Ladies and gentlemen, thank you for standing by. Welcome to Charter Hall Long WALE REIT 2022 full year's results briefing. At this time, all participants are in the listen only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to queue for a question, you need to press star one one on your telephone keypad and wait for a name to be announced. Please note that this conference is being recorded today, Tuesday, the 9th of August, 2022 . I would now like to hand the conference over to your host today, Mr. Avi Anger, Fund Manager. Thank you, sir. Please go ahead.
Good morning, everyone, and welcome to the Charter Hall Long WALE REIT results presentation for the FY 2022 full year ending 30 June 2022. Presenting with me today is Scott Martin, Head of Long WALE REIT Finance. I would like to commence today's presentation with an acknowledgment of country. Charter Hall is proud to work with our customers and communities to invest in and create places on lands across Australia.
We pay our respects to the traditional owners, their elders past and present, and value their care and custodianship of these lands. The format for today's presentation is that I will start with an overview of CLW and key highlights for the year. You will then hear from Scott, who will provide an overview of the financial performance of the REIT. I will then return to provide an operational update and portfolio overview and provide guidance for FY 2023.
We will then offer the opportunity for questions. Turning now to slide five. Today, CLW has a best in class AUD 7.1 billion diversified real estate portfolio consisting of 549 properties with a very long dated average lease term of 12 years. 52% of the income of the REIT comes from triple net lease properties. This is an important feature of our portfolio, given that under a triple net lease, the tenant is responsible for all outgoings, maintenance, and capital expenditure.
In addition, 80% of our portfolio is now located in markets on the eastern seaboard of Australia. These factors enhance the security and continuity of income of CLW. Turning to slide six. Our portfolio continues to be diversified by tenant, industry, geography, and property type, which contributes to the stability of our cash flow.
CLW has a high quality income stream generated from blue chip tenants with 99% of the tenants of the REIT consisting of government, ASX listed, multinational or national businesses. Our largest tenants are government, Telstra, BP and Endeavour Group. Our properties were leased to 81 tenants across Australia and New Zealand and diversified across Long WALE retail, office, industrial, social infrastructure and agri logistics sectors.
All the leases in our portfolio have annual rent increases, providing strong year-on-year income growth. This consists of a mix of fixed and CPI linked leases. Our income growth benefits from increases in inflation with 49% of rent increases across our portfolio linked to CPI. This is a material increase from 40% last year.
This is particularly attractive in the current inflation environment with a forecast weighted average increase in income across our CPI-linked leases of 6.3% in FY 2023. The average fixed increase across our portfolio was a high 3.1%. Turning now to slide seven and the key highlights for the period. I'm pleased to report that we achieved strong operating performance over the year, delivering operating EPS of AUD 0.305 per security. This represents growth of 4.5% over FY 2021.
Consistent with the FY 2021 results, there was negligible impact on the REIT's FY 2022 financial earnings as a result of the COVID-19 pandemic, given the very small exposure to tenants entitled to rent relief. Our exposure to major national tenants in non-discretionary and defensive industries means CLW is well-insulated against mandated COVID-19 shutdowns.
Our NTA at 30 June is AUD 6.17 per security, up 18.2% from AUD 5.22 at 30 June 2021. Over the year, we delivered AUD 670 million of net valuation uplift for our investors, demonstrating the quality and resilience of the portfolio. We achieved valuation uplifts across our entire portfolio, including our Pub, BP Australia and New Zealand, industrial and logistics and Telstra Exchange portfolios, vindicating our focus on Long WALE real estate.
CLW has a Long WALE of 12 years, providing security and continuity of income to our investors. 49% of lease rent reviews are CPI linked with a 6.3% weighted average forecast increase in FY 2023. 52% of the income of CLW is from triple net leases. During the period, we have completed some significant capital management achievements.
We refinanced and expanded AUD 1.7 billion of debt facilities in the period. Balance sheet gearing is 29.9% within our target gearing range of 25%-35%. CLW has a weighted average debt maturity of 5.2 years. Turning now to slide eight, environmental, social, and governance. We remain focused on implementing sustainability initiatives across our portfolio and consider ESG as a driver of long-term value for our investors and tenant customers. As a business, we've taken accelerated climate action. CLW has participated in Charter Hall's renewable power purchase agreement, which secures seven-year renewables in partnership with global energy giant ENGIE, a critical step in the group achieving 100% powered by renewable electricity by 2025.
