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Edited Transcript of AVN.AX earnings conference call or presentation 24-Feb-21 11:00pm GMT

·35 min read

Half Year 2021 Aventus Group Earnings Call Feb 25, 2021 (Thomson StreetEvents) -- Edited Transcript of Aventus Group earnings conference call or presentation Wednesday, February 24, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Darren Holland Aventus Group - CEO, MD & Executive Director * Jason James Aventus Group - Head of Leasing * Lawrence Wong Aventus Group - CFO & Company Secretary * Ruth Jothy Aventus Group - Head of Asset Management ================================================================================ Conference Call Participants ================================================================================ * Edward Day Moelis Australia Securities Pty Ltd, Research Division - Research Analyst * Grant McCasker UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate * James Druce CLSA Limited, Research Division - Research Analyst * Stuart McLean Macquarie Research - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [1] -------------------------------------------------------------------------------- Thank you, and good morning, and welcome to the Aventus 2021 Half Year Results Presentation. I'm Darren Holland, CEO of Aventus; and joining me this morning from our leadership team in speaking order is Lawrence Wong, our CFO; Jason James, our Head of Leasing; and Ruth Jothy, our Head of Asset Management. I'm very pleased to report a strong start to financial year 2021. Our performance during this period has once again highlighted the features that distinguish large-format retail from traditional malls, such as more affordable rent, superior convenience and the ability to comparison shop a range of home retailers under one roof. I've been saying for many years, not all retail is created equal, and our outperformance for this half in terms of traffic, rent collection and financial results make this point again. Before we begin on the highlights for the half, I'd like to turn your attention to Slide 2. On this slide, you'll find our refreshed purpose, our values and our team. Firstly, on team, I'm extremely proud and thankful for my talented team for their ability to adapt and accelerate over the past half. Although Aventus has a market-leading portfolio valued at over $2.1 billion, what I'm most proud of is my team. You will also see our values on this slide, which we all live every day. We have people first. We care deeply for our team, our customers; and we put service before self-interest. We own it. We are hands on, humble, and we do it now. And finally, in everything we do, we strive to find a better way. We're curious, and we adapt to accelerate. Finally, our purpose: feels like home. We want Aventus and our centers to feel like home for our team and for our shoppers and the retailers in our centers as well. This is the formula for our high-performance culture, and it's at the heart of our DNA. As I've said before, culture cannot be copied, and it's one of our key competitive advantages. Moving now on to Slide 3, where I'm proud to share our key highlights for the half. 2020 was a year like no other. Australians have a new found love for their home, and we're spending more time working, learning and entertaining at home than ever before. This focus on our home, coupled with the redirection of travel spend, has created unprecedented demand for products sold by our retailers, resulting in 9 months of double-digit sales growth across our portfolio. In my 26 years in LFR, I've never seen anything quite like this. I'm excited to report to you today that we have a stronger portfolio, stronger retailers and stronger financial results than pre COVID. Three key highlights to call out: firstly, we've achieved strong cash collection of 98%; traffic in our centers has grown 8%; and we've delivered funds from operations for the half of $56 million, up 6.5%. These are some of the main highlights from today, however, I'm pleased to say that we've improved on all of the metrics on this slide, and my team will talk you through these during the presentation. This performance gives us the confidence to upgrade our guidance, which I'll speak to in greater detail at the end of today's presentation. Moving on to our strategy on Slide 4, which has been the blueprint for our business. When we listed Aventus 5 years ago, we created 4 pillars to drive our strategy and performance. We aim to grow sustainable earnings and deliver long-term shareholder returns. This strategy has been and will continue to be the bedrock of our success, and it's been well tested throughout the COVID period and remains largely unchanged. I want to touch on each of these pillars, what we've delivered to date and importantly, why I'm confident we can continue to execute on strategy. Firstly, we optimized the portfolio to drive income and capital growth. Pleased to say, over the last 3.5 years, we have delivered over $270 million in valuation gains across the portfolio mainly through income growth and developments. Secondly, we capitalize on opportunities to acquire dominant assets, and we've consolidated the sector over the years with a market-leading share of 22%. Thirdly, we enhance our returns through development. We completed $120 million of developments with an average unlevered cash yield of 9%. And our recent successful project at Caringbah is pictured on the