Ladies and gentlemen, thank you for standing by. Welcome to the Charter Hall Social Infrastructure REIT 2023 half-year 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 questions, you'll need to press Star followed by one on your telephone keypad and wait for your name to be announced. Please note that this conference is being recorded today, Tuesday, February 14, 2023. I'd now like to hand the conference over to your host today, Mr Travis Butcher, Fund Manager. Thank you. Sir, please go ahead.
Good morning, everyone, and welcome to CQE's results presentation for the half-year ended 31 December 2022. Presenting with me today is Scott Martin, Head of Social Infrastructure REIT Finance. I'd 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, develop, and manage properties on land across Australia. We pay our respects to the traditional owners, their elders past, present, and emerging, and recognize their continuing culture and contribution to this country. Turning now to slide five. Key highlights for the half year were as follows: Distributions paid to investors for half were AUD 0.086 per unit, an increase of 2.4% on the first half of financial year 2022.
This is in accordance with the previously advised full year FY 2023 distribution guidance of AUD 0.172 per unit. Acquisitions of AUD 186.7 million were made in social infrastructure assets across six properties on long leases with strong tenant covenants. Key transactions were the Geoscience Australia building in Canberra in October 2022, and the Innovation Quarter acquisition in Westmead made in February 2023, both which significantly enhanced the quality of CQE's portfolio. During the half, CQE achieved a revaluation uplift of AUD 16.3 million, representing a 0.8% increase since 30 June 2022, driven by portfolio rental growth during the period, offsetting mild cap rate expansion. As a result of the acquisition activity, CQE's gross assets have increased by 8.5% during the half to AUD 2.3 billion.
NTA unit has increased by 0.2% to AUD 4.09 as at 31 December 2022. In September, CQE was added to the S&P/ASX 200 index. This was a pleasing milestone for CQE and should result in increased liquidity and institutional interest moving forward. The portfolio is very well-positioned in this current environment with a strong WALE of 13.6 years, 100% occupancy, and a forecast weighted average rent review of 4% for the next 12 months. Moving to slide six and CQE's strategy. CQE's strategy remains unchanged. Our strategy is to provide investors with secure income and capital growth through exposure to a diversified social infrastructure portfolio. We do this by focusing on enhancing income sustainability and resilience of the assets we own, targeting ongoing capital growth and undertaking continual portfolio curation. Turning now to slide seven.
During the half, CQE continued to enhance and diversify its income, with acquisitions during the period and post-balance date amounting to AUD 186.7 million. In October 2022, CQE acquired a 25% interest in the Geoscience Australia Life Sciences Complex in Canberra for AUD 90.9 million. The property was acquired on a 7.4% yield, 9.6 year WALE, and 3% annual increases. Geoscience Australia is a Commonwealth agency that serves as the Australian government's technical advisor on all aspects of geoscience and custodian of Australia's geographic and geological data, occupying the premises since 1998. Given the scientific nature of the tenant, the purpose-built property incorporates specialized lab facilities and the National Earthquake Alerts Centre. In February 2023, CQE acquired a 49.9% interest in Innovation Quarter for AUD 66.9 million.
A newly constructed healthcare, medical research, education, and training hub in Westmead. The property is located adjacent to Westmead Hospital, Westmead train station, the future Metro West station, and Parramatta Light Rail station, and sits within the Westmead strategic precinct, whose primary function is as a health, research, and education hub. Western Sydney University occupies approximately 47% of the building on a 15-year initial term, with the CSIRO occupying approximately 16% of the property on a 10-year initial term. Other major tenants include Telstra Health, PsychCentral, and WentWest. The property was acquired on a 4.7% yield and has average rental increases of 3.6%. Childcare continues to be a critical social infrastructure asset class and integral to CQE's strategy.