CLW has achieved an approximate 50% reduction in emissions under operational control because of our office and industrial sector being powered by 100% grid-supplied renewables in FY 2022. Additionally, CLW is proud to partner with tenant customers to agree on site solar totaling 5.6 MW at Canning Vale and Huntingwood properties.
The fund has leveraged its green credentials to execute sustainable finance transactions, including at our 242 Exhibition Street property in Melbourne. CLW remains committed to aligning with best practice frameworks to support transparency and disclosure. The fund achieved 72 score in the 2021 GRESB assessment, an increase of 10 points compared to the prior period, evidence of our commitment to continuous improvement. Turning to slide nine. CLW is proud to support Charter Hall's approach to creating strong communities.
The Charter Hall Group has invested AUD 1.27 million with social enterprise in the period, supporting 191 employment outcomes for vulnerable Australians. Of this expenditure, AUD 579 ,000 was in support of crisis and disaster recovery to UNICEF, GIVIT, and Foodbank. I would now like to hand over to Scott, who will provide an overview of the financial performance of the REIT.
Thank you, Avi. The REIT's key financial metrics for the year ended 30 June 2022 are set out on slide 11. As Avi just touched on, the REIT delivered operating earnings of AUD 207.2 million, or AUD 0.305 per security, and declared a distribution per security of AUD 0.305 for the same period, reflecting a payout ratio of 100%. NTA per security at 30 June 2022 was AUD 6.17, representing an 18.2% increase over the 30 June 2021 NTA of AUD 5.22 per security. Movements in all other key metrics shown on this slide result from portfolio-enhancing activities undertaken during the period, which Avi will cover in his presentation. Turning to slide 12, which provides a summary of the REIT's earnings for the FY 2022 full year.
Net property income has increased by 32.4% compared to the prior reporting period, and has been driven by a combination of like-for-like rental growth of 3.4% from the stabilized portfolio and net acquisition activity. The 3.4% like for like rental growth comprised an average of approximately 3.1% on fixed rent reviews and a weighted average CPI print for the REIT's CPI-linked leases of 3.7%. The increase in operating expenses has been driven by portfolio growth and new acquisitions, and finance costs have also increased period on period as a result of partially debt funding the REIT's acquisition activities together with an increase in floating interest rates.
Operating earnings per security and distributions per security have both increased by 4.5% on the prior corresponding period to AUD 0.305 per security, consistent with our guidance released to the market. Turning to slide 13 and the REIT's balance sheet position at 30 June 2022. The AUD 1.8 billion increase in total assets represents an increase of 38.3% since 30 June 2021 and has been driven by acquisitions transacted during the year and AUD 670 million of property revaluation gains. The AUD 8.7 million increase in the provision for quarterly distribution results from the growth in operating earnings arising from acquisition activity and annual rent escalations. Acquisitions were funded through a combination of debt and equity.
During the period, balance sheet drawn debt increased by AUD 611 million, and AUD 486 million of equity was issued. NTA has increased 18.2% from AUD 5.22 per security at 30 June 2021 to AUD 6.17 per security at 30 June 2022, driven by the AUD 670 million increase in property revaluations. Turning to slide 14, which provides a summary of the REIT's capital management initiatives. Balance sheet gearing was 29.9%, which is within the REIT's target gearing range of 25%-35%, and look-through gearing was 37.1% at 30 June 2022.
As outlined in the REIT's half-year results, the REIT has continued to work closely with the Charter Hall treasury team on a range of debt initiatives that have strengthened the REIT's balance sheet position through extension of debt maturities and reduction of margins. During the current reporting period, the REIT completed AUD 1.7 billion of debt initiatives.
The REIT successfully refinanced AUD 1 billion of existing facilities with an average extension term of 1.5 years and also secured an increase of AUD 357 million to existing facilities. The REIT has also secured AUD 355 million of new facilities with an average term of 6.1 years to partially fund acquisition activity. In total, these debt initiatives represent close to 50% of the REIT's debt platform and provide the REIT with secure long-term financing.
The REIT has total facilities calculated on a look-through basis of AUD 3.1 billion, which were drawn to AUD 2.7 billion at 30 June 2022. The REIT has a weighted average debt maturity of 5.2 years and a weighted average cost of debt of 2.8%. The REIT has 35% of debt sourced from capital markets long-term issuances, and 65% from foreign and domestic banks, with staggered maturities over a nine-year period from FY 2024 to FY 2032. The level of hedging at 30 June 2022, calculated on a look-through basis, was AUD 1.4 billion, which reflected a hedge position of 53%.