front cover. We are prudent capital managers, and during COVID, we focused on strengthening our financial position while preserving value for the long term, by not raising equity and diluting our shareholders. I want to touch on transactional activity briefly. Supply of large-format centers for sale is expected to pick up this calendar year, particularly in light of the low volumes in the prior period due to COVID. Currently, there are 3 assets on the market for sale in Queensland, Victoria and Western Australia with a combined value of about $200 million. Only one of these assets, in our view, is a dominant asset. As market leaders in the LFR sector, we actively investigate everything. However, we remain disciplined with a strict investment criteria and an owner's mentality. Our strategy is to grow profitably and only make accretive acquisitions where we can add value and complement our existing portfolio. Notwithstanding the limited transactional opportunities and also the growing investor demand for LFR, we are confident we will continue to deliver sustainable organic growth from the existing portfolio. As we've done in the past, we'll optimize the portfolio. We'll drive income, and we'll continue to build our development pipeline. Our large land bank is over 1.2 million square meters, and it's highlighted with my favorite aerial images on Slides 26 and 27. This land has considerable optionality to deliver attractive returns through development, and Jason will touch on this later. On third-party capital, last year, we established our first syndicate at McGraths Hill in Sydney, and this has been highly successful for our investors with the fund increasing distributions to an annual cash yield of 8.5%. Third-party funds management is a pathway to diversify capital sources and income streams, and we're committed to grow this part of the business over time. Now turning to Slide 5, where I'll touch on our portfolio and the map of Australia. Aventus has an irreplaceable portfolio of 20 convenience centers valued at $2.1 billion built across the last 17 years. The portfolio is geographically diverse across 5 states with 92% positioned along the highly sought after eastern seaboard. All centers dominate the catchment, and many are in growth locations. We have majority exposure in New South Wales, where we have 10 centers worth over $1 billion. We are the leading LFR landlord in Sydney and have over 43% catchment coverage. While most of our portfolio is in metropolitan locations, it's important to point out, we have no CBD retail. And our regional locations have been performing equally strongly through COVID as more customers choose to shop locally. On the topic of COVID, let's turn to Slide 6. This slide highlights Aventus centers are more popular now than ever before, with over 44 million visitors over the year and traffic up 8%. I'm additionally -- additionally, I'm proud to say cash collection has also grown to 98%, reflective of retailer performance. On the chart, the July to December, on Slide 6, you'll see that 1% of abatements and deferrals reflect our commitment to supporting our retailers. We're pleased to share with you today that our assistant agreements, which provided immediate relief to affected retailers, also provided and contained a prudent true-up clause based on sales performance. This meant that we provided support for the period of April to September in line with the National Code of Conduct, and we recovered abatements from those retailers who traded more favorably than first expected. Considering this, our results today includes a one-off additional amount of $2 million, which reflects the true-up of abatements and deferrals. And this again demonstrates our ability to proactively manage our portfolio to maximize returns for our shareholders. I'll now hand you over to Lawrence, who will take you through our key financial results. -------------------------------------------------------------------------------- Lawrence Wong, Aventus Group - CFO & Company Secretary [2] -------------------------------------------------------------------------------- Thank you, Darren, and good morning, everyone. The financial results of the group in this first half of FY '21 has recovered strongly following impact of the initial COVID lockdowns. Key indicators around rent collection, level of tenant support and property valuations demonstrate significant improvement. It is also evident in these first half results and is the basis on which we are upgrading Aventus' earnings guidance for the full year. Darren will elaborate on this later in the presentation. Before diving into the financial results, I'd like to point out 2 items to note that are specific to this period. Firstly, I would like to highlight the impact of tenant support provided under the National Code of Conduct. The first phase of support ran for 6 months starting in April through to September 2020. A level of tenant support continued into FY '21 for this first phase and subsequent extension of the code. However, the level of tenant support has tapered significantly towards the end of the half. This impacted net operating income through an expected credit loss in our income statement and the provision for doubtful debt in the balance sheet. Secondly, the other consideration to note is that in the comparables, we seeded Aventus Property Syndicate 1 with McGraths Hill in November 2019. The as a result, rental income in the comparables is replaced