Thanks very much, and welcome to the first half FY 2022 financial results for the SCA Property Group. My name's Anthony Mellowes, and I am the Chief Executive Officer. Presenting these results with me today is Mark Fleming, our CFO, and also in the room with me is Michelle Tierney, our COO, and Erica Reeves, our Company Secretary and General Counsel. I'm pleased with this set of results, and it reaffirms that we continue to remain true to our core strategy of investing in and managing convenience-based centers weighted to the nondiscretionary retail sector. First, let me take you to slide four, which sets out our first half highlights. Our net profit after tax of AUD 432.4 million was an increase of 320% over the same period last year.
Our FFO per unit of AUD 0.085 was up by 27.5% over the same period last year. Our distribution of AUD 0.072 per unit was up by 26% on the same period last year. Our gearing was at 32.5% at 31 December. Our NTA has also increased to AUD 2.84 per unit, up by 12.7% against 30 June 2021. Our portfolio weighted average cap rate is now 5.45%, and convenience-based assets are still in strong demand from investors, particularly high net worth individuals, as well as some new institutional investors. Investors continue to seek long-term defensive cash flows in a low interest rate environment. Our weighted average cost of debt has improved to 2.4%, with 5.8 years weighted average debt maturity.
Our portfolio occupancy is 98.1%, and our specialty vacancy is 5%. We acquired AUD 347.5 million worth of assets during the period. Moving to slide five, which sets out some of the key achievements that demonstrate how we continue to deliver on our strategy. The three key highlights for the period are the resilient performance of our portfolio, our progress on sustainability, and our new funds management JV with GIC. Going into a bit more detail, with respect to optimizing the core business, the resilient performance from our convenience-based centers is underpinned by the tenant sales are now above pre-COVID levels. Specialty tenant MAT sales growth was up by 5.5% despite lockdowns in New South Wales and Victoria. Our supermarket MAT sales growth was flat compared to the elevated levels in the previous year.
Our leasing spreads and cash collection rates were impacted by lockdowns in New South Wales and Victoria, but improved towards the end of the half-year period. Our sustainability strategy is progressing well, and our progress towards net zero continues with the rollout of solar panels on WA properties has commenced. The New South Wales and Victorian governments unfortunately extended the Code of Conduct to March 2022, despite there being no further lockdowns. With respect to our growth opportunities, funds management was a big period for us. We commenced a deal with GIC called the SCA Metro Fund, which is an 80-20 joint venture with GIC. It is all agreed and is expected to commence during the second half of FY 2022. SCA will be the manager of the fund and has agreed to sell 7 seed assets into the fund for AUD 284.5 million.
As well, SURF 3 was wound up, and that was our final SURF fund, and that was completed during that half year and achieved an IRR of 11% after fees for unitholders. Acquisitions, it was very busy for us. We acquired seven convenience-based centers for AUD 347.5 million in that first half, and we also divested Ballarat, which is a Big W and Dan Murphy's. That was contracted during the period for AUD 23.1 million and settled in January. This was 12% above our June book value. With respect to capital management, we had a valuation like-for-like uplift of AUD 350 million, or 8.7%, during that first half. Our balance sheet remains in a strong position. Our gearing at the 31st of December was 32.5%.
Our weighted average cost of debt is 2.4%, and our weighted average term to maturity is 5.8%. We currently have cash and undrawn facilities of AUD 177 million, and Mark will talk more about that later. Finally, our FFO per unit of AUD 0.085 represents an increase of 27.5% against the same period last year, and our distribution of AUD 0.072 per unit represents an increase of 26% against the same period last year. I'd now like to hand over to Mark to present the financial results.
Thanks, Anthony, and good morning, everyone. I'll start on slide seven, which shows the sales performance of our tenants and our cash collection rates during the COVID pandemic. On the top right-hand side of this slide, you can see that our specialty tenants recorded strong sales growth compared to the prior year, with MAT of 5.5%. But anchor tenant MAT growth was lower compared to the elevated levels in 2020. However, importantly, the sales for all tenant categories are significantly above the pre-pandemic levels. Compared to 2019, supermarket sales are higher by 8%. Discount department stores are 10.8% higher. Mini majors are up by 7.3%, and specialty tenants are up by 7.9%. Anecdotally, many specialty tenants have experienced a weaker start to the current half year due to virus outbreaks across Australia.
However, we've consistently seen that when restrictions ease and when the virus subsides, specialty tenant sales rebound quickly, and we expect to see that again in the second half of this financial year. In terms of cash collection, it's a similar story. You can see the cash collection rates were relatively weak in the first quarter of the financial year during the lockdowns in New South Wales and Victoria. However, cash collection rates rebounded in the second quarter when restrictions eased. We expect cash collection rates to improve again once the current COVID wave subsides. Overall, we're in a relatively strong position compared to pre-COVID, and we expect to record greater earnings per unit this year than ever before. Turning now to slide eight, profit and loss.
