Eora nation. Recognizing that you may be participating in this meeting on land other than traditional custodians, I pay my respects to the elders past and present of all those nations. If we experience any technical issues today, a resource on adjournment may be required depending on the number of security holders being affected. If this occurs, I shall advise you. My name is Steven Crane and I'm Chair of the Group, and I have been appointed Chair of this meeting. This afternoon, we are simultaneously holding meetings of Region Management Trust and Region Retail Trust. For the rest of the meeting, I will refer to the business of each trust conducted as one meeting. I would like to introduce Region's independent directors and senior management who are joining me here today.
My fellow, you might indicate, although I think you've got name tags out the front, but my fellow independent directors, Beth Laughton, Angus James, Michael Herring, Belinda Robson, Antoinette Milis , and Jane Lloyd. Anthony Mellowes is our Chief Executive and Executive Director. I think you know Anthony quite well. Erica Rees is our Chief Operating Officer and Company Secretary. Also in attendance is Yvonne van Wijk from the Group's auditors, Deloitte Touche Tohmatsu. We have representatives of the Group's registry, and I'm told this is how to say it, MUFG Corporate Markets joining us today. MUFG will be moderating the webcast platform. I've been informed by the Company Secretary that the quorum is present and I declare the meeting open.
The agenda for the meeting will be as follows: it will be the Chair's address as the Chair, the CEO's address, the formal business of the meeting, which includes the resolutions of the meeting, and general business and questions. My presentation today will cover the following: Region's financial performance, the key priorities and outlook, and financial value creation opportunities and governance matters. We are committed to delivering defensive, resilient cash flows to support secure and growing long-term distributions to our security holders. For the year ended 30th of June , 2025, Region's funds from operations, or FFO, was AUD 15.50 per security, up from AUD 15.40 per security in FY 2024. Region's adjusted funds from operations, or AFFO, was AUD 13.70 per security, up from AUD 13.60 per security in 2024. Distributions to security holders totaled AUD 159.1 million and represent a 100% payout of the AFFO, or AUD 13.70 per security.
During the year, we recorded an accounting statutory profit of AUD 212.5 million following the positive revaluation of our investment properties. We are pleased to note that our assets under management are now greater than AUD 5 billion, an increase of 8.7% compared to the prior year. Region was able to achieve a 3.2% comparable net operating income growth following strong leasing activity, increased fixed rent reviews, and proactive expense management. Net tangible assets per security has increased to AUD 2.47 off the back of the positive revaluation growth, up from AUD 2.42 per security last year. Region Group has delivered a total of 14.9% total shareholder return over the last year, which is broadly in line with the S&P ASX 200 A-REIT index over the same period. At the heart of our strategy is our customers.
This means the places we create will deliver both a practical and positive experience as we work to be the first choice for essentials at a place nearby. We know that through delivering customer value, we deliver security holder value. In our pursuit of delivering strategic pillars, we aim to ensure defensive, resilient cash flows to support secure and growing long-term distributions to our security holders. I'll now turn to our key priorities and outlook. Our operational priority is to generate sustainable net operating income growth from our core business. We will do this by working with our supermarket tenants to strengthen their offering and generate turnover rent, securing rental growth from our specialty and many major tenants, and proactively managing our expenses. Our balance sheet is strong, positioned for growth, and supported with growing valuations.
At 30th of June 2025, our gearing was 32.5% and we had AUD 313.3 million in cash and undrawn facilities. We are pleased to note that we have no debt expiring until FY 2027. 97% of our debt was hedged during the year and we were highly hedged in FY 2026, and we are highly hedged in FY 2026 and FY 2027. Our average hedge fixed rate over the next three years is below 3%. Our balance sheet provides us with the opportunity to grow through value accretion. During the year, we acquired Kallo Town Centre, a neighborhood center anchored by Woolworths and strategically located in the growth corridor of the northern suburbs of Melbourne. We also divested six non-core centers and a banning site for a total of AUD 228 million at an average passing yield of 5.8%.