by distributions on the syndicate, new management fees and equity released from the balance sheet. Bear this in mind in reviewing the financial statements. I would like now to move to Slide 8 to discuss some of the key financial metrics shown here. To begin with, and as Darren mentioned earlier, the group delivered FFO of $56 million for the first half of '21, which is equivalent to $0.10 per security. This is 4.2% higher than the prior comparable period. The main drivers of this result are continued income growth across the portfolio and a lower cost of debt. The support given to our retailers resulted in an additional $1 million of bad and doubtful debt expense compared to the prior comparable period. This appears low given the COVID impact, and it is because of the net of the reversals from the true-up mechanism that Darren mentioned earlier. We aligned tenant support to actual sales performance, and this has enabled us to reduce the level of support at the end of the half. Next, I would like to draw your attention to gearing, which was 34% at December 2020. We have brought this down from 36% 6 months ago due to higher property valuations and underwriting of the September 2020 quarter distribution reinvestment plan. This effective capital management will allow the group greater capacity to pursue acquisitions or developments. Finally, I would like to draw your attention to our strong debt serviceability. The interest cover ratio increased again to 5.9x, an improvement from 5.2x 6 months ago. This is mainly due to improved rental income as support provided to retailers tapered off and to lower cost of debt as floating interest rates declined. Moving now to Slide 9. Let us look at, in detail, income statement. As you can see from this summarized income statement, the group recorded a statutory profit of $103 million for the first half compared to $72 million in the prior comparable period. This increase of $31 million is due to a combination of the following factors. Our net operating income improved by $1 million. This is due to continued income growth from annual rent escalations offset by higher bad and doubtful debt expenses as part of tenant support and lower NOI contribution from McGraths Hill, which was syndicated in November 2019. Moving to property valuations. We have recorded a net gain of $46 million this half compared to $20 million in the prior comparable period. Finance costs of $7 million represent a significant decrease of $12 million -- on $12 million in the prior comparable period. This is due to lower cost of debt and lower borrowings. The gain on the mark to market of financial derivatives contributed $2 million to the reduction in finance costs. Moving now to Slide 10. There is a reconciliation of net profit to FFO, which will give you a better insight into the underlying performance of the group. Beginning with a profit of $103 million and adjusting for noncash and nonrecurring items, the most significant of which is the $46 million in net valuation gains, the group achieved an FFO of $56 million. Based on this result, the group declared distributions of $46 million. The payout ratio of 82% of FFO is lower than our stated target range of 90% to 100% of FFO because we had anticipated higher level of support will be required by our retailers. The level of support actually required was not apparent under the true-up mechanism undertaken at the end of the half. Distributions were declared before this was completed. The directors will assess the operating environment at the time the distributions are next declared. And if the trading environment remains stable and there are no further lockdowns, we are confident we can restore distributions in line with the payout ratio this financial year. Deducting maintenance capital expenditure and leasing costs from FFO, the adjusted FFO is $53 million. The lower maintenance capital expenditure reflects timing of the projects, which will be weighted towards the second half of FY '21. Moving now to Slide 11. I would like to discuss our operating cash flows. On this slide, we show cash generated from our operations. I would like to draw your attention to the chart at the top right-hand corner. This demonstrates that, over the last 5 years, we have consistently generated cash above the level of distributions paid. This is vital for a sustainable capital structure and for our ability to consistently declare and pay attractive distributions to investors. Moving to Slide 12, is a summarized balance sheet. The key items on the balance sheet at the end of this period are the property valuation gains and the acquisition of the development land at Epping, which settled in July 2020. As you can see, the value of the investment properties have increased $73 million comprising $46 million in net valuation gains, $16 million in capital expenditure and acquisition of Epping development land costing $12 million. The reduction in borrowing reflects debt paid down from the cash raise from underwriting to September 2020 quarter reinvestment plan. The overall result of these changes is that net tangible asset per security has increased by $0.10 to $2.24, and the net asset value per security increased $0.09 to $2.50. Moving to Slide 13. I would like to discuss the valuation gains in more detail. We are very pleased to see valuation gains this half, including independent valuations conducted for 29% of the portfolio by value. Income growth was a main contributor