I would now like to hand the conference over to Mr. Anthony Mellowes, CEO. Please go ahead.
Thank you very much for the introduction and welcome to our Half-year FY25 Financial R esults. My name is Anthony Mellowes and I'm the Chief Executive Officer, and presenting these results with me today is Evan Walsh, our Chief Financial and Information Officer, and also in the room with me is Erica Rees, our Chief Legal and Investment Officer. Firstly, let me take you to Slide four, which sets out our first half overview. Our funds from operation, or FFO, was AUD 7.6 per security. Our adjusted funds from operation, or AFFO, was AUD 6.7 p er security, and our distribution was AUD 6.7 per security. Our statutory net profit after tax was nearly AUD 82 million. Our operational metrics remained resilient. Our portfolio occupancy remained at 98%. Our average specialty leasing spreads were 2%, and our comparable non-discretionary MAT growth remained strong at 3.2%.
With respect to capital management, we have divested four centers for a total of AUD 106 million during the six months to December 24 and have completed our initial AUD 200 million capital recycling program. Our weighted average cap rate was stable at 6.08%. Our weighted average cost of debt stayed steady at 4.3%, with 100% of our debt hedged. Our gearing is 32.8%, which is at the lower end of our targeted range of 30%-40%. Moving to Slide five, Region is positioned for growth, and we are looking to unlock the potential in the portfolio. The convenience-based retail sector is bolstered by supply constraints, the resilient Australian consumer, and continued growing population. Our portfolio is underpinned by quality anchor tenants and non-discretionary specialty tenants, which leads to solid comparable net operating income growth.
As I mentioned, we have completed our initial capital recycling program with proceeds reinvested into acquisitions, funds management, and capital expenditure, and some temporary debt reduction. High levels of hedging over the next three years and moderating levels of inflation, together with our targeted investment in center repositioning, sets the foundation for growth in earnings. On Slide six, our strategy remains unchanged. It is to provide defensive, resilient cash flows to support those secure and growing long-term distributions to our security holders. Moving on to our operational performance, which starts with our portfolio overview on slide eight. We have strong weighting towards the non-discretionary food, health, and retail services tenants. 46% of our gross rent is attributable to our anchor tenants, and 54% of our gross rent is to specialty and mini majors, heavily with a key focus on food, liquor retail services, pharmacy, and healthcare.
We have 88 centers that are owned 100% by Region, which are geographically diversified across Australia. Slide nine shows our leasing activity that has driven higher occupancy in annual fixed rent reviews. 98% of the portfolio is occupied, with 85% of expiring tenants retained. The portfolio WALE decreased by 0.2 years to 4.9 years, and our average specialty gross rent increased from AUD 880 a square meter to AUD 900 per square meter. We also achieved an average of 4.2% for fixed rent reviews, which was applied across 93% of our specialty and mini major tenants. Moving to Slide ten, we continue to capital partner with our anchor tenants to continue to drive sales turnover, with over 55% of supermarkets now generating turnover rent. We have 123 anchor tenants contributing 46% of our gross rent.
We have 75 Direct to Boot and e-commerce facilities, and we have 2.5% supermarket comparable MAT growth to December. AUD 4 million of turnover rent was generated from 56 anchor tenants, with a further 15 tenants within 10% of that threshold. Moving to Slide 11, we continue to have consistent and resilient sales growth across those non-discretionary tenants. Our 2% comparable MAT growth is driven by the supermarkets at 2.5%. Our discount department stores improved to 1.7%. Our mini majors were 2.9%.
Our non-discretionary specialties were 3.2%, and our discretionary specialty tenants were minus 4%. Our specialty sales productivity is now AUD 10,800 a square meter, which equates to an annualized growth rate of 5.8% since June 2019, prior to COVID. On Slide 12, we are proactively remixing to secure quality everyday essential tenants. We did complete 256 deals at an average leasing spread of 2.1%. Our specialty vacancy improved slightly to 4.5%.
