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Edited Transcript of SCG.AX earnings conference call or presentation 21-Aug-19 11:00pm GMT

Half Year 2019 Scentre Group Earnings Call

Sydney Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Scentre Group earnings conference call or presentation Wednesday, August 21, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elliott C. Rusanow

Scentre Group - CFO

* Greg J. Miles

Scentre Group - COO

* Peter Kenneth Allen

Scentre Group - CEO & Executive Director

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Conference Call Participants

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* Adrian Dark

Citigroup Inc, Research Division - Director and Analyst

* Darren Leung

Macquarie Research - Analyst

* Grant McCasker

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

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

* Simon Chan

Morgan Stanley, Research Division - VP & Equity 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 Scentre Group 2019 Half Year Results Update. (Operator Instructions) Please note that today's conference is being recorded, Thursday, the 22nd of August 2019 at 9 a.m.

I would now like to hand the conference over to your host today, Mr. Peter Allen. Please go ahead, sir.

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [2]

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Good morning. Welcome to Scentre Group's results briefing for the half year ended 30th of June 2019. Joining me on the call this morning is our Chief Financial Officer, Elliott Rusanow; our Chief Operating Officer, Greg Miles; and Cynthia Whelan, our Chief Strategy and Business Development Officer.

I'm pleased to report our financial performance for the half was strong with FFO growing by 3% and distributions by 2%, both in line with our forecast. Our results demonstrate our ability to adapt and grow our business during a period of low economic growth. They reinforce the confidence we have in the long-term sustainability of our business and our platform. We continue to be active in focusing on the customer and investing to deliver what they want.

Our purpose is creating extraordinary places, connecting and enriching communities. Our platform of 41 Westfield Living Centres is regarded as the preeminent portfolio of retail property assets in our markets. Our proposition is simple: We are that third place for the customer alongside their home and work or school. Our relentless focus on the customer and our ability to listen deeply to what they want and act on their feedback allows us to curate a unique offer that delights customers.

Our customer advocacy continues to improve. This in turn inspires frequent visitation and longer dwell times. It is what sets us apart. Annual customer visits continue to grow and exceeds 535 million. Average customer dwell time at a Westfield Living Centre is 81 minutes. As a result, we are able to help our retail partners succeed by enhancing the most efficient platform for them to engage with their customers. This can be seen in the productivity of our platform. An average specialty store on our platform generates annual in-store sales of $1.52 million per store compared to $1.29 million 5 years ago. And occupancy costs as a percentage of in-store sales have also reduced.

By delivering on what the customer wants, we have curated towards experience-based offerings, which continue to grow across our portfolio. We define experience-based offering as those that can be only consumed on-site. Today, 42% of the stores in our portfolio are experience-based. At the same time, we've maintained our focus on the best fashion and lifestyle retailers, and this is further driving customer visitation and dwell times.

All of this is being achieved at the same time as growing our cash flow and distributions for securityholders and maintaining our strong financial position. During the half, we released $2.1 billion of capital from the divestment of the Sydney Office Towers and the joint venturing of Westfield Burwood, both at premium values. We are focused on investing capital to deliver long-term sustainable value for our securityholders and to maximize long-term cash flow.

The capital realized from the transactions is being deployed into our business through providing additional financial capacity for our future activities and the security buyback program of up to $800 million. We're excited about the long-term prospects of our business. Our plan is to continue to invest to gain a deeper knowledge of our customers and ensure they consider our platform as an integral part of their lives.

I'll now hand over to Greg Miles to talk more about our operations and initiatives.

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Greg J. Miles, Scentre Group - COO [3]

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Thanks, Peter. As referenced earlier, we've created the most productive and efficient platform for retail partners to build their brand and engage with their customers. All of our Westfield Living Centres are high-quality retail property assets, all considered leading centers in their respective trade areas, located in areas that benefit from the nation's highest pockets of population growth and adjacent to infrastructure and transport hubs. More than 65% of Australians and New Zealanders live within a 30-minute drive from one of our Westfield Living Centres, demonstrating how connected we are to our customers' lives.

Those retail brands who stay close to their customers, invest in developing their physical and digital platforms, have a unique product offering continue to thrive. We continue to make good progress on developing our capability in understanding the influence of the physical store on retailers' ecosystems sales. The best retailers recognize that in-store sales are only part of a store's benefit. Exposure of a store and its products to many customers also drives online sales through a customer's own site or marketplaces where their products are sold.