Our statutory net profit after tax was AUD 432.4 million, which was up by 320% compared to the same period last year. The primary reason for that increase was an increase in the fair value of investment properties during the year. Stepping down the P&L, net property income increased by AUD 24.1 million or 27.3% due to acquisitions and reduced COVID impacts compared to the prior year. Funds management income represents disposal and performance fees associated with the successful conclusion of SURF 3. Corporate costs increased due to lower management incentive accruals in the prior period.
Fair value of investment properties increase was primarily due to cap rate compression, and fair value of derivatives increased slightly due to the impact of a weaker Australian dollar on our USPP cross-currency swaps, and there was an unrealized foreign exchange loss for the same reason. Interest expense was up slightly due to a higher level of debt, partially offset by a reduction in the weighted average cost of debt. Moving to slide nine, funds from operations. To get to funds from operations or FFO, we reverse out the non-cash and one-off components of our net profit after tax, including fair value adjustments. FFO of AUD 94.3 million is up by 30.4% on the prior year, primarily due to acquisitions, reduced COVID impacts, and lower cost of debt.
AFFO of AUD 80.9 million was up by 29.6% on the same period last year, slightly less than FFO because of an increase in maintenance CapEx. AFFO per unit of AUD 0.0735 per unit was up by 26.7% for the same reasons. Distributions were AUD 0.072 per unit, representing a payout ratio of 99% of AFFO. Turning now to slide 10, which shows our summary balance sheet. The book value of our investment properties has increased to AUD 4.426 billion due to AUD 347.5 million of acquisitions and a AUD 386.5 million increase in the valuation of investment properties.
The valuation increase is primarily due to cap rates tightening by 45 basis points from 5.9% at June 2021 to 5.45% as at December 2021. Net debt has increased due to the acquisitions completed during the period, and net tangible assets per unit increased to AUD 2.84 per unit due to the investment property fair value increase. Finally, our management expense ratio has reduced to 38 basis points due to the increase in assets under management. Moving to slide 11, which deals with debt and capital management. As at 31 December, our gearing was 32.5%, 57% of our debt was fixed or hedged, and we had AUD 177 million of cash in undrawn facilities.
During the half year, we issued AUD 250 million of new eight-year medium-term notes at a fixed rate of 2.45%, and we used the proceeds to cancel an expiring bilateral facility. We now have no debt expiring until June 2024. Following the sale of assets to the SCA Metro Fund, the group's pro forma gearing will be less than 29%, 70% of our debt will be fixed or hedged, and we'll have cash and undrawn facilities of over AUD 450 million. Finally, as you can see, we're well within our banking covenants. Thank you. I'll now hand back to Anthony for the operational performance overview.
Thanks very much, Mark. Just turning to slide 13. We continue to be focused on ensuring that our weighting of categories continue to be within the nondiscretionary sectors, being primarily food, medical and retail services. Our occupancy is 98.1%, and the number of our specialties has now increased to over 2,100 tenants. Forty-eight percent of our gross rent comes from majors such as Woolworths, Coles, ALDI or Wesfarmers. Of the remaining 52% are heavy weighting towards those key nondiscretionary categories. Slide 14 describes our portfolio occupancy, and our specialty vacancy has still remained stable despite the COVID-19 challenges. Our occupancy level increased slightly to 98.1%, and the vacancy reduced marginally from 5.1% to 5%. Our specialty tenants on holdover for our entire portfolio has increased to 3.9%.
Slide 15 talks about sales growth and turnover rent, and our turnover rent continues to increase. As Mark outlined, our centers continue to perform strongly. Our supermarket MAT sales growth was flat for the year but primarily due to the exceptionally strong sales of last year. However, when compared to the pre-COVID sales, 2019, we were up 8.2%. Similar story with our discount department store. The sales MAT growth has declined by 4.2%, but again, very strong against pre-COVID periods. Mini majors increased 1.4%, and specialty sales have increased 5.5%, with nondiscretionary again outperforming those discretionary categories within our portfolio. Our turnover rent increased. We now have 45 anchors contributing turnover rent with a further 16 anchors within 10% of the turnover threshold.
We had two anchor tenant turnover rents were captured into base rent during the period. Our specialty key metrics are outlined on slide 16. Our sales productivity and occupancy cost remained stable across the portfolio, and our sales productivity is in line with the prior period at AUD 9,842. Our average rent per sq m has increased slightly to AUD 795. This means our occupancy cost increased marginally to 8.8% compared to 8.6% at June. Our leasing strategy was to allow increased number of holdovers during the period, and in total, we did 131 leasing deals with improved leasing spreads of 0.2% with average 4% rent reviews in excess of five years.
