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Edited Transcript of CQR.AX earnings conference call or presentation 15-Aug-19 11:30pm GMT

Full Year 2019 Charter Hall Retail REIT Earnings Call

Sydney, New South Wales Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Charter Hall Retail REIT earnings conference call or presentation Thursday, August 15, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine Kelly

Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager

* Gregory Chubb

Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited

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Conference Call Participants

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* Adrian Dark

Citigroup Inc, Research Division - Director and Analyst

* Grant McCasker

UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate

* Pete Davidson

Pendal Group Limited - Head of Listed Property

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

* Stuart McLean

Macquarie Research - Research Analyst

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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 Retail REIT 2019 Full Year Results Briefing. (Operator Instructions) Please note that this conference is being recorded today, Friday, 16th of August 2019.

I would now like to hand the conference over to your host today, Mr. Greg Chubb, Retail CEO. Thank you, sir. Please go ahead.

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [2]

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Good morning, and welcome to the Charter Hall Retail REIT full year results presentation for the period ending June 30, 2019. My name is Greg Chubb. I'm the Retail CEO for Charter Hall and an Executive Director of CQR. Joining me this morning is Christine Kelly, Head of Retail Finance and Deputy Fund Manager of CQR. And we'll start this morning on Slide 4 and look at our key achievements for the period.

FY '19 was a year of delivery for CQR. The portfolio achieved NPI growth of 2.1%. This is up from 1.8% as reported in FY '18. This, in turn, flowed through into EPS growth of 2% per unit, enabling us to lift distributions by the same amount. Our underlying operating performance remains positive. Leasing spreads were up 0.8% from the 366 specialty leasing transactions that were conducted over the period. Our centers continue to deliver positive trading results. For supermarkets in turnover, MAT growth was 4%. Total comparable MAT growth across the portfolio when including specialty sales was 2.8%. We saw visitations to our centers up 1.8% over the period, and we see this as a reflection of the ongoing performance of our supermarkets, the convenience attributes of our centers and their role within their local catchments. Aligned with our strategy, we disposed of 2 assets and acquired 3 high-quality convenience-plus assets, continuing to enhance the portfolio and the fund's future income growth potential. The REIT's portfolio increased in value by $189 million due to development and transaction activity. Valuations across the portfolio remain stable. CQR continues to deliver reliable net property income growth and steady and consistent growth in operating earnings and distributions.

We'll move now to Slide 5 and the REIT strategy. Our strategy remains unchanged, and we continue to focus on being the leading owner and manager of convenience-based retail. Our focus is that our portfolio of centers are the leading convenience offerings in their respective catchments. We achieve this through active asset management, continuing to enhance asset quality and maintaining a prudent capital position. The result of our strategy is that we deliver a secure and growing income stream for our investors.

Now moving on to Slide 6 and the execution of our strategy. Portfolio occupancy remained stable at 98.1%, and as previously noted, NPI growth strengthened to 2.1%. This is up from 1.8% in financial year '18. And over the period, we undertook 175 specialty leasing renewals and completed 191 new specialty leases. We continue to align our capital programs with those of our major tenants and store renewals, and this has seen us extend 10 major tenant leases, delivering a stable portfolio WALE of 6.5 years. We have now also commenced our solar rollout program across an initial portfolio of 14 assets, and I'll go into more detail on the importance of this initiative a little later in the presentation.

As noted earlier, enhancing the quality of our portfolio saw us dispose of 2 smaller assets and acquire 3 convenience-plus assets, namely Gateway Plaza and Campbellfield Plaza, both in Victoria, and Rockdale Plaza in New South Wales. This supports the fund's strategy of curating a portfolio of centers in metropolitan markets that are the dominant convenience centers in their respective catchments. Today, we're also pleased to announce that we've contracted to divest a further 3 assets for total consideration of $60.7 million, namely Katherine in the Northern Territory, Balo Square in Moree in New South Wales and Carnarvon in Northern New South -- Northern Western Australia. Notably, these are 3 of our most remote assets. We will look to redeploy these proceeds from these divestments over the course of FY '20. Also, the redevelopment of Lake Macquarie Square in New South Wales is now complete with the opening of a new Coles supermarket in January and additional food tenancies more recently in May.

