Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Social Infrastructure REIT 2022 half-year results briefing. At this time, all participants are in a 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 will need to press star followed by 1 on your telephone keypad and wait for your name to be announced. Please note that this conference is being recorded today, Thursday, the 17th of February, 2022. I would now like to hand the conference over to your host today, Mr. Travis Butcher, Fund Manager for CQE. Thank you, sir. Please go ahead.
Good morning, everyone, and welcome to Charter Hall Social Infrastructure REIT's results presentation for the half-year ended 31 December 2021. Presenting with me today is Scott Martin, Head of Diversified Finance. I'd like to commence today's presentation with an acknowledgement 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, the elders past and present, and value their care and custodianship of these lands. Turning now to slide five. CQE has had a strong first half to FY 2022, continuing to deliver on its strategy and achieving robust financial and operating results. Activities during the half resulted in the fund being well positioned to continue to deliver unit holders secure income and capital growth.
Key highlights for the half year are as follows. Operating earnings were AUD 0.085 per unit, with distributions paid of AUD 0.084 per unit, which are an increase of 6.3% and 12%, respectively, on the first half in FY 2021. CQE has available investment capacity of AUD 200 million following the expansion and extension of CQE debt facilities, allowing CQE to pursue opportunities consistent with the fund's strategy. We've made significant progress in respect of CQE's ESG framework during the current period, including the commencement of the rollout of a solar installation program across the portfolio with a commitment made of up to AUD 8.6 million. In addition, we've recently announced a two year partnership with our major tenant customer, Goodstart, to provide funding to enable vulnerable children to access childcare.
CQE's balance sheet is in a very strong position, with gross assets increasing by 28.2% in the current reporting period to AUD 1.9 billion. This growth has been driven by a combination of acquisition activity and revaluation gains. The revaluation uplift of AUD 175.4 million or 11.9% increase since 30 June 2021 reflects the strong demand and yield compression for long WALE social infrastructure assets. The valuation uplift is a key contributor to the growth in NTA per unit of 16.3%, which has resulted in an NTA per unit of AUD 3.78 as at 31 December 2021. The portfolio is in a very strong position with a portfolio WALE of 14.6 years, 100% occupancy, and a weighting of 79% of income to metropolitan locations.
CQE is pleased to reconfirm the upgraded FY 2022 distribution guidance provided in December of AUD 0.172 per unit, reflecting growth of 9.6% over FY 2021 DPU. Moving to slide six and CQE's strategy. CQE's strategy is 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 to the assets we own, targeting ongoing capital growth, and undertaking ongoing portfolio curation. Turning to slide seven. During the half, CQE continued to enhance and diversify its income. The development of the South Australian Emergency Services Command Center was completed in December 2021 and is now occupied by the four government agencies. The building is leased on a 15-year term with fixed annual rent increases of 2.5% and two, five year options.
The property was valued at completion, which has resulted in an uplift of AUD 6.5 million or 8.1% on purchase price. Secondly, during the half, the Mater Hospital completed their fit-out works and occupied their new headquarters and training facilities in Newstead. This asset is underpinned by a new 10-year lease with two five year options and fixed annual increases of 3%. A valuation uplift of AUD 4.5 million or 3.7% was achieved as part of the December revaluation process. Finally, during the half, CQE has acquired a healthcare asset in Heidelberg, Victoria, leased to Healius, a leading ASX-listed healthcare operator. The asset is strategically located within one of Victoria's largest medical precincts adjacent to a Healius-operated pathology lab.
These three assets, combined with the Brisbane bus terminal, now contribute 15% of CQE's income and provide four well-capitalized tenant covenants to the CQE portfolio. Turning to slide eight. 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 portfolios leased to well-capitalized operators with a total of AUD 189.1 million invested during the half. A portfolio of 18 childcare centers in Western Australia was acquired in December 2021 for AUD 100 million, with average lease expiries of 12.5 years.
These properties are leased to the two largest operators in Australia's childcare sector, Goodstart and G8 Education. In addition to the WA portfolio, a further five childcare center assets were acquired, including three assets in the Greater Melbourne metropolitan area, one in metropolitan Brisbane, and one in the Sunshine Coast. They are leased to premium operators, Nido Early Learning and Only About Children, on new 20- and 15-year leases respectively. Settlement of three of these assets occurred in January and February 2022, with the remaining two settlements to occur by April 2022. All the acquisitions are well-located for childcare and positioned with 88% metropolitan weighting, and combined with the fixed 3%-4% reviews will deliver long-term income and capital growth.
