts in the next 12 months.

Thanks, Lou. As I said, we're planning on starting 101 Castlereagh retail component. As you know, as a building, it's well progressed, particularly the offer some residential components that we've been building on behalf of Cbus. Our component being the retail, effectively street level, and a few levels above. We plan to commence this year being luxury flagship anchored. In terms of -- as I said, we've got planning approval now for Booragoon, which we would expect to develop out in a number of stages, probably commencing in 2024. Albany in New Zealand, which we've previously called out as well, has consent, again, probably a '24 start. I think, though, that when we talk about our development pipeline, we are becoming very, very targeted in our investment in order to ensure that it's really driving an increasing customer visitation, increasing customer dwell time and effectively activating these destinations for much longer periods of the day throughout all the day, hopefully, as an objective, 24 hours a day at some point, so we can actually drive greater efficiencies for our business partners to connect with customers. So our development pipeline of $4.5 billion has remained constant, but we're continuing to invest in our assets in order to ensure that they actually can produce more efficient platforms for businesses that occupy that space.

Great. And can you remind me for 101 Castlereagh, what your cost and expected yield is?

So I think we've previously guided it. The incremental cost is circa $120 million -- around $100 million, I'm sorry. If you remember, we've already invested, when we acquired the property, $182 million. So it would be $182 million what we've already spent in acquiring that opportunity, some development cost to date and then incremental $100 million for the remainder to complete that project.

And the yield on cost? Or IRR?

So we -- as you know, we target IRRs in the range of 12% to 15%. And the yield on cost would probably be around circa 5.5% to 6%.

Great. And then a final one for me. How do you see kind of maintenance CapEx? Tenant incentives kind of evolved in '23 compared to '22.

Lou, it's Andrew here. Look, we'd expect it to continue to be a similar number to where we landed in 2022. A big driver of that comes down to the demand we have for space. As you see, in 2022, we did more than 1,100 new merchant deals and where we're contributing to the fit-out contribution on those deals, that obviously drives part of that capital number. If we continue to see the same level of strong demand, which we're really confident about, then you'll see a similar amount of capital. And then from an operating capital perspective, we did similar to what I said. On the maintenance side, we had deferred some of the operating capital works during the pandemic period. So we're a little bit in catch-up mode in terms of what we did in 2022 and what we expect to do in 2023.

Your next question comes from Grant McCasker from UBS.

Can I just check a few things on guidance. What you incorporating in regards to, say, CPI in '23. Also, as that flows to income growth, I think you called out 5.1% in the second half. How does that look in the full year '23 and then project income expectations relative to '22?

Yes. Thanks, Grant. So CPI averaged around 6.3%. We see the market curve is implying that, that reduces to below 5%. So we're incorporating what's implied by the market curve in that CPI assumption. As you know, 80% part of our leases, everywhere but Victoria, are CPI-plus linked. So obviously, that flows through. Then we have to make an assumption about the level of deal activity. Last year, as I said, we did a record number of leasing deals of 3,409. I think -- that we're not seeing that number materially. That level of activity continue. But having said that, we are expecting our occupancy to continue to increase, which it is doing. So when we add all that up, we obviously take -- make assumptions around what the new leases are for the space that we are leasing up -- the vacancy -- eating into that vacancy, the very little vacancy that remains. All in all, that goes into that guidance calculation. The other point to make is that, as Andrew said, so obviously, we're seeing -- we're forecasting what would be very strong EBIT growth. Obviously, the interest rate on the 15% of debt that isn't hedged, we're seeing the average interest rate on our debt increase by 80 basis points through the course of this year. So all in all, that offsets the growth versus the interest in both the EBIT and the interest line gets to our guidance number of between 3.4% and 5.9%.

So just checking project income, no material change in '23 versus '22?

Not significantly, no.

Okay. And then if we look at just CapEx, your developments underway in the period were not a lot, but I'm just trying to reconcile what you spent versus the cash flow statement of $400 million in CapEx on investment properties.

Yes. So Knox is obviously the largest component. The other projects I called out was Parramatta, Penrith, Mt Druitt. We have spent some predevelopment works at 101 Castlereagh. And then we do progress predevelopment on a number of projects. As you're aware, we are still completing -- we have completed a number of majors downsizing and replacing those with many majors and new specialty stores. Warringah Target is an example, we've -- similar to what we did at Carindale with David Jones in that downside. Actually those downsizes have performed very, very well, replacing whether it's the discount department store or the department store in certain circumstances with far more productive brands, which resonate with what customers are actually spending their time doing and consuming. So -- so in effect, it's -- there's a whole bunch of development -- predevelopment work that goes on in projects over and above what I've announced or announced yet on this call, but really feel what allows the $4.5 billion of future development opportunities to be executed in due course.

Your next question comes from Ben Brayshaw from Barrenjoey.