However, this could be impacted in the immediate term by the failure of a national specialty retailer. We continue to progress our sustainability targets, which are spelled out in our annual sustainability report. The key focus for us has been on environmental, which has been progressing with our social rollout and initial pilot for the battery at Chancellor Park, Queensland, and socially, we continue to make a positive impact on the communities that we operate in and have maintained our 40-40-20 gender representation across senior management and board, and with respect to governments, our alignment to ASRS is on track for that FY27 reporting. I'd now like to hand over to Evan, who will talk through our financial performance.
Thanks, Anthony, and good morning, everyone. I'll start on Slide 15, where we highlight the key drivers of the movement in our funds from operations. Our FFO for the first half is AUD 0.076 per security, which is in line with the first half of FY24. There were positive contributions from the comparable portfolio NOI, which was growing by 2.4%, the impact of our transactional activity, and the establishment of Metro Fund Two. The FFO growth was held back by the previously flagged short-term impact of our center repositioning projects and the normalization of our corporate-related expenses. During the half, we also raised a provision for unpaid rent relating to a national tenant that entered administration during the period. Moving to Slide 16, our statutory profit for the half is AUD 81.8 million.
This compares to an AUD 38 million loss in the prior corresponding half, with the impact of the fair value adjustments in our property valuations now being positive. As mentioned, our FFO was AUD 0.076 per security. Our AFFO came in at AUD 0.067, and our distribution for the half represented a 100% payout ratio of this amount. Our property expenses remain elevated, but in line with previous guidance, and our interest expense has now stabilized. Our maintenance capital and leasing incentives are in line with the long-run averages. Onto Slide 17. As at 31 December, our total assets under management was AUD 5.2 billion. This is an 8% increase from 30 June and includes the Metro Fund Two properties that we started to manage during the half. Our balance sheet remains healthy, with gearing of 32.8% at the lower end of our target range.
This provides us with flexibility to act quickly on investment opportunities, as evidenced by our recent purchase of Callowtown Centre. Our NTA has now stabilized at AUD 2.42 per security. The outstanding rent payable from our tenants continues to remain low at 1.4% of our billings. Slide 18 shows some further information around the change in the valuations of our portfolio. During the half, our like-for-like valuations increased by around AUD 40 million, which represents an increase in valuations of just under 1%. Cap rates were stable, with just a one basis point move over the half. Our discount rate is at 6.82%, which has increased by seven basis points. We also saw AUD 16 million of development-related capital expenditure that increased our valuations, and this is primarily related to the expansion of Delacombe Town Centre. Onto Slide 19, where we talk to our capital management position.
It has been another busy year, busy period, where we have been focused on further improving our earnings stability over the medium term. We completed AUD 1.4 billion of interest rate swap transactions, primarily focused on FY26 to FY29, where we increased hedging by an average of 30% over these years. We were 100% hedged for this half and are expected to be 94% hedged for the full year. Our weighted average cost of debt remains stable at 4.3%, and we have no debt expiries until FY27. I will now hand back to Anthony to talk through our value creation opportunities.
Thanks very much, Evan. Onto Slide 21, our initial AUD 200 million capital recycling program is complete. However, we are monitoring future investment opportunities. That AUD 196 million of lower-yielding non-core properties have been divested at an average passing yield of 5.3%, and we have redeployed this capital into accretive opportunities through the acquisition of Coolum and Kawana and Callowtown Center at a 6.6% initial yield, and also our co-investment in the Metro Fund. Additional proceeds have been reinvested into our regen, revive, and solar projects, and the balance has been used to repay some debt. With respect to Slide 22, our portfolio composition approach, we continue to be focused on improving the quality of our core portfolio. We have settled on the acquisition of Callowtown Center, and we recently exchanged on the disposal of our Target shopping centre at Warrnambool.