to the $46 million in valuation gains, mainly driven by high occupancy, annual rent escalations, high levels of rent collection and tapering of COVID support to our tenants. As Darren mentioned earlier, there were limited comparable transactions to support a sector-wide depression of cap rates. However, the independent value was compressed to cap rates for 4 centers because of center-specific circumstances. Caringbah following the completion of the development, Epping following the site's amalgamation, Warners Bay and Highlands following the significant works stabilized centers, resulting in higher occupancy and longer WALE. We have conservatively maintained the cap rate for the rest of the portfolio until comparable transaction evidence emerges. Overall, the cap rate of the portfolio compressed slightly by 9 basis points to 6.64%. The cap rate over the last 3.5 years was stable, therefore, $270 million in valuation gains booked over that period is due to income growth and development projects. Looking ahead, the investment proposition for LFR centers is compelling given the long-term spread of cap rates to interest rates and the sustained demand for LFR centers based on the performance of the tenant base. Moving to Slide 14, is more details on capital management. We are focused on 3 elements in our capital management: firstly, gearing; secondly, debt expiry; and finally, debt serviceability. Regarding our gearing, we have sought to manage and reduce gearing very deliberately this year. We underwrote the September 2020 distribution reinvestment plan to raise $22 million. And together with the property valuation gains, we achieved a material reduction in gearing. At the end of the period, Aventus' gearing has come down to 34%, 2% lower than the gearing 6 months earlier. Furthermore, it is well within our target gearing band of 30% to 40%. Similarly, the substantial prefinancing works in prior years meant that we have no debt expiring before May 2022. So we are not exposed to any short-term refinancing risks. This allowed the group to focus on the operations and supporting our tenants through the initial lockdown period without the distraction and difficulty of refinancing during an -- pandemic. Looking now at the cost of debt. It is pleasing to see the group's weighted average cost of debt falling further to 2.8% in the first half of FY '21 from 3.1% in FY '20. This is driven by a lower floating interest rate and Aventus' hedging policy, which has enabled us to capitalize on a downward trend in rates. As a result of the lower cost of debt, the interest cover ratio has increased to a healthy 5.9x from 5.2x of a short 6-month period. This improvement in our ability to service debt has occurred despite the impact of COVID-19. Overall, we were able to navigate the initial impact of COVID-19 without a significant equity raising. Our focus is, as always, on preserving investor value, as a significant equity raising at a large discount would be dilutive, especially to investors that cannot participate. To summarize, Aventus is well positioned with no near-term debt expiries, lower gearing, stronger debt serviceability, higher level of rent collection and comfortable liquidity. The group finishes the first half of FY '21 in a strong financial position, having absorbed the impact of COVID so far and is well positioned to capitalize on future growth opportunities. That concludes a review of the financial results, and I will pass you to Jason to discuss the leasing and development highlights. -------------------------------------------------------------------------------- Jason James, Aventus Group - Head of Leasing [3] -------------------------------------------------------------------------------- Thank you, Lawrence. Good morning, everyone. Let's now turn to Slide 16, where I'll walk you through our portfolio outcomes and leasing strategy. Our active leasing strategy has resulted in 63 deals across 41,000 square meters of GLA. This volume is up on previous year and despite challenges of interstate retailer meetings, demonstrates the strength and resilience of our portfolio and quality of our product. We have achieved over 75% of these deals at flat or positive leasing spreads. However, overall, spreads for the period have moderated as predicted last half. Incentives remain low comparative to other retail sectors remaining steady at just over 5%. This is a strong result, especially in the leasing environment we have been experiencing over the last 12 months. Demand for space across Aventus centers remains strong, with the portfolio occupancy increasing from 98% to 98.5%, which, for clarity, does not include short-term deals and is across our entire portfolio of 20 centers. The work in creating consistent lease structures across our portfolio means we have attractive in-built growth with fixed annual reviews. These now comprise 77% of the portfolio and a key component of our future stable growth with embedded fixed annual rent reviews averaging 3.8%. We have a manageable and staggered leasing profile over the next 3 years and minimal holdovers of under 2%. This profile and WALE of around 4 years allows us to consistently curate our retail mix to keep up with the evolving demand of our shoppers and optimize our rental growth. Finally, our rents continue to be affordable with an average gross rent of $331 per square meter, which is multiple times lower than that of our closest subsectors. Aventus estimates that, on