Finally, we maintained an active focus with our capital structure, refinancing $445 million of debt facilities and increasing our hedging while also issuing $165 million of new equity in April to support the acquisition of Rockdale Plaza. CQR continues to sit in a strong position with no debt maturing until FY '22.

So on that note, I'll now hand over to Christine to run through the financial results, and I'll return to discuss the operational performance in a little more detail. Thanks. Christine?

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [3]

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Thanks, Greg. Our operating earnings and distribution can be found on Slide 8. The 2% growth in operating earnings and distribution shows the benefits of the asset recycling strategy that we've continued to undertake over the past 12 months. Our FY '19 distribution of $0.2876 per unit is a 2% increase on FY '18 and represents a 92.4% payout ratio.

Over the past 12 months at 30 June, we have divested 2 assets and reinvested into 3 convenience-plus assets. Our joint ventures grew through the partnership with MTAA Super via the CPRF fund with joint investments in Gateway Plaza and Salamander Bay. The primary driver for the 1.7% reduction in total net income is the timing of these transactions, which has reduced the average wholly-owned assets held by $183 million. This has been offset by the additional NPI from the completions of our redevelopments in Wanneroo in Metropolitan Perth and Lake Macquarie in New South Wales over the period and the reinvestment into joint venture assets.

Finance costs have also reduced to the timing of transactions over the period, reducing weighted average drawn debt in conjunction with the lower interest rate environment. The timing of acquisitions and divestments has also resulted in a reduction in other expenses.

Despite the lower net income as a result of the asset recycling strategy, this has been offset by strong underlying same-property NPI growth of 2.1%, strengthening from 1% 24 months ago and 1.8% 12 months ago. Coupled with finance savings, this has delivered the positive 2% operating earnings growth for the period.

Turning now to Slide 9 and the balance sheet. At 30 June 2019, cash has returned to normalized levels. Our total investment properties increased by $180 million -- $189 million over the 12-month period, including our wholly-owned and joint venture properties. This is due to the net impact of acquisitions and divestments of $112 million and the capital expenditure totaling $77 million. The $77 million consists materially of the capital spend at Lake Macquarie Square redevelopment completed over the period. Over the last 12 months, we also undertook capital spend aligned with our major lease extensions and associated refurbishments, improving convenience and amenity for our customers. In addition, we invested in our infrastructure related to our energy and waste management strategies, mitigating forecast cost pressures.

Taking into account our cash position, net borrowings have increased $41 million due to the impact of the new acquisitions over the past 12 months and our capital spend, offset by the capital raise as part of the Rockdale Plaza acquisition. NTA has decreased primarily due to the movement in the mark-to-market value of our interest rate swap portfolio in a falling interest rate environment. NTA has also been impacted by the write-off of acquisition costs on the $275 million of acquisitions over the period.

Our key valuation metrics are shown on Slide 10. The entire portfolio is externally revalued during the year with 83% revalued at both December 2018 and June 2019. During the period, the portfolio cap rate moved 3 basis points to 6.18%. The movement in cap rate was offset by the income growth over the period resulting in a stable portfolio valuation at 30 June 2019. The revaluations' outcomes for 30 June 2019 reflects the quality, defensive attributes and the income growth of our portfolio and reinforces the active asset management strategy undertaken by CQR over the last 24 months.

Slide 11 shows the key highlights of our capital management. Prudent capital management remains a core area of focus for the fund to ensure that we can execute on strategy and deliver a secure and growing income stream. During the period, we delevered the balance sheet by completing the $165 million capital raise associated with the $142 million Rockdale Plaza transaction, with $150 million placed through institutions and $15 million through the UPP. It was another active 12 months refinancing $445 million of debt across new and existing banks with new maturities across 2023, 2024 and '25. This means we have no further debt maturities until FY '22. The weighted average debt maturity is 5 years with weighted average cost of debt now at 3%.

We took advantage of the lower swap rate environment during the year and extended and increased hedging to 75% at 30 June. Our forecast 5-year average interest rate hedging is 59%. Our balance sheet gearing of 32.9% sits comfortably at the lower end of our 30% to 40% target range. The ICR increased for the period due to reduction in average debt balance over the period in a falling interest rate environment. Our liquidity position remains strong at $143 million at 30 June 2019. This leaves our balance sheet in a strong position to continue to enhance the portfolio quality and fund future activity.