The market continues to be liquid, with cap rates appearing to have stabilized, and we continue to see solid interest in this asset class. We remain the largest owner of convenience-based centers, with a proven transactional track record in acquiring and disposing of these shopping centers. Slide 23, our funds management platform. During the period, we established Metro Two, which grew our funds under management to AUD 680 million, and we do believe there are additional investment opportunities with our joint venture partner there. On Slide 24, capital expenditure and unlocking the value through this targeted reinvestment. Slide 24 highlights the year-to-date and indicative spend on our capital deployment program. In FY25, we are planning to spend around AUD 80 million, and we are targeting a completion yield of between 6% and 10% and a 10-year IRR that is greater than our weighted average cost of capital.
Although this spend is predicted to enhance future returns, we expect that there will be a short-term impact to some of these earnings. On to Slide 25, our Delacombe Town Centre. That has progressed well and with key tenants now open and trading. This includes a Woolworths mini distribution center for home delivery in the greater Ballarat area, Supercheap Auto, Rebel, Boating Camping F ishing, and a new very large Planet Fitness gym. We do have further rights on stage three, which will include a new Coles supermarket. On Slide 26 is our investments in our regen and revive center repositioning projects. We have several projects currently underway focusing on remixing tenants, improving the customer experience, improving the amenities, all to drive greater asset value. Moving on to Slide 28, our outlook. There are Australian supply-demand fundamentals in the retail sector that do benefit Region.
The outlook for retail floor space remains limited, and the current merger reform and ACCC inquiries into supermarkets could also negatively impact the development of new space. There is a return of positive retail sentiment. There is a stabilization of cap rates with continued income growth, providing support for growing valuations. Evan, can you just talk through our medium-term AFFO growth target?
To drive our medium to long-term earnings growth, we are focused on generating comparable NOI growth of at least 3%. Through our value creation initiatives, we aim to add another 1% to our growth rate. Our work in the capital management space to increase our hedging has mitigated some of the short to medium-term earnings volatility generated from interest rates, with a longer-term impact dependent on market movements. Based on all of this, we are targeting medium to long-term growth in our FFO and AFFO of at least 3%-4%. I'll now pass to Anthony, who will talk through our key priorities and outlook.
Thanks very much. We do believe that non-discretionary retail will continue to be resilient, and we will generate comp NOI growth with some moderating expenses outlook. We have some limited interest rate headwinds with our relatively high hedging in place now until FY28. Our balance sheet is supported with stabilized valuations, which provides us the opportunity to invest in our centers, be disciplined with acquisitions and disposals, and explore future funds management growth. Assuming there are no significant changes in market conditions, our FY25 guidance is maintained for FFO of AUD 0.155 per security and AFFO of AUD 0.137 per security. I'd now like to hand over to any questions.
Thank you. If you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you would like to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Lou Pirenc from Jarden. Please go ahead.
Good morning, Anthony and Evan. A few questions. First of all, your guidance unchanged implies quite a swing from the first half to the second half. Is it just that cost inflation you were talking about, Evan, or are there other moving parts that we should be aware of?
The second half NOI is stronger, and there's a couple of moving parts there. It's not just one thing. On the revenue side, we are seeing the impact of the higher fixed rent reviews. We are seeing increased turnover rent, and we're also expecting stronger casual mall leasing income. On the expense side, we're now seeing the impact of the technology project that we largely finished in June. We're seeing some efficiencies on the expenses related to that, and we also are starting to see a full period impact from the solar that we've installed.
Thank you. So from the second half, should we expect property income to grow ahead of property expenses, or do you think that property expenses still have a drag for a bit longer?
I think, Lou, it's Anthony here. I think there will continue to be a slight drag, but it's moderating.
Great. And then finally, just with the industrial relations issues with Woolies in your portfolio, have you seen malls materially outperform Woolies over the period?
No. Look, it's been close. It's not like there has been over many years where one is dramatically outperforming the other. It is pretty close where they're both trading. There's no significant difference in our portfolio.