average, a rent accounts for approximately 10% of occupancy costs, which we believe to be sustainable and affordable. Turning to Slide 17. As Darren highlighted earlier, our retailers have enjoyed resurgent sales, especially in the last 6 months as the country opened up and restrictions eased. We believe these results will both insulate our sector from any potential economic moderation and provides impetus and demand for growth in store sizes and further opportunities to grow across our portfolio. Aventus continues to be the partner of choice for several key retailers. Just recently, we completed a new store for Spotlight at Highlands, and we're expanding and upsizing several national retailers across the portfolio, including Adairs, Officeworks and King Furniture. As we've previously reported, our tenant base is made up of 88% national retailers. The left bar chart shows our top 15 tenants are all market leaders in their categories. Ten of these are listed. Our top 10 account for only 28% of our total income, limiting the financial exposure to any one group. For example, our largest exposure is to 1 of Australia's best retailers, Bunnings, at approximately 4% of income with a strong WALE of 6.3 years. We continue to focus on growing our everyday needs category. These retailers account for 37% of the portfolio by income and comprise about half of the total retail base by number. However, the majority of our retailers have businesses connected to the home and with strong sales this half and positive projections over the next period. As a reminder, Aventus has no department stores or discount department stores, and our portfolio has less than 2% exposure to fashion and apparel. Now on to the next slide, and we'll speak to the value that Aventus adds through development. As Darren mentioned, we have an extraordinary 1.2 million square meters land bank, the majority of which are East Coast concentrated and in metro locations. The site coverage ratio of the land bank is a low 44%. We have a track record of consistently creating value through development having invested over $120 million across 24 projects, creating more than 18,000 square meters of new GLA and achieving an average unlevered cash yield of 9%. Our development pipeline remains active with construction of a new site to begin at Cranbourne in the coming weeks, an imminent development approval underway for Tuggerah and good progress being made on master planning Epping post the recent acquisition of the ex Kaufland site. Turning to Slide 19. I just want to talk you through our latest development at Caringbah. To recap, we successfully delivered the Caringbah transformation 100% leased and trading in November 2020. This was an exceptional result with the project delivered during COVID. We're incredibly proud of the team for the dedication and hard work that went into this project. The center is anchored by key national tenants, including JB Hi-Fi, Harvey Norman, Freedom and Adairs. The development has also allowed 4 of our existing retailers to expand their offer and footprint and introduce a number of new retailers, including James Lane, Plush and Bed Bath N' Table. There has been a significant value uplift achieved at the center post development with the value lifting $42 million or up 43%. We also exceeded our initial IRR target of 10% with the project achieving an IRR of 13%. Over time, we also intend to further develop our 2 adjoining sites located opposite Bunnings. I'll now pass you over to Ruth, who will take you through some exciting portfolio initiatives. -------------------------------------------------------------------------------- Ruth Jothy, Aventus Group - Head of Asset Management [4] -------------------------------------------------------------------------------- Thanks, Jason, and good morning, everyone. Both Darren and Jason have already highlighted the financial results of our listed and national retailers. Our traffic increase of positive 8% reflects the strength of our LFR centers throughout the COVID period. Shoppers have adapted to spending more locally and the convenience of our centers allows us to benefit from this trend. What we've learned through 2020 is that it's all about providing choice. Shoppers browsing online have the choice to visit in-store or utilize one of our Click & Collect pickup points. We see this in our portfolio through both the strength of our retailers online and in-store sales. Our Click & Collect option now in all 20 of our centers has been well received by our many retailers. We believe that to maximize traffic and retailer sales, we must connect with shoppers digitally and use that connection to drive in-store visits to retailers. To further highlight this shift, you will see on Slide 21 that our unique website visits have grown 38% year-on-year, showing a greater awareness of Aventus centers. The last 6 months have shown that understanding our customers is more important than it has ever been, and we are now actively using shopper spend data to understand behaviors and ensure we have the right retailers and products in our centers. We have also rolled out refreshed customer listening tools to ensure we receive timely feedback, allowing us to respond and better meet the needs of those visiting our centers. COVID has created a shift in retailer demand, whereby retailers seeking LFR tenancies for their flexible spaces with high clearance and reloading access means they can be used for a variety