Convergence across sales channels will continue to be a key theme for our retail partners and the way they value our space and the audiences we deliver. Recent analysis of our sales data over a 5-year period shows that, on average, specialty stores in our portfolio are not only increasing their sales but becoming more productive and efficient. This means that highly productive stores are becoming more valuable to brands in a converged retail environment.

Total portfolio sales are up $1.2 billion for the year to $24.4 billion. One of the hallmarks of our business is the way we curate our offering, our ability to read where the customer is going and transform our assets beyond simple shopping and into a place where customers want to spend their time, their third place. We are very pleased that our customer advocacy score has continued to improve across the portfolio during the half. The driver of this improvement is not a single item but a combination of our focus on listening and responding to customer feedback through our CX Loop platform. Through this platform, we are constantly identifying local issues and opportunities to improve.

The focus on the customer experience and our evolution to living centers means we have remained focused on curating the right mix. Of the 118 new brands that joined our platform in the past 6 months, almost 60% are experience-based or consumed on-site. Similarly, of the 117 brands that grew their store network with us, more than half are experience-based. We continue to embrace technology and invest in initiatives to improve the customer journey, which lifts advocacy and in turn visitation, audience and sales across all channels for our retailers.

Approximately 70% of our customers travel to and from our centers by car, about 350 million vehicles per year, so it's critical we make their parking experience as seamless as possible. Of the 25 centers in our portfolio that have managed car parking, 15 feature world-leading ticketless parking technology. Enhancing the parking experience is a key focus of Westfield Plus, a membership platform we have recently developed and launched in New Zealand to coincide with our Westfield Newmarket development. It will enable us to have a direct relationship with our customers via our digital platforms.

In the past year, we introduced a customer research initiative called Westfield iQ to complement our unique customer listening tool called CX Loop and to give us a deeper and richer customer insight. Since launch, our online community of more than 11,000 customers have participated in 20 separate research activities. Another way we have embraced technology in our living centers is growing our digital and connected screen advertising business into one of the largest in Australia and New Zealand.

We run our business for the long term and are conscious of doing so with a responsible business mindset and approach in relation to our community, our people, environmental and economic impact. Westfield Local Heroes, our community recognition and grants program, is now in its second year and has struck a chord with our local communities with more than 100,000 people voting for their 2019 finalists. In the fourth quarter, we will announce 3 recipients per living center.

We are a large-scale solar electricity generator with 6 megawatts capacity generating in excess of 9,000 megawatt hours per annum. We have reduced our emissions intensity by 29% since our baseline year of 2009 and have reset our target to reduce this by 20 -- by 35% by 2025.

As Peter mentioned, as part of our highlights, Westfield Newmarket is progressing well. And next week, we'll open the first stage with 40 retail partners, including Farmers, Coco Republic as well as Rebel, Under Armour, Kathmandu, Platypus and many others, just to name a few.

We are very proud of what our team has achieved in Newmarket. We're often asked about our vertical integration, and the benefits of our vertical integration have been most obvious on this project. Where other larger projects in Auckland have been delayed for significant periods and up to 2 years, we have, with a lot of hard work by our team, remained on time and budget. The balance of Newmarket will be completed and opened in stages prior to the year end with our luxury precinct opening early next year.

Looking ahead, we have a $3 billion-plus future development program across Australia and New Zealand. These developments will continue to enhance our platform and create growth and value to securityholders, targeting an accretive yield of more than 7% and IRR of greater than 15%. In Sydney, we are excited to keep moving ahead with plans to expand Westfield Sydney, Sydney's home of luxury, to the adjacent David Jones men's store when David Jones vacates in mid-2020. A stage 2 development approval is expected to be received by the end of the year.

In Perth, the redevelopment of Westfield Stirling will see the center almost double in size and transform to become Perth's ultimate living center. We continue to reinvest in our portfolio to ensure we keep engaging our communities and keeping our centers relevant to our customers. At Westfield Doncaster, we have recently started a $30 million redevelopment of the level 2 dining and entertainment precinct. This project is due for completion in early 2020 and will transform the area into a modern village-style rooftop dining and entertainment precinct.

I will now hand over to Elliott for our financial performance update. Thank you.