Elliott, just on the lease expiry profile, could you comment on what that looks like for, say, the next couple of years? The average specialty store lease term is now up to 6.9 years. So just trying to get a sense as to how much you're looking to derisk and the team has to work through over the next, say, 12 to 24 months.

Thanks, Ben. So as you know, the -- we generally have somewhere between 17% to 20% leases expiring. What we didn't do -- well, what we did do during the pandemic period is maintain standard lease structures, particularly with regards to duration. So we didn't enter into short-term leases. And so we've maintained effectively that pretty constant profile of specialty lease expiry. And so there's no any particular lumpy in '23 versus any other year. It's a fairly smooth profile. And so we would continue to see the '23, the profile there is in the ordinary course. We do, do a lot of preleasing. We did do that in 2022, particularly in the second half, where we did a lot of -- agreed with a lot of terms with regards to our '23 expiry and '24 expirees. So we have effectively started that derisking process. But if anything, it's an opportunity because what I didn't announce on the call but I will say now is that our specialty sales per square meter for specialty stores was $12,115, which is obviously a very productive number and provides us a lot of opportunity to continue to hopefully grow our occupancy costs from the 16%, which I did discuss on -- in -- during my notes.

And is there any color you could provide on the tenants in hold across the portfolio, just either as a percentage of the total area of the portfolio or income? And how that has changed over the course of the last 6 months, please?

Yes. So there has been a big focus in reducing that level of holdover. Holdover is now less than 3%. And that -- we expect that number to materially reduce over the course of this year. So that is a big focus for us to continue to reduce that level of holdover. Interestingly, the -- those business partners that make up that less than 3% have occupied the space for a long period of time. So -- and they continue to pay their rents. So that would indicate that they want to stay. And our expectation is that if they do want to stay, they'll be signing leases to document that for an extended duration.

Your next question comes from Simon Chan from Morgan Stanley.

I just want to clarify, how much was lost rent in 2022 from outages due to CapEx in development?

With regard to the works that we were doing at, say, Knox and...

Yes, yes, yes. And then how should that normalize in 2023?

Simon, Andrew here. Look, total loss rent, including -- if you look at where our occupancy is, so we're at 98.9%. So that's a key driver in terms of the level of loss rent. Also, the other part is the fact that we did 1,100 or more than 1,100 new merchant deals, the downtime associated with those deals. We have seen downtime during the post-2019 extend. There's been a number of drivers for that. So I think we spoke about it previously, that there have been supply chain challenges in terms of the shop fitters and the shop fit-outs. We had seen at the start of last year some labor shortages have an impact on that. But what we are seeing is that we're reducing that downtime period, and it's getting better. And we're confident that, that level of downtime will continue to improve in 2023 and beyond. And then we had some one-off downtime impacts from a number of projects. So with Westfield Knox, we spoke about the impact of Penrith, Westfield Penrith, Westfield Parramatta, the works there. So they all have impacts as well in terms of the overall loss rent number.

So can you quantify that? Are we talking about $10 million? Or are we talking about $50 million, like ballpark?

Well, yes, overall, in terms of the different projects, it's probably -- it will be closer to the $10 million to $20 million mark.

Okay. That's inclusive of everything, right, Andrew?

Of the projects in terms of the remixing projects that we spoke about.

Okay. Understood. The -- if I look at your guidance for '23, taking the midpoint, and if I look at actuals for '22, your divi payout ratio implies about 79% last year and also next year. How should investors think about payout ratio going forward?

Well, as we've historically said, we don't target a specific payout ratio. What we have -- what we do, do is have an objective of progressing the growth of our distribution. In some years, it will be decoupled from the growth of -- in FFO. So in effect, we look at what our capital needs are as a business for the next year or the next years beyond that and then make a decision on how do we grow that distribution in line with where we see FFO being in the next year, which we've guided to, but also having regard to CapEx in future years as well and CapEx in the current year. So we're confident that with that range of FFO, we're able to give a more definitive, at least, $0.165. Bearing in mind that this time last year, we gave a distribution guidance of $0.15. We were able to significantly deliver more than that in the actual course of the year. We did upgrade it at the half year, and we're able to deliver $0.1575. So yes, we are looking at growing that distribution. So it's $0.165 on the $0.1575, which, if this call was -- we wound the clock a year ago, that was sitting at $0.15. So the business is growing very, very well.

That's great. And my final question, I think Andrew touched on this in his prepared remarks, but the property expenses went up 7.5%, I think the $560 million, $570 million. And the reason was there was some catch-up of deferrals. Should that line -- is that line expected to remain high? Or has the catch-up happened? Like can you just give us some color on that, please?

