Thanks very much, Chris. Good morning, everybody. Thanks for joining the call. So I'm joined by Matthew Strotton, who's head of real estate, and also Peter Granato, who's the key fund manager on this fund. The plan is that we'll take around the next 20 minutes to run you through our presentation that was posted this morning. As Chris said, just leaving enough time for Q&A thereafter. On page two of the deck, you will see the agenda. So I'll run through the highlights. Then I'll know it's Peter to cover the financial performance. Then Matt will take up the baton and discuss the performance of the portfolio and capital management. Then I'll quickly sum up before opening to questions. Turn to page four. I'm running you through the highlights from left to right.
A feature of the presentations in the recent past has been strong leasing spreads, and that continues to be the case, with an average of 8% increases across 17 deals in the period. So that inflation protection is coming through, as we suggest it might. And that's in addition, of course, to the ongoing escalators within the leases. Since inception, occupancy has always sat around 98 or 99%, and that continues to be the case, as you might expect from such a defensive portfolio. And that robustness is also reflected in solid valuation.
Externally valued every single asset in the portfolio over the last 12 months, as of 31 December, and sold three of them at a book or value or premium to book value. So our valuations can be relied upon, to be fair. Our debt is under control with no short-term refinancing risk, ample headroom, and gearing of 35.7%.
That's likely to fall in the next few months as we move through the year and continue our capital recycling program. As we recently increased the hedge to 76%, taking the opportunity to do so as rates started to normalize, meaning that the hedge became cheaper. In terms of capital management, we initiated the buyback program in December with 1.2 million securities bought, and a similar amount also traded in January. That will take you through our plans to evolve the portfolio and how we're seeing opportunities to enhance the asset mix, both in terms of accretive acquisitions and value-add initiatives, which will be funded out of asset sales. We see, therefore, no change to our previous guidance, and the DPU equates to a yield of over 8% on today's price, with around about 97% of that being tax deferred. So with that, I'll hand over to Peter.
Thanks, Scott. Today, I'll be taking us through the financial performance of the fund commencing on slide number six. I would like to step through the financial performance, focusing on the first half activity, and provide insights to the activities that will contribute toward achieving full-year guidance. Scott has highlighted a range of key operational success parameters, including the sustained strength of leasing spreads and NOI growth. I would like to also highlight that the inflationary pressures across the fund have been managed both on an income and expense basis via inflation-exposed rental escalators, which have been complemented by the portfolio that comprises approximately 70% net leases. Now, this allows the increase of the most property expenses to be passed on to the tenant, which is incredibly important.
At this stage, I would like to call out the first half FFO, which on the surface may appear behind based on the full-year run rate. In particular, I would like to call out the finance costs, which remain a key focus and another key consideration of the capital recycling strategy. As you can see, the weighted average cost of debt was 4.87% for the reporting period, and this will continually manage through active hedging and through continuing to draw upon the in-house interest rate markets expertise within RAM. As with previous years, it's no real surprise that the run rate is skewed to the second half. Rent reviews, in our case, are more prevalent in the second half. For example, our three largest healthcare tenants have their annual reviews during December, quite late, and resulting in the increases from this date onward, thus affecting the second half.
The second half will also see further leasing activity and ongoing expense management initiatives, which will continue to drive full-year FY24 earnings as well. The second half will also see a reduction in finance costs, more so as a reduction of reducing debt levels, both a result of divestment activity and noting the proceeds of the three recent divestments at book or above were utilized to pay down debt. There are further divestments targeted for the second half, which will provide FY24 accretion and also support growth into FY25 and beyond. At this stage, I'd also like to reiterate that both medical and essential retail asset classes remain resilient, with transactional activity underpinned by proven liquidity edge. These sectors remain attractive to multiple buyer groups, including private capital. These buyers have remained active throughout the recent cycle and are actively targeting quality assets at the sub-20 million capital value.
This will continue to contribute positively as we embark on our capital recycling strategy. As mentioned earlier, the share buyback continues well into calendar year 2024 with an accretive effect. Moving on to slide seven, this slide highlights the key elements of our strength and balance sheet, incorporating enhancements to our capital management. As you can see, the gearing is currently 35.7%, comfortably within the range of our 30%-40%. Gearing will be managed towards the lower end of this range post near-term capital recycling initiatives. Hedging remains ongoing and a key consideration, noting recent positive signals of easing inflation, which have all been considered in parallel to the capital recycling strategy. We have not rushed into increasing the hedge position, and the timing really had to be right to consider further hedging, saying that earlier this month we increased our hedge position by further AUD 50 million.