The market continues to be liquid with cap rates firming and continued strong interest from non-discretionary retail neighborhood and sub-regional centers. We remain the largest owner of convenience-based centers with a proven transactional track record. We invested AUD 75 million into capital expenditure during the year, including developments, center repositioning, sustainability, and investing with our anchor tenants. Finally, funds under management have more than doubled to AUD 711.5 million following the addition of another Metro Fund with a global institutional investor in November 2024. In July 2025, the Metro Fund exchanged on the acquisition of Dalyellup Shopping Centre for AUD 35.8 million, which will contribute to funds management growth in the future. The board remains committed to our key objective, which is to deliver secure and sustainable earnings and distributions which grow over time. Importantly, we believe we have the right management team to deliver that outcome to security holders.
On the 18th of August 2025, our Chief Executive Officer, Anthony Mellowes, gave notice of his intention to retire. This is a significant day for this meeting. In line with his contractual obligations, Anthony has given nine months' notice, allowing time for a smooth transition to his successor. On behalf of the board, I would like to recognize and thank Anthony for his outstanding contribution as the inaugural CEO of Region . Under Anthony's leadership, the group has grown from an entity comprising 69 properties and a value of AUD 1.4 billion to an entity now owning and managing over 100 properties with a value in excess of AUD 5 billion today. As announced on the 1st of September, the board has appointed Greg Chubb as the role of CEO and Managing Director effective March 2026. Greg has extensive retail property experience with Link, Charter Hall, Coles, and Mirvac.
The board is looking forward to working with Greg to deliver the best outcome for Region stakeholders. As foreshadowed by Belinda Robson at the 2022 AGM, she will not be standing for re-election and will retire after this year's AGM, so after today. Having joined the board at the time of listing in 2012, over the past 13 years, Belinda has made a significant contribution, bringing deep expertise in the property industry and providing valuable strategic guidance. The board sincerely thanks Belinda for her dedication and service. The board has nominated a new director, Rhonda Jane Lloyd, for election at this year's AGM. Ms. Lloyd has more than 30 years' experience in Australia and international property markets across commercial, retail, industrial, and residential sectors. Finally, on behalf of the board and management team, I thank you all for your continuing support. I'll now hand over to Anthony.
Here we go. Thanks, Steve. Good afternoon, ladies and gentlemen. I'm Anthony Mellowes and I'm the Chief Executive Officer of Region Group. This afternoon, I'll run through some of our key achievements for FY 2025 and provide an update on the outlook for FY 2026. As Steve said, we delivered our funds from operations of AUD 15.50 per security in line with guidance and representing a growth of 0.6% over FY 2024. There were positive contributions from the comparable portfolio NOI growing by 3.2%. The impact of our transactional activity and the establishment of the Metro Fund II were offset by our previously flagged short-term impact of the center repositioning projects and the normalization of our corporate-related expenses. The distribution paid to the security holders was AUD 13.70 per security, which represented a payout of 100% of our adjusted funds from operations.
With portfolio valuations improving during the year, we were able to achieve a statutory profit of AUD 212.5 million as compared to the statutory profit after taxes of AUD 17 million in the prior year. Our assets under management have increased from AUD 4.8 billion in FY 2024 to AUD 5.2 billion in FY 2025. Our operational performance was very strong during the year with our positive comparable sales of our moving annual turnover, or MAT growth, demonstrating the strength of our non-discretionary portfolio. This has been bolstered by our continued work with our retail partners to invest in the centers and enhance the experience for all of the customers. The average annual specialty fixed rent reviews have increased from 4.1% to 4.3% and are applied across 94% of the specialty and many major tenants. The average specialty leasing spreads remain positive at 3.7% and we generated comparable net income growth of 3.2% during the year.
In our portfolio, weighted average market capitalization rate compressed 10 basis points from June 2024 to 5.97%. That's the yield on the properties. During the year, we also commenced a non-market security buyback program. To date, we've only been able to purchase AUD 2.2 million of securities at an average price of AUD 2.30 for a total consideration of AUD 5 million. These initiatives have helped contribute to an increase in our net tangible asset, or NTA, up to AUD 2.47 per security. Our weighted average cost of debt remained consistent at 4.3% per annum, with, as Steve mentioned, 97% of our debt hedged or fixed. As of June 2025, our portfolio comprised 13 sub-regional and 74 neighborhood retail properties located across all states and territories across Australia.
