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Edited Transcript of CLW.AX earnings conference call or presentation 11-Aug-19 11:00pm GMT

Full Year 2019 Charter Hall Long WALE REIT Earnings Call

Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Charter Hall Long WALE REIT earnings conference call or presentation Sunday, August 11, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avi Anger

Charter Hall Long WALE REIT - Fund Manager

* Kerri Leech

Charter Hall Long WALE REIT - Head of Finance

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Conference Call Participants

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* Darren Leung

Macquarie Research - Analyst

* David Lloyd

Citigroup Inc, Research Division - Director & Analyst

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

* Suraj Nebhani

Citigroup Inc, Research Division - Assistant VP & Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Long WALE REIT 2019 Full Year Results Briefing. (Operator Instructions) Please note that this conference is being recorded today, Monday, the 12th of August 2019.

I would now like to hand the conference over to your host today, Mr. Avi Anger, Fund Manager, CLW. Thank you. Sir, please go ahead.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [2]

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Thank you, and good morning, everyone, and welcome to the Charter Hall Long WALE REIT Results Presentation for the Full Year ended 30 June 2019. Presenting with me today is Kerri Leech, Head of Long WALE REIT Finance.

The format for today's presentation is that I will start with key highlights for the year. You will then hear from Kerri, who will provide an overview of the financial performance of the REIT. I will then return to provide an operational update and portfolio overview for the period and provide an update regarding earnings guidance for FY '20. We will then offer the opportunity for questions.

Turning now to Slide 4 and the key highlights for the period. We completed another year of strong operating performance, delivering operating EPS of $0.269 per security, up 1.9% from FY '18 and delivered distribution per security of the same amount. During the year, we invested in $707 million in 37 properties across office, industrial, long WALE single-tenant retail and agri logistics.

Today, we also announced that we've agreed terms with Woolworths for a 5-year lease extension at Hoppers Crossing. This takes the remaining lease term of that property out to 6.5 years. As a result, our WALE is now 12.5 years, up 16% from 10.8 years at the start of this financial year.

We successfully raised $406.3 million of equity during the year. And gearing is towards the lower end of our target gearing range with a weighted average debt maturity of 4.5 years.

Turning to Slide 5. We have actively managed the portfolio to extend portfolio WALE, improve tenancy profile, improve diversification and deliver earnings growth. As I mentioned at the start of FY '19, the portfolio WALE was 10.8 years. As a result of WALE-enhancing transactions together with the recently announced Woolworths, Inghams and SUEZ lease extensions, we've increased the portfolio WALE to 12.5 years at 30 June '19. Our portfolio continues to be diversified by tenant, industry, geography and property types which contributes to the stability of our cash flow.

At year-end, our properties were leased to 32 tenants across a broad range of industries, and we've strengthened the quality and diversity of our tenants with new tenants including the Queensland government, the Western Australian government, Brisbane City Council, Telstra, Thales and Inghams. Our rental revenue is diversified across sectors with our largest weightings being to industrial of 37% and office of 30%.

We upgraded our FY '19 earnings guidance twice during the year. We upgraded the original FY '19 operating EPS guidance. And then in June, we confirmed at the top end of this upgraded guidance range.

I think it's worth noting that we've increased our quarterly distributions 7x since IPO, and our earnings guidance for FY '20, which we discuss later in the presentation, is approximately 10% higher than our annualized FY '17 earnings guidance which we provided when we listed CLW in November 2016.

I would now like to hand over to Kerri who will provide an overview of the financial performance of the REIT.

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [3]

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Thank you, Avi. The REIT's key financial metrics for the year-ended 30 June 2019 are set out on Slide 7. In FY '19, the REIT delivered operating earnings of $70.8 million or $0.269 per security and similarly declared a distribution of $0.269 per security. Balance sheet gearing was 27.5% at 30 June, comfortably within our target range of 25% to 35%. Movements in all other key metrics shown on this slide result from portfolio-enhancing activities undertaken during the period, which Avi and I will speak to later in the presentation.

