Please note that this conference is being recorded today, Wednesday the 4th, February 2026. I would 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 2025. Presenting with me today is Erin Kent, Head of Social Infrastructure Finance. Before starting today's presentation, I'd like to commence with an acknowledgment of country. Charter Hall acknowledges the traditional custodians of the lands on which we work and gather. We pay our respects to elders past and present and recognize their continued care and contribution to country. Turning now to slide four. CQE's results for the first half of FY 2026 were underpinned by high organic rental growth of 4.2% and ac cretive portfolio curation resulting in strong earnings growth and upgraded distribution guidance.
CQE delivered operating earnings for the half of AUD 0.085 per unit and an 11.8% increase on the first half of FY 2025. Distributions paid for the half were AUD 0.084 per unit, an increase of 12% from the prior period.
CQE has continued to be active with its accretive portfolio curation during the first half of FY 2026, with acquisitions totaling AUD 181 million at an average yield of 6.8%. The key acquisition made in the half was the acquisition of a 50% interest in the Western Sydney University campus in Parramatta, totaling AUD 152 million, which is a great addition to CQE's portfolio, and I'll talk further to this transaction in the following slides. During the half, we also contracted to divest 20 early learning properties for a total consideration of AUD 89 million. Pleasingly, these were completed at a premium of 4.6% to their previous carrying value and an average yield of 4.3%. CQE delivered high rental growth over the last 12 months, with like-for-like weighted average rent reviews being achieved of 4.2%.
A key component of this rental growth was the completion of 58 early learning market reviews during the half, resulting in a 6.1% uplift in rent for these properties, which continued to demonstrate the under-rented nature of CQE's early learning portfolio. We're pleased to announce today that, based on information currently available and barring any unforeseen events, full-year earnings per unit guidance have no less than AUD 0.172 per unit and an upgraded distribution guidance of AUD 0.17 per unit, which is an increase of 11.8% from FY 2025. Turning to slide five, which sets out CQE's key portfolio highlights. CQE has a diversified portfolio of 308 properties in Australia across various social infrastructure subsectors, providing essential services to the community. CQE benefits from 72% of its leases being triple net, where the tenant is responsible for all property outgoings and capital expenditure.
There are two key drivers to enhance the quality and returns from CQE's portfolio. Firstly, active portfolio curation has been a key component of improving CQE's property returns and portfolio diversification. Since 30 June 2022, CQE has upweighted its investment in long WALE social infrastructure assets to 35%, up from 15%, enhancing CQE's income sustainability and resilience. During this period, CQE has acquired four long WALE social infrastructure assets, totaling AUD 422 million, at an average yield of 6.5%. This has been predominantly funded through the divestment of 74 early learning property assets, totaling AUD 320 million, at an average yield of 4.4%. This is a yield spread of over 200 basis points.
The early learning property market continues to have high levels of liquidity, with almost AUD 1 billion of transactions in the last 12 months, providing future liquidity options for CQE. The second driver is strong organic rental growth. Moving forward, CQE offers attractive rental growth prospects through a combination of 69% of lease income subject to annual fixed escalators of an average of 3% and the balance being inflation-linked and market rent reviews.
Moving slide six and further details on CQE's key acquisition for the half, being the acquisition of a 50% interest in the Western Sydney University campus in Parramatta. This modern purpose-built university campus was completed in 2017 and provides essential higher education learning through specialized technology-enabled learning studios, unique study spaces, and other student amenities. The campus is approximately 26,500 square meters of NLA located in the heart of Parramatta's CBD, with strong transport links. This asset has excellent property fundamentals, with a long lease of 16.1 years remaining, a well-capitalised tenant who's also a co-owner of the asset, and importantly, annual rental reviews of 3.75%.