Our renewal leasing spreads improved to negative 0.4% with a considered approach on holding tenants over. The retention rate increased to 82%, and we continued to remix towards those key nondiscretionary categories. An average of 3.9% fixed rental increases are applied across 89% of our specialty tenants. Sustainability is outlined on slides 17 and 18. Since launching our sustainability strategy in August 2020, we've made a great start to achieving our 42 sustainability commitments by moving forward with clear pathways and targets. Our net zero by 2030 despite COVID. We are on program to install 25 MW of solar by 2025, with works commencing on-site across six Western Australian shopping centers and site-specific investigations commencing across sites in Queensland, New South Wales and Victoria.
Our other sustainability highlights include the commencement of an energy-efficient pilot at Market Town Shopping Center using a data-driven approach to improve the mechanical and electrical efficiencies, the consolidation of our portfolio electrical metering to improve our data analytics to increase our efficiencies, the introduction of building management systems to Emerald, Lavington and West End shopping centers, and our continued strong partnership with The Smith Family. Our GRESB score increased from 71 to 75 in 2020, and this means we do perform above the average scores of Asia, Europe and the Americas with a GRESB average. We also achieved our 6-star NABERS rating in FY 2021 for our corporate head office. Slide 20 highlights our new JV with GIC and the successful conclusion of our SURF business.
Our GIC fund, or will be known as the SCA Metro Fund, was announced on the second of December with a start date expected during the second half of FY 2022, probably around the first of April. FIRB approval has been received for the seed portfolio and the debt funding package negotiations are progressing well. The key features of the fund are the assets. They are metropolitan neighborhood centers, initially seeded with seven assets from SCA for AUD 284.5 million. These were sold on a cap rate of 4.84%, which was a 9.3% premium to our June 2021 book values. The initial target fund size is AUD 750 million. The capital structure, it is an ownership of 80% GIC and 20% SCA with a target gearing of 50%+.
Management, SCA is to be the property manager and the investment manager. This positions SCA to access the relatively lower return metropolitan neighborhoods in partnership with a high quality and globally recognized partner while growing asset light management fee income. With respect to our SURF funds, they are now all wound up. SURF 1 was successfully concluded in October 2020 with an IRR of 11%, generating a performance fee of AUD half a million dollars. SURF 2 was successfully concluded in May 2021 with an IRR of 12% and a performance fee of AUD 700,000. SURF 3 was successfully sold its three remaining properties in November 2021 and finished in December 2021 with an IRR of 11% and a performance fee of AUD 400,000. Turning to slide 21, our acquisitions.
We acquired seven centers during the period for AUD 347.5 Million, being Raymond Terrace in New South Wales, Drayton Central in Queensland, Delacombe Town Center in Victoria, Moggill Village in Brisbane, Queensland, Moama Marketplace in New South Wales, Warrnambool Target in Victoria, and Woodford in Queensland. Slide 23 outlines our indicative development pipeline over the next five years. In summary, we have identified and are working on more than 30 potential developments with total CapEx spend in excess of AUD 250 million. Our Soda Factory development was recently completed with a total project cost of AUD 16 .5 million, and it is expected to have an IRR of 15%. Our key priorities and outlook. Our core strategy outlined on slide 25 remains unchanged.
We'll continue to seek and deliver defensive, resilient cash flows to support our secure distributions. SCP will continue to focus on the convenience-based retail centers with strong weighting towards that nondiscretionary retail segment. We'll be seeking long-term leases to quality anchor tenants such as Woolworths, Coles, ALDI, and Wesfarmers. Again, all demonstrated by our latest acquisitions. We will continue to explore the core business growth opportunities as demonstrated in our development pipeline, our acquisitions, and our fund management business, but we will remain disciplined with respect to those acquisition and disposal opportunities. I'd now like to hand over to Mark to talk about our longer-term growth targets.
Thanks, Anthony. Slide 26 sets out our indicative medium to long-term target, which is to grow AFFO per unit by 2%-4% per annum. This earnings growth will come from a combination of comparable NOI growth, supported by supermarket turnover rent and specialty rental increases, developments, acquisitions, and funds management, all underpinned by a disciplined control of our operating expenses and our capital expenditure. Anthony, back to you for the closing comments.