Now back to Greg to present the operational performance of the fund and our outlook.

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [4]

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Thanks, Christine. And we'll turn now to Slide 13 and look at the portfolio summary. And our portfolio continued to deliver defensive and dependable performance. We have a well-balanced geographic spread of assets. When we include the recent acquisitions of Gateway Plaza and Campbellfield Plaza, our Victoria exposure has risen 4% over the past 12 months and now represents 14% of the total portfolio. Importantly, our weighting to the Eastern states is up slightly to 80%. At an operational level, this translates to delivering consistent performance and income growth.

During the period, the portfolio delivered total MAT growth of 2.8%, largely driven by supermarkets that were up 3.7%; mini majors were up 2%; and in the specialty space, retail services were up 1.8%. And as noted earlier, our portfolio WALE remains stable at 6.5 years following 366 specialty leases and 10 new major leases and extensions, which consisted of 8 supermarkets and 2 discount department stores. This remains a core strategic focus for the fund. And as demonstrated through the chart at the bottom right-hand side of the slide, that shows the portfolio WALE remaining largely unchanged over the last 4 years. The portfolio occupancy is also unchanged from F '18 at 98.1%, and these results translated into a resilient 2.1% NPI growth, and that's up from 1.8% on the prior corresponding period.

So we'll look now at our tenant customer profile in more detail on Slide 14. The defining characteristic of the portfolio is the solid and reliable nature of our rental income. 93% of our income now comes from nondiscretionary retailers, and nearly half of all rental income is derived from our major tenants, namely Woolworths, Coles, Wesfarmers and ALDI-related businesses. Pleasingly, ALDI is now our fifth largest tenant customer with representation increasing from 6 to 9 stores over the period. We also introduced Bunnings to the portfolio with the acquisition of Gateway Plaza and our first Officeworks with the acquisition of Campbellfield Plaza. Importantly, when we look at our exposure to any one specialty retailer, it remains limited, and we retain a clear bias towards everyday needs and convenience-based retail.

And looking at our supermarkets in more detail on Slide 15. It's clear that supermarkets remain the foundation of our convenience-based offering now with 75 supermarkets across our portfolio of 58 centers. Our portfolio of supermarkets delivered MAT sales growth of 3.7% over the period, whilst our supermarkets in turnover were slightly higher at 4%. Importantly, the performance of CQR supermarkets is significantly higher than the Urbis industry benchmarks and averages, and this demonstrates the defensive and resilient nature of our portfolio and the dominant position of our centers within their respective catchments. This translates to delivering consistent and reliable returns for our investors.

The number of supermarkets in turnover has increased to 56%, with an additional 17% of supermarkets within 10% of their threshold. Our portfolio of supermarkets, including those in turnover, continues to be evenly balanced between Coles and Woolworths and coupled with an increasing exposure to ALDI. During the period of the 10 new major leases or extensions, 8 of those were supermarkets, and this demonstrates our commitment to preserving and extending our WALE proactively. Over the last 12 months, Coles, Woolworths and ALDI refurbished 13 stores across our portfolio, and this follows a similar level of activity in financial year '18. Importantly, this ensures supermarkets within our portfolio continue to provide the best level of customer satisfaction and, in turn, sales performance.

Innovation, customer service and shopper experience are a core focus of our supermarkets. In addition to the 13 stores refurbished, during the period, Coles and Woolworths also extended the rollout of click-and-collect facilities across our portfolio to now 24 locations, continuing to deliver the most convenient shopping experience. By the end of this financial year, we anticipate approximately 50 of our supermarkets will include click-and-collect facilities.

And now to Slide 16 and our specialty tenants. Over the past 12 months, we've completed 366 specialty leases consisting of 191 new leases and 175 renewals. We maintain positive leasing spreads at 0.8% for the period, with new leases achieving 2.4%, and that was up from 0.9% at June 2018. Incentives on new leases remained stable at approximately 11.3 months, and we continue with our policy to not incentivize on renewals.