Great. Thank you.
Thank you. Your next question comes from Simon Chan from Morgan Stanley. Please go ahead.
Hi, good morning, Anthony. Good morning, Evan. Hey, guys, I just want to dig into this 6.7% uplift in property level expense a little bit more. Anthony, you said it will kind of moderate, but still be a drag in the second half. Guys, what's the reason for the uplift? Because I thought, like last year, the property level expense was up 6.5%. First half of this year, it's up even worse. Is there an underlying issue here we need to be mindful of?
Look, I think we did flag last year that the expenses will remain elevated, and certainly that's been skewed to the first half. There actually is a broad brush increase across the board. There's not one particular area that is driving that. I will say, though, there has been an investment in some of the areas that will drive future growth, and I'll call out one in particular is we have invested in sort of staff around casual mall leasing, and we are seeing that revenue growth in the second half.
Okay, cool. That makes sense. My second question, Slide 12 on leasing spreads. It seems a little bit counterintuitive or countertrend. Spreads for renewing tenants are rather low at just 1.7% and quite high, actually, for new merchants at 2.8%. I thought typically it's the other way around, isn't it? Where the average uplift for new leases are a bit smaller. What's going on here?
No, you're entirely right. That's what the expectation is. We did roughly 150 deals. Roughly 50 were new deals. 100 deals were renewals. Of those 100 renewals, if we take four out, we had four bad ones, but basically the remaining 96 were roughly in line 3%-4%. So there were four that dragged it down. And on new leases, we had one very strong new lease that basically pushed that number up, skewed it. So it's pretty well in line, but they're the numbers that came out, but it was skewed by five deals out of 158.
That's fair enough. Yeah, yeah. Just one last one. You guys took AUD 1 million provision for the Mosaic Administration. Are there any longer-term impacts going forward from here into the second half of FY26 in terms of vacancy or those stores vacating, etc.?
Yeah, there will be, and that is baked into our guidance. So we had 32 tenancies. We've actively had deals on roughly 16 of those, and there's 16 that we're working on. We are forecasting some downtime on a few of them, and we haven't received notices from the administrator yet, but we've read in the paper that they're talking about everything being closed by April, and that's pretty well what we're forecasting. So we've released some straight away. Others we're holding for our regen program, and then there's basically half that we've still got to lease. Overall, we believe the rental on that space will increase by sort of a 20-odd% uplift, maybe more. However, there's some leasing CapEx everything. Value-wise, we're going to be slightly ahead, but there's going to be a bit of a short-term issue, a short-term cash flow issue.
But that is baked into our guidance at the moment.
So just to make sure I heard you clearly, so you're predicting 20% leasing spreads for those stores. Is that what you said?
We think overall, out of those 32 tenants, overall we should get an uplift of roughly 20%. They're on pretty low rents, is the other way of saying it.
Great. That's all I've got this morning. Thanks, guys.
Thanks, Simon.
Thank you. Your next question comes from Howard Penny from Citi. Please go ahead.
Yes, thanks a lot for the call. So just on the Mosaic administration, could you provide any color on what you expect with existing rental levels of that space if it needed to be replaced and the expectation of bringing in a new tenant into that space? Would you expect that to be higher rental levels than existing?
Yeah, that's what I was just talking about, Howard. We think overall, in the entire 32 tenancies, that we'll get roughly a 20% uplift on the previous rent to the new market rent, so to speak. And that's going to cost us a bit in leasing capital to do it with new leases, obviously. So there is a short-term cash flow impact, but overall we think valuation-wise it will be a slight positive.
And what are the ideas that you would use in the space? Who would you be targeting? I know you can't necessarily name them exactly, but what would you be targeting there?
It's on a side-by-side basis, but basically our core groups of tenants that we like, which is food, retail services, pharmacy and medical, those types of tenants are certainly our number one target, and then we'll go into some of the other, some of our centers that have the smaller sub-regionals that have an apparel range, we'll be looking to modernize that apparel, and that's a big part of those regen projects that I've spoke about.