of purposes, including dark stores, showroom, warehousing, click and collect, and distribution points. What we're seeing from a broader range of retailers suggests that larger, more accessible spaces are more attractive than ever before. Moving on to the next slide. I want to touch on some of the benefits that our portfolio provides to our customers and the additional income opportunities that we're realizing. This slide shows the nonrent income opportunities across our portfolio. While these opportunities are incremental to the performance of the assets, they demonstrate our continued focus on maximizing value. We have received regulatory approval for our first ticketless parking project at Kotara. This delivers on 2 key initiatives: Firstly, it grows our nonrent income; and secondly, the project improves the shopping experience for our customers by ensuring ample and convenient parking spaces. Additionally, our sustainability focus continues with the rollout of solar across our portfolio, with Marsden Park being the next center, where we will install rooftop solar panels. By using our existing embedded network and on selling energy to our retailers, we will see additional nonrent income. This will be our second solar project and is on track to be completed in FY '22. We anticipate further ticketless parking and solar panel rollout opportunities given we have 13,000 car spaces as well as 475,000 square meters of roof space available. And we plan to continue to develop this over time. Now I'll hand back to Darren, who will speak to our upgraded guidance. -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [5] -------------------------------------------------------------------------------- Thank you, Ruth. On to our guidance and outlook on Slide 23, with the image of my favorite local center at Belrose. As we detailed in our presentation, Aventus has performed strongly during the half, and we're in great shape for the rest of the year. Even though retailer sales will moderate, we expect operating conditions to be favorable with continued tailwinds from travel restrictions and an improved housing outlook. We'll continue to deliver on strategy by driving income and capital growth from portfolio optimization, execution of the development pipeline, exploring third-party funds management and opportunistic acquisitions. We also anticipate further valuation growth driven by continued income growth and the potential for further cap rate compression, as Lawrence touched on, off the back of strong demand from investors for large-format retail given the resilience of the sector over 2020. In conclusion, I'm excited about the year ahead for Aventus. Accordingly, we upgrade our FY '21 guidance from FFO per security growth of at least 2% to FFO per security growth of at least 4%, implying an FFO cent per security of at least $0.19. This guidance includes the one-off true-up and assumes no further major outbreaks of COVID and no significant government restrictions. Thank you. I'd now like to invite questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of James Druce from CLSA. -------------------------------------------------------------------------------- James Druce, CLSA Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Good results. Just wanted to talk about a couple of things. Firstly, can we get a feel for the leasing spreads over the period and maybe get a feel for how that looks across every day needs, furniture and bedding and the other major categories? -------------------------------------------------------------------------------- Jason James, Aventus Group - Head of Leasing [3] -------------------------------------------------------------------------------- Yes, sure. It's Jason here. Look, our spreads -- as we said, we completed a larger-than-normal number of transaction over the last period, so the vast majority were flat or positive. We did complete 3 strategic renewals, which were below passing rent, which means slightly negative overall. However, over these 3 deals, the spreads on average are positive in line with our pre-COVID results. We don't typically split things up between different uses, however, so -- but just in terms of -- the last deals we've completed since January have trended back to a normal positive spread. -------------------------------------------------------------------------------- James Druce, CLSA Limited, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. So the outlook from here, you'd expect to be positive? -------------------------------------------------------------------------------- Jason James, Aventus Group - Head of Leasing [5] -------------------------------------------------------------------------------- That's what we've seen over the last period from January, yes. And our expectation and outlook would be similar to pre-COVID levels. -------------------------------------------------------------------------------- James Druce, CLSA Limited, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Okay. And maybe just on guidance, the sort of [$0.005] upgrade, so half of that is coming from the true-up. What is the -- what's driving the remaining portion of that upgrade or extra? I know the other $2 million. -------------------------------------------------------------------------------- Lawrence Wong, Aventus Group - CFO & Company Secretary [7] -------------------------------------------------------------------------------- James, Lawrence here. You're