The 50% interest in the property was acquired for AUD 152 million, with a current yield of 6.5%. Moving to slide seven and CQE's strategy. CQE's strategy remains unchanged, which is to provide investors with resilient income and capital growth through exposure to a diversified social infrastructure portfolio. We see the attributes of social infrastructure assets such as strategic locations, long leases, predictable income growth, and sectors providing essential services as all critical components to CQE delivering on its strategy. Turning to slide eight. Social infrastructure has a number of industry and demographic tailwinds, which will increase the need for social infrastructure assets moving forward. The first is population growth in Australia. Over the next 10 years, Australia's population is anticipated to grow by 3.5 million, or 12.6%. The key component of this is net overseas migration, which is currently running at over 300,000 per annum.
Secondly, given the essential nature of social infrastructure, governments provide significant financial support with federal government funding for key social infrastructure subsectors of over AUD 200 billion per annum. Government budgetary constraints, both at federal and state levels, are increasing the need for private capital to fund both existing and future requirements. Finally, focusing on the Australian education sector, which is key to sustaining productivity and driving GDP growth. There are two aspects to this, being international student enrollments and the importance of this to the economy, being Australia's fourth-largest export market. Secondly, the skilling up of the Australian workforce to meet the skills required in the future. Australia has set a target by 2050 to require 80% of the workforce to have both finished school and obtained an additional qualification. Both of these factors will drive demand for tertiary and vocational education campuses.
I'd like to now hand over to Erin, who provided an overview of the financial performance of CQE.
Thank you, Travis, and good morning to everyone on the call. A summary of CQE's earnings for the first half of FY 2026 can be found on slide 10. During the half-year, CQE achieved like-for-like net property income growth of 4.1%, enhanced by the positive market rent reviews achieved across the portfolio. This is further supported by net accretive transaction activity, divesting lower-yielding early learning assets and replacing these with higher-yielding social infrastructure assets. This resulted in overall net property income growth of 10.5% compared to the prior reporting period. Finance costs have increased due to the higher average debt drawn over the first half of FY 2026 to fund this net transaction activity. This has resulted in CQE delivering operating earnings of AUD 31.4 million for the six months to 31 December 2025, which equates to AUD 0.085 per unit.
Distributions per unit of AUD 0.084 represents a distribution payout ratio of 99% and distribution growth of 12% on the prior comparable period. Based on the upgraded FY 2026 distribution guidance of AUD 0.17 per unit provided to the market today, distributions in the second half of the year will increase to AUD 0.086 per unit. Turning to slide 11, which provides a summary of CQE's balance sheet position at 31 December 2025. During the first half, CQE continued to deliver on its social infrastructure portfolio diversification strategy, settling AUD 181 million of new acquisitions, the most significant being the Western Sydney University campus in Parramatta, which Travis spoke to earlier. In addition, CQE settled 19 early learning property divestments for a total consideration of AUD 89 million, the divestment of a further four early learning centers equating to AUD 21 million are due to complete in the second half of FY 2026.
61% of CQE's portfolio was independently valued in the last six months, resulting in a total portfolio net valuation uplift of AUD 12.2 million, reflecting the continued demand and positive market sentiment towards the essential resilient nature of CQE's portfolio. CQE's NTA per unit is AUD 3.90 at 31 December 2025, representing a 1% increase on 30 June 2025, driven by portfolio revaluations. Turning to slide 12, which provides a summary of CQE's capital management position. As announced at the full-year result in August, CQE completed the successful refinance of its entire debt platform, adding diversification via the Asian term loan market, longer tenor, and increased covenant headroom. In addition, improved pricing lowers CQE's weighted average credit margin by 20 basis points, contributing to the earnings growth result presented for the half-year.
As at 31 December 2025, CQE's weighted average cost of debt was 5.1% based upon 81% balance sheet hedging at an average fixed rate of 3.3%. CQE's balance sheet gearing was 34.1% at 31 December 2025 in the lower half of the target 30%-40% range and provides considerable headroom to covenants. CQE remains highly hedged across the second half of FY 2026 at 83% and has increased FY 2027 average hedging to 63%, providing earnings stability in the current interest rate environment. CQE's weighted average debt maturity is 4.4 years, reflecting a 2-year extension as a result of the platform refinance, with no facilities expiring until FY30. I will now hand back to Travis to provide a portfolio update.
