Thank you very much, Regina, and good morning, everybody. Today's plan is that we take the next 20 minutes to walk you through the half-year results. I'll cover the highlights and the ESG matters, then hand over to the team for the detail. On page two, which is the agenda page, you'll see we have a welcome to country articulated, as do others, but we thought it'd be more interesting to also show that happening in reality. The picture is taken at a ceremony of one of our assets in Queensland, and you will see one of the elders of the Darumbal Nation doing a much better job of welcoming people than I ever could. The agenda is fairly standard. I'll give the overview, hand over to Brad to run you through the financial numbers. Matt will take you through the portfolio strategy.
Doug will articulate the very important value-add pipeline, and then we'll just cover the outlook before handing back to questions. Turning to page three, the overarching comment here is that we continue to make steady and dependable progress against the plans that we've outlined previously. The portfolio remains robust with stable valuations, a resilient tenants mix in defensive sectors. Book values have actually increased by 1% over the period. Embedded organic growth, both in terms of income and capital, continues to be a feature with an ever-growing value-add pipeline and baked-in rental growth, a mix of CPI fixed and turnover driven. While investors' minds are without doubt turning their attention to consideration of a reversal in the direction of inflation and rates, they both remain elevated, so having a clear proof of inflation protection within the portfolio remains important.
We are pointed to rental growth being a key component of that previously, and you can see that coming through with very high leasing spreads, 10% on renewals across 22 deals, which compares very favorably to our peers. In terms of capital management, we've increased the headroom in the debt facility to a position that approximates the two-year CapEx. The hedge component of our debt is almost 60%, and we have extended the duration of the hedge. That leaves us at a level of gearing that we've always targeted, managing to low 30s. Bringing that all together, it means we're happy to reconfirm the guidance of AUD 0.057-AUD 0.058 per security, which puts the stock on a yield just above 7%. On page four, you'll see the investment case summarized, which remains consistent. The strategy hasn't changed.
It is a defensive, diversified portfolio comprised of long WALE assets with a high-quality tenant mix generating a stable and secure income stream. Growth comes via the development pipeline as well as active leasing and income growth being baked into the leases. Primary healthcare exposure remains scarce in the listed environment in Australia, and this product provides that. It's pleasing to note valuations holding up well in that sector relative to others. I've just outlined the capital management approach, and the leasing spreads speak to the active approach of managing these assets. Last page for me is page five, which summarizes our ESG approach. We have run through our credentials of the firm a number of times, and they remain as strong as ever. The accreditation shown across this page and the work we do in the community through our Real Giving Program demonstrate the firm does the right thing.
At the asset level, our smaller essential retail and healthcare properties don't have clear ESG benchmarking, so we've asked KPMG to create that for us. These can then be tracked over time. The work we've commissioned them to do tracks electricity, gas, and other energy consumption and operational data to benchmark each asset and then track them. This will put us in a position to achieve our long-term goals, including adopting a net-zero position aligned with best practice in the industry benchmarks with clearly established interim milestones. Embracing the electrification of properties and the phasing out of natural gas and refrigeration, and finally reducing embodied carbon and identifying opportunities to slash carbon emissions from materials used in property fit-outs or developments. With that, I'll hand over to Brad to talk to you through the numbers.
Thank you, Scott, and good morning to everyone. I'll quickly run through the financial performance starting on slide seven. Net income from the property portfolio was AUD 22.3 million, driven by positive leasing outcomes, both in terms of adding lettable area as more projects are completed, as well as positive lease review outcomes in the latter part of last calendar year. Fund-level management fees were AUD 3 million, while net finance costs increased to AUD 4 million, which resulted in funds from operations of AUD 14.4 million and FFO per security of AUD 0.0276 for the half year. Distributions declared during the period totaled AUD 0.029 per security at a run rate that's in line with guidance for the full year. Now turning to page eight, which is where our balance sheet and key capital management metrics are located.
Gearing rose from 29.9% in June to 32.8% in December as we utilized borrowings to support Capex across the portfolio. The cost of debt increased in line with our budgeted expectations from 2.26% to 3.37%, a good result due to effective hedging earlier in 2022. Interest cover remains comfortable at six times. Now referring to the bottom of this slide, I'm very pleased to update that post-balance sheet date of December, we've strengthened the position of the fund with the agreement of new terms with the fund's primary financier. The facility has now been extended to June 2026, providing more than three years of committed funding, and the limit has also been increased by a further AUD 20 million to AUD 300 million, giving the fund aggregated consolidated headroom of AUD 44 million, or around two years' worth of development Capex.