Post the reporting date, the REIT has taken out a further AUD 650 million of hedging, which has increased the level of hedging to AUD 2.1 billion, which reflects a hedge position of 77%, with a weighted average hedge maturity of 2.9 years. I will now hand back to Avi to provide an operational update and portfolio overview.
Thank you, Scott. Turning now to slide 16 and recent portfolio leasing highlights. While the benefit of a long WALE portfolio is the long-dated nature of the REIT's expiry profile, we are focused on proactively extending leases ahead of the expiry dates. We are pleased to announce today that CLW has executed a long-term lease extension with Metcash at our Canning Vale Distribution Center in Perth.
As a result, this expiry, which was to occur in FY 2024, has been pushed out by 11.3 years from today to occur now in FY 2034. Agreement with Metcash includes expansion of facilities on site and installation of a significant rooftop solar system. This lease extension demonstrates the active and collaborative approach of CLW to achieve mutually beneficial outcomes for investors and tenant customers.
This lease extension was made possible as a result of the deep relationships across Charter Hall's business with Metcash, and highlights the significant benefits which CLW receives by being part of the Charter Hall platform. CLW also recently entered into a 10-year lease with the listed Emeco at our property in Osborne Park, Perth. This takes this building to 100% leased with a WALE of approximately 10 years.
Turning to slide 17. During the year, CLW completed the acquisition of a 50% interest in ALE Property Group, together with investment partner Hostplus, one of Australia's leading superannuation funds. The national portfolio of 78 high-quality pubs and bottle shops is located in predominantly metropolitan locations along the east coast of Australia.
The properties feature triple net leases to best-in-class ASX-listed Endeavour Group, with the portfolio featuring uncapped annual CPI reviews and an open market review in six years' time. The large landholdings and significant under-rented portfolio provides the opportunity for both income and capital growth well into the future. The portfolio of pubs has been externally valued, resulting in a AUD 99 million valuation uplift from acquisition.
Turning now to slide 18. An important part of our strategy is to grow and enhance our portfolio through accretive acquisitions. In addition to the previously mentioned acquisition of 50% of the ALE Property Group during the year, we also acquired three modern industrial logistics facilities for a total consideration of AUD 88 million. These acquisitions include one of Australia's largest waste-to-energy facilities located in Sydney and leased to joint venture between Cleanaway and ResourceCo.
The property was acquired off-market and features a long 15.9-year WALE. The Modern Star Distribution Centre in Brisbane and the Toyota Material Handling Distribution Centre in Brisbane were other acquisitions completed in the year. All properties acquired in the year were independently valued since acquisition, materially higher than their purchase price.
The ALE Group and industrial acquisitions demonstrate our focus on transactions offering attractive long-term risk-adjusted returns, but also mindful of downside protection, investing in properties strategically important to our tenants with strong tenant credit, favoring large companies and properties with high underlying land value.
Given Charter Hall's strong reputation and strong relationships in the marketplace, we continue to see most deals in the market and also have access to many off-market opportunities as a result of existing relationships across the Charter Hall group. We are able to secure deals not solely based on price, but also based on our ability to provide certainty of completion and ease of execution to the vendors.
Turning now to slide 19. In the following slides, I would like to provide an overview of our portfolio and outline some key attributes of the portfolio. Slide 19 is our portfolio overview. During the year, we were able to grow and enhance the portfolio through acquisition and positive valuation movements. The value of the portfolio is now approximately AUD 7.1 billion. During the year, we have further enhanced the portfolio with AUD 923 million of acquisitions. These acquisitions have increased the number of properties of the REIT to 549. The portfolio has a long-dated WALE of 12 years at June.
This WALE has been impacted by the acquisition during the period of the ALE portfolio, which has a 6.5-year WALE. However, we have a high degree of conviction that this tenant is likely to remain in these properties for the long term. The properties in the portfolio feature a blend of annual lease review structures, both fixed and CPI-linked. Our average fixed reviews are 3.1%, while our CPI-linked leases will deliver strong growth with 6.3% growth forecast in FY 2023.
This results in a forecast weighted average rent review for FY 2023 of a strong 4.6%. Our portfolio has occupancy of 99.9%, and the portfolio average cap rate is 4.35%. Turning now to slide 20, and an outline of our tenant customers and the tenant diversification of the REIT.