Our portfolio tenant retention rate remained strong at 82%. Sales productivity improved, and our specialty occupancy costs remained steady and sustainable at 10.9%. Nonreporting categories like essential services, including medical, continue to grow in number, whilst discretionary tenants like jewelry, homewares and fashion remains limited as a proportion of the total specialty tenancy mix. For those interested, the specialty MAT growth mix by category and geography can be found in Annexure 10 of the appendices.

Over to Slide 17 and just looking at our acquisitions and divestments. Our recent acquisition activity is a continuation of our strategy to enhance portfolio quality by recycling out of lower growth properties into properties that offer better-quality earnings and growth prospects. Over the past 24 months, the fund has disposed of 17 properties for a total consideration of $387 million. And during financial year '19, we acquired 3 quality properties for a total of $275 million, bringing the total number of properties in the portfolio down from 71 to 58 over the last 2 years. This has sent the average asset size over this 2-year period increase from just under $39 million to just under $55 million. As you can see in the table at the bottom of the page, the recent acquisitions complement and enhance all of CQR's portfolio metrics, demonstrating our commitment to deliver sustainable income and earnings growth for our investors.

Now turning to Slide 18 and sustainability. Sustainability remains a critical part of enhancing our portfolio quality and essential to Charter Hall's approach to property management. Across the CQR platform, we continue to explore opportunities to introduce sustainability initiatives that enhance returns for unitholders. As referenced at our half year results, we have recently entered into power purchase agreements, or PPAs, to deliver our solar rollout program across an initial portfolio of 14 assets, and installation of those is well underway. I'm also pleased to advise that the solar panels associated with this initial portfolio will deliver 40% of the energy needs of those 14 assets or approximately 25% of CQR's total portfolio energy needs. Importantly, the PPAs provide electricity price certainty for the operation of our centers at a lower cost than the prevailing electricity market.

During the period, we implemented waste management programs to double landfill diversion rates across the portfolio, and additionally, we have recycled some 90 million containers through our ongoing recycling partnership with TOMRA here in New South Wales. In addition to our sustainability initiatives, we also are aimed to ensure that our centers provide support and engage with the communities in which they operate.

And our tenant customer relationships is outlined on Slide 19. Our tenant customers are at the heart of our business and core to our decision-making. Our engagement, service levels and dialogue with them is critical to achieving our strategic objectives. As part of our ongoing focus annually, we undertake the industry-recognized Net Promoter Score survey with Monash University. And over the past 12 months, the Charter Hall Retail management team has continued to act on the feedback from the financial year '18 survey. Pleasingly, our people, their commitment to growing relationships and communicating are recognized by our tenant customers as our greatest strengths and our key drivers in maintaining positive tenant customer retention. It's this commitment by the Charter Hall management team that creates positive partnerships with our tenant customers.

Now finally, moving to Slide 21 and looking at our summary and outlook. Our focus on convenience-based retail will continue to deliver long-term sustainable growth in earnings for our investors. This growth is underpinned by the strength of our supermarkets coupled with food retailing and nondiscretionary needs and services. We forecast supermarket sales will remain strong, underpinning customer visitation growth and underlying portfolio performance. Going forward, we will maintain our commitment to shape the portfolio, both in terms of tenancy mix, pleasant experience and enhancing the centers within the fund. This is central to the REIT strategy. Barring unforeseen events, the REIT's FY '20 guidance for operating earnings is to grow by 1.5% to 2% per security over FY '19. The range is subject to the timing of acquisitions and divestments. And as highlighted at the beginning of the presentation, we have contracted to divest 3 smaller centers post-balance date, and we'll be looking to redeploy those proceeds over FY '20. The distribution payout range is expected to be between 90% to 95% of operating earnings.

And with that, I'll now invite any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Stuart McLean from Macquarie.

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Stuart McLean, Macquarie Research - Research Analyst [2]

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Just had a question on NTA and cap rates. Just looking through some asset-specific numbers. So Salamander Bay, cap rate there seems to have increased from 5.75% to 6% over the last 6 months; Bateau Bay, similar, from 5.75% to 6%. Can you just run through the changes there? And then also maybe your comment on this -- the convenience-plus strategy and why that's sort of the right route to go down when these sorts of assets seem to be having their cap rates really low.