CQE unitholders have benefited from the Charter Hall transaction platform, with significant acquisition activity in the period, securing high quality, accretive social infrastructure assets in predominantly off-market transactions. Turning now to slide nine, Environmental, Social, and Corporate Governance. Continuous ESG performance is a key focus area for the fund. Year to date, we've made significant progress towards the integration of ESG into our stabilized portfolio and believe active tenant partnerships will unlock environmental and social value alongside financial outcomes. Some of the REIT's key highlights include approval of up to AUD 8.6 million to provide solar solutions across the CQE portfolio. This will support clean and affordable energy for tenants in partnership with the fund. We have agreed the terms on 31 properties during the half.
This will also enable CQE to better understand tenant operational performance through information sharing, which is currently not available under existing lease arrangements, therefore be able to measure the impact of the solar initiatives and reduce the fund's Scope 3 operational emissions. The initiative will assist CQE's focus on improved performance in industry-recognized ESG assessments such as the fund's GRESB performance. In December, we launched a two year partnership with tenant customer Goodstart to provide funding to enable children from vulnerable families to access fee-free childcare. We expect that the funding provided will enable 55 children to be able to attend childcare in CQE centers two days per week as a result of this partnership, which in turn supports employment opportunity for parents and carers. Finally, we're excited to announce the partnership with the Green Building Council of Australia to develop Australia's first social infrastructure rating tool for operational assets.
This will support operational performance, promote active tenant partnerships, and create awareness of social and environmental initiatives at an asset level. I would now like to hand over to Scott, who'll provide an overview of the financial performance of the REIT.
Thanks, Travis, and good morning to everyone. A summary of CQE's earnings for FY 2022 half year can be found on slide 11. Net property income has increased by 12.6% compared to the prior corresponding period, and has been driven by a combination of like-for-like rental growth of 3.1% and AUD 3.3 million generated from net acquisition activity. There was no impact on CQE's earnings as a result of the COVID-19 pandemic during the half, with all rent collected in full. Finance costs and operating expenses increased period-on-period by 27% and 36.6% respectively due to portfolio growth and new acquisitions. CQE delivered operating earnings of AUD 30.8 million, representing an increase of 5.8% on the prior corresponding period.
Operating earnings per unit were AUD 0.085, and distributions per unit were AUD 0.084, in line with our full year guidance. Turning to slide 12, which provides a summary of CQE's balance sheet position at 31 December 2021. The AUD 362 million increase in investment properties represents an increase of 24% since 30 June 2021, and has been principally driven by AUD 175.4 million of property revaluations, AUD 135.4 million of property acquisitions settled during the period, and AUD 44 million of expenditure on childcare developments and the completion of the South Australian Emergency Command Center. Acquisitions and development expenditure have been debt-funded, resulting in drawn debt increasing by AUD 265 million to AUD 565 million as at 31 December 2021.
Cash reserves at reporting date were AUD 55.1 million in order to fund committed acquisitions in the March 2022 quarter and payment of the December quarter distribution. NTA has increased by 16.3% from AUD 3.25 per unit at 30 June 2021 to AUD 3.78 per unit at 31 December 2021, driven by the net property revaluations and the uplift on CQE's unit holding in Arena REIT. Turning to slide 13, which provides a summary of CQE's capital management initiatives. During the current reporting period, the REIT has continued to work closely with the Charter Hall treasury team on a range of debt initiatives that have continued to strengthen CQE's balance sheet position through extension of facility limits and debt maturities, together with a reduction in margins.
Post-reporting date, CQE increased its total facilities to AUD 800 million, providing it with AUD 200 million of available investment capacity to pursue new social infrastructure opportunities. CQE has diversified funding sources with no debt maturity until June 2025 and a weighted average debt maturity of 4.2 years. CQE's weighted all-in cost of debt is 2.5%, which is calculated based upon drawn debt of AUD 565 million and includes line fees on undrawn debt capacity and amortization of borrowing costs. Balance sheet gearing was 30%, and look-through gearing was 30.8% as at 31 December 2021, adjusted to include contracted childcare acquisitions and disposals together with the funding of the remainder of the childcare development pipeline. Gearing levels remain at the lower end of CQE's target gearing range of 30%-40%.