Thanks, Mark. Look, slide 27 just outlines our key priorities and outlook for FY 2022. We're gonna continue to drive the performance of our centers. We're gonna continue to make further progress on our sustainability initiatives and also grow the SCA Metro Fund. As such, for our core business, our focus continues to be on serving our local communities for their everyday needs, partnering with our supermarket anchors to provide a convenient supermarket offer, and this includes working with Coles and Woolies to improve their online offer. This supports our strategy of generating defensive, resilient cash flows. Our growth opportunities. We will continue to look to grow the SCA Metro Fund, and we'll also continue to explore and acquire accretive neighborhood centers in a disciplined and measured way for our own balance sheet.
We'll progress our identified development opportunities, including all of our sustainability initiatives. With respect to capital management, we'll continue to actively manage our balance sheet to maintain diversified funding sources with long-weighted average debt expiries and a low cost of capital consistent with our risk profile. Our gearing is to remain below 35%. With respect to our earnings guidance, our FY 2022 FFO per unit guidance is to achieve at least AUD 0.175 per unit, which is 18.5% above FY 2021, and our AFFO per unit guidance of at least AUD 0.152 per unit, again 20% above FY 2021. This assumes obviously no further major outbreaks of COVID and no significant new government restrictions and no further acquisitions. I'd now like to invite any questions from the floor.
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 speakerphone, please pick up the handset to ask your question. Your first question comes from Sholto Maconochie from Jefferies. Please go ahead.
Hi, everyone. Thanks for your time. Just a quick question on the guidance. The COVID impacts, I think you had ECL of 10.4 and the rental assistance 3.1. What are you assuming in the second half? I think you said there was a bit softer trade in the first part of this year from the nondiscretionary tenants. What sort of COVID charge on the rental assistance you assuming in the guidance because it was upgraded?
Thanks, Walter. Well, the upgrade was primarily actually driven by the first half. You'll see that when we first gave guidance in August, our first half guidance was 7.1, and we've come in at 7.35. The main reason for that is that if you think back to August, we were in the depths of the New South Wales and Victorian lockdowns. You know, we took a fairly conservative view, I guess, of what the COVID impact might be in the first half. As things turned out, it wasn't as bad as we expected, and that's why the first half has come in a little bit stronger than the guidance we gave in August. In terms of the second half, it's around about the same guidance, implied guidance, as we gave back in August.
There's an up and a down there. The up is that, as we said on the call, we've delayed the start of the GIC fund, which is a positive because we keep the assets for a little bit longer. The negative, in getting to your specific question, is we've allowed an extra AUD 1 million. AUD 1 million of COVID impact in the second half is what's implied in the guidance.
Okay. AUD 1 million impact second half. Just on the holdovers, I notice your holdovers increased to 3.9%. Were they more the non-discretionary type tenants in that 3.9%, went from 1% to 3.9%?
No, no. It's straight across the board, basically. Yeah, we just made the decision if, you know, we're happy to hold on holdovers. It's increased slightly. It's still well below our peers, so we're very comfortable with the position. But it wasn't any one particular group.
Do you intend to retain the increase from June when they renew?
Well, I hope so. Yes. That's the plan. That's why we haven't renewed them because we believe the space was worth more than what they were willing to pay at that time, which again, was in the depths of lockdown in New South Wales and Victoria.
Then just on the gearing, obviously it decreases sub 29% plus the GIC sale. Well, your hedging will probably increase as a percentage of debt, given you'll be paying down debt. What hedging are you targeting for the year?
After the sale of the GIC assets to the SCA Metro Fund, our fixed or hedged percentage will be 70%, just a little bit over 70%. We're pretty comfortable at that level. Our policy is to be more than 50% hedged, so we're well within policy. What we'll probably look at in this half is whether we want to extend out the weighted average maturity of those hedges a little bit. As at 31 December, our average fixed maturity was four years, so we'll have a look at that. But overall, we're pretty comfortable with where we're sitting. We did, as we said in the presentation, issue an eight-year fixed medium-term note back in September last year, at 2.445%.
That sort of helped us in terms of that hedging percentage and the duration. We'll probably do some playing around the edges over the next few months just to make sure we keep an appropriate duration in our hedging. We're very happy with sort of 70%, which is the level we'll be at.
The cash collection for the full half was about 96%, was the average of the 93% and 98%. Was that about right for the full half?
That's right. About 96%. Obviously, as we say, first quarter was weak, particularly in New South Wales, and to a lesser extent, Victoria. We've had a good January in cash collections. We're at 89% collections in the month of January and 90% overall, including prior month collections. The trend is still, you know, continuing as we'd expect, which is that when we're in lockdowns or when there's virus outbreaks, the cash collections dip. We do, you know, with a very focused effort, improve those cash collection rates when things go back to more like normal. We'd expect the same thing will happen in the second half again.