Simon, so what we've seen is, as I spoke about, there was some deferred maintenance works that were deferred during the pandemic period. Some of those are more one-off in nature in terms of the level of maintenance. And I think if you step back and have a look at what's happened and what we've been focused on, we've been focused on driving customer visitation. And when you see that we've added 67 million customer visits during the year, what we've got to do is make sure that the centers look and feel great, and they're clean and secure and safe. And with that level of visitation, what we've done is we've decided to make sure things like line marking and painting, et cetera, in the centers has been done. And then we've also elevated our level of cleaning and security, both from a volume perspective. And then we've also seen higher wage award rates come through. We would expect growth in 2023 not to be anywhere near that 7.5% growth that we saw in '22.

Your next question comes from Sholto Maconochie from Jefferies.

Just a couple of follow-ups. Just on the CPI, I think you said 6.8%. Obviously, it's a bit of a lag effect. I know you're saying 5% for the full year, but does the swing factor to the top end of guidance assumes that the sort of strong CPI coming in the first half which benefits the whole year, is it really just a CPI and better leasing driving that high end of the range?

Well, I think, Sholto, there's a number of factors that go into that guidance range. Again, if we rewind the clock back 12 months ago, it was very difficult to forecast. And we said as much, it was very difficult to provide a forecast. During the course of last year, we became a lot more confident in our ability to forecast. Sitting at this point in time, the world of forecasting remains somewhat challenging. And so what we are providing the market is a range of what we see different scenarios being, noting that there is a fairly volatile environment with regards to predicted inflation, predicted interest rates, et cetera. And so it's very difficult to put a -- pinpoint one number. And so given all of that kind of level of cloudiness when it comes to macro conditions, we provide the range of where we see the likely outcomes as we sit here today.

And then just on that, what do you assume your comp NOI growth this year? Because there's only $40 million of COVID impact, which are only in the first half. So what do you think your comp NOI, stripping out those COVID impacts, would be based on your guidance [ be over 5 ]...

That's exactly right. Yes, I was about to say 5. So it's -- you're spot on.

Okay. It must work well. I have 5%. Okay. And then I missed on the call, the leasing maintenance CapEx at $126 million does sort of drop out before.

Yes, that's right, Sholto, $126 million.

Okay. And that's sort of stable year-on-year?

Yes. As I said previously, we expect the number to be similar number in 2023. And a lot of that is driven by the strong demand we've seen for retailers to take space within our centers.

Okay. And then finally, if you just go to the guidance, that -- you only got 15% floating debt. So the real swing factor, the moving BBSW isn't as much of an impact as it was before. So it's really just that CPI line and the leasing that will be driving that NOI, correct?

That's right. I think if you -- what the big swing factors are going to be is our ability to eat into that, as I said, very little vacancy that is in our portfolio, driving that occupancy rate and the downtime in being able to do so in the rate which we're able to transact that are probably the main drivers for growth next year -- or this year, in 2023, I'm sorry.

Yes. And then just strategically, you got a good pipeline with the hybrid. Your gearing is higher than your peers. And I know you manage the business for cash flow, not LTV. But given the market is pretty good for retail at the moment, and your centers are pretty productive, is there any update on any strategic JVs you'd reintroduce capital partners into some of your flagships?

Well, as we've said previously, we do look at various opportunities with regard to the capital needs of the business when the capital is needed within the business. And so we're constantly having relationships and dialogues with potential joint venture partners as well as with our existing joint venture partners. But when we need the capital, we have plenty of sources of where we can get that capital.

And is it capital? Are you looking at any build-to-rent stuff in the pipeline on some of the surplus land or like above carparks like Westfield used to do on podiums?

Well, the answer is that there are opportunities at a number of our locations, either in our location or around our location. If you think about what our portfolio represents, it's a central infrastructure where a lot of economic activity occurs in and around it. And so whether it's us or whether it's someone else doing it next to us, a lot of activity for other usages besides businesses connecting with people does occur around our destinations. So we do look at opportunities where we do have additional land, about how we activate that land from an economic point of view, bearing in mind, though, that the main game here is how do we ensure that these destinations continue to be the destinations that people choose to spend their time on. And so we do hold strategic landholdings, but we also hold them for strategic reasons rather than trying to necessarily extract value here today, but losing the potential long-term value of those in the future. Land is a scarce commodity. And sometimes when you have it, you don't necessarily want to give it up.

Congrats on a good first result.

Thank you.

Your next question comes from James Druce from CLSA.

Congratulations on a good result. Just curious about the strategic initiative and just the outlook for that spend. You mentioned it's sort of going back to more than $25 million or $21 million levels this year. Where does that spend go for the next few years after that? Is that a similar number or too hard to forecast at this point?