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [3]

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Thanks for the questions. So those assets that you referred to that have seen cap rate decompression, that has been offset largely by income growth. So the underlying quality of those assets remains. And our strategy to invest in convenience-plus assets that offer good income growth is core to our strategy. So all of those assets you've mentioned are dominant convenience assets in their respective catchments and still generating significant income growth and performance.

So across the year, we externally revalued the portfolio. And in -- with 83% of our assets by income, we externally revalued them twice. We saw 1 basis point of compression in the first half, and that was offset by 3 basis points of decompression in the second half, and the portfolio value remains stable. So that's the summary of the valuation process over the year.

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Stuart McLean, Macquarie Research - Research Analyst [4]

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And maybe, can you go into maybe why the cap rates to those assets have widened? Is it transactional evidence? Is it perceived riskiness of the larger subregional assets in your portfolio?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [5]

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Yes. Look, we change our valuers regularly, and in some instances, it's just a change of methodology from the valuers. But importantly, the value of the portfolio has remained constant. We've seen 15 assets with cap rate decompression in the second half, and we've been able to maintain the portfolio value.

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Stuart McLean, Macquarie Research - Research Analyst [6]

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Okay. And then maybe switching to guidance. In the additional divestments of $60 million, I think you just mentioned at the end of your prepared remarks that you'll look to acquire assets throughout the course of the year. How are you thinking about your balance sheet gearing both on a net debt -- so tangible assets also on a net debt-to-EBITDA basis? How much headroom do you feel that you have?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [7]

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I'll just -- I'll answer the first question, and I'll defer to Christine on the second part of your question. But with regard to the divestments of the 3 assets that we've announced today, namely Katherine in the Northern Territory, Moree -- or Balo Square in New South Wales and Carnarvon in Northern Western Australia for $60.7 million, they're 3 of our most remote assets, and we will look to deploy those proceeds into F '20. You should note that the timing of those settlements is in the second half of the financial year, which gives us time to redeploy those funds. I'll hand to Christine.

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [8]

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Stuart, also, with respect to the leverage, as you can see, over the last 12 months, the balance sheet gearing has only moved 0.2%, and we've obviously had a high level of transactions in that period. So we're very comfortable that we can manage that leverage within the 30% to 40% band. And you can demonstrate that with -- throughout the whole of the 12 months, we managed to keep it at the lower end of that band.

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Stuart McLean, Macquarie Research - Research Analyst [9]

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And maybe net debt to EBITDA, where do you currently see that? I think your rating's at 6.25x. Whereabouts are you there?

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [10]

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Yes, so look, we remain slightly elevated on that, and we will be discussing as usual with Moody's post results.

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Stuart McLean, Macquarie Research - Research Analyst [11]

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Does that inhibit your use of using debt to acquire assets?

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [12]

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I think in going back to Greg's comment, when we look to acquire assets, we're looking for those with strong income growth, so obviously, that should improve your net debt to EBITDA over time.

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Stuart McLean, Macquarie Research - Research Analyst [13]

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Okay. If you are kind of above net debt to EBITDA from Moody's and you continue to use that, obviously, that's an impact there so you might make -- use more equity to fund the transaction similar to Rockdale.

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [14]

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Yes, look, that's -- we've got lots of sources of capital when we look to acquire and divest assets. One of them is equity in conjunction with selling assets.

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Stuart McLean, Macquarie Research - Research Analyst [15]

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And then maybe just also on guidance. I'm looking at the bridge. I think it's on Page 24. Just the other category there, that's a drag on earnings this year since you had a 10% increase in that kind of other costs or that $0.4 a share. Can you just run through some of the components there and why you're calling out the increase in the base management fees? Is there a hurdle that's been reached or anything like that?

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [16]

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No. For -- with respect to the increase in the base management fees, that's basically because the weighted average assets that we'll be holding -- we have forecast to be holding for FY '20 is higher than in FY '19. In conjunction, as you'd be aware, there's a lot of hardening in the insurance market so there is some increases in insurance cost in that line as well.

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Operator [17]

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Your next question comes from the line of Adrian Dark from Citi.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [18]

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Just 2 questions in relation to guidance input, if I can, please. Are you able to confirm what you're forecasting for comp NOI growth and also for the weighted average cost of debt in '20 versus FY '19, please?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [19]

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Yes. So comp NOI growth is at 2%. And debt, Christine?