Thank you. Just talking a little bit about where you are on acquisitions versus your cost of capital, what kind of yields would you be looking at to buy new assets at the moment?
Yeah, we've been pretty consistent over the last sort of 12 months on that. We need to have an asset that has at least a 6% yield in front of it, probably a little bit more, and that's demonstrated by the assets that we've bought with Coolum Village and Callowtown Centre, which have been 6.5 plus %. And then it has growth of at least 2%-3% on top of that.
Great. Well, thanks a lot for the time.
Thanks, Howard.
Thank you. Your next question comes from Murray Callinan from MA Financial Group. Please go ahead. Morning, everyone.
Morning, Murray.
Multi-retailer again. I was just wondering whether you could give us just a little bit more color on the downtime that you're expecting around that space. You've said that everything's to be closed by April, but how long do you think it takes to refill that space and get it productive again? Or I guess how far into FY26 would you expect that space to be producing again on average?
Look, it's going to be. I'd love to say we'll have deals done on everything by the end of this calendar year, but that would be a great effort if we're able to do that. There's some tougher spaces there for us, but the fortunate thing is they're not super high-paying rents for us. But it is going to be a slight drag for us, but it's pretty inconsequential in the greater scheme of everything that we do.
Thanks. And then again, I know we've discussed already, but just drilling into the leasing spreads down a touch there, I was wondering to what extent we should be looking at that as sort of reflective of where we are in the cycle at the moment and tenant confidence around business prospects versus a few sort of outliers around what was actually being done.
Look, I'll tell you this generally on the leasing market. We are still targeting for our renewals that 3%-4%. I don't think anything has changed there. In the vast majority, we're actually in that range. We had a couple that dragged us down. So renewals I'm still comfortable on. New leases, pretty much the same, pretty well flat, although we did get a bit of an uplift this time, but there was one particular deal. The thing that has changed in the leasing market is fit-outs are a bit more expensive. You've seen our fit-out contributions. It's still around that 12 months for a five-year deal. It's edged up a little bit to 13 months for a five-year deal for us.
That's a bit of the mix, but from my leasing executives, they are saying it is costing a little bit more for fit-outs, and that's sort of flowing through in what some of the tenants want in that ask of the negotiation on new leases. But renewals, I'm still pretty confident. And the other thing that we are still very positive on is our fixed rent reviews. We are getting closer to 5% on those as opposed to 4%, and that's why we've moved from sort of 3.8% average fixed rent reviews through the period up to sort of 4.2%, 4.3% at the moment. So they're the major changes in the market. I'd say fit-out expenses are driving through to a bit more in fit-out costs, but it's moving. We were slightly under 12 months, but it's now slightly over 12 months is what I'd say.
Thanks. And then just lastly, you mentioned the additional opportunities that you're hoping to do within the funds management platform and your partner there. Just obviously, you're keen to grow that platform over time, but I was curious to hear what the sort of near-term appetite is as far as you can tell.
Look, I think when opportunities come up, we put them to our partner, but I think they're on. They like retail. They like convenience-based retail. I think there are some opportunities there that fit their hurdles and or that meet their hurdles. And yeah, we've got to find them, and I think we will.
Got it. Thanks very much.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Richard Jones from JP Morgan. Please go ahead.
Good morning, Anthony. Just in relation to the balance sheet position, do you think you'll be obviously, you've announced Callowtown acquisition, but do you think it'll be a net buyer in 2025? And do you think you'll push gearing back to the mid-30s? I'm just conscious that you've got a few headwinds on the interest hedging side in FY26. I'm just interested in how you think about absorbing that.