Thanks, Erin. On slide 14, we summarize CQE's portfolio. CQE's portfolio has a property passing yield of 5.5%, an 11.4-year WALE, and 99.6% occupancy. Weighted average like-for-like rental growth for the year to 31 December 2025 was very strong at 4.2%, which primarily reflects the completion of 114 market reviews over the last 12 months. In this half, 58 market reviews were completed, resulting in a 6.1% uplift in rent on these properties. As previously mentioned, accretive portfolio curation continues to be a key focus for CQE to drive earnings and distribution growth. Acquisitions contracted during the half amounted to AUD 181 million and an acquisition yield of 6.8%. During the half, CQE contracted to dispose of 20 early learning properties for a total consideration of AUD 89 million and an average yield of 4.3% and a 4.6% premium to previous carrying value. Moving to slide 15.
CQE's portfolio WALE remains strong at 11.4 years. Lease expiries within the next five years remain low at 4.2% of CQE's total lease income, with 1.8% of these expiries incurring in 2030. CQE's long WALE highlights the importance of the property and lease terms to the tenant's operations and also the option notice period required under the leases, which typically ranges between three and five years for the early learning properties. It's also worth noting that only 1.8% of lease income is true expiries where there are no tenant options. Turning to slide 16. While CQE is a long WALE, there are opportunities throughout the lease terms for market rent reviews, typically every five years. This slide provides further detail of the market rent review outcomes and future rental growth profile.
During the half, 58 market reviews were completed with an average 6.1% increase or an additional AUD 0.7 million of rental income achieved across these properties. 52 of the reviews were capped at up to 7.5%. 81 early learning properties, or 16% of CQE's rental income, are subject to market reviews in the period through to June 2028, providing the potential for further increases in rental income. Market rents are set with reference to operator fees in that particular location. Operator fees have historically seen strong growth and, based on our tenant data to September 2025, grew by 8.4% year on year. This further highlights the under-rented nature of CQE's portfolio, which is supported by CQE's net rent-to-revenue calculation, which currently sits at 9.7%, clearly below market parameters. Turning now to slide 17 and ESG.
We remain focused on implementing sustainability initiatives across our portfolio and consider ESG as a driver of long-term value for CQE. The key highlight we wanted to focus on today is the recent achievement of a Green Star Performance rating following our pilot with the Green Building Council of Australia. This has been a true partnership between Charter Hall, the GBCA, and one of our key tenant customers. The achievement represents Australia's first early learning centre rated under the most recent Green Star Performance version two rating. Pleasingly, the centre achieved a four-star Green Star rating, representing best practice in operations. This initiative is an example of active partnership with our customers and provides us with knowledge and expertise to look at further opportunities across CQE's portfolio to deliver shared sustainability outcomes with tenant customers. Moving to slide 19. The outlook and guidance.
We'll continue to execute CQE's strategy to actively manage the diversified social infrastructure portfolio, which delivers essential community services. Social infrastructure is a growing asset class with long-term opportunities for future investment for CQE due to positive industry and demographic tailwinds. We are pleased to announce today that, based on information currently available and barring any unforeseen events, full-year earnings guidance of no less than AUD 0.172 per unit and an upgraded distribution guidance of AUD 0.17 per unit, which is an increase of 11.8% from FY 2025. 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. Ladies and gentlemen, as a reminder to ask the question, please first star one-one on your telephone, then wait for your name to be announced. To withdraw your question, please first start one-one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Richard Jones with JP Morgan. Your line is open.
Good morning, Travis. How are you going? Just a couple of questions. Just wondering if you'd expect the weighting of ELC to continue to be diluted and used to fund growth in other kind of long WALE asset classes that obviously has been a strategy over the last three or so years.
Yeah, thanks, Richard. I think over time, we've sort of previously flagged we'll probably trend towards 50/50. But ultimately, it comes down to, for us, in terms of where we invest our capital, it comes down to obviously being in social infrastructure, being well-capitalized tenants, and sort of the key property fundamentals. So whether that's in ELC, whether that's in other social infrastructure subsectors, that's really drives our decision-making.