Our portfolio of Long WALE properties is leased to high quality tenants, including Endeavour Group, government, Telstra, BP, Ingham's, and Coles. The acquisitions completed during the period further increase our exposure to the high quality, best in class Endeavour Group. While the introduction of new tenants in the period further diversifies our tenant base.
Turning to slide 21 and the industry diversification of our tenant customers. Within our overall portfolio, approximately 99% of tenants are ASX-listed government or multinational or national corporations, with the vast majority of these tenants operating in non-discretionary industries. During the period, we increased our exposure to the pubs and bottle shop sectors with the best in class operator, the AUD 14 billion Endeavour Group through the ALE acquisition. The government, including the ATO and Australia Post, are another example of our non-discretionary tenant exposures.
In the telecommunications sector, we have partnered with another best in class operator, the AUD 47 billion Telstra Corporation, which includes our portfolio of 37 exchange properties on long triple net leases. We also have a high proportion of tenants operating in the non-discretionary grocery and food sectors such as Woolworths, Coles, Ingham's, Arnott's, and Metcash. Our BP Australia and New Zealand portfolio of 295 properties on long triple net leases provides us with exposure to the resilient fuel and convenience retail sector. Importantly, all the tenants mentioned and the vast majority of tenants in our portfolio performed well through COVID-19 and paid all rent through the period of lockdowns.
Turning to slide 22. As can be seen from the chart on 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 is a long dated 12 years following the Metcash lease extension announced today. We continue to work to push out our expiry profile as far as possible to the right of this chart, both through acquisition and negotiating lease extensions with our tenant customers.
These preceding slides demonstrates the resilience and strength of our portfolio. Our portfolio WALE, quality of tenants, and proportion of triple net leases provides better downside protection and more resilient income streams for our investors. Turning now to slide 24. I would now like to provide earnings and distribution guidance for FY 2023.
Based on information currently available and barring any unforeseen events, CLW provides FY 2023 operating EPS guidance of AUD 0.28 and distribution per security guidance of AUD 0.28. Based on yesterday's closing price, this represents a 6.4% distribution yield. That concludes today's presentation, and I would now like to invite questions.
Thank you. As a reminder, if you'd like to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. There'll be a short silence while questions are being collected. Thank you. The first question comes from the line of Lou Pirenc from Jarden. Please go ahead.
Thank you and good morning. A few questions on debt and hedging. The 2.8% all-in cost of debt, is that what your guidance is based on for 2023, or is it just as of right now today?
Hi, good morning, Lou. The 2.8% is our cost of debt as at 30 June. Going forward, we've provided our assumptions around BBSW in the pack. We've taken the rate that we know is printed for the first three months of the year of 1.89%, and consensus for the balance of the year of 2.91%, which averages out at about 2.66% BBSW for FY 2023.
Great. What does that mean for an all-in cost of debt for 2023 in your guidance?
It'll be around the similar level. About that 2.9%.
2.9%.
2.9%. Yep.
Yep.
Thank you. Now, can you talk about the hedging? That 650 of new hedging. What do you pay on that kind of protection right now?
That hedging was taken at an average rate of about 1.5%. You know, the idea behind that, Lou, is really to provide a sort of reliable and stable income to our investors for the year and subsequent year. That's over a two-year period and takes our hedging to about 77%.
Great. Sorry, last one on the hedging. You're providing your appendices, the hedge profile for the next three years. Does the cost change much over those, you know, particularly the three years where you're in the seventies?
It's that 0.96%, yeah, for the, you know, for 2023, 2024.
Okay. I missed the beginning of that, I think.
The hedge rate does not change materially over 2023 and 2024. We've got a weighted average hedge rate of 0.96%, which will flow into 2024 as well.
Okay, thank you. Final one for me, just more strategically. I mean, your gearing is, I know in the middle of your range, but with cap rates quite low, there's a risk, I guess, of gearing going up. Are you considering selling some assets to improve your balance sheet here?
Look, Lou, I might, I'll just point out that we are seeing some very strong underlying rent growth across our portfolio. Half our portfolio has uncapped CPI, and we've said in our presentation that we expect that to be north of 4.5% for this coming year. We're also our portfolio is relatively low rents. About half our portfolio is effective rents. We've got some, you know, in the future, some strong rental increases coming through from market reviews, including our ALE portfolio. I think that'll provide a good buffer to, if we see any rising cap rates, we'll on the basis of some strong income growth.