We also manage an additional 13 neighborhood retail properties located across five states on behalf of the Metro Fund, bringing our total portfolio to 100 retail properties under management. Nearly half of our income is from anchor tenants such as Woolworths, Coles, Kmart, Big W, and Aldi. These are long leases with average weighted expiry of more than six years, which contributes to that rental income security. Our portfolio of convenience-based retail centers has proved resilient with its high-quality mix of supermarket-anchored retail partners and a focus on non-discretionary specialty tenants. In FY 2025, the total portfolio sales grew at 3.1%. Our supermarkets continued to perform well with sales growth of 3.3%, and over 55% of the supermarkets are generating turnover rent. We've also strategically benefited from our focus on non-discretionary specialty tenants. We focus on having the right tenant mix for everyday essentials.
This means that we have specialty tenants such as food, hairdressing, gyms, post offices, pharmacies, and healthcare offerings to complement your shop at the supermarket. By incorporating these tenants in the portfolio, we ensure a steady stream of foot traffic and defensive revenue, as these businesses are less susceptible to the economic downturns compared to discretionary retailers. This was evident during the year with non-discretionary specialty sales growth of 3.7%. Over 97% of the portfolio is occupied, with 81% of expiring tenants retained, which helps to minimize our leasing capital, expenditure, and downtime. Our average specialty rent has increased to over AUD 900 a square meter, representing annualized rental growth of 5% since FY 2022. Our leasing is done in-house, and during the year, we completed 372 leasing deals at an average of 3.7% uplift, with strong performances from new leases, which increased by 6.1%.
The average annual fixed rent reviews of 4.3% are applied across 94% of our specialty and many major tenants. This is a really important area of focus for the business because we've increased this figure from 3.9% in FY 2022 to 4.3%, which affects 80% of our specialty leases every year. We continue to progress towards our sustainability targets, which are spelled out in our annual sustainability report. The key focus has been on environmental, which is progressing with our continued solar rollout with 21.7 MW of solar across 33 sites installed and operational. On the social side, we continue to make a really positive impact in the communities that we operate and have undertaken a number of community initiatives, including the Hope in a Suitcase, which has helped raise awareness and collected donations across 13 centers to provide children entering foster care with essential items.
On our governance side, our alignment to the ASRS is on track for FY 2027 reporting, and our tendering process for new national contracts included modern slavery risk assessments and protections. In terms of key priorities and outlooks, our strategy of delivering defensive, resilient cash flows to support the secure and growing long-term distributions to our security holders has remained unchanged since listing on the ASX in 2012. There are excellent Australian supply-demand fundamentals in the retail sector that will benefit Region Group. The outlook for new retail floor space remains limited, with strong or continued strong population growth creating solid to strong fundamentals. There is a real return of positive retail sentiment, with cap rates not only stabilizing, but recent evidence is suggesting continued compression in that space, with also continued income growth, which supports our continued growing outlook for valuations.
With respect to our September quarter, we've seen our supermarket moving annual turnover growth continue to be above 3%. Our specialty moving annual turnover growth is above 3.5%, which also follows some positive growth in both our non-discretionary and discretionary categories. Discretionary has been negative for the last couple of years, but that's now both positive. We've also seen continued momentum in the first quarter for specialty leasing. We did over 90 deals at positive spreads and increased the fixed rent reviews on the achieved deals consistent with those prior periods. We remain committed to delivering on the defensive, resilient cash flows. To achieve this, our focus will continue to be on improving our comparable net operating income through strong leasing, focusing on those increased fixed rent reviews and proactive expense management. We're going to continue to curate our portfolio through some selective acquisitions and disposals.
We're going to continue to reinvest in our centers to drive additional value. We are also looking to continue to grow our funds under management. We'll maintain a really proactive approach to capital management, including the on-market buyback, asset recycling, and continued interest rate hedging. Assuming there is no significant change in market conditions, we continue to maintain our FY 2026 earnings guidance of FFO, our funds from operations of AUD 15.90, and our AFFO of AUD 0.14. Finally, I want to say thank you to you all for your time this afternoon and the support over the past 13 years. It's been a real honor to be part of Region Group's story, and I'm really looking forward to the continued success. I wish Greg and the board all the best. I'd like to now hand over to Steve. Back to Steve.