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Elliott C. Rusanow, Scentre Group - CFO [4]

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Thanks, Greg. The strong operating performance for the first half underpins the group's FFO of $676 million or $0.1275 per security. This is up 3% on the prior corresponding period and is in line with forecast. EBIT was $952 million, up 5.2%, including comparable NOI growth of 2.3%, the positive contribution from the recently completed developments and the acquisition of Westfield Eastgardens in 2018. FFO before project income was $647 million and grew by 3.2%.

Project income for the half was $41 million compared to $42 million previously. Project income for the half include the contributions from the Newmarket redevelopment, the recognition of profit on the completed Coomera development and sundry projects. Our overheads were $42 million, in line with the prior period.

Cash flow from operating activities was $629 million. After taking into account the $47 million improvement in working capital, cash flow is in line with FFO. We expect operating and leasing CapEx for the year to be approximately $115 million with the year-to-date expenditure under half that amount. The distribution for the first half was $599 million, an increase of 2% per security, also in line with forecast.

Statutory profit for the 6 months was $740 million, including the revaluations during the period as well as the capital gains from the joint venture of Westfield Burwood and the disposal of the Sydney Office Towers.

The group's financial position remains strong with FFO to debt of 11.3% and interest cover of 3.5x. Following the $2.1 billion of proceeds from the transactions completed during the half, balance sheet gearing has reduced to 30.6% at the end of June. It is worth noting that our balance sheet does not ascribe any value to the group's unique operating platform, which generates approximately 16% of our FFO. The group has A-grade credit ratings from S&P, Moody's and Fitch, who rated the group for the first time earlier this year. During the period, we also announced a security buyback program of up to $800 million.

We continue to maintain high levels of liquidity with undrawn committed facilities and cash totaling $4 billion. During the half, we issued EUR 500 million of 10-year bonds. The group continues to have diversified source of funding with 65% of our funding from long-term bonds and 35% from bank facilities. Our debt maturities extend until 2029 with a weighted average debt maturity of 4.5 years. Following the transactions and the repayment of floating rate debt, our interest rate exposure was 96% hedged at 30 June. The average interest rate on our debt for the 6 months was approximately 4.25%.

For the 2019 full year, we expect to achieve FFO growth per security of approximately 0.7%. This includes the impact of the transactions completed during the half. Adjusting to exclude those transactions, FFO growth per security would have been expected to grow by 3%. This is consistent with the outlook provided in February.

These forecasts do not include the expected positive earnings impact from the security buyback program. The distribution for the 2019 year is forecast to grow by 2% per security, again consistent with the forecast provided in February.

I'll now hand back to Peter to conclude.

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [5]

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Thank you, Elliott. It's interesting to note how time flies because during the half, we marked our fifth anniversary of Scentre Group. We're certainly excited about the future of our business and our ability to generate long-term sustainable growth. We will continue to invest in deepening our understanding of the customer and maintain our relentless focus on what they want as we deliver on our purpose, creating extraordinary places, connecting and enriching communities.

I'll now open the call to your 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 Simon Chan from Morgan Stanley.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [2]

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First question I got just in relation to Elliott's slide in Slide 12. I find the way you present that one quite interesting, and it's different to what you've done in the past, how you strip out -- how you're doing FFO before project income and then present FFO inclusive of project income. Is that -- is there a reason behind that? Like are you guys trying to move to an underlying FFO and you're kind of softening the market up for potentially a lot less project income in the coming years given you don't have a lot of developments kicking off?

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [3]

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Simon, as we said right at the start when Scentre Group was formed that we were going to have volatility in terms of the project income line. And we thought that it is important to show that with that project income line proving relatively stable over the last probably 5 years, but we're seeing an underlying growth in terms of our operating earnings before project income as being higher than that stable nature of the project income. So we just thought to highlight that as something which is important to the market to understand.

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Elliott C. Rusanow, Scentre Group - CFO [4]

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There's also no new information. It's just a change of ordering. So...

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [5]

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Yes, fair enough. So how do we think about the project income line if we look on an 18-month basis? Because I see Stirling's moved into pre-developments but you own 100% of that. Newmarket wraps up this year. So am I right to think project income will probably take a bit of a break over the next 18 months?

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [6]

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Well, it's really hard to predict, Simon, because number 1, we'll still be recognizing project income from Newmarket next year as we finish it out and stabilize. We're also looking at commencing Knox, which a joint venture project, next year. We've got a number. We've now looked through it in terms of what we're doing there. Doncaster, Greg talked about what we're doing there with the entertainment and restaurants on the upper level there.