Just your latest thoughts on a share buyback?
Yeah, Richard, with that one, we ultimately came down to what was the best use of CQE's capital. So during the half, obviously, we announced the acquisition of WSU, 50% of that. The returns on that, well, that's got a property IRR, forecast property IRR of close to 10%, yield of 6.5%. So we were strongly of the view that was a significant better use of capital for CQE from both a short-term and long-term point of view than completing the remainder of the buyback. Obviously, we'll assess that moving forward, but for the first half, that was sort of the best use of CQE's capital.
I assume guidance assumes that the rate cut sorry, the rate hike that went through yesterday, is there any further hikes in your numbers?
Hi, Richard. Yes, that's right. It's Erin. With the FY 2026 remainder of the year, we've assumed a floating rate in line with market, and that had the embedded rate cut fully priced in that happened yesterday.
Great. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Daniel Lees with Jarden. Your line is open.
Thanks, Travis and Erin. Thanks for taking my call. Just on the hedging, I can see you've topped up FY 2027 on what looks like pretty favorable terms there. Can you give us any color on what your strategy and thinking is around hedging?
Thanks, Daniel. Yes, you're right. We were able to execute on some hedging initiatives. We did some back in July and August, which was at the start of this period, and these were forward starting swaps, which resulted in that high hedge percentage of 83% for the remainder of this year. In terms of FY 2027, more recently, we extended some of our existing positions to top that percentage up to 63%. We will continue to be active in this space and look for opportunities to progressively add to our longer-term profile in time.
Great. Thanks. And just another one. Just in terms of the upgrade, can you give us a flavor on how much of the upgrade was driven by your market rent reviews versus the hedging and outcomes from your accretive transaction?
Yeah, Dan. Travis here. Probably in terms of without going into all the ins and outs of it, probably the biggest component of that was the acquisition accretive portfolio curation. So the upweighting, obviously, we announced the first 22.5% of 1 PSQ at the August results. So there was further upweighting to that during the half and obviously the divestment activity at 4.3%. So that was probably the key component. Obviously, we did have visibility, and we did make forecasts on the market rent reviews when we put out guidance back in August. So yeah, probably the portfolio curation was really the key determinant of that upgrade.
Great. Thanks. If I could just ask one more, actually, just to clarify on Richard's question. Can you just confirm that your guidance is now in line with the latest BBSW curve, post-yesterday's hike?
Yes, confirming that that is the case.
Great. Thanks. That's it from me.
Thank you. Please stand by for our next question. Our next question comes from the line of Ben Brayshaw with Barrenjoey. Your line is open.
Morning, Travis. Thanks for the presentation. I was just wondering if you could comment on the decline in occupancy, just what's happened there, and what your expectations are for the occupancy level in the second half.
In terms of our 99.6% occupancy, yeah, there was one childcare center that the tenant went into administration on. We're currently active leasing campaign on that. We hope to get that sorted in the coming months. So hope to be in a position by 30 June that that's back to where it's been historically at 100%.
You mentioned in the slide that it excludes one early learning center, which is vacant, and it includes a heads of agreement, presumably, on a center that was leased. Yeah, just a comment on what's happened there at either one or both of those assets.
Yeah. So the one with the heads of agreement was similarly that was that same tenant that went into administration. So we've progressed that one. And the vacant early learning property, which we've divested, was just in terms of we came to a mutual agreement with the tenant on that one. They wanted to exit that location. So we came up with a mutual agreement and have seen that lease and property divested.
Great. Thank you. How are you seeing the environment for fee growth to come in at 8.5% for the last 12 months? I was just wondering your thoughts are on that going forward, given that it's pretty strong?