Thanks, Anthony. Yeah, great to you. You can be very proud of your time. Thank you, Anthony. Ladies and gentlemen, the resolutions for consideration today may not be voted, but may only be voted on by security holders, proxy holders, and security holder company representatives. Security holders participating in person or online will have the opportunity to ask questions or make comments on each matter being put to the security holders. We do not have any security holders registered to ask questions by phone, I think. Is that still correct? Yeah, that's still correct. I have been informed that the notice of meeting was sent or made available online to all registered members within the notice period required. I now table the notice of meeting, and unless there are any objections, I'll take the notice of meeting, the notice convening this meeting as read.
A reminder that we are simultaneously holding meetings of Region Management Trust and Region Retail Trust. Although only one resolution will display on the presentation slides, and you'll be asked to vote only once on each resolution, your vote will be taken as a vote for each trust. Voting on the resolutions will be conducted by way of poll. In accordance with the Corporations Act, as Chair of this meeting, I demand a poll on each resolution to be considered in this meeting. For those security holders participating in the online portal, you will need to register to vote by clicking on the "Get a voting card" button at the bottom of your screen. Once you have registered your voting card, your card will appear with all other resolutions to be voted on at the meeting.
You may need to use the scroll bar on the right-hand side of your voting card to view all resolutions. Following the meeting, general business questions will be taken. For online participants, please click on the "Answer Question" button, type your question, and click "Submit." I encourage security holders to send their questions through as soon as possible. The voting will close five minutes after the close of the meeting. Security holders attending the meeting here today may vote using the voting cards provided by the MUFG registration desk. Members who are entitled to vote today should have received a yellow voting card. Members who have voted before the meeting should have a blue admission card. Those in possession of either a yellow or blue card are welcome to ask questions, while those with a red visitor card are requested to only observe during the meeting.
If you've not received the correct card, please go to the registration desk where an MUFG representative will assist you. I will endeavor to give all members who wish to ask a question or make a comment a reasonable opportunity to do so. I ask that you please keep your questions or comments related to the matter at hand and as succinct as possible to allow all participants an opportunity to ask questions, which I would ask be limited to two per participant, please. If you wish to ask a question, please come to the microphone at the center. It's actually at the center back there, unless you have a very large voice because just to make sure that everybody can hear your question. We're going to move it to the center aisle there.
Before asking your question, please identify yourself and confirm that you are a security holder or a duly appointed proxy for a security holder by displaying your voting card. I might say also, just because we had some pre-testing, you'll need to stand quite close to the microphone to be heard properly. Please don't stand too far back from the microphone. General business questions received from security holders prior to the meeting will be addressed during the general business questions period. Each resolution set out in the notice of meeting is an ordinary resolution, and as such, to pass must be approved by a simple majority of votes cast by security holders entitled to vote and voting on the resolutions. I've demanded a poll on all resolutions.
You should record your vote by selecting for, against, or abstain squares for the relevant resolution shown on the paper or on the online voting card when I put the motion to vote. The voting cards will then be collected at the end of the meeting, and the votes tallied. We will announce the results of the vote to the ASX following the end of the meeting. If you have to leave the meeting before all resolutions are voted on, you may provide your completed yellow voting cards to an MUFG representative on your way out. I now open the poll. I appoint MUFG Corporate Markets Ltd. as scrutineer for the poll. In accordance with the Corporations Act, each member will have one vote for each dollar value of their total RGN securities held by them.
MUFG have all the details of this value per security, so you don't have to worry about that. I have been advised by MUFG that all proxies received have been checked, and those that have been found to be properly completed I declare valid for voting at this meeting. I will disclose proxy votes on the screen prior to the vote being taken for each resolution. These figures will be as at the closing time for receipt of proxies, which was 2:00 P.M. on Friday, 17th of October 2025. These figures may change if a security holder who previously submitted a proxy has joined the meeting today and revoked their proxy. We will disregard any votes cast on the relevant resolutions by those persons set out in the voting exclusion section of the procedural notes section of the notice of meeting.