Turning to Slide 8 are the REIT's FY '19 full year results. The 20% increase in net property income is attributed to like-for-like growth of 2.6% and $16.5 million from net acquisition activity. Operating expenses similarly increased 11% due to portfolio growth and new acquisitions. We also saw a 19% increase in finance costs year-on-year as a result of partially debt funding the REIT's acquisition activity. OEPS and DPS are both up 2% on prior year at $0.269 per security, in line with the top end of our revised guidance range.

Turning to Slide 9 is the REIT's balance sheet position at 30 June. Investment properties increased $434 million or 49% due to acquisition activity and $43 million evaluation uplift. Similarly, the $77 million or 16% increase in equity accounted investments represents $21 million of valuation uplift in the following acquisitions: a 50% interest in the Brisbane City Council Bus Network Terminal, 2 new ALH-leased pubs and an additional 4.9% stake in the existing ALH-leased pub portfolio.

The $7 million increase in the provision for the quarterly distribution results from operating earnings growth arising from annual rent escalations and acquisition activity. The $25 million increase in other liabilities represent stamp duty payable on the acquisition of the Telstra office building in Canberra and movements in derivatives driven by the historically low swap rates printed over the last 6 months.

Acquisitions were funded through a combination of debt and equity. During the year, $98 million of balance sheet debt was drawn, and $406 million of equity was raised. NTA has increased 1% from $4.05 at 30 June 2018 to $4.09 at 30 June 2019 due to net valuation gains and equity-raising activities partially offset by movements in derivatives.

As shown on Slide 10, the REIT has $732 million of drawn debt calculated on a look-through basis. At year-end, balance sheet gearing was 27.5%, and look-through gearing was 34.3%. The difference between the balance sheet and look-through gearing ratios relates to 2 joint venture facilities, each secured by long WALE properties, triple net leases and strong tenant covenants. The first is the ALH-leased pub portfolio, which is 43% geared backed by a 15.1-year WALE and a weighted average debt maturity of 6.3 years. The second is the Brisbane City Council Bus Network Terminal, which is 50% geared backed by a 19.2-year WALE and a 5-year debt maturity. In addition to adding a new facility for the Brisbane City Council Bus Network Terminal, we further diversified the REIT's debt platform by introducing 2 new international lenders who have provided $200 million in bilateral facilities. We also increased the limit of the REIT's syndicated debt facility by $10 million and extended the ALH-leased pub portfolio bank debt by 5 years and then added an additional $10 million of capacity to our share of this facility.

The combination of these activities resulted in a weighted average cost of debt of 4% for FY '19 and a weighted average debt maturity of 4.5 years as at 30 June 2019. We also entered $215 million of additional interest rate swaps in the latter part of the year to minimize future interest rate volatility and to take advantage of historically low interest rates. As a result, 91.2% of the REIT's debt is hedged, and the weighted average hedge maturity is 4.3 years.

I'll now hand back to Avi to provide an operational update and portfolio overview.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [4]

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Thank you, Kerri.

Turning to Slide 12. An important part of our strategy is to grow and enhance our portfolio through accretive acquisitions. During the year, we transacted $881 million of property, which consisted of $707 million of acquisitions and $174 million of divestments. The $707 million of acquisitions for the year were diversified across retail sectors including office, industrial, long WALE, single-tenant retail and agri logistics. The combined acquisitions this year featured an accretive average WALE of 16 years when we include the Inghams lease extensions and increased the REIT's exposure to strong ASX-listed and government tenants. Importantly, a number of these acquisitions were secured off-market, demonstrating the strength and benefits which the Charter Hall platform provides to CLW.

In the office sector, we acquired $314 million of office property anchored by high-quality tenants in government, Telstra, Thales and also weighted towards key Eastern Seaboard markets. We acquired $109 million of industrial property during the year, the most recent acquisition being the Brisbane City Council Bus Network Terminal in Eagle Farm, Brisbane. The property is located in a prime industrial precinct in close proximity to Brisbane Airport with direct access to major motorways. It features triple net lease to Brisbane City Council with 19 years remaining at acquisition.