Well, I think, Ben, with that one, you've got the overlay of the wage funding, which the government provided. So probably looking forward, in order to get that 15% funded wage increase from the federal government, operators typically had to cap their fees around that 4.4%. So I think you will see that soften this time next year, but still very strong. And I think for us, from a rental affordability point of view, with our rent-to-revenue at 9.7%, we're sitting in a pretty comfortable position from that perspective.
Can you just clarify the uplift on the uncapped market reviews? Appreciate there's only six for the half. Just curious as to where they came in.
They actually were. They came in at 3.1%. So in terms of just to give you a bit more color on that composition of those 58 market reviews, of the 52 capped, they were 7.1% uplift. All but one of those hit the cap. Majority of those were capped at 7.5%. There were a handful at 5%. But yeah, in terms of the six uncapped that got 3.1%, they were new leases. So this was the first market review five years into that lease. And in terms of the average rent per place, just to give you a bit more color, they were AUD 4,800 a place on those six centers, just to compare the average of CQE's portfolio, which is at AUD 3,000 per place. So I think with all these market reviews, really depends on individual circumstances of those leases.
Great. Thanks for your time, Travis.
Thanks, Ben.
As a reminder, ladies and gentlemen, to ask the question, please first start one-one on your telephone. Please stand by for our next question. Our next question comes from the line of Murray Connellan with Moelis Australia. Your line is open.
Morning, Travis and Erin. There's obviously been a lot of movements with regards to interest rate expectations in the past six months. I was wondering whether that leaves you in terms of balance sheet comfort and where you'd like to see gearing. You're obviously towards the midpoint now of your target range. Could you see that going much higher?
Hi. Yes, we are in the lower band of our target gearing range, and that will come down closer to 33% gearing when we receive the proceeds from the 4 early learning centers we currently have held for sale. We are quite comfortable at this level of gearing and have considerable headroom to covenants. Also, we do think that the interest rate cycle that we're in at the moment won't necessarily transfer into valuation decline, so we're quite comfortable at that level.
I think, Murray, the other thing to add to that is I think you've seen this year childcare sales almost get to AUD 1 billion in the last 12 months. That's sort of been proven over the last three to four years. Liquidity's been strong despite the increasing interest rate environment. A lot of purchases are privates, cash buyers. They're not doing 10-year IRRs. They're using cash that they've from other property sales. I think there's that resilience in these valuations as well that does assist that in terms of our look-forward gearing position.
I don't appreciate the direct market color. I was wondering whether I could also just pick your brain on you sort of touched briefly on market rents. That 9.7% rent-to-revenue ratio is obviously quite a bit lower than it has been historically, and I suspect is probably quite helpful when it comes to negotiating market rent reviews. But I was wondering whether you could comment on what that number looks like at the moment when it comes to new leases in the industry being struck, insofar as you're sort of able to tell based on what you've seen. It's obviously yeah, it's a ratio that's probably been closer to the sort of early to mid-teens historically, but lots changed with regards to the sector and labor costs and the challenges with that in the past few years.
I was wondering whether you might be able to comment on what a sort of more normalized level might look like.
Yeah. Murray, if you're sitting in new lease today, you're typically sitting at 12%-14%. And you do adjust that revenue to reflect some vacancy. So you're typically whether it's sort of 85%-90% adjustment for that. So that was where if you're striking a new lease today, obviously, what's happened with our portfolio has been the fee growth over a significant period of time has been greater than the rental increases. So that has seen that rent-to-revenue dip below 10%, puts us in a really strong position in terms of the market rents. Obviously, you look at those capped ones that we hit the cap out of 51 out of 52. So that just demonstrates where we sit.
But yeah, typically, it's that, coming back to your question, 12%-14% is where you'd if you're striking a new lease today, depending on whether it's where the property's located, metro versus regional, etc., sort of comes into it as well.
Yeah, that's clear. Thanks, Travis.
Thanks, Murray.
Thank you. Ladies and gentlemen, I'm sure there are no further questions in the queue. I would now like to turn the call back over to Travis for closing remarks.
Thank you, everyone, for your participation today and questions, and look forward to meeting a number of you over the coming weeks. Thank you.