I remind the meeting that the Chair will vote any undirected proxy votes in favor of all resolutions. All voting by the Chair is subject to the voting exclusion details included in the notice of meeting. The first item of business is to consider the annual financial report, Director's report, and auditor's report for Region Group for the financial year end 30th of June 2025. There is no resolution in respect of this item, but if there are any questions or comments on the annual report, you may submit them now. For this item and all that follow, I request you take the time to identify yourself before asking a question. In case where you are a proxy holder, please identify on whose behalf you are holding the proxy. Are there any questions or comments on the management of the group or on the financial statements and reports? Yes, sir.
Good afternoon, Chair. David Kingston, KCapital. Congratulations, Anthony, on your long and distinguished role with Region . You're a total gentleman, and we wish you well with your future. There's a great opportunity for Region . The annual report, a message from the Chair and CEO, correctly identifies the positives, including Region focuses on the defensive non-discretionary sector, and retail valuations have troughed. There's a lot of demand for retail at the moment. Well done to the board, Anthony, on some asset sales at low cap rates and the buyback, although not used much, noting the discount to NTA is too low. I like Region because it's internally managed. I'm pretty wary of externally managed REITs, but Region is internally managed, which gives it a huge advantage. That's the good news.
The challenge and the opportunity to improve is that the last five years' results, Chair, have been underwhelming. Let's look at the figures in the annual report. Gross property income has gone from AUD 290 million to AUD 377 million. These are the annual report figures. FFO per security, which is crucial, AUD 14.80, just up to AUD 15.50. AFFO, which is even more important because it's a de facto indicator of true free cash flow, has moved merely from AUD 12.60 to AUD 13.70, which is disappointing in five years. NTA, Chair, has actually gone down, which is very disappointing. AUD 2.52 down to AUD 2.47. The share price has gone down in the last five years from AUD 2.52 to AUD 2.46. Now, yes, I appreciate that there's been a near 100% distribution of AFFO, but where is the capital gain on the properties that should have lifted the NTA over the last five years?
Particularly noting annual fixed rent reviews were 4.3% in FY 2025, and comparable NOI growth last year was 3.2%. The second key point is where let's look at the true free cash flow. Every business is a function of the true free cash flow. Everything else is a bit secondary. This company, for some reason, is purely converting of its rental of AUD 326 million, ignoring the recoveries. It's converting a mere 49% of the AUD 326 million to AFFO. AFFO is a mere AUD 159 million. That's a pretty disappointing figure, and it's very hard to understand from the annual report where that money is going. The annual report in the P&L lists property expenses at AUD 137 million. There's no breakdown. You can read it from cover to cover. None the wiser. Corporate expenses are shown at AUD 18 million.
Bottom line is AUD 326 million gross rent drops down to AUD 159 million that's available for shareholders. Maybe the external management of the properties is impacting cash flow. Other things that come out of the annual report, impairment of investment in association.
Sorry, David. I don't mind the question, but try and keep it as brief as you could, please.
Yeah. Chair, it's important to have context. The questions are meaningless without context. It's the one event of the year, Chair.
No, no, I'm 100% with you.
You have the right to make comments. It's right under the Corporations Act. Please be patient, Chair. These are important issues.
I'm just asking that you try and make sure that it's as succinct as you can make it, okay? That's all.
It is. It's short, sharp, to the point. There are pretty clear messages, and I'd appreciate your response to the issue, Chair.
Sure.
Page 36 shows maintenance CapEx at AUD 9 million. That seems an incredibly low figure on a [AUD 4.4 million] portfolio. I own properties directly. I wish I could have my maintenance CapEx at that low figure. That's remarkably low. If it actually turns out to be higher, then the AFFO, which is the critical issue, will be even lower. Leasing incentives and costs AUD 11.9 million. Again, that seems pretty modest against the gross rent. Maybe you've got success in keeping a lot of tenants. Chair, coming to two questions, and then I'll have some questions on other resolutions later. Why are you generating AFFO of just 49% of your rentals? In other words, you're spending 51% of that money on expenses.