During the current reporting period, CQE increased its level of hedging to AUD 325 million, comprising a mix of fixed rate swaps and interest rate cap. CQE has a staggered hedging profile through to December 2025, with an average amount hedged of 54% at an averaged hedge rate of 0.54%. I will now pass back to Travis to continue with the presentation.
Thanks, Scott. On slide 15, we have CQE's portfolio summary. As detailed earlier in our strategy, we are focused on continual portfolio improvement, enhancement of income sustainability and resilience. The portfolio continues to be 100% leased, and the portfolio WALE sits at a very healthy 14.6 years. During the half, 18 childcare acquisitions settled and four childcare developments completed with average lease terms of 13 years. Disposal activity has reduced due to significant portfolio curation completed in previous years, with only one asset divested in the half at a premium of 39% to book value, with a second asset contracted for divestment, with settlement to occur in February at a premium of 36% to the 30 June 2021 book value.
Lease expiries in the next five years remains low at 3.9%, highlighting the importance of the property and lease term to the operator's business. It's also worth noting that in calendar year 2027, where there is lease expiries amounting to 5.8% of income, that 97% of this income have options with typically five year notice periods. Therefore, we expect that a significant proportion of these options will be exercised during 2022. Moving to slide 16. CQE's current portfolio is well-positioned to deliver both income and capital growth, with 71% of CQE's income underpinned by top five tenants who are all well capitalized. The portfolio is heavily weighted to the Eastern Seaboard states, with 79% of income derived from these states and 79% of income derived from metropolitan locations.
Childcare assets comprise 85% of the portfolio, and over the medium term, we expect this to reduce to 50%-70% of the portfolio as other social infrastructure assets are added to the portfolio. Fixed annual reviews comprise 75% of the portfolio income at an average rate of 3%. It is important to note that in the three year period from FY 2025 to FY 2027, there are approximately 180 market reviews in the portfolio, allowing CQE to capture rental growth both from under renting across the portfolio and also if inflation exceeds fixed rental growth up until the market review period. Rental growth moving forward is forecast to be 3%, comprising both fixed increases and the balance of CPI increases. Turning to slide 17.
CQE undertook 337 childcare valuations during the period, which represents 100% of the portfolio, excluding acquisitions undertaken during the half. The childcare portfolio saw an uplift in valuations of AUD 159.8 million or 13.2% from 30 June 2021, with the average passing yield of the childcare portfolio now sitting at 5%. As can be seen from the bottom right graph, the value of the childcare market transactions are at record levels, with sales of approximately AUD 619 million compared to the full FY 2021 year, with sales of approximately AUD 550 million. Yields have continued to compress with average transaction yields of 4.6%, which is 40 basis points tighter than the value of CQE's childcare portfolio.
The four non-childcare assets were also independently valued as at 31 December, resulting in a AUD 15.6 million or 5.2% increase. Noting that the healthcare asset acquired in October is being held at the valuation undertaken at the time of acquisition. The non-childcare portfolio has an average passing yield of 4.4%. The compression we are seeing in the long WALE social infrastructure sector is a combination of strong demand for long WALE assets in essential sectors with stable income and a low interest rate environment. Turning to slide 18, which provides an update on CQE's childcare developments. During the half, CQE completed four developments with a total valuation on completion of AUD 28.3 million and an average yield on cost of 5.6%.
All these developments are in high quality locations and provided a valuation increase on completion of AUD 5 million or 21.5% on cost. There are a further 10 remaining properties in the development pipeline, and we are forecasting seven of these to be completed during calendar year 2022. The remaining properties have a forecast cost to completion of AUD 26 million and average yield on costs of 5.6%. The completion of developments is a key priority for CQE, as upon completion, these projects increase CQE's net property income and add to CQE's portfolio of high quality childcare centers. Moving to slide 20 and an update on the social infrastructure sector. It's estimated that expenditure for additional social infrastructure assets in Australia could reach AUD 700 billion over the next decade, providing opportunities for CQE to further expand its social infrastructure portfolio.