Over to Slide 13. During the year, we invested $77 million in long WALE single-tenant retail which included increasing our investment in the LWIP portfolio of 61 properties on triple net leases to ALH Group with a WALE of 15 years at year-end. We also made investment in the agri logistics sector with the acquisition of a national portfolio of 27 properties on triple net leases to Inghams Group. The portfolio was acquired with a WALE of 16 years which we subsequently extended to just under 25 years. The lease extensions further demonstrate Charter Hall's strong relationships with our tenants and our ability to work with tenants to achieve mutually beneficial outcomes. We also completed 2 divestments during the year being 50% of the ATO building in Adelaide and the Grace Willawong industrial property in Brisbane.

Turning to Slide 14. We actively managed the portfolio to enhance value and secure long-term income for our investors. Today, we've announced that we have agreed terms with Woolworths Group to extend the current lease term at Hoppers Crossing to December 2025. Our market incentive will be paid in relation to the extended term. And the lease otherwise remains on substantially the same terms with net passing rent being maintained as are the 3% per annum fixed increases. As part of the lease extension, we've also agreed for Woolworths Group to be able to assign the lease to Linfox, consistent with the new services agreement between Woolworths and Linfox to provide warehouse logistics services to BIG W stores. It's great to be able to announce this lease extension. As the next major lease expiry of significance in the portfolio, extending this lease out to December 2025 improves the WALE of CLW and, as a result, the earnings certainty for our investors.

Shortly after the acquisition of the Inghams portfolio, we entered into an agreement with Inghams to extend the lease terms on a number of properties in that portfolio. The leases of properties representing approximately 62% of the portfolio by income were extended for terms ranging from 22 to 34 years. As a result, the WALE of this portfolio increased from 16 years to just under 25 years.

We also completed 2 lease extensions with SUEZ with 2 new 20-year leases entered into at both properties located at Newton and Davis Road in Wetherill Park. This forms part of a portfolio of 11 triple net lease properties to SUEZ which CLW purchased from SUEZ on a sale and leaseback transaction in December 2016. These lease extensions further demonstrate our strong relationship with tenant customers and our ability to work with tenants to achieve mutually beneficial outcomes. And I would like to thank the efforts of our asset management team in achieving this great outcome for our investors.

Turning to Slide 15. In the following slides, I'd just like to provide an overview of our portfolio and outline some key attributes to the portfolio. Slide 15 is our portfolio overview. During the period, we were able to grow and enhance the portfolio through acquisition and positive valuation movements. The value of the portfolio is now approximately $2.13 billion. During the period, we further enhanced the portfolio with $707 million of acquisitions. These acquisitions have increased the number of properties of the REIT to 118 million. Our WALE has increased as a result of the transactions and lease extensions completed in the period with a long-dated portfolio WALE of 12.5 years at year-end. The properties that are subject to fixed rent increases is 68% of the portfolio with a portfolio weighted average rent review of 2.8%. Our portfolio occupancy is 99.6%, and our average portfolio cap rate is 5.95%.

Turning to Slide 16, an outline of our tenant customers and tenant diversification of the REIT. The portfolio features a high-quality portfolio of long WALE properties leased to high-quality tenants including Woolworths, Coles, Westpac, Telstra and Commonwealth and State governments. The acquisitions completed during the period further diversify the tenants in the portfolio and introduce additional high-quality tenants to the portfolio as well as increasing the weighting of the portfolio to government tenants.

Turning to Slide 17 and the industry diversification of our tenant customers. Within our portfolio, approximately 98% of tenants are ASX listed, government or multinational corporations with the vast majority of these tenants operating in nondiscretionary industries. For example, the government including ATO and Australia Post are an example of our nondiscretionary tenant exposure. We also have a high proportion of tenants operating in the nondiscretionary grocery sector such as Woolworths, Coles, Inghams and Metcash.

Turning to Slide 18. As can be seen from the chart of this slide, the REIT's portfolio has a long-dated lease expiry profile and reflects a low risk position relative to our peers in the sector. Our portfolio WALE has increased 16% this year from 10.8 years at the start of the year to 12.5 years at year-end. I'd like to point out that our WALE today is longer than it was at the CLW IPO in November 2016. In November 2016, the portfolio at that time had a WALE of 12.1 years. Had we done nothing, that portfolio WALE would now be 9.5 years at June 2019 versus the 12.5 years we're reporting today.