That seems a huge proportion of the money that you're spending and depriving the shareholders of being able to take advantage of that and contributing to the fact that there's been no capital growth in the last five years. Secondly, given the ongoing rental growth and cap rates have stabilized, why has Region, NTA, and share price not delivered any capital growth over the past five years? If we'd bought Sydney residential property, a lot of it's doubled in the last five years. Yet Region, NTA, and share price have not moved. Yes, there's been a distribution, but no capital growth. I think most investors would like both. The principle of property, Chair, is that if you buy something at a 6% cap rate and if there's 3% rental growth, in theory, there's 9% IRR ungeared. Throw a bit of gearing on there, you can get IRRs of 11%, 12%.
At the end of the day, what's been happening with Region in the last five years, and I never pick stats out. I tend to look at over a longer period of time. It would be wrong to look at one year or two years. I'm talking about five years, your own figures, Chair. At the end of the day, the principle of property is if you buy at 6% or 5.5%, there's 3% rental growth. Your ungeared IRR is 8.5%, 9%. Throw in a bit of gearing, which you've got, and you should be up over 10%, which is what gives you the capital growth. You distribute 6% or thereabouts. The residual is capital growth, which means the share price would be a lot higher. Thank you, Chair. They are my two questions on resolution one, or the first item by my status.
Thanks, David. I'm going to ask Anthony to respond to some of it, but I just say that the last five years, of course, have not been a normal five years in the sense that interest rates went from a very low level to a much higher level, not high by historical standards, I might say, but relatively high. That has definitely had a significant impact on the income that we get out of income growth we've seen. It's had the same effect depending, you know, just looking at that period. It's also had an effect on cap rates and how they moved. I think we're now entering into a period where, fortunately, it seems that at least interest rates have stabilized. Maybe they're going to go lower, maybe they're going to go higher.
At least where we're sitting, it seems like there's starting to see some firmness in cap rates, which we saw in our latest results. We would expect that, as Anthony said, to continue. That's been some of the factor that's impacted on that net amount when you already pay a distribution of about 6% out of those numbers that you quoted. Anthony, you might like to make some further comment.
On the first part, yes, we start with the gross rental. Then we subtract the operating expenses at the shopping center level. Then we subtract the debt costs, and they have moved significantly over the last five years. We then subtract the corporate costs, which, as you said, is AUD 18 million. That's been pretty stable over the last few years. Again, you rightly point out, we then subtract our leasing and our management CapEx. Now, with the leasing CapEx, why it is low, we basically did say both. I said in there that we have a retention rate of north of 80% for our specialty tenants because that's only about specialty tenants. You don't pay, we don't pay CapEx, leasing CapEx on renewals, unlike in office. In retail, you only pay a leasing CapEx generally on a new deal.
Because we have such a high retention rate of our specialty tenants, therefore, our leasing CapEx is actually quite low. The leasing CapEx is only for new leases. In terms of our management CapEx, that is also low, but it is continuing to increase. We have some years where it's higher, some years lower, but it's basically going to be trending up a little bit as the centers age. There's a lot to do with the CapEx, forward-looking CapEx, to do with air conditioning, with the majors, and that type of thing, which we often get wrapped up with when we do a refurbishment with Woolworths and Coles, and that gets wrapped up into a new deal that we do with them. It sort of falls away a little bit.
They're the major reasons why we get down to that 49% per your numbers for the AFFO or the distribution because we do distribute everything. It's the operating expenses, it's the interest rate, it's our corporate costs, and then it's our capital costs as well. They're the factors. With respect to the capital growth, if I go back, and as Steven touched on there, you look at what has happened to cap rates. I think five years ago, we were at 5.4% cap rate. That moved out to 6.25%. Our interest costs went up very significantly. That was the major area that moved valuations at a shopping center level, which was the movement in the cap rates. We still had some income growth at the center level. We also had very significant operating expenses increases because of inflation during that period.
We weren't having our comp growth at 3% as we had this year because we had inflation going through. That was mostly to do with labor-based inflation, which is cleaner securities, which are the major things. Also, the other big area is land tax council rates, which I don't think if anyone lives in Sydney, you've seen what your council rates are doing. They're not going backwards. They've continued to increase. They're the major reasons why things have moved and why our NTA has moved from AUD 2.50 down to AUD 2.47. It's a combination of cap rates and expense growth.