Look, I'll say this. In the 13 years just seems like yesterday, but in the 13 years I've been doing this, our gearing range has been between 30 and 40, with a preference to be between 30 and 35. We've been over 35 once in 13 years, and we've been below 30 twice or maybe three times. We're really happy in that range. We have bought a couple of assets worth AUD 140 million, which has basically been funded from AUD 200 million of divestments. We have a lot of assets that I think we've demonstrated if we can sell at 5%, 5.25% that don't have a lot of growth but are very secure assets. We will continue to recycle that into other assets that are slightly higher yielding and have better growth, as demonstrated by Callowtown and Coolum. So I think there's probably that's where we're going to go.
We don't like having our gearing pushed really high, as demonstrated by what I said at the start. So the other side is I think cap rates have stabilized. We do have good income growth, so we're not looking at there's going to be all of our assets being devalued. I think they're going to continue to increase in value. So that assists with our gearing. But yeah, we're very mindful of it, but I don't think we're going to change horses and start pushing gearing above 35 in the short to medium term at all.
Thanks, Anthony.
That's all right, Rich.
Thank you. Your next question comes from Cody Shield from UBS. Please go ahead.
Good morning, Anthony and Evan. Just a few questions on center repositioning. So if you look at 25 guidance, you included an impact from repositioning there. Just looking at first half 25, was that drag maybe a little bit heavier than you were expecting? You've got a bit of CapEx left there for the second half, so just keen to get a read on how we should be thinking about lost rent in the second half 25.
Look, no, it's in line with what we expected. Some of the developments have pushed out a couple of months, but I don't think the income is any different than what we expected. The first three deals, they're expected to be sorry, the first three projects are expected to be completed by June, and the leasing will come on after that, but yeah, it wasn't any different to guidance.
Okay, sure. And just kind of looking a little bit further out, you've got AUD 48 million there committed for 2026. Just kind of trying to think through, to what extent do you think the ongoing center repositioning activity is going to impact growth over the next few years?
Look, from FY26 onwards, we're not expecting any impact. So we had a one-off negative hit for the centers we're doing this year. We expect that rent will come on next year, and you'll have some rent coming off for those new projects. So you're going to have that impact for a couple of years.
Okay, perfect. Thanks.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Ben Brayshaw from Barrenjoey. Please go ahead.
Good morning, Anthony. I was wondering just a follow-up question on the center repositioning CapEx. Could you just provide a little bit more color or discuss the key projects that comprise the AUD 35 million for this financial year?
Yeah, they're mostly our what we call our regen projects, which are predominantly our sub-regional centers, where roughly half of the CapEx that we spend is towards tenant incentives, where we are remixing significantly the centers and moving out older tenants and putting in newer, more appropriate tenants for that particular market. The other half of the money is spent on amenity upgrades, mall upgrades. Because of the age of the shopping centers, it's up to sort of 15-odd years in most of those cases. So they're the two major buckets that we spend on those, which is, like I said, leasing incentives because we're doing a lot of remixing and center amenity upgrades and that type of stuff. And some solar is also thrown into that as well.
And so, across how many projects, Anthony, would you be typically looking to include in that over this financial year?
So we've got three of the regen projects at the moment. So that we started last year. And we've got another two that are coming online, and they're two sub-regionals. And we probably expect to have two to three each year to start. For the next few years, yeah.
When you talk about a target yield on cost of 6%-10%, does that assume a yield on cost for the center repositioning CapEx, or is that excluded from that target return?
No, it's included. We expect a yield on cost on that.
So sorry to hop on this. Can I just clarify? Is that an incremental yield on the cost, or is that a yield that you notionally ascribe to those projects when compared with not having undertaken the work?
It's an incremental yield on the cost that we're spending. Yeah.
Okay. Thanks.
Thank you. If there are no further questions at this time, I'll now hand back to Mr. Mellows for any closing remarks.
Thank you very much, everyone. I hope you got a bit out of that. Looking forward to seeing you all over the next couple of weeks as we do our road shows, and looking forward to having lots of questions and discussions with you. Thank you very much, and I hope you all have a terrific day. Goodbye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.