As shown in the graph, annual government spending on essential social services like health, education, childcare, and transport is forecast to reach AUD 180 billion per annum in FY 2025. There are several key drivers of demand supporting this level of expenditure and providing a fundamental basis for ongoing social infrastructure investment. These are demographic and societal changes. Notably, there's a growing and aging population, with Australia's population aged over 65 projected to grow 21% by 2066, increasing the demand for health-related services and assets. There's greater focus on more equitable opportunity and participation, which is a key factor in increased demand for childcare services, with the female participation rate increasing from 55.1% 20 years ago to 61.5% as at December 2021.
Fiscal constraints of the providers of social and community services and the ability of these providers to utilize capital more efficiently is expected to provide increased investment opportunities in the medium to long term. In many cases, the rate of demographic change and social evolution outpaces the ability of government and other providers to fund required expansion and upgrading of social infrastructure assets. Turning to slide 21, more specifically childcare. The essential nature of childcare continues to be demonstrated throughout the COVID-19 pandemic, with continued federal government assistance provided to operators to navigate through both the impact of reduced attendances and staff absences. The operators have faced a very challenging and fluid period in the last 2 months- 3 months. However, school holidays have ended and COVID cases and isolation rules have eased. Conditions are improving for operators on a week-by-week basis.
Despite this environment, CQE received 100% of its contracted revenue for the first half of FY 2022, and has collected 99% of its contracted revenue for January and February, highlighting the resilience of the portfolio. Federal government funding, which amounts to AUD 9 billion in FY 2021, provides critical support for the sector. Additional government funding aimed at improving childcare affordability and workforce productivity has been brought forward to March 2022. This was targeted at lower to middle income families and is expected to benefit approximately 250,000 families, which will provide good support for the sector as attendances recover post-COVID. It is expected as part of the approaching federal election that both major parties will focus on childcare affordability as part of their election campaigns, which could result in further increased funding to the childcare sector. Turning to supply.
Net center supply levels for the year grew by 3.1% or 249 centers, with 8,441 centers at 31 December 2021. The annual growth rate of 3.1% has pleasingly moderated from the prior year growth of 3.7%. There were 130 new center openings in the current period, compared with 183 in the prior corresponding period. Moving to slide 23 and the outlook and guidance. CQE is focused on continuing with the execution of its strategy to pursue opportunities in both the childcare and broader social infrastructure areas, underpinned by strong tenant and property fundamentals. CQE's future earnings and distribution growth will benefit from the full year impact of acquisitions and completed developments during the half.
We are pleased to reconfirm that based on information currently available and barring any unforeseen events or a further deterioration in the COVID-19 environment, the FY 2022 forecast distribution guidance is AUD 0.172 per unit, resulting in an increase of 9.6% on the FY 2021 annual ordinary distribution paid. 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. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Solomon Zhang with JPMorgan. Please go ahead.
Hey, Travis and team. Thanks for your time. First question, just on development unit costs. 5.6% this period is down a little bit from prior comparable periods. Clearly some construction cost pressures coming through. Just interested in your thoughts on unit costs going forward, I guess the level of development activity you wanna undertake in the short to medium term.
Yeah. Thanks, Solomon. In terms of that 5.6%, that's a reflection of increased construction costs. Also just delays in terms of some of the projects. The majority of those projects are based in Melbourne, and just with construction delays due to COVID, that sort of increased the holding costs on that. From a development pipeline moving forward, it's our preference to really move more towards upon completion or acquisition of existing sites. What's driving that is really around, we wanna make sure that we get accretion in earnings from day one in terms of acquisitions. Also just wanna really avoid the development risks from a fund point of view. Obviously with developments there's planning approvals, construction delays, cost escalations. That's really taking that risk out of the funds moving forward.
That's great. Just next question, just on sort of market rents versus portfolio rents. Could you quantify, I think, gaps at the moment on an aggregated basis?
I think on a conservative basis, we're probably sitting 5% under market. We called out in the presentation that FY 2025 through FY 2027, we've got approximately 180 market reviews. That gives the fund a good opportunity to pick up that under renting. Also if inflation does run north of our fixed 3% increases, which are across 75% of the portfolio, that gives an opportunity to pick that up as well in that sort of three year period.
Maybe just final quick one from me. Just sort of around operator attendance levels at the moment. Are you seeing a strong bounce back or is it still pretty challenged?