Okay. Just finally, just back to the guidance, is obviously you get a pick-up from the acquisitions, full period effect of that, and the later GIC. You've got the FFO and AFFO both increase in the second half, sort of 4% and 7%. Is there less maintenance, leasing CapEx assumed in the second half? Or does it tick up in the first half? Or is it broadly the same?
Yeah. In the second half, we do have a little bit less maintenance CapEx. Sometimes 'cause these are basically cash numbers, sometimes you can have some timing differences between halves, and we are expecting the maintenance CapEx to be a little bit lower in the second half than in the first half. Leasing CapEx, we'll have to see. It'll depend on what we spoke about earlier in terms of the market environment and whether we're comfortable to resume doing a higher number of deals. We'll see what happens on leasing CapEx. In our forecast, we've got it fairly flat.
Yep. Okay. Thank you.
A slight increase in the second half on maintenance. Yeah.
Thank you.
A slight increase in leasing CapEx in the second half, but a reduction in maintenance CapEx.
Thank you. Your next question comes from Simon Chan from Morgan Stanley. Please go ahead.
Hey, good morning, guys. The first question in relation to your funds management initiative. Can you highlight, I guess, what other stuff you've got planned outside of GIC? Or is GIC the first and last initiative you're looking to do on that side of things?
Yeah, Simon, thanks for that. Look, our SURF funds were our first. Our GIC fund is our second, but it's, I don't think it's gonna be our last, but we've got a lot of work to do with, one, bedding it in, and then, two, growing it. We like to get a track record before we move on to doing different things. That's really where we're at the moment.
Anthony, have you thought about bringing back SURF or adding, you know, these sort of retail funds? 'Cause you know, the fees are pretty good, right? You know, 150 bps on the way in. I think from memory, 70 basis points of fees on AUM going forward. With the wind up of SURF 3, why don't you do more of them? 'Cause the fees are super good.
The fees are good, but there's also a lot of other risk factors and time. Look, we're very pleased with what we've done with SURF 3, and we're very pleased with where we're heading with the SCA Metro Fund as well at this stage. Yeah, but we're fine with where we're heading.
At this point in time, you probably don't have much of a target external AUM number yet, do you, that you're prepared to disclose to the street?
Correct.
Anthony, are you on mute?
No. I said correct. That's
Yeah.
We don't have a target.
No target.
No target.
Great. This question is probably more for Mark. Hey, I see the accounts receivable number has kind of increased somewhat. I mean, pre-COVID is a very small number. Last time it was AUD 13 million, it's now sitting at AUD 18 million. I guess can you clarify as to what's in the AUD 18 million that you've booked as revenue, but you haven't collected the cash for yet?
Yeah. That receivable has all been booked as revenue. What we do is we book a provision against that, which is the ECL, which goes through property expenses. Waivers never get into revenue and never get into receivables. Waivers just don't appear in the financial statements. Deferrals and unpaid rent, we do count them as revenue at the time they're due. They would have been due. We, every six months, make a decision around what provision we wanna set aside against that receivable. At June, we had an AUD 13.4 million receivable, and we had an AUD 9.8 million provision against that. Obviously, now we've got an AUD 18.1 million receivable, and we've got an AUD 10.4 million provision against that.
In terms of P&L, you know, the full increase in receivable goes to revenue, and the increase in ECL goes to expense. Now, why has it increased so much? I guess that's sort of the underlying question. It's really about those cash collection numbers in the first quarter, and that, as I said, is primarily about New South Wales. We did have lower cash collection rates in New South Wales during the half and particularly the first quarter. Zeroing in even further, it's Sydney that's the main issue. We'll see how that goes over this six-month period. As I said, it'll be a key focus of the team to collect as much of that AUD 18 million as we can over the next 12 months.
Great. My last question. I think Anthony touched on Code of Conduct being extended in his prepared remarks earlier today. I guess what percentage of tenants are actually qualifying under the Code of Conduct now? 'Cause I understand the thresholds actually decreased dramatically as to what's an SME, right? What percentage of your tenants are actually qualified now?
We'll have to get back on the exact percentage, but what I will say is you're 100% right. It does keep changing. There's a whole lot of red tape that you gotta deal with. There's been 27 changes of Code of Conduct since it was introduced in different states across the board. It's very difficult to keep up. They also. It was originally done for lockdowns, and now the government, relevant governments, particularly New South Wales and Victoria, are extending it without any basis of any lockdown either. It's a very difficult situation for all landlords. You know, we have all put in a lot of work and committed a lot of money into this area, of which the governments just continue to hand out other people's money. It is difficult.
It's clumsy, and we are the ones that have to deal with it.