You know, having said that, absolutely, the board will often discuss, you know, potential divestments and it's something that's always on the cards and being considered. Yeah, that's something we're looking at.
Great. Thank you.
Thank you for the question. Next question comes from the line of Simon Chan of Morgan Stanley. Please go ahead.
Hi. Good morning, Avi. Good morning, Scotty. Just on the AUD 50 million of hedges that you took post-balance date, can you explain the rationale for that sort of structure?
Yeah, sure.
I mean, you've paid AUD 21.6 billion up front. That's all. I'm just trying to work out the rationale behind all of this.
Simon, from our perspective, we've seen, you know, quite a run-up in cost of debt, which is affecting CLW and many of its peers. You know, we're focused on providing investors with stable and reliable income, and the action that we've taken increasing our hedging provides better earnings visibility and security to our investors. We think the right approach was to increase hedging in the current environment. We think that is prudent. Yes, there was an upfront cost associated with that, but it's got a relatively immaterial impact on gearing, and the cost of the hedge is recovered over the life of the swap.
If I'm interpreting it properly, it's essentially a bit of a capital/FFO swap in the scheme of things. Is that right?
What it does is, as I mentioned, it provides that better income stability and security for our investors. Given the nature of CLW, we think that's prudent in the current environment. Our EPS and DPS has been set at a level we think is manageable and sustainable for the medium term.
That's great. Your overall hedging is only 77%, you mentioned. Can you give some color as to the balance sheet debt hedging and then the joint venture debt hedging? Is there much difference?
In respect of the total hedging, there's AUD 2.1 billion. It's about AUD 795 million, AUD 650 million, about AUD 1.4 billion on balance sheet, and the remainder of the AUD 700 million is sitting in the JVs.
Right. Can you talk a bit about the 242 existing debt facility? Cause I see ICR it's at 3.6% and the covenant's at 1.75%. Is that facility pretty much hedged? Cause it's not inconceivable to say interest expense could double over the next 12-24 months.
That's a relatively small exposure for us.
Yeah.
Well, we
There's 15% interest in that. We'll come back.
We might come back to you on that one, Simon.
We'll take that offline. Yeah, I don't have those numbers just to hand, Simon. We'll circle back with you.
Okay. Not a problem. On the Metcash deal extension, good to get that out of the way. Is there any insights you can give us as to, you know, the sort of leasing spreads you got? 'Cause, you know, everyone we talk to suggests that industrial rent's gone up remarkably over the last couple of years.
Yeah. Look, absolutely, Simon. Industrial rents have risen significantly over the last couple of years, particularly in Sydney and Melbourne. Perth is rising, but it's a bit sort of delayed relative to Sydney and Melbourne. You know, we've said previously our view was that passing rents at that property equivalent to market rents, we still hold the same view, and that's certainly where that property sits. The rents are being kept at current level and increasing in line with the existing lease, which is uncapped CPI. Yeah, that's our view of the market and where that property is.
That's very good. Thanks, guys.
Thank you for the question. The next question comes from the line of Stuart McLean from Macquarie. Please go ahead.
Good morning, and thanks for your time. First question, just looking at the operating cash flows, looks like about AUD 188 million there versus your earnings of AUD 207 million. What's driving that AUD 20 million spread between the two, please?
Oh, yeah. One of the JVs activated a DRP to pay for an acquisition throughout the year. We had operating earnings coming through. Rather than pull the operating earnings and then call the capital, the JV just retained some of the earnings, I think it was, yeah, through the ALE portfolio to fund a pub acquisition.
Okay, great. Thank you. The second question is just on LEP. Just, are there any conversations at the moment between Charter Hall and Endeavour regarding that 26% undertenanting? Any progress there?
No, no update at this stage, Stuart. I mean, we're very happy with the fact that, you know, we're experiencing really strong CPI growth in that portfolio at the moment. Rental growth, you know, through the uncapped CPI, that's got about 6.5 years remaining, and we'll continue, you know, to work with Endeavour on realizing value in that portfolio. You know, there's a lot of embedded value as you know, in that portfolio and it's just a question of when we realize it.
Great. Thank you. Final question, just in relation to Avi, you mentioned opportunities that are potentially coming to market Charter Hall. Can you see opportunities just in the context of the balance sheet? Can you fund acquisitions at the moment?