Thanks, James. I think it is difficult to forecast. But I think what we're trying to do is -- it's based on the initiative itself. As you see, we were able to launch our marketplace platform. We were able to acquire 3 million new members who joined us in our membership platform. And so driving that -- those initiatives as part of our strategic initiatives is really what dictates the level of investment. We -- as I said, we brought forward a number of initiatives that we are planning to do in 2023 into '22, given the material change of -- in conditions within what is really basically into that technology sector. And so that has allowed us to guide to a significantly lower number in the range that you've just mentioned. To forecast beyond that, I think it's very difficult at this point because it all depends on what the initiatives are that we will be pursuing and how we go about pursuing those.

All right. And just talking about the value assumptions. So you've had some pretty strong income growth coming through. I noticed the discount rates, at least the range that you do disclose in the notes in the accounts hasn't changed. Can you just touch on what valuers have done in valuations of the half?

James, in terms of assumptions, so what the valuers have done is they've taken into account the strong growth in rent that's come through in terms of the actual rental escalations, also the deals that have been achieved and the fact that we're seeing the strong growth in sales. So those assumptions are going as a tailwind into their valuation assumptions. What we are seeing though is they continue to be conservative on the vacancy line, the CapEx line, the downtime and the level of incentives. So similar to those assumptions haven't really changed in terms of the assumptions that they move to when we went into the start of the pandemic. So we're seeing sort of high on the discounted cash flows. They're also starting to increase slightly at the margin, the growth in terms of the CAGR growth including on the top NOI line. Your question regarding discount rates. Basically, the centers where we've seen capitalization rates softened. We've also seen corresponding movements in discount rates on those same centers.

Your next question comes from Stuart McLean from Macquarie.

First question on occupancy costs. I think you said they sit around 16%. Pre-COVID, they were closer to 18%. Just what's changed to bring it from 18% down to 16%, please?

Thanks, Stuart. Well, the simple thing is that sales have grown dramatically. The productivity that our business partners are achieving in our space has -- continues to increase at really good rates, and that's driven down the occupancy cost. Obviously, part of that is driven by CPI, but the growth is well above CPI, which would indicate that they're selling greater volumes and their efficiencies continues to improve. And so you're right, the occupancy cost is now at a level that's 200 basis points lower than what it was going into the pandemic. And with these levels of efficiency, we see that as a great opportunity for the future of our business.

I'm just trying to match that up with the comment that sales is 10% above since 2019. I imagine rents are at least up 10% as well. And so just what am I missing with regards to the sales growth over the last 3 years and rental growth over the last 3 years when the occupancy cost is falling from 18% to 16%?

I think that the sales continue to grow, as I said, and also the rent has increased by 10%, I think, is in what you've just commented. The -- you're right, there was a high inflation rate last year. Bearing in mind that we have had negative leasing spreads, which have continued to improve, but that has been a feature within the portfolio for a number of years. And so the combination of, yes, high CPI in 2022, which rolls through in effect during the course of '22, but mostly into '23 and beyond. But there were lower -- much lower levels of inflation prior to that as well as the negative leasing spreads, which obviously rolls off as the lease expire has meant that sales growth has well exceeded rent growth for our business partners.

Okay. The sales growth would need to be about 20% above rental growth to achieve occupancy cost go from 18% to 16%. I'm not saying what you think you achieved.

I'll have to come back and look at your mathematics. But what I do know is that occupancy cost is 16%. And I think that you're right, the occupancy cost pre-pandemic were 18%. So we'll go back to you to check your math.

And just on that then, is 18% a number you can get back to? So just talking about the run rate for growth, do you think you can get back to that 18% just knowing that the highest CPI in the last quarter and the ability for tenants to sustain that? Do you think you're kind of underrented by that amount?

Well, I think the reality is that we lease the space to the business partner on the best terms that we can achieve, bearing in mind that committing to an extended period of time, they're also going to take into account what they think those escalations are going to be and what level of productivity they're going to achieve. The better we can drive productivity, the more likely they are to stay and renew. And when they do, do that, obviously, the outcome is better because it's -- they've built up their own brand equity in that location and connecting with the customer. And so we don't target a specific occupancy cost per se. What we do, do is target having as many people come to our destinations as possible because the more people would come, the more opportunity we provide that business to interact with those people. And the better we can do that, the more that business will pay us because it is very efficient for them to do so from a business point of view.

Okay. Great. And then just a final question. Just on the property-linked notes, the $355 million that are remaining there. Just what's the outlook do you think that'll be redeemed? How do you think about that for 2023, please?

Stuart, so the Southland note was redeemed in January 2023. So that's around $160 million of that -- the number that you're quoting. And then the Hornsby notes will mature at the end of this year, early next year, and we'll be in discussions in advance of that note to confirm one way or the other in terms of whether it extends or whether we redeem.

They just occur, correct?

That's correct.

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

Thank you. Thank you, everyone, for joining today. If you have any further questions, myself and the team are available to deal with you offline, but I hope you have a great rest of the day, and thank you for joining.

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