Yeah. I will say, just to add to that, and I sort of mentioned it earlier, that during the first half, we gave AUD 3.1 million in rental assistance. Roughly split between waivers and deferrals. We're expecting around another AUD 1 million to be given in the second half. That sort of gives some quantum around it. It has tailed off a lot, but there will still be some in New South Wales and Victoria.
Thanks. Thanks, Mark. Thanks, Anthony. Cheers.
Thank you. Your next question comes from Murray Connellan from Moelis Australia. Please go ahead.
Morning, Mark and Anthony. Just given that, the pro forma gearing is now below 29%, does your full year guidance assume any additional acquisitions in the second half? Just following on from that, what, I guess, are your expectations on balance sheet deployment, in the current direct market as you see it?
Well, on the first question, no, there are no acquisitions assumed in the guidance. The second question is, it depends. It depends on the market environment, it depends on the opportunities that arise. You know, we're certainly. There's no change in strategy when it comes to acquisitions. We have, as I said, AUD 450 million of cash and undrawn facilities. We could deploy pretty much all of that and still stay below 35%, which is our preferred gearing range. There's plenty of balance sheet capacity for acquisitions. As to what will happen, as I said, it'll depend on the market environment, it'll depend on the opportunities.
We always say, you know, that we like to do AUD 200 million-AUD 300 million per annum as an average kind of run rate through the cycle, and you can see the slide that we've.
Slide 30.
We've got in the pack there, which is slide 30, which shows what we've done historically. There's no real reason for us to depart from that sort of run rate. As we said, you know, some years, as you can see on that slide, that chart on slide 30, some years we do a lot, and some years we don't do much. As I said, it just depends on the market and the, and the opportunities that arise.
Sure. Then, just with about 4% of specialty tenants, obviously now in holdover, what's the strategy around the executing of leases going into calendar year 2022? What's the background or what's the backdrop looking like right now in terms of doing deals, and what's the expectation for that 4% currently in holdover?
Yeah. Well, if we looked at what happened last year as we came out of lockdown, the second half of FY 2021 was a lot stronger for leasing deals as opposed to the first half, which was during lockdown. We took the same view as is gonna happen this year, and so that's why we didn't do as many deals in that first half, and we believe that we will be able to do better deals in the second half as people do come out of lockdown, et cetera. We're quite confident that what repeated last year will repeat again this year.
Thanks very much.
Thank you. Your next question comes from Lou Pirenc from Jarden. Please go ahead.
Hey, good morning. Just following up on the acquisition comments you made earlier. Given the strong demand for the asset class, are you finding it harder to find opportunities, particularly at the price that you're willing to pay? Maybe linked to that, Mark, in your kind of medium-term growth target at 1%, are you assuming that AUD 260 million average that you've had over the last 10 years, or is it a lower number in this example?
Yeah, Lou, it's Anthony here. Asset prices have been tightening. Cap rates have been tightening basically over the last eight years. Certainly in the last couple of years, they've tightened even further. Yet we've still really done a lot more than our average of sort of 260 a year. Last year, FY 2021, we did AUD 450 million. We've already done AUD 350 million year to date, and we've still got six months to go, or five months to go now. The key is remaining disciplined. Buying things is easy. You can pay a dollar more than the next person is prepared to pay, but the key is buying good quality assets that you believe you can add value to, and we think we can. The majority of our acquisitions are off market, they always have been.
I think that's gonna continue to be, as well as we've got this great opportunity with the SCA Metro Fund, where we can access a part of the neighborhood market that we haven't been able to access before, being predominantly metro in Sydney, Melbourne, Brisbane, for that particular fund as well. We're very confident that we'll be able to continue those acquisitions again, but in a very disciplined manner that we add value to or we see value as opposed to just buying for the sake of getting more scale. Mark, you wanna.
Yeah. Lou, in terms of the indicative long-term target on slide 26, the important thing, I guess, to note there is that this is an AFFO per unit target. When we talk about acquisitions, we need to take into account the cost of capital as well. Yes, this includes about AUD 200 million per annum of acquisitions, but obviously, we've got to fund that with debt and equity in accordance with our target gearing range. That does lead to some variability in the outcomes, which is why we say 1%+.
Yeah. No, fair enough. Just is there an opportunity to sell more assets or do you have more assets that you'd like to sell into this strong demand?
We sold Ballarat, Big W and Dan Murphy's this year as well. We've always sold assets. We sold New Zealand. We've sold a number of assets through since 2012. I'd say we don't have many non-core assets at the moment. When people come in and they do offer you more than what you believe the value of that asset is, yes, we will sell. Likewise, we look to buy when we can. We think it is good value. We will sell if we think that's good value as well. There's no difference there.
Great. Thank you.