correct. The true-up -- the one-off true-up is half of it. The other half is around our lower cost of debt. So the lower -- our cost of debt has fallen significantly than what we anticipated. So as I said, it's going to -- it came in around 2.8%, and that was driven off the drop in the floating rate (inaudible). -------------------------------------------------------------------------------- James Druce, CLSA Limited, Research Division - Research Analyst [8] -------------------------------------------------------------------------------- Okay. And then just on ancillary income, you're sort of calling out a couple of items there. Can you just provide some context about the quantum of that number at the moment and what sort of growth you see going forward? -------------------------------------------------------------------------------- Ruth Jothy, Aventus Group - Head of Asset Management [9] -------------------------------------------------------------------------------- James, it's Ruth here. So I guess it's currently nonrent income of just under 2% of our portfolio is income. And I guess, as you've noted, we've got the potential to roll out more into -- across the portfolio. So we're early in those stages, but we're not yet able to predict what that will look like across the portfolio. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from the line of Stuart McLean from Macquarie. -------------------------------------------------------------------------------- Stuart McLean, Macquarie Research - Research Analyst [11] -------------------------------------------------------------------------------- The first question I have is probably for Lawrence, just on the balance sheet. So gearing is now 34%. Where do you want to be sitting in terms of gearing over the next 6 to 12 months? Can we expect further DRPs? Trying to get a sense of how you think about the balance sheet. -------------------------------------------------------------------------------- Lawrence Wong, Aventus Group - CFO & Company Secretary [12] -------------------------------------------------------------------------------- Stuart, very comfortable with where gearing is right now. Our target gearing -- our target band is between 30% to 40%. In terms of future DRPs, we'll assess that at that particular time. There's probably a number of factors to consider there. So a few things we're thinking about at that time is what the security trading price is, what's the appetite from investors. Overall, the DRP is a very small impact on gearing. It's just a very -- it's a way for us to potentially match the equity that we raise with our development pipeline. So it's driven by what our equity commitments and needs are at that particular time. -------------------------------------------------------------------------------- Stuart McLean, Macquarie Research - Research Analyst [13] -------------------------------------------------------------------------------- Okay. And then so a follow-on question, so DRP helps the development pipeline. I think, Darren, you mentioned there was an asset potentially on market that's interesting to -- it sounds like it could be accretive in terms of strategic to your portfolio. How do we think about funding that? And if you were to fund it by debt, you happy running at that higher leverage ratio? -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [14] -------------------------------------------------------------------------------- Stuart, Darren here. So as Lawrence said, we're comfortable sitting at the 34% mark. That particular acquisition that you said is interesting, it'll be a highly competitive process. If we are successful, yes, comfortable to lift up gearing marginally through debt funding. And as we proved over time, we can smoothly, in a disciplined way and a measured way, reduce gearing over time. -------------------------------------------------------------------------------- Stuart McLean, Macquarie Research - Research Analyst [15] -------------------------------------------------------------------------------- Can you talk to pricing that you're seeing as well as you think a competitive process? Just what are you seeing at the moment in terms of demand from capital and cap rates? -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [16] -------------------------------------------------------------------------------- It's a great question. As Lawrence had alluded to, there's been limited transactional evidence really in the last 6 to 12 months, probably half of the 3-year average supply LFR. There are 3 assets on the market for sale now. I can't really comment on the pricing other than the demand is very strong. I think sectors of convenience retail and large formats have outperformed traditional malls during COVID, and there's certainly new entrants looking at our sector given the high yield and given spread between interest rates and cap rate, as Lawrence said. So there's interest from privates, syndicates, high net worths, et cetera, and of course, Aventus, but again, will be measured and disciplined. Not in the business of driving down our own cap rates. We'll really only buy if it's accretive and if it's value adding and complements our portfolio for the long term. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- (Operator Instructions) Our next questions comes from the line of Grant McCasker from UBS. -------------------------------------------------------------------------------- Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [18] -------------------------------------------------------------------------------- Just one question. Just thinking about the upside case here. As you talk about large-format retail being the best operating conditions you've ever seen, I see occupancies ticked up a bit. But when is it that you're really starting to get some lease intention to really drive some material leasing spreads to start driving those average rental levels materially higher? Or is it difficult given sort of the different lease structures without a lot of your sales being reported? -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [19] -------------------------------------------------------------------------------- That's correct. So we only get 40% grant there, and we only get 4% sales disclosure, so limited sales information. When a tenant exercises an option, for instance, and we're going through the market rent review process, we can't take into account their sales performance or supply and demand, et cetera. It's valued really on the value of that space at a rate per square meter. So you can't factor sales performance into the value of our rentals. And over time, as you said, we've ticked up the occupancy up by 50 bps. I consider that to -- that's a good outcome, and I think that'll continue to rise over time. Our holdovers remain steady and will reduce over time. They're currently sitting at 2%. There's obviously some pressures from shopping centers looking at some of the large-format retailers. So that may put some pressure on elevating the incentive levels. And that's natural given what's happening in some of the traditional shopping center malls with some space coming back from department stores, et cetera. But overall, we're positive. And just on spreads, just as a reminder, they really only affect about 10% of the income of the portfolio every year, which is effectively the expiries on a yearly basis plus the vacancies. The vast majority of our income growth actually comes from, as Jason touched on, the 6 months averaging 3.8% per annum over time. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Edward Day from Moelis Australia. -------------------------------------------------------------------------------- Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Just on the leasing fixed bumps, are you seeing any change in the structure of your leases or any reduction or increase in that sort of average fixed bump level? -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [22] -------------------------------------------------------------------------------- Good question, Ed. I'll take that. Darren here. So in conclusion, no. We've actually ticked up fixed bumps on the 76% last half, and now they're 77% fixed bumps and they range between 3% to 5%. Not easy to get those fixed increases, as you can imagine, however, our leasing team are doing an excellent job in negotiating those on a deal-by-deal basis. And as a reminder, there's only 23% of the portfolio that actually has CPI reviews in them. It's also important to point out about [600] leases, we have no capped occupancy deals across the entire portfolio. And we're aware that, that's very different from other retail subsectors. -------------------------------------------------------------------------------- Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [23] -------------------------------------------------------------------------------- Right. And just on your expiry profile, you have 5% left in '21 and 12-odd percent in FY '22. Are there any more strategic tenants in there in line with the 3 strategic renewals you did in the half? -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [24] -------------------------------------------------------------------------------- Look, Ed, there's always national retailers that we want to retain and anchor deals over time. We'll review those on a case-by-case basis. But as Jason said, we expect to see, if you effectively strip out just 3 deals with major national tenants that were reset, our leasing spreads overall were actually positive. And as Jason said, 75% of all of the deals are actually flat to positive out of the 63 deals. So we expect to see that normalizing and returning back to the pre-COVID levels of being overall positive. But every year, there's deals that come up. Some of the portfolio is still over rented. And as we've seen, there's a couple that we need to reset and retain for strategic purposes. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- (Operator Instructions) There's no more question at this time. Speakers, please continue. -------------------------------------------------------------------------------- Darren Holland, Aventus Group - CEO, MD & Executive Director [26] -------------------------------------------------------------------------------- Thank you. And just some closing remarks. Thank you to those analysts for those quality questions as usual. That concludes the formal presentation. I just want to take a moment to say thank you to our 5,000 investors for their continued support and interest in Aventus, our millions of shoppers who choose to shop locally and [at Aventus] Super Center; and importantly, our retailers for their partnership and ability to adapt to capitalize on the shifting household patterns. From the Aventus family, all the best, and we look forward to seeing you in person or over Zoom in the coming few weeks. Thank you.