So again, it's going to be volatile. So it's very hard to predict. But we still are driving to deliver space for this growing customer base that we have around our centers. And where we see the demand by retailers and uses for that space, we'll be able to extend that. As we said before, it's very hard to predict. I think it's...

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [7]

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That is fine. A final question just in relation to Appendix 1. It seems like you've been a little bit more parsimonious with the way you disclosed the movement in valuations and cap rates. You started grouping them in 3 buckets now or 4 if you include New Zealand. But were there any major uplifts or downlifts that you'd want to call out in valuation in your assets?

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Elliott C. Rusanow, Scentre Group - CFO [8]

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No. I think if you look at the cap rates, you'll see that they're fairly stable between periods. They actually dropped by 3 points, principally driven by a positive movement in the separately announced Carindale results, which you'll be able to see, and obviously the Burwood transaction, which occurred during the first half. But we have moved to this style of disclosure because we believe that from a balance sheet perspective, it more accurately reflects the cash flow nature of our business and particularly group by productivity of those particular centers rather than the previous disclosure. And it's also in line with the way the global REITs would report their similar statistics.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [9]

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So there were no major positives and negatives that offset each other I guess was my question.

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Elliott C. Rusanow, Scentre Group - CFO [10]

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Well, there's positives and negatives but nothing of materiality to call out.

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Operator [11]

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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 [12]

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A couple of questions. Just in relation to Booragoon, is it your understanding that, that project's on hold?

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Greg J. Miles, Scentre Group - COO [13]

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Yes, Richard, it's Greg. Yes, at the moment, we understand it's on hold. That is clearly a third-party project for Scentre Group. It's owned by AMP. I don't think it's any secret that they've announced they're putting it up for sale. And so we obviously hold design and construction rights there through until '21. And we're hopeful something will get going over that period of time. But at the moment, yes, it's on hold.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [14]

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Okay. So if it doesn't get going before 2021, do you just lose that right there?

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Greg J. Miles, Scentre Group - COO [15]

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Well, I'd like to think that we obviously have a lot of capability and capacity that people recognize. I think that's really been demonstrated through Newmarket, where there's obviously been, if you will, in that market, we have been able to use our vertical integration to deliver there. We obviously have a lot of knowledge of Booragoon, which I'm sure would be valuable to anybody that may end up with that property. So no, look, we would like to think that we could continue there even if it does occur post '21.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [16]

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Okay. And you've called out negative leasing spreads of minus 4.8%. Can you clarify across the 41 centers how many of those centers have positive spreads?

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Greg J. Miles, Scentre Group - COO [17]

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We tend not to look at it that way, Richard, because we're obviously running a portfolio. But it's clearly a mix because assets go through different cycles. There's some that are coming out of development and some getting ready for development. It pretty much picks up everything. But we tend not to look at it on that basis.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [18]

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Okay. Just in relation to the developments, I know there's 3 projects that have come into the mix and 3 that have been withdrawn on the pipeline on Page 10. Can you just kind of step us through the changes there?

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Greg J. Miles, Scentre Group - COO [19]

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Well, Mt Druitt's come in there. That's because we intend to do a restaurant and lifestyle precinct much similar to Doncaster there, which we expect to start right at the end of the year.

Liverpool has come on there because we have an application going through Liverpool Council that will enable a restaurant and lifestyle precinct again to be incorporated there as well as a 10,000-meter office building approximately, which we have a lot of interest. And so we expect that we'll be able to start sooner. It's become a little bit of a university town Liverpool. There's a lot of interest from education with the University of Western Sydney on our doorstep.

We've introduced Doncaster because of the recent major planning approval by the state government down there. And clearly, there's a lot of demand. And I think one of the ones that's been removed is Tea Tree principally because of the success of the recent restaurant precinct driving traffic and visitation that we've pulled that off.

So that's pretty much -- the other one, I guess, that's come off is St Lukes. And again, we've, I guess, pressed the pause button on that. We think given where we're at now with Newmarket, and frankly, a focus on Albany, which we think is now much closer given some commitments with countdown and others over there that we've reprioritized Auckland. That's pretty much the background to the changes.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [20]

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And Whitford is the last one?