As such, CQE has continued to invest in high quality childcare assets with a further four assets acquired during the half, totaling AUD 28.9 million on an average yield of 4.9%. These acquisitions are all on new 15-year leases to premium operators who are existing CQE tenant customers. With respect to development activity, CQE completed three childcare developments during the half, delivering brand new assets with average lease terms of 15 years. Valuation uplift to AUD 5 million and yield on cost to 5.8%. As part of our active portfolio curation and capital recycling during the period, CQE disposed to five freehold childcare assets with an average WALE of 8.1 years for AUD 15.3 million at an average yield of 4.4%.
In addition, in January 2023, CQE fully divested its 3.5% holding in listed Arena REIT, generating gross proceeds of AUD 44 million. Based on Arena's current FY 2023 distribution guidance, the divestment was undertaken on a 4.6% yield. Proceeds of both the childcare assets and Arena securities have been utilized to reinvest into direct social infrastructure properties, providing unitholders with stronger income and capital growth prospects. Moving now to page eight. The broadened social infrastructure mandate has delivered higher quality income from properties with stronger tenant covenants. Since the mandate was broadened with the purchase of the Brisbane Bus Terminal in June 2019, CQE has made acquisitions of AUD 746 million, including AUD 294 million in childcare and AUD 452 million in other long WALE social infrastructure properties.
The long WALE social infrastructure properties acquired include the Brisbane Bus Terminal, Geosciences Complex, the Emergency Command Center, and the Robina TAFE, all assets providing essential services to the community. These acquisitions have allowed the fund to actively curate its childcare portfolio with divestments of AUD 171 million over the same period. These assets were either centers with weaker tenant covenants, located in regional locations, poorly designed, or aging centers facing obsolescence or competition effects. Social infrastructure is a growing asset class with long-term opportunities for future investment for CQE. Key thematics driving this are both the growing and aging population in Australia, with estimates of an additional 11 million people expected in Australia's major cities by 2054. The population is also aging, with 20% of the population expected to be over 65 in the next 10 years.
This will require a significant investment in social infrastructure in the future. As shown on slide 25 of the presentation, government spending in childcare, education, health, and transport are forecasted to continue to grow. Governments will not be able to fund all the required infrastructure, creating significant opportunities for private capital. As the pie graphs show on the right of this slide, CQE has diversified its income into broader social infrastructure subsectors, with childcare assets currently comprising 77% of the portfolio and other social infrastructure assets sitting at 23%. Over the medium term, we expect the childcare weighting to reduce to 50%-70% of the portfolio as other social infrastructure assets are added to CQE's portfolio. CQE unitholders have benefited from the Charter Hall transaction platform, with significant acquisition activity, securing high quality social infrastructure assets in predominantly off-market transactions.
Turning now to slide nine and ESG. We remain focused on implementing sustainability initiatives across our portfolio and consider ESG as a driver of long-term value for the fund. Key points to focus on from a CQE perspective are continued partnership with our tenant customers to provide solar solutions across the CQE portfolio, of which now 0.5 MW have been installed across the portfolio. This will both support clean and affordable energy for tenants, but also enable CQE to better understand tenant operational performance through information sharing, which is currently not available under existing lease arrangements. Secondly, CQE has continued to work with the Green Building Council of Australia on the development of Australia's first social infrastructure rating tool for operational assets.
Finally, we are entering the second year of our partnership with major tenant customer Goodstart to provide funding to enable 55 children from vulnerable families to access fee-free childcare. I'd like now to hand over to Scott, who'll provide an overview of the financial performance of CQE.
Thanks, Travis, and good morning to everyone. A summary of CQE's earnings for the half year can be found on slide 11. Net property income has increased by AUD 7.6 million or 19% compared to the prior corresponding period and has been driven by like-for-like rental growth of 3.7% from the stabilized portfolio and a further AUD 6.8 million generated from net acquisition activity. 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 higher levels of drawn debt and an increase in floating interest rates. CQE delivered operating earnings of AUD 29.6 million, which equates to operating earnings per unit of AUD 0.081.