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [20]

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Yes, weighted average cost of debt is 3%.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [21]

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Okay. That's an FY '20 number versus 3.8% in FY '19?

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Christine Kelly, Charter Hall Retail Real Estate Investment Trust - Head of Retail Finance & Deputy Fund Manager [22]

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Yes. So average weighted average cost of debt over FY '19 was 3.6%.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [23]

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Okay. And then just in relation to the development pipeline, I think I'm correct in saying that there might not be a slide on a future pipeline in this presentation today. Is that correct? Are you able to comment on, I suppose, your expectations for developments going forward, please?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [24]

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Yes, so I guess we've been guiding the market progressively over the last year or so that our development pipeline has been moderating. We've successfully delivered Wanneroo and Lake Macquarie over the year. And the projects that we've been talking to previously, namely, Allenstown and Rockhampton and Carnes Hill in Sydney, the feasibilities associated with those projects are not reaching the hurdles that we would be comfortable with. So we've got more work to do on those projects before we would look to activate them. So our development pipeline -- or redevelopment pipeline for FY '20, there is no development activity, and we've diverted our attention to working on smaller capital projects associated with our major tenant expiries and lease extensions and refurbishments. And we're seeing those as really unique value add-related projects.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [25]

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Okay. And just finally from me, Greg, are you able to comment on what you're seeing in terms of broader operating conditions? I think at the last result, you were talking about sort of the reasonably subdued backdrop about the benefits of recycling. Are you seeing it similarly today? Or is there any shift as you view it?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [26]

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From what we spoke to at the half year, it really hasn't changed. The -- look, the core focus for us is around sales generation of our supermarkets. That drives our footfall. We saw footfall growth of 1.8% over the full year, and it's largely driven by the performance and relevance of our supermarkets, so that's a key attractor of our assets.

In the specialty leasing space, we're able to complete 366 deals over the year, and we did more new leases than renewals, which is a sort of a change in composition for us. Fair to say over the -- probably the final quarter of the financial year, we did see a slight uptick in leasing activity. So we've been able to print positive spreads on new leases of 2.4%. And incentives have remained stable at 11 months -- just over 11 months.

So the general market hasn't really changed for us. And I guess the position of our assets, more importantly, and the supply and demand equation of our assets, we've got very limited amounts of specialty floorspace in our centers in composition to our major tenant floor space. So it's not as if we're dealing with oversupply issues. We've got a really good balance of specialty space to majors, and that's allowing us to keep good stable occupancy at 98.1% and to drive for performance in our tenancy mix.

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Operator [27]

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

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [28]

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Just a question on the supermarket sales growth. If we sort of adjust the 52 weeks, it's sort of running at around 2%, but you're saying 30% of the portfolio has been refurbished. Do you have the Split-out of sort of the sales growth? Or like, what are the recently refurbished stores doing relative to the rest of the portfolio?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [29]

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Yes, look, most of the stores in the portfolio have been refurbished at some point in time over the last 5 or 6 years. So the refurbishment activity is going back in and topping up concepts with regard to some of our higher-performing supermarkets. So the sales growth that I would point to probably relates more to those of our supermarkets in turnover rent, which is a little bit higher than that 2%. But then we've got some assets that we've acquired more recently that we are in the final throes of seeing refurbishment activity on those that we'll talk to at the half year, and that's where we are hopeful of seeing some, I guess, above network sales growth. But we do see uplift in sales when we do have refurbishment activity from our supermarkets.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [30]

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So how many stores are you looking to refurbish in FY '20?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [31]

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Look, it will be probably a similar number to what we've undertaken in F '18 and F '19. So we've got a fairly good run rate there. And we're finding that when we co-invest alongside our major tenants, when we go back into our centers and do some capital works and refurbishment activities, we do get a greater uplift not just from our supermarkets, from also from our specialty tenancies, and it also allows us to lease to better quality tenants in some instances as well.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [32]

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Okay. And then on supermarket sales growth in '20, do you have an outlook on supermarket sales growth?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [33]

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Yes, we'd expect them to grow at a similar level to '19. We've just reviewed our July sales performance in the last day or so, and it's sitting at levels -- well, July was at similar levels to what we reported for the full year.