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Greg J. Miles, Scentre Group - COO [21]

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Oh, Whitford, yes was the other one. Yes, again, Whitford, with the focus on Stirling and what's happening in Perth, we've again deferred to David Jones inclusion there and pushed it out. And so we've removed that for the moment off the list.

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Operator [22]

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(Operator Instructions) 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 [23]

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Can you maybe touch on Stirling and Knox and talk about sort of the change in sort of the plan from those developments or any recent changes that you may have made to those development schemes?

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Greg J. Miles, Scentre Group - COO [24]

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Yes. Grant, if I talk through Stirling, again, we have said for a while that we certainly believe that Stirling will end up being the best product in Northern Perth when we complete that. We are -- and we think it's sensible in the current market to secure more precommitment from retailers and particularly retailers that are influential to others that follow them. And so we've made great progress there with security, fashion in particular, health and beauty and other major retailer commitments that will provide the confidence to others to follow. So there's no change to the scheme there other than finalizing and securing those commitments.

In relation to Knox, we have reached agreement with Myer to effectively repeat their store. It'll shrink a little bit to about 12,500 square meters. We've reorganized that plans in relation to where Woolworths will be incorporated, where Aldi will be incorporated and the scale of that. And we're just going through the process of amending that plan, putting in place those major retailer agreements. And we expect to start that during next year. It's obviously been a long time coming, but we do think that it's been very resilient during a period of time where a number of our competitors down there have reinvested. And we expect that will be successful once we kick off next year.

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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 [25]

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And one further question is on the balance sheet and interest rate hedges. Elliott, I think you said 96% hedging. Can you just remind us what the policy is and what you think the optimal sort of leverage -- sorry, the hedge rate at this point?

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Elliott C. Rusanow, Scentre Group - CFO [26]

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Obviously, that was a position at 30 June and it is 96%. And we obviously had a lot of proceeds coming in very late in June, which took up our hedging percentage because those proceeds were used to pay back floating rate debt, and there was obviously a higher cash balance on the balance sheet versus the previous corresponding period as a result of that transaction.

We do have -- we have the ability to be 100% hedged. We obviously entered into the period at lower amount. I think we were around 70% hedged at the start of the period. I would point to that we're about to pay distribution in a couple of days. And we're going to -- and we have some debt that is maturing during the second half. So I think that, that hedge percentage will be naturally reducing over the 6-month period.

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Operator [27]

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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 [28]

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Could you clarify for me, please? I can't find the specialty sales per square meter figure in the presentation. Is that number disclosed this period? Or are you able to provide that, please?

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [29]

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No. Adrian, we're not going to be disclosing that anymore. I think the focus is really in total sales rather than sales per square meter because what you find it's relatively -- it's very volatile given the nature of when you're adding space to that it just makes it kind of a meaningless number. So we've decided that it's not appropriate. It's not the way that we look at our business. We look at our business in terms of the total sales that our retailers are able to achieve through their stores. And as I've said in the call, yes, we're really pleased because when you look at the overall productivity, the average store in our portfolio does over $1.5 million of sales.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [30]

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Just looking at the annual figure then, it looks like it's been between 11,200 and 11,300 for the last 3 annual results. So there doesn't appear to be a lot of volatility in that number?

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [31]

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There hasn't. But again, it depends -- it comes down to what projects. Certainly, last year, the sales per square meter, if we included Coomera, for example, would reduce because the sales per square meter at Coomera is lower than the average of the organization. That doesn't mean that the rest of the organization is going backwards. And so that's kind of a misnomer in terms of kind of false information.

When you look at our business, our total sales are increasing. Greg mentioned that sales are up $1.2 billion this year to $24.4 billion. That's the real measure that we have, is that we're seeing that, yes, when we look at our strategy, our strategy is driving customer traffic into our centers. What we're seeing is by the activities which we've put on, by curating the right mix, that traffic is out and then able to be converted by our retailers into sales. And so we're seeing that total sales grow across the portfolio.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [32]

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Okay. In terms of NOI growth, I think at February, the comparable NOI growth is expected to be around 2.5%. Today, it's looking like 2% to 2.5%. Are you able to talk a little bit about the market backdrop and perhaps why that might be changing a little bit?