It does vary center by center. I think what you're seeing is that January is typically a slow month anyway, just with you have the older year level go up to start prep. You're seeing the Queensland school start delayed by two weeks. All the operators we speak to have said attendance is improving week by week. I think what you're seeing is that people are getting more comfortable and learning to live with COVID. You're seeing the isolation rules ease, so I think government support's been fantastic through that period. Yeah, operators are seeing that week by week attendance has increased, which is really positive.
Sort of ballpark percentage of pre-COVID?
Oh, it's really hard to answer that one at the moment. We're sitting like pre-COVID, the portfolio was sitting around 79%. It really does depend tenant by tenant, location by location, so it's hard to give that sort of exact answer, Solomon.
Yeah. Thanks for that. Cheers.
Thank you. Your next question comes from Mollie Urquhart with Barrenjoey. Please go ahead.
Hi. Good morning, Travis, Scott. You've got AUD 200 million of investment capacity, and you're continuing to divest at the margins. Given where assets are trading and your earlier remarks about intending to step away from development risks in the portfolio, where are potential returns most attractive to deploy this capital?
Well, I think we've got that two-pronged strategy. Obviously, childcare continues to play a big part in the strategy. We bought 24 assets in the half, and then also the broader social infrastructure assets we're looking at. It really comes down to, can we secure opportunities in either of those two areas? It comes down to which one it is, really depending on the ultimate, the property fundamentals of the deal, who the covenant is, then ultimately, can you secure it at a price that makes sense for the fund. I think what's been one of the strong things we've done during the half is the off-market transactions. In terms of the childcare, 20 out of the 23 were off-market, and that's sort of leveraging that Charter Hall transaction platform.
Also leveraging our relationship with our tenant customers. For example, the Only About Children deal was done off market. Only About Children bought the business, we bought the freehold and entered into new leases. You need to get creative. It is quite a competitive market out there. It's all about making sure that is the right price, is the price right for the property deal you're getting and the covenant you're buying.
Yeah, for sure. On childcare at the operator level, can you give us some color on how tenants are tracking, where are occupancy costs? When you look across your book, do you see any risks within the current labor and inflation environment?
Yeah. In terms of just picking up on the comments I made before, it really is improving. I think we've had a lot of discussions with operators in the last week, and there's a lot of operators talking about growth, talking about expansion. We've seen some M&A activity happening already, so we're getting assignment requests. There is still that, which gives you confidence that the operators are coming out of this period positively. In terms of our rent, where occupancy costs sit, across our portfolio we're at 10.6%. I think as I spoke to before, that's sort of under market.
I think operators have obviously had a challenging time working through this with staff absences, and obviously they've still got the problem, the challenge around long-term labor and having labor suppliers, which both federal and state governments are looking at solutions to assist there. I think one thing to always bear in mind with childcare, the operating margins are typically a good operator's achieving 15%-20% EBITDA margins. There is room for increase in labor, and obviously they've got the flexibility of increasing the fees to parents as well. There is some flex in terms of enabling more to be paid to the workers while still keeping that profit with healthy levels.
Just on that, increasing of fees, do you have a number for what the average daily fee is at the moment?
Across our portfolio, it's AUD 116.
Brilliant. Just lastly, on the inflation point you were talking to before, 25% are linked to CPI. What's the majority of the mechanism there? Is it the greater of fixed or CPI? And perhaps what you're expecting to get out of those leases in terms of above average growth, and what's assumed in your guidance?
No, actually quite simple. It's, yeah, 75% are fixed, average 3%, and the balance is just CPI. We've assumed, and it depends on which quarter that rental increase falls, but we're assuming a 3% CPI increase for the next six months, and that's what's been factored into guidance as well. It's interesting what if inflation, say for example, talking about the market reviews we touched on earlier, if inflation ran at 4% for the next three years, that's at a 1% above our fixed 3%. That sort of 3%, obviously a bit higher than that compounding it. We'd pick that up sort of in the market reviews that happen throughout FY 2025 to FY 2027 period.
Brilliant. Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We will now pause a moment to allow for any further questioners to register. There are no further questions at this time. I'll now hand back to Mr. Butcher for closing remarks.
Thank you everyone for your participation today, and I look forward to meeting with you, many of you over the coming weeks. Thank you.