Distributions per unit were AUD 0.086 in line with our full year FY 2023 distribution guidance released to the market. Turning to slide 12, which provides a summary of CQE's balance sheet position at 31 December 2022. The AUD 180.4 million increase in investment properties represents an increase of 9.1% since 30 June 2022 and has been principally driven by AUD 154 million of property acquisitions transacted during the half and AUD 16.3 million of property revaluations. Acquisitions and development expenditure have been debt funded, resulting in drawn debt increasing by AUD 170 million to AUD 723 million as at 31 December 2022.
NTA increased by 0.2% to AUD 4.09 per unit at 31 December 2022, driven by the AUD 16.3 million of property revaluations. Turning to slide 13, which provides a summary of CQE's capital management initiatives. In September 2022, CQE increased its total facilities to AUD 850 million, providing it with additional investment capacity to pursue new social infrastructure opportunities. CQE currently has a total of AUD 75 million of available investment capacity. CQE has diversified funding sources with no debt maturity until January 2025 and a weighted average debt maturity of 3.5 years. CQE's weighted average cost of debt as at 31 December 2022 was 4.1%, which is calculated based upon drawn debt of AUD 723 million and includes line fees on undrawn debt capacity.
Balance sheet gearing was 33.7% and look-through gearing was 34.4% as at 31 December 2022, adjusted to include contracted acquisitions and disposals, the divestment of ARF units together with the funding of the remainder of the childcare development pipeline. Gearing levels remain within CQE's target gearing range of 30%-40%. During the current reporting period, CQE increased its level of hedging from AUD 325 million- AUD 475 million. In December 2022, CQE entered into a AUD 150 million interest rate swap with a forward start date of June 2023 and a two-year maturity. Hedged debt comprises AUD 375 million of interest rate swaps and a AUD 100 million interest rate cap with an averaged hedge rate of 1.82%.
CQE has a weighted average hedge maturity of 2.9 years, with an averaged hedge percentage of 59% through to June 2025. I'll now pass back to Travis to continue with the presentation.
Thanks, Scott. On slide 15, we summarize CQE's portfolio. As detailed earlier in our strategy, we are focused on continual portfolio improvement and enhancement of income sustainability and resilience. As at 31 December 2022, CQE owns 373 operating properties with a total value of AUD 2.2 billion across a diversified social infrastructure portfolio. During the half, CQE's portfolio increased by five properties, which included the settlement of the TAFE Queensland and WiSE Medical Properties in Robina, Geoscience Australia acquisition in Canberra, and completion of three childcare developments, all improving the portfolio quality. The portfolio continues to be 100% leased, and WALE sits at a very healthy 13.6 years. Lease expiries within the next five years remain low at 4.2%, highlighting the importance of the property and lease term to the tenant's business.
It's also worth noting that of the 4.2%, only 1.4% is true expiries where there are no tenant options. Moving to slide 16. CQE's current portfolio is well-positioned to deliver both income and capital growth, with the portfolio heavily weighted to metropolitan locations comprising 82% of income and a strong Eastern Seaboard weighting also of 82%. As part of our strategy, we've worked to diversify our tenant mix, our income composition has expanded now to include both federal and state governments. Concentration risk has reduced, with our largest tenant, Goodstart, providing 35% of CQE's income as at 31 December 2022. Fixed annual reviews comprise 78% of CQE's lease income at an average rate of 3%, with the balance of lease income based on CPI reviews.
Rental growth for the next 12 months is forecast to be 4% based on a CPI assumption of 7.5%. Over the next five years, 46% of CQE's rental income is subject to market reviews. These reviews are all childcare properties, with the majority occurring in the three-year period from FY 2025 through to FY 2027, and are typically capped at 7.5%. This will allow CQE to capture rental growth from under renting across the portfolio, which has been independently assessed by the valuers at approximately 5%. Rent to revenue for the childcare operators based on tenant data provided under the leases sits at 12.1%, which is very sustainable for operators, which is very important given the long lease terms. Turning to slide 17.