Turning to Slide 19 and the geographic diversity of the REIT. The properties of the REIT are diversified across sector, tenants as well as geographically. During the period since IPO, we've increased the number and value of properties in the portfolio located along the Eastern Seaboard of Australia, and we further increased this during the period with the acquisitions and divestments we've completed.

These preceding slides provide investors with an overview of what we feel are some of the important attributes of the REIT and demonstrate the high-quality nature of CLW. The intention of management is to continue to diversify the portfolio by tenant and geography and maintain a long portfolio WALE through renewal and lease extensions as well as through acquisition.

Turning to Slide 21. I would now like to provide an update on our earnings guidance for FY '20. Barring any unforeseen events and no material change in market conditions, CLW's guidance for FY '20 EPS is $0.28 per security. This represents 4% annual growth on FY '18 operating EPS. The REIT maintains a target distribution payout ratio of 100% of operating earnings.

Finally, I'd like to thank the important contribution of the CLW team and the broader Charter Hall management platform in delivering the strong performance of CLW which we have outlined here today.

That concludes the presentation, and I would now like to invite questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Suraj Nebhani from Citigroup.

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Suraj Nebhani, Citigroup Inc, Research Division - Assistant VP & Associate [2]

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Just on the comp NOI number, I think the number provided in the half was 2.8%. Can you please provide the number for the full year '19?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [3]

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So the full year is the 2.6%.

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Suraj Nebhani, Citigroup Inc, Research Division - Assistant VP & Associate [4]

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Okay. All right. And presumably there's a lot -- given the transaction activity, not a large portion of the portfolio is now in the comp basket.

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [5]

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Can you repeat that?

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Suraj Nebhani, Citigroup Inc, Research Division - Assistant VP & Associate [6]

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I'm saying presumably given a lot of the transaction activity I'm assuming not a large portion of the portfolio is now in the comparable basket. Is that fair to say?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [7]

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Yes.

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Suraj Nebhani, Citigroup Inc, Research Division - Assistant VP & Associate [8]

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Okay. And just on the debt cost, I think at the time of the raising, the number provided was 3.7%. Today's presentation said it's 4%, and floating rates have actually fallen since then. So can you explain what happened here?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [9]

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There are 2 different ratios provided. The 4% was for FY '19 looking backwards as a whole, so it would reflect the higher base rates throughout the beginning of the year. And 3.7% is where we're sitting looking forward for FY '20.

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Suraj Nebhani, Citigroup Inc, Research Division - Assistant VP & Associate [10]

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Got it. Okay. So 3.7% is what is included in guidance. Sorry, I just wanted to confirm 3.7% is what is included in FY '20. Is that correct?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [11]

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Yes, it is.

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Operator [12]

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Your next question comes from the line of Darren Leung from Macquarie.

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Darren Leung, Macquarie Research - Analyst [13]

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Just 2 quick ones from me. Perhaps as an extension of the last question on guidance, so I mean since June, to that point growth rates have come down. But just the difference in the 0.25% growth rate in guidance of 4% versus 3.75%, is that mainly cost of debt attribution?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [14]

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It's more when we went out with the equity raise, we were still finalizing our FY '20 asset level budget, so we're a bit of conservative in providing the 3.75% growth. And now that we finalized all the budget from the bottom up, we're comfortable to stand behind the 4%.

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Darren Leung, Macquarie Research - Analyst [15]

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Understand. Where was the concern on the asset level we should think about?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [16]

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It wasn't a concern. We just -- given the timing of the equity raise, we had to announce guidance not earlier than we normally would have.

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Darren Leung, Macquarie Research - Analyst [17]

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Understand. I suppose put another way, where were you more conservative?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [18]

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Just across the board taking a higher-level view.