Thank you. Your next question comes from Stuart McLean from Macquarie. Please go ahead.
Good morning. Thanks for your time. First question is just on the outlook of maintenance CapEx rent incentive, and I appreciate you touched on this. Given a lot of the portfolio IPO was new and you're now up to 10 years old or so for those assets, do you expect to see any divergence between FFO growth and AFFO growth going forward? I appreciate slide 26 has them growing in line. Is there a risk that AFFO is slightly below FFO growth?
Look, I think, you know, as we say on slide 26, longer term, we'd like to keep maintenance and leasing CapEx constant as a percent of asset value. It has been increasing as a percent, and it probably will continue to gradually increase as the portfolio ages. We're not expecting any really sharp movements from one year to the next. Sometimes, as I said before, you can get some timing differences between halves. Overall, I'd say, in the next couple of years, you might see a slight increase as a percent of asset value, but longer term, we'd like to see that stabilize.
To try and wrap some dollars around that. One half is AUD 7.6 million in maintenance CapEx. Annualized, that's circa AUD 15 million. Would you expect that number to increase beyond AUD 20 million or 25 million or should it be staying around that sort of certain AUD 15 million mark?
Well, as I said, I think the AUD 7.6 million has some timing elements in it, so I wouldn't place too much weight on the AUD 7.6 million. We are expecting it to reduce in the second half. Last year, FY 2021, we spent AUD 9.7 million on maintenance in the whole year. This year it will increase, but you know, nowhere near AUD 20 million, and it will certainly be less than AUD 15 million. It is what we're expecting.
More moderate increases rather than a significant CapEx program.
Moderate, gradual increase, yep, over time.
That's clear. Thank you. Staying on CapEx, then switch to development CapEx. I was looking at slide 23, please. Just in regards to center expansions and the sustainability CapEx, what's the targeted yield on costs coming through from that circa AUD 50 million spend per annum?
Look, we don't have a target yield on cost. Our target is an IRR. We try and achieve a 7% unlevered IRR on our development spend. Sometimes the yield on cost will be, you know, double digit, and sometimes it might be, you know, a low single digit. It does vary quite a lot. We get asked this question a lot because obviously you guys wanna put some numbers in your model. Generally what I've said is, if you assume a 5% yield on cost, you'll probably. That's probably a reasonable number, but it does vary a lot from project to project.
Okay.
The yield on cost target.
Thank you.
Yeah.
Thank you. Just in regards, final question in regards to leasing spreads. You said that New South Wales and Victoria was a bit of a drag, and I'm assuming that also contributed to the higher holdovers. Are you able to give an idea of spreads outside of New South Wales, Victoria, potentially?
No, it's pretty consistent for us. There's a lot of national retailers that are based in Sydney and Melbourne anyway, and so they're still not doing deals in other parts. Look, it's, well, not doing really good deals from a landlord's perspective. Yeah, there's no material difference by state for us.
Okay, thank you very much.
Thank you. Your next question comes from Grant McCasker from UBS. Please go ahead.
Good morning, Anthony and Mark. Can we just talk about some of the supermarket sales things you've seen more recently. I guess a few things I wanted to hear about, one is, yeah, the view of, you know, shopping local versus the larger shopping centers. How you see the recent step change online played out. I guess the bigger question is, you know, what's the implication for your specialties in the short to medium term?
Yeah. Look, the first thing I'll say, there is no doubt, and I've talked to Woolies and Coles. They have both spoken about their really strong growth in online. We're working very closely with both groups to improve the online offer as much as we can with click and collects or drive-throughs. The key aspect for us is to make our center as convenient as possible, and if customers want online and click and collect or drive through, we wanna make sure we can provide that, and we will work and continue to work closely with Woolies and Coles to do that. Online is still really, really strong.
With respect to shift to local, I think there has been a shift to local for the last couple of years, and we're still seeing some really solid performance in those areas. I mean, we don't have any in the CBD location, so I can't comment on that. None of our centers are really large. They're all those small local centers. We've got a couple of sub-regional centers, but there's no discernible difference between the neighborhoods and the sub-regionals for the supermarket sales. Yeah. Most of ours are out in the suburbs, and they're performing well. Very pleased with it.
On the specialties, it's a great result, but I don't wanna dwell on any negatives. Are you seeing, you know, any categories or, you know, retailers actually need the help at this point in time?
We have the Mandatory Code of Conduct that's enforced in New South Wales and Victoria, as we've spoken about, that's been extended despite no lockdowns. Our cash collection rates have been very strong. As Mark spoke about in January, we have had one tenant out of in excess of 2,000 hand back the keys in the month of January. That is a lot lower than normal. Our tenants are performing pretty well. There is some movement within some of those categories which are affected by lockdown. Takeaway food is really positive. Some of our cafes and restaurants haven't been as positive because they've had restrictions placed on them. There's nothing different to what has happened in the prior lockdown periods.