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [33]

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Yes. So certainly, Adrian. Yes, you're right. When we said that we thought it was going to be approximately 2.5% in terms of comp NOI growth, I think at the time, we were working on CPI. We were thinking about 1.8%. I think it was 1.9%, something like that. But where we're at now, I think the average CPI is around 1.5%. So for the first 6 months of this year, as you know, all of our leases other than Victoria, index CPI plus margin. And so with that lower CPI, we're being negatively impacted as far as comp NOI growth.

Yes, as you would have seen in terms of the leasing spreads that we have of minus 4.8%, that's relatively consistent. So the major change is the CPI rate. And we're in a low-growth environment, which we're seeing, and we're seeing the benefits. Even with the comp NOI growth being slightly lower, we're going to benefit in terms of the slightly lower interest rates, which we have. And our average interest rate now is 4.25%.

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Operator [34]

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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 [35]

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Just a few quick ones for me. One, just on the cash flow that you presented in the slides. So when I'm looking at the cash flow statement, essentially it's $629 million, call it, $115 million of maintenance CapEx, a bit less than sort of half in the first half. It's below the distribution declared. So how do I think about that normalizing in the second half and the full year, please?

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Elliott C. Rusanow, Scentre Group - CFO [36]

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Well, the $629 million, the distribution is $599 million. We spent, as you say, less than 115 -- less than half of $115 million in the half. What I did note in my call is that there's been a $47 million positive movement in working capital during that period, which needs to be taken into account in that thought joining that you're trying to do. So I think that's the best way of thinking about it, that we've improved our working capital position in terms of reducing outstanding payables. We're paying our distribution of $599 million. We generated $629 million of operating cash flow, and our FFO is $676 million.

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Darren Leung, Macquarie Research - Analyst [37]

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Understand. And perhaps circling back to an earlier question just on the Appendix 1 of the accounts in terms of the portfolio disaggregation. So it feels like most of the cap rates are largely flat. A lot of vals have softened a bit, obviously implying, I suppose, less positive cash flow assumptions. Do you think there's much more downside risk from here either through your internal vals team or through the external valuers?

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Elliott C. Rusanow, Scentre Group - CFO [38]

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Well, just to clarify, the valuations haven't softened. What you see there is the change in asset carrying value as a result of a half share interest of Burwood being sold and the office towers in Sydney being sold. So that's the movement.

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Darren Leung, Macquarie Research - Analyst [39]

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Okay. And then perhaps final one for me. And can you please provide us the disclosure for holdovers as at 30 June '19?

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Greg J. Miles, Scentre Group - COO [40]

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Yes. Darren, it's about the same as it was last year. Around about 5% is still where it's sitting. And we, of course, would like it lower, but it's a balance between -- as I think I said before, retailers, they seem to be a bit slow with decisions. There's a desirability for some flexibility. And it, frankly, suits us, in some cases, to have a flexibility as well.

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Operator [41]

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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 [42]

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Sorry, just a couple of follow-ups. Just on Carindale. Obviously, given the sales, your balance sheet position is obviously a lot stronger. Are you intending to continue the creep on Carindale?

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [43]

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Well, Richard, we've -- at this stage, we continue to review it. As you would've seen, we didn't use any of the pre-provisions in the first half, but it's something which we'll continue to review.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [44]

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Okay. And can you just provide some update just on -- obviously, you've secured target on level 2. The CapEx is lifted on the expected spend on that project. Just can you give us an update on how the remaining level 2 commitments are going and what the return looks like given the increasing CapEx?

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Greg J. Miles, Scentre Group - COO [45]

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Yes, Richard, it's Greg. It's Kmart that we secured for the upper level. Surprisingly or not, Kmart is actually one of the most requested retailers at Carindale. So David Jones will open there in around October, November. And then we'll see Kmart open by about the middle of the year. There's no further leasing to be done there. That basically takes up all of the ex-David Jones space. What we'll end up doing is completing some remixing around both of the entries of both of those stores. But we're basically fully leased.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [46]

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And the return?

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Greg J. Miles, Scentre Group - COO [47]

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It's consistent with what it was previously disclosed as.

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Operator [48]

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

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Peter Kenneth Allen, Scentre Group - CEO & Executive Director [49]

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Yes, thank you very much for your participation on the call. If you've got any further questions, please don't hesitate to contact our IR team. Have a great day. Thank you.

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Elliott C. Rusanow, Scentre Group - CFO [50]

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Thanks.

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Operator [51]

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That does conclude the presentation for today. Thank you for your participation. You may all disconnect.