Look, I think realistically, Stu, you know, we're comfortable with where gearing is at the moment. You know, as I mentioned, we've got very strong earnings growth that will offset if we saw any softening in cap rates, but we're comfortable with gearing. Future acquisitions are things that we're looking at, I think, you know, may well be funded through divestments potentially and recycling, but, you know, it's something that we're looking at all the time. We're not looking to take the gearing materially higher, if that's the question.
Is there a profile of assets that you would look to remove from the balance sheet to fund acquisitions?
Well, I think logically, you'd probably look at your lower yielding, you know, lower cap rate assets and recycling into, you know, high yielding assets, you know, given that that we're looking to increase income, you know, growth for our investors. But, you know, with a view to still maintaining quality and security of income.
Again, nothing's planned at this stage?
No.
Fantastic. Thanks for your time.
Thank you for the questions. The next questions comes from the line of Richard Jones from JP Morgan. Please go ahead.
Good morning, Avi. Hey, just in relation to Metcash, just can you clarify the valuation assumptions and, you know, how you think all things being equal, the value might move?
Well, we last valued the asset at June. That was before we signed the deal with Metcash, so that's not included in the valuation that's printed in the booklet today. We will value the asset in December. That will reflect the new deal. You know, my expectations at this point is we should receive a positive valuation outcome in December. I can't give you an amount or quantum.
No. Okay. Just in terms of the lease extension, can you clarify what CapEx commitments you made as part of that? Then separately, what the potential CapEx could be on the expansions that you call out in the presentation and how that will be rentalized, what yield you'll get?
Look, the terms of the deal we've done with Metcash are commercial in confidence, and we've really just got approval from them to release what's in the pack today. I can't comment on the numbers. Suffice to say that, you know, yes, we're doing CapEx, as we've noted in the pack. That'll bring the asset up to modern standard and, you know, future-proof it for the next sort of 12 years. We're really happy with the outcome and modernizing the asset and of course, you know, the significant solar that we'll be constructing in the asset for Metcash. We're excited by that as well. I can't give any more detail on that, Richard.
Okay. No details about how you might rentalize the future CapEx.
Well, yeah. It's at a, you know, market re-related cap rate. It's about 5%. It's a reasonable yield on cost.
Okay. Thank you. In terms of the valuations at 30 June, can you also just give us some color as to what they were assuming from a CPI perspective? Obviously, you're talking about 6.3%. Is that consistent with what the valuations are assuming?
Yes. I think most valuers would've had a similar CPI assumptions going forward, but it's probably a bit higher today than it was in June, the assumptions around CPI. You know, it varies across different valuation houses, and we use a spread of valuers across all our portfolio. It's hard to comment generally.
Okay. That's all for me. Thanks, Avi.
Thank you for the questions. As a reminder, to ask question, please press star one one and wait for your name to be announced. Our next questions comes from the line of Alexander Prineas from Morningstar. Please go ahead.
Good morning. Thanks for the presentation. Just in terms of the, can you comment what the WALE is for the CPI linked part of the portfolio?
The CPI, the WALE for the CPI-linked part of the portfolio, I think it would be generally consistent with the portfolio average, circa 12 years.
Okay. Thank you. Just in terms of the LEP portfolio we mentioned, you know, that's kind of one of the factors.
Push the WALE down a little. You know, when you look to renew those leases, would you be looking to extend them sort of up to or is it just an area where you're comfortable having slightly shorter leases there with the confidence in those tenants?
Yeah. Look, you were just breaking up there a little bit, Alex, but I think you were asking about the WALE of the ALE portfolio and that drags down our average because it's only a six and a half year WALE, which drags our portfolio average down to 12 years and it would otherwise be higher if not for that.
You know, as I mentioned in the presentation, those assets are strategically important to Endeavour and we see them being in occupation of those assets, likely being occupation for the long term. I think, you know, it's just a question as you note of when we renew those leases. We're in the process, you know, of having discussions with LEP. They've got options at the expiry in six and a half years.
If we can renew them earlier, we will. You know, I think they're likely to stay there when we get to the six and a half year mark. If we do, I think you'll see them renewing and staying at those assets long term.
Thanks. Just one quick one from me. My calculator wasn't as fast as you guys could answer questions earlier. Can you comment on the weighted average cost of debt on new debt that's been issued recently?
I think you're asking about. Just to reconfirm the weighted average cost of debt calculation. We've got an average fixed rate of 96 basis points and we're 77% hedged. Our average margins are 1.5%. Then you apply a BBSW to that and we're coming out in that 2.8%-2.9% region for FY 2023.