During the half, CQE revalued 100% of the portfolio, excluding acquisitions undertaken and developments completed during the half. The portfolio saw an uplift in valuations of AUD 16.3 million, representing a 0.8% increase from June 30, 2022, with the average passing year of the portfolio now sitting at 4.8%. The valuation uplift has been driven by portfolio rental growth during the period, offsetting a mild yield expansion of 6 basis points. As can be seen from the graph on the right, the value of childcare market transactions for the last six months have slowed, with direct market transactions recorded at approximately AUD 217 million.
This is down from a record year in FY 2022, where there were transactions of approximately AUD 830 million. Transaction yields for the six months have increased to 5.3%, up from 4.7% in FY 2022. However, there were limited transactions in the period, and the transactions were of lower quality and secondary stock with weaker tenant covenants. As has been proven in previous property cycles, due to the asset size of childcare assets, there is still liquidity in the market, as purchasers are often not reliant on borrowings to make property purchases. By way of example, in December, CQE exchanged contracts for sale of five properties at an average yield of 4.4%. Turning to slide 18, an update on the current childcare market.
The last six months have been very positive for the childcare sector from a government policy perspective, and once again highlight the importance of the sector as both a labor supply mechanism to the Australian economy and provision of quality educational outcomes for children. Annual federal government spending is expected to increase by 44% to AUD 14.1 billion in FY 2026. A big proportion of this increase, being 20%, is expected to occur in FY 2024 due to the implementation of the federal government's Cheaper Child Care plan, which is expected to be implemented in July 2023. The legislation to implement these changes successfully passed through Parliament in November 2022. This policy will increase the affordability of childcare through increased subsidy rates and higher family income eligibility. The outlook for the childcare industry continues to improve, with current operator performance strong.
Occupancy levels have returned to above pre-COVID levels in most instances, and daily fee growth has been achieved. Across our portfolio, operators have increased the daily fee by AUD 4 per day or 3% over the last six months with an average daily fee of AUD 124. The additional government funding will also support occupancy growth. There are also early signs that the challenges faced by operators in attracting and retaining staff is starting to abate. Turning to supply, net center supply levels for the year grew by 2.8% or 238 centers, with 8,679 centers at 31 December 2022. This annual growth rate has pleasingly moderated from the prior year growth of 3.1%. Vacancy across the industry remains low and is estimated at circa 1%.
Moving to slide 20 and the outlook and guidance. CQE is focused on continuing with the execution of its diversified social infrastructure strategy. The key focus of this strategy is to actively curate the portfolio to larger scale assets underpinned by stronger tenant and property fundamentals. Today, we are reconfirming that based on information currently available and barring any unforeseen events, the FY 2023 forecast distribution guidance is AUD 0.172 per unit. That concludes the formal component of our presentation. I'll now hand back to the operator and open the line for your questions. Thank you.
Thank you. As a reminder, to ask a question, you need to press star followed by one one on your telephone keypad and wait for a name to be announced. If you would like to cancel your request, you can also press star one one again. One moment for the first question. The first question comes from the line of Solomon Zhang of JP Morgan. Please proceed.
Thank you. Morning, Travis and Scott. A couple questions from me. First one, on the balance sheet, gearing of 34% has ticked up a little bit, and the interest coverage has dropped from 6.8 to 3.5 times, knowing the co-covenants at 2.5x. Are you comfortable with debt levels at these levels in this point in the cycle? Are you sort of looking to reduce that over the next six months or so with further non-core asset sales?
Thanks, Solomon. Scott here. Just to clarify that the ICR covenant's 2x not 2.5x. To answer your question in respect of gearing, we're sitting right in the middle of our target gearing range of 30%-40%. Like we're quite comfortable at that range. We've got significant headroom to our debt covenants with the banks. Very comfortable where we sit at the moment.