At the same time, we've also executed a new blend and extend hedge that extends coverage to 59% of the debt portfolio, now with a weighted average duration of 2.4 years. Lender appetite to increase facility remains strong, and along with the implementation of our ESG framework, we continue to assess green and sustainable debt options to fund a number of our development pipeline projects. As always, we closely monitor interest rates and hedging and will take a view on pricing to strike the right balance on the certainty of income for investors versus maximizing unit holder returns. And with that, I'll now hand over to Matt for an update on the portfolio.
Thank you, Brad. Folks, it's a pleasure to present to you again. Firstly, on slide 10, let's take a closer look at the REP portfolio and certainly our last six months. I hope you can read that summary table on the front there comparing the two periods. Our gross portfolio value has moved slightly higher to just over AUD 807 million, with weighted average cap rate moving slightly outward by four basis points from 5.45% to 5.49%. This is a strong result in a challenging capital markets environment, and we are quite pleased with our positioning. Such a muted move in cap rates in this environment is testament to how well the portfolio was assembled from listing in 2021, and of course, due to the resilience of our underlying sector exposures.
Fund's WALE remains at seven years, and occupancy remains steady at 98%, which has dipped slightly, but we also anticipate to remedy in short order due to our leasing efforts at Mildura, where we expect to lease up with a stronger covenant on a longer term with higher rent than previously achieved. REP's portfolio is steady at a 94% aggregate essential services, and gross portfolio exposure remains steady, again at equal between 50% healthcare and 50% retail. This is a strong snapshot, particularly given the backdrop of 2022. Like us, we trust you take a high level of comfort in such a stable and diversified picture. Let's now turn our attention to slide 11 and talk a bit more about income. There's little argument we've all experienced a range of stress tests, stress tests over the last few years, including what Australia experienced throughout the pandemic, significant stress tests.
However, what you see here are a set of figures that do not hint at any sign of stress and, in fact, are quite an exceptional set of results. A continued average rental review profile of 3.4%, where 90% of the portfolio is subject to annual escalators. Of this, rental revenues are further underpinned by a significant proportion of the portfolio with CPI, CPI plus, and formula and/or turnover-based reviews. Our review mix between fixed and CPI is quite appropriate. We are very happy with this position, and the portfolio is well positioned for a variety of economic scenarios. I call out majors growth, both supermarkets and DDS, of 8.1%. This growth in sales naturally translates to a stronger outlook for percentage rent income.
We have also noted on the bottom right-hand side a chart which highlights the weight of reviews that naturally occur in the portfolio towards the back half of the financial year, a point that has been picked up by some of our analysts and something we're happy to elaborate on. Finally, and most noteworthy, leasing spreads. The figures on the right-hand side highlight the success of the REP team's efforts, an 8.1% total leasing spread, 10% on renewals, and 5.7% on new deals, an impressive outcome that brings forth the underlying strength in fundamentals of the portfolio. Quite pleasing indeed. Now, if we turn to slide 12, our objective here is to highlight our key partner relationships as we've done in the past across both sectors and to discuss that despite challenging conditions, our tenants are well positioned, and why do we say this?
Because of this positioning, our engagement, the feedback, and our ability to draw market intelligence from these partners bears fruit to our teams, fruit that directs leasing efforts, drivers in asset management, our perspective on development, and importantly, capital recycling efforts, which includes what might be considering new acquisition opportunities. Our relationships with existing and new tenants is an integral part of the approach for the group. For example, discussions with healthcare partners bring opportunity for expansion, as is the case with Healthe Care on our Northwest and Mayo Private Hospital assets, and further, a strong in-place relationship with partners such as Coles aids in our exploratory work on new acquisitions or development opportunities, as well as opening up new possibilities in master planning on our retail schemes. Now, if we move forward to slide 13, let's talk a little bit more about valuations.
45% of the portfolio has been externally valued as of December and has produced, as I said, a muted move outward of four basis points and gross value of the portfolio now a little over AUD 807 million. All of us have been witness to an effective widening in the quality spectrum of cap rates. This has been due to a variety of factors, structural reasons, even disruption in some sectors, but this has impacted sectors outside of healthcare and essential services retail, where we as a team remain highly encouraged by continued investor demand seeking exposure, particularly offshore capital, which underpins and puts a bookend on cap rate movements. These results are testament, as I said, to a well-constructed portfolio, stable valuations, and resilient tenants. And finally, slide 14.
We wanted to call this out in this particular point in time to really reaffirm RAM's commitment to healthcare and to give you a little bit more insight into how we're approaching this next phase of evolution. During our launch, we were focused on building the portfolio weighting to healthcare to reach 50%, which was achieved in our first full quarter of operations. Over the last 12 months, as foreshadowed in prior quarter presentations, we have further positioned our team to source a greater range of opportunities. This leads to redevelopment of both existing assets and contemplating redevelopment of new assets has positioned us for a significant depth in deal flow pipeline. We've deliberately shifted our lens to identify value add. We want to develop assets to core. And why? We have high conviction in the sector. We believe in the structural advantages that are well documented.