This demonstrates once again that the hedge position has been actively managed, in this case through an expansion of matured tier one banking relationships and the recent hedge. This has increased the hedging to 76%, as mentioned previously, which is slightly higher than upper target range, but reflective of the upcoming activity. The key metrics on this slide are quite self-explanatory, and I do draw your attention to the syndicated facility, which has been expanded with an additional tier one bank. The limit of this facility has increased to AUD 349 million and complemented by a significantly improved ICR covenant of 1.5, which reinforces the strength and underlying cash flow and assets. As we move on to the next slide, slide eight, once again, this slide is quite self-explanatory and represents the facility and hedge positions before and after the recent expansion of the syndicated facility and recent hedge.
In particular, I'd like to call out the headroom, which has increased to AUD 57 million, along with the improvements to the hedging and the increased hedging tenure now at 1.8 years. I'll now pass over to Matt, who will step us through the portfolio performance.
Thank you, Peter, and thank you, SK. Let's just turn to slide 10, folks. We've covered this a little, but I'll call it out again. But REP's defensive qualities and resilience are shining through yet again. Leasing retention continues to be a highlight for the fund across our 17 new deals and renewals, with spreads again in the high single digits. This has contributed to NOI growth on a like-for-like basis at 7.1% and 2.4% on a straight-line basis. And we further note supermarket aggregate MAT growth, or average MAT growth, continues soundly above CPI at 6%. Just a brief call out again as to why we continue to deliver at these levels. Well in short, it is fundamentals. The central premise for REP is based on the ongoing need for healthcare and essential services in our communities.
The services and goods in our location have been and continue to be supported by top-down fundamentals. Our population base continues to grow, and our population continues to be skewed towards an aging demographic. Our consumers continue to demand convenience, and our communities expect flexibility in working and living arrangements and much more. These principles are what REP was founded on, and our results continue to support this. Just on to slide 11 now. Folks, you'll be quite familiar with this, and I'll pause briefly to allow you to absorb the figures further. Allow me to call out some noteworthy items. There has been further movement outward in the fund's average cap rate. We're now at 5.81%, and from a total return point of view, there has been an uptick in the average rent review, as foreshadowed in earlier quarters. We are now at 4.1%.
You'll recall you know in our prior presentation, we were at 3.5. 94% continues to be in essential services, and we are pleased with the shift in the momentum of our lease negotiations such that there remains a defensive mix between CPI and fixed reviews. You will note that the fund's expiry profile remains quite healthy; however, it is now ebbing downwards towards six years. RAM has been working on initiatives. Both Peter and SK mentioned that in their opening comments that will address both the income sustainability of the portfolio and its quality in the coming quarters. We intend to commence a process that will elevate both asset and tenancy profile through further development and select acquisitions. I'm going to touch on that a little more shortly. So if we now turn to slide 12, again, you'll be familiar with this layout.
As noted, the weighted average cap rate for the fund now sits at 5.81. Medical at 5.65 and retail approaching 6%. Fund valuation, gross valuation after taking account of asset sales last year, has moved from AUD 786.5 million down to about AUD 745 million. Cap rates in medical and retail continue to benchmark well to our peers, and we feel quite comfortable with the interpretation of our pricing by our panel of external valuers. Market activity and buyer debt in both our sectors continues to be quite active. Again, for assets in the lower parcel sizes, but we are seeing green shoots emerge with activity on larger assets and partial asset sales. So stepping back, our cap rate's slowing down. Have we reached a peak in this valuation cycle?
Our house view is that we will start to see sectoral cap rate spreads further tightening, and this is a sign of improving pricing tension. You will note, and you will recall yourselves, that a wider spread typically highlights a more patient and discerning buyer. This is an early sign of the cycle reaching equilibrium with a greater depth of capital emerging to pursue a wider range of transactions. As of late last year and earlier this year, the forward interest rate curve has been consistently inverting, and we now note, like you, that the spread for our three or four-year forward rates has moved inward since December by about 75 to 80 basis points. So will investors start to revisit real estate allocations? Will sentiment shift back towards asset classes with sustainable, reliable income with lower volatility? Will we see a normalization of cap rates?
We believe that this will be the case, yes. From our perspective, the current market dynamic is as follows. There is continued support from investors targeting our sectors. There is continued advantages in transacting lower parcel sizes, recalling, as Peter mentioned and recalled, our liquidity edge as we've demonstrated late last year. We are witnessing green shoots emerge for larger asset sizes and partial interest sales, and importantly, we believe there is a normalization of the interest rate cycle with a sustained inversion on the yield curve. All of these combined support RAM's proposal to elevate transactional activity. We see this environment as an opportune time to recycle capital within the portfolio. I'll just pause there and move forward through to slide 14, folks. So capital recycling, what's our plan? We've mentioned our intention, and we do indeed intend to move forward with a range of potential divestments.