Great. Our next one was just on the market rent reviews. It looks like your 2.7% is half a bit weaker than your 5% underwritten assessment. Was it a bit of a call to not push rents given more challenging operator conditions or anything center-specific there?
That's an interesting one. When you've got four properties over a portfolio of 350, each one's got individual circumstances. I think we called out in the presentation that the valuers have assessed, we're sort of sitting 5% under market. We probably think that's a little bit conservative. We've always said we sort of think 5%-10%, but it really comes down to how early in the lease terms that market review, a lot of different circumstances. You can't really sort of take the results of four and apply that across the whole portfolio.
Yeah. Maybe just final one from me. Just on slide 17, you sort of called out the robustness of the sub AUD 5 million transactions. What percentage of your portfolio is under that threshold, broadly speaking?
Good question. I'd like without knowing the exact number, I'd sort of probably say 200. There might be 200 or so assets under that sort of amount. I think that's really important. I think that sort of highlighted what we did in December, contracting five assets at 4.4%. This sort of shows that liquidity and that this also played out back in the GFC when there was still liquidity for childcare assets when there wasn't a lot of liquidity for other asset classes.
Great. Thank you. Thank you for the questions. Once again, to ask question, please press star 11 and wait for a name to be announced. At this time, there are no further questions from the line. I'd like to turn the call back to Mr. Travis Butcher for closing remarks.
Just wanna double-check there's no further questions from anyone?
Yeah. beg your pardon. We do have one question just came in. One moment while I release it. We got a question from the line of Lou Pirenc from Jarden Group. Please proceed.
Yes. Good morning, Travis and team. Thanks for your time. Just a quick one on the payout level. Clearly, it's your dividend is well ahead of FFO for the first half. Is that something that your guidance is based on for the full year, or is there a big swing in FFO in the second half?
Yeah, thanks, Lou Pirenc. Whilst we're not providing earnings guidance today, I think second half will be not significantly different from first half, so there will be that gap between operating earnings and distribution for this year. When we set guidance, there were a number of moving parts, and a number of options we looked at in terms of setting that guidance. These included sort of acquisitions, divestments, and timings of those. Obviously the big sort of lever at the moment in terms of op earnings is interest rates. As the sort of half progressed, we held the distribution at AUD 17.2. Investors in CQE really like the predictability and certainty of that distribution.
That has come at some capital costs, but we think that's pretty small in the overall scheme of things, like circa AUD 1.9 million, less than 10 basis points. We're comfortable with that. We think that certainty and predictability of distribution was important. Then moving forward into sort of FY 2024, there's a number of operating earnings levers we've got, which will help growth moving forward.
Great. As a second question, can I just ask about market rent reviews. You highlighted 46%, I think, coming up in the next few years. Have you had many market rent reviews in the last six months? Can you just talk about kind of what kind of rental uplifts you're seeing there?
Yeah, Lou, that was... In the key stats at the back, page 29, Solomon called that out before with the four market reviews at 2.7%. Just, I think, just wanna have a little bit of caution on those because they each have individual circumstances. We had the valuers, which we included in the pack around assess the market rents. They've assessed them as 5% under market. Obviously really comes down to what the fee growth is between now and those market rent reviews. The bulk of those are coming through in the period, sort of equally through FY 2025 through FY 2027. It depends. The operator's getting quite strong fee growth at the moment.
A lot of our leases are growing at 3%, so that should help in terms of that increase that ability to capture some higher market rent reviews when they come through in that three-year period.
Great. Thank you.
Questions. As a reminder, to ask question, please press star one one and wait for a name to be announced. Once again, if you'd like to ask question, please press star one one. I would now like to turn the call back to Mr. Travis Butcher for closing. Thank you.
Thank you everyone for your participation today and questions. We look forward to meeting with many, many of you over the coming weeks. Thank you.