Excellent. Thank you.
Thank you. Your next question comes from Lourenne Zhang from JP Morgan. Please go ahead.
Thanks, guys. Thanks, Anthony and Mark. Two questions from me. Probably first one just around the ECL provisioning. Just curious to understand the impact on first half 2022 FFO in terms of the quantity. I can understand that there's a total provision of AUD 10.4 at the end of the period versus AUD 9.8, but I guess what was the gross increase and the impact on FFO?
The way it works is the change in the provision goes through property expenses. In this case, we've had an increase from AUD 9.8 million- AUD 10.4 million, so that's a negative AUD 0.6 million impact on FFO from that movement.
Gotcha. Second question, just around IRR expectations of the acquisitions in the GIC fund. Can you talk to that versus your balance sheet assets?
Sorry, I missed that question.
Yeah. Can you repeat?
Can you repeat that, Lourenne?
Oh, yeah. Just talking about IRR expectations of the acquisitions in the SCA Metro Fund.
It is a different methodology. When we're assessing acquisitions, our primary methodology is an unlevered IRR, and depending on the property, we have different hurdles. Generally, we're looking for at least 6.25% unlevered IRR, and that's for the balance sheet acquisitions, and we try to do better than that, obviously. The Metro Fund will be measured based on a levered IRR, and as we said in the presentation, the target leverage is actually 60%.
What that means, and I don't wanna go into the specific targets 'cause that's confidential with GIC, but the whole design of it and the whole rationale for it is that this will enable us to access lower yielding inner-city metro neighborhood assets that historically we haven't been able to buy on balance sheet because we can't get that 6%-7% asset level IRR on them. We will be targeting lower yield assets, and the target return metrics are designed to allow that to happen.
Great. That's clear. Thanks.
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. Your next question comes from Alex Prineas from Morningstar. Please go ahead.
Yes, good morning. Just a question around the anchor rents, and specifically around turnover rent, which is one of the sort of swing factor contributors there on slide 26. Just wondering with that 1.0%-1% contribution to AFFO and FFO growth, is that more driven by new anchor tenants newly hitting the turnover thresholds? Or is it more driven by existing tenants that have already hit the thresholds, just growing their turnover?
It's both. Obviously once they've hit the turnover threshold, our rent to just simplify it, I guess, our rent grows in proportion with their sales growth. If they get a 4% sales growth in a particular year, we'll get 4% rent growth. That's sort of how it's designed. And obviously when a supermarket ticks over their threshold, they go from 0% growth to, you know, whatever their sales growth is, in my example, 4%. It is a combination of both existing supermarkets that are already in turnover rent, that met their thresholds, and new supermarkets meeting or coming into turnover rent, if you like, achieving their thresholds and growing from there.
Thanks for that. Is it reasonable to assume a bit of a, sort of, a flat period in that? You know, 'cause obviously we've had strong, as you mentioned, you know, the switch to local and strong anchor tenant turnover in the last couple of years. Is it reasonable to assume a bit of a flat spot, you know, as we come out of lockdowns and restrictions in terms of.
Turnover growth?
You're seeing that now. If you look at slide 15 and you can sort of see the turnover rent trend there, you can see that it's flattening off now. The reason for that is that the supermarket MAT growth for 2021 was basically flat. We will see a flatter period because we're cycling really strong growth in the prior year. But we expect that when we're cycling this year, it'll again be reasonable growth. You'll see a flatter spot and then you'll see it increasing again.
This is where inflation comes in.
'Cause obviously it's based on the gross.
Sorry, yeah, but.
Gross sales, yeah.
So.
Just quick on the 0%-1% longer term, can you give us, sort of, some color around, your thinking of what would drive it closer to 0% or closer to 1%?
Well, there's really two factors there. One, what percentage of our anchor tenants have hit their thresholds? That's the first factor. The second factor is how fast are their sales growing? If we had 100% of our anchor tenants growing at 4% that have met their threshold and they're growing at 4%, then our anchor rental growth will grow by 4%, which because anchor is at 50% of our total rent, that would be a 2% contribution to our revenue growth, for example.
Thank you very much.
Yeah.
Thank you. There are no further questions at this time. I'd now like to hand back to Mr. Mellowes for closing remarks.
Great. Well, thank you very much, everybody. Really appreciate your time this morning and look forward to speaking with you all over the next couple of weeks. Thank you very much and I hope you all have a safe period with not too many COVID interruptions. Thanks a lot and speak to you all soon.