CBRE, in a recent research post, called out the hidden potential of the asset class that they term a foundational community asset. CBRE also pointed out for this AUD 25 billion sector that one would struggle to name another asset class which has withstood the barrage of economic hits laid upon Australia. RAM intends to focus more on sourcing opportunities in this sector and to address the needs of our operators, of our new discussions with partners that are often brought about by shifts in technology and by responding to changes in community needs, communities that are seeking localized care and specialized solutions. We will increasingly position ourselves as a preferred and aligned partner or as an in-house provider of solutions to our partners. However, let me point out RAM's increased dedication to seeking opportunities in healthcare, importantly, will not occur by reducing efforts to deliver value-added retail.
In fact, aligning our efforts across these sectors will provide significant planning synergy. With that, I'll hand it over to Doug to draw out a little bit more an update on our value-add program. Thanks, Doug.
Thank you, Matt. Turning to slide 16, the delivery of the value-add pipeline continues to be a core asset management strategy for the fund. As stated previously, the attributes of the value-add pipeline have remained consistent since listing. Firstly, the pipeline has organically evolved from an existing asset base of medical and essential retail properties. The projects and opportunities have been driven through tenant demand at the benefit of strategically purchasing assets with low site utilization or the ability to generate upside through positive planning outcomes. Secondly, the pipeline of value-add opportunities is predominantly a smaller collection of projects. This allows them to be more effectively de-risked from a construction cost and tenant demand perspective. Thirdly, we have continued to build on the established strong relationships with our major anchor tenants.
This has enabled us to leverage their increased demand for space, either due to strong retail sales or requirements for additional medical and healthcare space. Finally, the value-add pipeline benefits from flexibility in staging and timing. Given the underlying assets are stable and the small scale of projects, we have the flexibility to adjust the timing if required due to market conditions. Please note, the value of the pipeline has continued to expand by AUD 15 million to AUD 155 million of near-term projects, largely driven by an increased scope of healthcare value-add. This has largely been cultivated by investment in our internal capabilities, covering specialists in healthcare development and leasing. We are actively working with several major health organizations and are building on our existing strong relationships in this sector.
The increased scope of work for healthcare includes significant expansion opportunities at Mayo Private Hospital and Northwest Private Hospital, incorporating additional facilities, including mental health, proposed expansion of Willetts Health Precinct, and the proposed development of Miami Private Hospital, which will provide an increase in NLA of more than 3,000 square meters to existing footprint. We will continue to progress these healthcare initiatives as a priority. We are also diligently progressing through the master planning approvals for several key retail projects, including expansion opportunities at Coles Rutherford, Ballina Central, and Yeronga Village. We have advanced discussions with key anchor tenants that will underpin these projects, and we look forward to providing continued updates as they progress. Importantly, the value-add pipeline is a discretionary development opportunity. The underlying assets are strong with high occupancy and long WALE.
We are acutely aware of the current dynamics impacting the construction sector, with cost escalation and availability of trades impacting project feasibilities and timing. We have proven with our capital management it will only take projects if they accrete earnings and significantly de-risk prior to commencement. Turning to slide 17, the value-add pipeline continues to be an important driver of future income and NTA growth, and therefore remains a high priority. We are making steady progress, completing six projects since listing at Keppel Bay, Windaroo, Springfield Fair, Coomera Square, and Ballina Central. We are close to breaking ground on two operator-led healthcare expansions at Mayo Private Hospital and Northwest Private Hospital. We have identified and progressed through planning phases on a number of projects, which increases the value of near-term opportunities by AUD 15 million to AUD 155 million. I will now pass back to Scott.
Thanks, Doug. So just looking to page 20, you can see that we are reconfirming the forecast in the range of AUD 0.057-AUD 0.058 per security. That puts the stock on a 7% yield, or at least it was this morning. I know the price is going up the other direction of the market. The payout ratio is expected to be around the 96% level, and importantly, that's on a four-year basis. And the distribution being paid forwardly, 98% of that income is tax-deferred, which I know is important for many investors on this call. On page 21, you can see that sort of summarized. Today, I hope we've shone a light on a strategy that is actively managed with strong leasing outcomes and a fulsome value-add pipeline.
The portfolio is defensive, resilient to cap rate expansion, but over time also delivers growth, both income and capital growth through the value-add pipeline and embedded organic growth within the portfolio. In terms of capital management, that continues to be prudent. The gearing is where we said it would be. We have managed the cost of debt facility while already showing a willingness to recycle assets in the short time since listing. The stock is underpinned by rock-solid valuations, rock-solid cash flows, which means picking it up as a 7% yield must be attractive. With that, I can hand back to Regina to take us through the Q&A.