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Darren Leung, Macquarie Research - Analyst [19]

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Understand. And then second question, just on this Woolworths lease extension to Linfox, obviously, a good outcome and you guys saw covenant as such. Is there a reason why Linfox didn't take the lease themselves?

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [20]

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Well, the arrangement is, at the moment, we have a lease to Woolworths Group. So the first, I guess, step of that transaction is Woolworths extended the lease, sort of taken it out to a December 2025 expiry. And then consistent with their service agreement that they now have with Linfox and BIG W, they have the ability to assign the lease to Linfox which is effective from September of this year. So that was -- that's the nature of the deal. I mean it was an existing lease which was extended and then an assignment that we've agreed to.

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Darren Leung, Macquarie Research - Analyst [21]

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Understand. Can you give an indication as to what the incentive is?

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [22]

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Yes. It's a market-related incentive. And for these types of properties in Melbourne at the moment, that's sort of in the 35% to 40% range for the extended term, not for existing term, [for 5 years].

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Darren Leung, Macquarie Research - Analyst [23]

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So for the 5-year period.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [24]

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Yes.

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Darren Leung, Macquarie Research - Analyst [25]

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Okay. Understand. Do you know how the tenant is taking that?

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [26]

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Yes. They're taking it as a rent rebate over the term of the extension. But I think it's important from our perspective, whether they take it up front or over the term of the lease, for us, we look at it the same way. It's an incentive that's provided to the tenant, and they can choose how they wish to take it.

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Darren Leung, Macquarie Research - Analyst [27]

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Yes. Understand. Can you give an indication as to what the face rents did on -- all will do on the commencement date as a new term?

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [28]

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So the face rent is not changing. It stays the same.

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Operator [29]

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Your next question comes from the line of Richard Jones from JPMorgan.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [30]

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Avi, just interested in your thoughts on, obviously, it's been an active year in FY '19, just how you view the acquisition environment moving forward and, I guess, what's on your desk at the moment.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [31]

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I can answer the first part of the question. The acquisition environment moving forward is -- I think it's really positive. I mean the markets are active. There's plenty to look at that we're seeing of good-quality deal flow. We've got the benefit of being part of the Charter Hall platform which has great access to deals that CLW gets to see. And I -- look, I see that continuing at the moment. I think for us, given where we're placed, it's really good. Our cost of debt's coming down. Our -- support of our investors is really good. So I think for us, it's looking really positive for the year ahead. In terms of what's on my desk at the moment, that's not really something I can comment on.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [32]

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No, of course not, it wasn't meant to be that specific. Sorry, I meant more along the lines of are you looking at active opportunities right now.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [33]

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We're always, always looking at opportunity. Like I said, like we see probably at least a transaction a week from Charter Hall, and we filter that and work out what could work for CLW. But we see a lot of deal flow which is a great part of being part of the Charter Hall platform.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [34]

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Okay. And then just on -- obviously, you made a couple of sales for the year. Just any assets that you think you might move on in FY '20.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [35]

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No. We got no plans to sell anything at this point.

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Operator [36]

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Your next question comes from the line of David Lloyd from Citi.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [37]

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Just a quick one. Just a follow-up to Richard's questions. Avi, just what's in guidance with regards to acquisition?

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Kerri Leech, Charter Hall Long WALE REIT - Head of Finance [38]

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We haven't assumed any acquisition activity.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [39]

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All right. So presumably anything that -- most acquisitions will be accretive. So based on historical performance, we'd probably see upside with the original guidance.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [40]

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We can't comment. You're going to have to form a view on what you're seeing, yes.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [41]

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Is it more likely that you guys will be net acquirers in the year ahead or net sellers?

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [42]

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I'd like to think we'll be net acquirers, but that's going to be subject to our ability to fund deals as they come up, but yes.

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Operator [43]

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(Operator Instructions) There are no further questions at this point. I would like to hand the call back to Mr. Anger for closing remarks. Thank you.

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Avi Anger, Charter Hall Long WALE REIT - Fund Manager [44]

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Thank you, and thanks, everyone, for joining the call today. Really appreciate your support during the year, and I look forward to meeting you for one-on-one meetings over the course of the next few days.