During the last several quarters and after successfully testing the market last year, the team continued to refine their review and conduct more detailed analysis of the portfolio. A review of asset quality, asset maturity, tenancy profile, relative risk, relative yield compared to the additional dollar cost of debt, and each asset's individual value equation. In reflection on those earlier comments I just made, and after a short listing of a subset of assets, we intend to move forward with several sales campaigns. Now is the time. Now is the time, Scott said, to evolve the portfolio. We propose investments of up to around AUD 100 million in value, assets where that equation is relatively weak, compared to allocating capital towards both either the reduction in debt or towards acquiring more accretive and more sustainable and attractive acquisitions.
The fund is currently under exclusivity on two new opportunities in the medical sector. Both would result in the addition of far stronger covenants and provide a significant boost to the funds to the fund's WALE. The assets are located in Metro Sydney and Metro Melbourne, both that have emerged off-market and both have required quite a distinct and dynamic partnership approach to structuring each deal. The result of these capital recycling initiatives will enhance overall quality of the portfolio, further enhance our leasing proposition, and allow the fund to pursue selective elements or value-add schemes in addition to pursuing a more attractive and in-depth deal flow pipeline that is being identified by the broader RAM team.
We don't take this process lightly, but as you know and as foreshadowed, we have been contemplating this pathway, but we have been waiting, waiting for the right dynamics, and we see that today.
Slide 15, folks, you'll recognize this slide. We wanted to recall this again to affirm our commitment to the healthcare sector. We've updated this in various components and included today. It is an affirmation of our strategy and a confirmation of that belief in sector fundamentals. Economic, space market, demographic fundamentals continue to strengthen and support our investment case. RAM has an approach to actively source and de-risk assets with high-quality covenants. Combined with our recent moves to cast a far wider lens in sourcing risk assets, this has led to a significant depth in deal flow pipeline, a pipeline that REP will be turning towards actively. We also further note that both the Northwest and Mayo developments remain on our horizon in our pipeline.
Our operating partner has been finessing the scope of both schemes with Northwest, due to commence prior to June this year, and Mayo more than likely to have a commencement in the next financial year. So with that, I'll hand it back to SK for our closing remarks. Thank you very much, Matt.
So on page 17, you can see the summary of the guidance, but as we've already been through those numbers with you, we'll skip through page 18 and I'll sum up. So in summary, we continue to see strong leasing spreads. We've also seen an uptick in the weighted average rent review across the fund. The assets are pretty much fully occupied with strong tenants, 94% of whom are essential retail or medical in nature.
Matt described the environment that we're now in and how that, along with our real estate ecosystem, is throwing up opportunities to enhance the portfolio and capital recycling. In doing so, we're seeking to take advantage of our so-called liquidity edge. As we evolve the portfolio, we do so with a strong balance sheet. We've always suggested that we've managed gearing around the low 30s, and that continues to be the case. We also foreshadowed that we'd increase the hedge when it was more economic to do so, and we've done that recently as rates started to adjust. Finally, that leads us to a position where we're happy to reconfirm guidance of AUD 0.056, which is great through a very attractive yield on a current price of 8.4% with 97% of that tax . So with that, we might open it up to questions.
Thank you. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Your first question comes from the line of Leanne Truong from Ord Minnett. Please go ahead.
Good morning, everybody. Just the first question around the first-half and second-half skew in your guidance. I mean, the second-half skew's a lot bigger than, I guess, this time last year. Just wondering if you're assuming in terms of acquisitions or buyback first. Thanks.
Yeah, sure. I think you know what's certainly key to note here is that you know a significant portion of the portfolio is weighted towards the second half, and obviously, you know the composition of the tenancies is an ongoing evolution and is certainly changing, but I think fundamentally, there is a contribution of that, and the acquisition and divestment program certainly will contribute as well to that second half, as we said. There were some timing misses on some of our new deals that were going to be going into the end of the financial or the end of the first half year. Leanne, again, that has contributed to that. Probably amplified that a bit more than last year. But yeah, the timing of most of those events, again, is skewed to the second half.
So you're assuming some acquisitions then in the second half in your guidance? Is that fair to say?
And we did that. We incorporated that into our budget, but equally balanced with what we might expect to be a more conservative leverage position. So we're weighing up those particular pathways. We do incorporate a certain level of contribution from putting that capital to work in acquisitions, in accretive acquisitions. And both those two mentioned do provide a reasonable uplift in earnings as well as, obviously, the quality of the portfolio.