As a reminder to ask a question, simply press star one on your telephone keypad. Our first question will come from the line of Leanne Truong with Ord Minnett. Please go ahead.
Good morning, everybody. Just the first question on financial year 2023 guidance. It implies that your second half will be higher than your first half, so I'm just wondering where the incremental is there.
Yeah. Hi, Leanne, it's Matt here. Yeah, look, it's just a construct of the portfolio that can happen from time to time where 75% of the cash uplift actually occurs in the second half. That's just an outcome of the program of leasing we've had, or certainly the prior ownership had in assembling these assets. So that's the most significant hit there. Not a hit, actually. No significant reason for that yet.
It's just, I guess you picked it up on your note, Leanne, and so have you, UBS. It's just not straight lines. You'll see the cash flows coming through in the second half, which means we won't be up. We'll be at 96%, which is why I've payout ratio, which is why I emphasize that, and still hitting guidance. It's just not a straight line outcome.
Yeah, sure. Okay. And just a second question on your developments. I think in the past you guided to about AUD 35 million in financial year 2023. So how much of that have you incurred, and how much do you expect to spend in the second half?
We couldn't quite hear you, Leanne. Was that CapEx?
Yes, on your development CapEx.
Yeah, we've spent about AUD 10 million today. Yeah, thank you, Leanne. With a further AUD 10 million to come, most of that is going to be committed to the first phase expansion costs due on Northwest and Mayo. There is a chance that breaches across beyond 30 June, however.
Okay. Yeah. And with Keppel, is that now fully leased or stage two?
Sorry, can you go again, Leanne? Sorry.
Yep, sorry. So stage two of Keppel. Is that now fully leased, not running?
No, we've still got sort of three tenancies that remain vacant, three and three additional, which we've got heads of terms at the moment. But the center is complete. The cinemas are now trading. I think we foreshadowed that last year. And the center is presenting very, very well.
Okay. Thank you.
Once again, for any questions, please press star one. Your next question will come from the line of Tom Bodor with UBS. Please go ahead.
Good morning, everybody. Look, thanks for clarifying that point around the rent uplift in the second half. Just maybe drilling into the occupancy a bit. I think you talked about the Mildura vacancy having been relet. Can you talk to when the income will start or the rent will start flowing from that releasing? And also, I noted that you talked about rent guarantees. I'm just wondering if you're calling any rent guarantees at present and what the quantum is.
Yeah, just firstly on Mildura, we have received a draft letter of offer. It's a little too early to confirm that. That will include a rent-free period, but we are looking at what may well be a 10-year term on that lease. That lease is over the entire premises, so it's a very good outcome. I better not say too much more, but naturally, Tom, there will be a period up there where we won't be recognizing income because of the rent-free. We're quite pleased, and in fact, on a valuation basis, I think there'll be a nice little pop back up. Your second question, always on the rental guarantees. Where have we got that, Yeah, rental guarantees is about a 1.7% factor, which you've probably called out in your research there. We have an active program looking to address those well ahead of time.
It's something that we will be more actively reporting on to the board as those start to call in the next sort of 24-36 months.
Okay. Can you just remind me which assets those guarantees are on?
Predominantly across the medical portfolio, across four or five of those out there.
Okay. That's great. Thanks. And then so back to Mildura, it's fair to assume that's more a 2024 story in terms of the rent from that asset?
Yeah, Tom, I think perhaps what we'll do once we've, if appropriate, once we've got that heads of terms done, we'll give you a better indication. But I would say probably three months of 2024, possibly six months of income.
Okay. Thanks. And then in terms of the CapEx and the income on that CapEx that you've spent, I think you sort of talked about AUD 10 million in the first half. Is it fair to assume that sort of that yield on cost that you're targeting will start flowing into the second half off that initial AUD 10 million of CapEx you did this year in the first half, or is it?
That's a good question.
Or do you still need to complete?
Yeah. And in fact, we're waiting just a little bit further on in terms of declaring the actual specifics of the arrangement with Healthe Care on Northwest and Mayo. But I'll give you an indication that we are in effect bringing forward what is the future profit of that by way of a coupon arrangement with Healthe Care. So you will see some of that effectively profit brought forward into this year and obviously into 2024 as well.
Okay. That's great. Thank you.
Do we have no further questions at this time? I'll hand the call back over to Scott for any closing remarks.
Yeah. Thank you. I'll only reiterate the sort of points I made before. We think this is a very strong set of results underpinned by a very strong portfolio and clear evidence of active management from the team. So I guess it's just for me to thank everybody for their time this morning. I know we're seeing a number of you one-on-one over the next couple of days, and we look forward to doing that. So thanks.