Okay, thanks.
Thank you for the question. Our next question comes from the line of Suraj Nebhani from Citi. Please go ahead. Suraj, your line is now open. You may unmute locally.
Sorry, just was on mute. Sorry. I was talking to myself. Good morning, everyone. Thanks for the opportunity. A couple of questions have been answered. Just on the CPI expectations of 6.3%, can I just check, is that like consensus expectations that you're looking at in coming up with the 6.3% number? I know there was, you know, quite good disclosure on that, but just wondering, you know, what's the basis for that?
That's market consensus of CPI over the next sort of three quarters. We've outlined in the pack what that assumption is for each of the next three quarters.
Yeah. All good.
Full year.
Maybe one question for you. Are we looking out maybe over the next two to three years? I know you mentioned that there's strong rental growth potentially coming, but you know, like if you were to give a two-year view on asset values, you know, where do you think cap rates and rents are likely to land over the next two years?
Well, look, we at the moment, we're not seeing any evidence of any cap rate softening. As you know, Suraj, we've got a pretty diversified portfolio and I'm not sure if all asset classes are gonna behave uniformly. We're seeing very strong interest. You may have read, you know, in the papers recently in asset classes like pubs, Bunnings, you know, those assets are still very highly sought after and strongly performing.
We're seeing very strong rental growth in areas like industrial, where if we did see a little bit of cap rate softening, it'd be more than offset by the rental growth. You know, I think asset values overall with the rental growth that we're likely to see, I think they'll probably hold relatively steady even if there is a bit of cap rate softening.
Okay. Maybe just on that point, like, I know, you know, market transaction activity has come down a bit in the recent quarter, which is not surprising, you know, given the move in bond yields. But how would you expect any movements in asset values, let's say in market asset values, to come through into book? You know, will valuers essentially be waiting for transactions to happen before any change in book value is reflected?
Mm-hmm.
Until then, book values sort of stay where they are. Is that the way to think of it?
Yeah. I mean, look, it's, we don't really provide valuation forecasts, Suraj. I think, you know, I think I've sort of answered that question before.
Okay. No worries. All good. Thanks.
Thank you for the question. Once again, to ask question you may press star one one and wait for your name to be announced. I think I have new questions from the line of Ben Brayshaw from Barrenjoey. Please go ahead.
Avi, good morning. Thanks for the presentation. I was wondering if you could touch on or expand a bit on your comments earlier around the pub market. Lots of press about the demand for assets. I suppose just interested in what you're seeing. Any, you know, any recent transactions as well that you could point to that you know you see as comparable or relevant for, you know, LWIP or obviously ALE.
Hi, Ben. Yeah, thanks for the question. Look, yeah, look, the pub market is strong and as we announced, you know, in the pack today, we already you know, achieved some significant value uplift in the LWIP in the ALE portfolio even though it was only, you know, acquired six months ago. That valuation's increased about 12% since acquisition. So some good performance there.
I think, you know, those Endeavour leased long leased pubs, they're as rare as hen's teeth in terms of their, you know, the trading of them. So it's hard, you know, there are not a lot of evidence I can point to. A lot of the transactions in the market are owner/operator type pubs. You can see from, you know, things like the Crossroads Hotel, you know, the pricing being achieved is extremely strong.
With Endeavour covenant, you can see, you know, Endeavour's market cap, you know, has increased significantly recently. That business is performing extremely well. It's now, you know, AUD 14 billion market cap entity. To have that sort of tenant covenant with very long triple net leases, you know, they're unique and very valuable and we're really happy with our exposure in that sector and to that tenant.
Yeah. That's great. So just further to that, I mean, when you look at cash flow and discounted cash flow valuations, what typically are unlevered IRR expectations in the pub market at the moment in your view?
About six. Probably six, Ben. You know, bearing in mind, you know, that uncapped CPI is also, you know, very attractive and that, you know, provides a very strong return at the moment with CPI, you know, if it continues in the same trajectory.
Yep. Okay. Thanks.
Thank you for the questions. Once again, to ask question, please press star one one. At this time, there are no further questions from the queue. I'd like to hand the call back to the management for closing.
Thanks, everyone, for joining the call this morning and for your questions. Appreciate your time, and we look forward to catching up on one-on-one meetings over the course of the next couple of weeks. Thank you.