Sure. And then, yeah, obviously, you mentioned that you're looking to acquire forward you know two assets. What does that do to your gearing? And I guess, what does that do to your buyback program as well?
Yeah, it's a good question. And it's and the board have been. We had quite a deal of discussion around this point. The plan to pursue the divestment program's around 12 assets or 11 or 12 assets. We will only be pursuing and committing to both development and new acquisition on the basis that we have achieved unconditional transactions or unconditional divestments. So we will be marrying out that program quite carefully between now and June.
Okay. Yep, that's it. Thanks.
Your next question comes from the line of Tom Bodor from UBS. Please go ahead.
Good morning. Thanks for your time. Look, I just want to go back to the sort of comments you made around timing and skew because it's pretty material. And you know I'd just be interested in, at the NOI line, like what is it that's causing that second-half skew? Are there one-offs in the income line that are going to come through in the second half? T alked about the portfolio changing in terms of tenant mix, but just, yeah, can you just elaborate a little bit on what didn't come through in the first half that maybe you'd expected and what is coming through in the second half that's going to cause a significantly better result?
Yeah, sure. Certainly, you know you know what we're seeing is you know we've got a couple of deals that have pushed into the second half, obviously, in addition to those reviews. So we have no particular.
Are you talking about leasing deals or rent review?
Sorry?
Is that rent review, sorry, or is that actual transactions, asset sales, and acquisition?
Well it's it's a combination of you know income in relation to a portfolio-wide leasing deal that has pushed into the second half. In addition to that, we have the weighting of the rent reviews, which push into the second half as well.
From an NOI perspective, like what sort of quantum is it? How many billion dollars should we think about in the 2H?
Oh, that's probably, Tom, if that's okay, when we meet with you and we'll share it with all of our others, we would probably cable that out rather than talking it through line by line because there is quite a bit there. I mean, those transactions we talked about as well, there is a component of that that we bring forward income through into the part of this year. The net result, in addition, the net result of transactions occurring, you can imagine the assets we're looking at disposing of have a relatively light yield compared to the additional dollar cost of debt. So the net result there will also be incorporated into the results through to June as well.
Okay. But the portfolio and leasing deal, can you talk to at least the dollar impact of that, or is that something still?
I have no idea. [crosstalk] .
We'll grab that for you, but look, it's off the top, and the team's going to go and scramble by now. Like It's about AUD 1.5 million or more.
Yeah. That's right. Yeah.
Okay. That's great. And then the other question I kind of had was selling assets to get the gearing down. You've got a buyback on. It's not material dollars, but I think it's a signal. How do you balance that with the desire to buy things and deploy capital, you know the CapEx program? Like how are you sort of thinking about that? Because I suppose there's a question about scale and relevance against return on capital. And where do you sort of see that equation playing out? Like do you think the buyback will be significant into year-end? And you know how do you see, I guess, your acquisitions and investments on a net basis to the year-end?
Yeah. Good question, Tom. I think at the moment, the buyback program is still on track. We don't propose to adjust that. I think if you stood back and if we lined up in parallel buying and selling assets as well as prioritizing capital towards development, yeah, it will be it will be quite incumbent on us to manage how each of those three prongs marry into each other and making sure there is a prioritization, as we've foreshadowed on the Northwest Development Scheme. If that does indeed emerge and we do require commitment for that in May this year, which is what we are being told again by our partner, then that will rank and become a priority in our capital management through to June. We will be staying very close with all of our individual divestment programs.
Some of those we anticipate going unconditional as early as sort of mid-April, and some of those pushing forward through into April and May. We will make sure any commitment to either an acquisition or any further value-add scheme is only undertaken on the basis that we have the capital there in an unconditional format and then ensuring that it balances through to also an allocation of net proceeds, rebalance leverage down to lower levels.
Yeah Matt, I've tried sometimes to summarize few times but it might be helpful if we just [uncertain] to two points. So firstly, it's a kind of it's a balancing act, and it will come down to the numbers as much as anything else, just making sure that ultimately we're doing the things that are enhancing earnings. So that's about prioritizing, as Matt said. And secondly, I guess the one differentiating factor with REIT is access to liquidity. So if you remember, we have a small ticket size. We can sell into the private markets, which we alluded to. We've described it as our liquidity edge, which is a phrase that's been given to us by an investor. So that allows us access to capital, which means we can manage leverage, as we always said, to low 30s and at the same time evolve the portfolio.
So we think we've got attractive acquisitions where we can do that, and we can access capital by sale of assets into the private market. And that's really the difference. That's where the money comes from.
Okay. Thanks.