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Operator [34]

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(Operator Instructions) 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 [35]

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Just wondering if you can contrast the performance of the neighborhood assets versus convenience-plus kind of perhaps touching on like-for-like NPI growth, sales growth and spreads between the 2 different categories.

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [36]

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Yes. There's no differential between the convenience and convenience-plus assets. So -- and we've been talking on a consolidated level now for 18 months or so with regards to the portfolio, and we're not seeing any differential in performance between convenience or convenience-plus. The attributes of the assets remain constant, and the performance of the supermarkets and the footfall and all of the major leasing metrics are constant between those 2 categories.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [37]

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Okay. Just second question. Just obviously, you would have noted Vicinity's comments earlier in the week around withdrawing some assets they had in the market. I'm just interested in your thoughts on the investment market in the subsectors where you operate and where you think kind of the better opportunities lie.

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [38]

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Yes. Well, look, we're delighted with the 3 acquisitions we made over the financial year, and we think we acquired those properties well and they're welcome additions to the portfolio. At the same time, the assets we've been selling and we've been quite active on the sell side over the last 12 to 18 months as well and announcing 3 further acquisitions today, we're seeing that -- sorry, divestments today, we're seeing that there's interests from the market with regards to the sort of properties that we're selling. And there was a good transaction in recent weeks with the divestment of Leichhardt in Sydney at, I think, a 5.4% yield.

So the interest from investors in convenience-based assets and supermarket-based assets remains really strong. But yes, so we're seeing quite a lot of transaction activity. We continue to assess the market for opportunities as we do on a very regular basis, and we'll be looking to continue the portfolio curation program that we've been really, really strong with over the last few years.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [39]

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Okay. And can you touch on just what the exit yield is on the 3 assets you've announced and how they compare to book values perhaps from 12 months ago?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [40]

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The 3 assets that we've announced today were divested at their book values, and they were at yields in the 7% range.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [41]

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Okay. And would you envisage selling anything else this year or...

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [42]

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Well, that's something we'll continue to assess, Richard. And as we've said, we'll continue to assess the tail of the CQR portfolio. And if the opportunities are right for us to reinvest those proceeds into other opportunities, we'll look to do that at that point in time.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [43]

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Okay. But nothing active that you've got in the market?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [44]

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No.

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Operator [45]

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Your next question comes from the line of Peter Davidson from Pendal Group.

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Pete Davidson, Pendal Group Limited - Head of Listed Property [46]

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Look, my question is just around the net returns on supermarkets in turnover. Over the history of this portfolio, what's the lowest it's been? What's the highest it's been? And typically, on your divestments of the supermarkets in turnover and the divestment-style assets, so it's really just a bit of getting a bit more detail around that metric.

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [47]

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Yes, it's a good question, Peter. It would have been maybe about 4 or 5 years ago -- about 4 years ago, I think, the supermarkets in turnover dropped down to about 33%, 34%, I think it was, roughly, roughly. And we're probably at the current number at around 56% as high as we've ever been. So the composition of the portfolio is good. And as you know, that number can fluctuate up and down as those supermarkets crystallize their turnover rent into base rent. And pleasingly, we still have around 17% of our supermarkets within 10% of their thresholds. So it just shows the strength of the performance of the supermarkets that we do have in the portfolio.

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Pete Davidson, Pendal Group Limited - Head of Listed Property [48]

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And the divestment assets, what are they typically in or around return of investments in those assets?

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [49]

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Yes, look, some of the freestanding supermarkets we've sold were in turnover rent growth, but the vast majority of them haven't been. I think it's one of the lenses for us in looking at the long-term ownership of those assets and the total returns that we can achieve from those assets.

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Operator [50]

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(Operator Instructions) There are no further questions at this point. I would like to hand the call back to Mr. Greg Chubb for any closing.

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Gregory Chubb, Charter Hall Retail Real Estate Investment Trust - CEO of Retail, Fund Manager & Executive Director of Charter Hall Retail Management Limited [51]

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Thanks, everybody, for joining us this morning. We appreciate your time and do look forward to catching up for one-on-ones over the course of the next few days. And have a good day. Thank you.