Thanks, Anthony. Just one follow-up. Your gross rental income in the last five years has risen 30%. There are a couple of extra properties in there, but to a large extent, that reflects the fact that as you have proven this year, your rentals are going up. The conundrum for investors, or for me anyway, is that there's been 30% growth in rental income, but at the end of the day, the key earnings stats, which are the key determinant of how shareholders go, determines the distribution, AFFO. You're doing the right thing. You're distributing 100% of that. That's fine. The problem is that your rentals have gone up 30%. I know a few expenses have gone up, but at the end of the day, the improvement in five years on the AFFO and the distribution has been pretty disappointing. That's an opportunity for the future.
I do think that there are a number of possible areas where the company can improve its costs. Certainly, I know you're looking at possibly insourcing some of the things you outsource to the management of some of the properties. There are a number of things that one can look at, but I do believe, and Anthony, it is a comment that some of your competitors, a lot of them are jealous and vindictive and whatever, but some of the competitors say that there are some costs that can come out of this company. An objective review of the facts would indicate that's probably correct. Thank you for the comments. Thank you.
Thanks, Dave.
Yeah, I won't comment. I shouldn't comment, but most of them, of course, don't manage their companies as cheaply as we do. That's a fact. Thank you, David.
Thanks.
Are there any other questions?
Yes.
Yes. Sir.
Oh, thanks, Mr. Chairman. I'm not sure this is the appropriate time to ask the question.
You ask. Sorry, what's your name, sir?
Sorry, my name's William Prentis.
Thank you, William.
[My rent card].
Thank you.
It's a really easy question. In my area, there's a lot of illegal tobacco shops everywhere. I guess you guys have seen them. I've seen them in shopping centers. I haven't seen them in, I don't have any of your shopping centers around. I just want to ask you, have you currently or in the past ever had any of these illegal tobacco stores? Have any of them approached you to be in the center if you have not? If they did, what would your reaction be to that?
Well.
Maybe that's.
That's a fair question. The board takes a strong interest in this issue. We don't have illegal, as far as like the question is finding out whether a tobacco shop is illegal. There's a whole, and I know, you know, you could walk in and do some mystery shopping and all that sort of thing. We spend, the board spends quite a bit of time focused on this issue. We do have how many tobacco shops?
72.
72 tobacco shops. It is constantly under review to understand the risk that those may or may not present to our centers. Of course, making sure that we are always abiding by the law. I don't know. There's not much else I can, I don't think I can. Anthony, is it, what do you want to say?
Yeah, it's an evolving issue. In our leases, everyone must abide by laws, right? Criminals don't necessarily abide by laws. We don't know whether they are or not abiding by the laws. That's up to law enforcement, whether that's the police. In tobacco, that actually comes under the health side of things, so you need health officials to be determining whether they're making illegal sales or not. You may very well think they're making illegal sales, just like you may think someone's speeding as they go past you. Unless you have the actual gun to make sure that they are speeding, you don't necessarily know. It's a very difficult question. There's a lot of legislation going on that's being started in Queensland. New South Wales is following up now here on exactly this issue.
Health officials will be going in and closing or putting closure notices or stop selling illegal tobacco notices. We as a landlord must then follow that. If they get an actual closure notice, we then must close that store. We aren't the police to determine whether someone is or isn't breaking the law. We rent space. We contract with people, with tenants to make sure that they follow all laws. That's what we do. We're not the police.
You take whatever the tenant tells you, we're doing this. That's fine. Are you required to do any vetting of tenants by any law enforcement or Department of Health or anything else? Have you ever been asked about that?
No, they do that. That is the government role.
Have they ever asked you for information like the Department of Health?
No.
They've turned a blind eye, basically.
I wouldn't say they turn it. I'd say this is an evolving issue. I think they're very focused on the issue now because it has a lot of other implications. It's certainly an issue that all levels of the property industry, landlord industry is very, very focused on. There are significant penalties for the tenants. Also, there are going to be penalties for the landlords if they do not follow the directions given by the relevant health officials in terms of closing.
Perhaps an easy test would be to actually go in there and buy something and see how much those cigarettes cost because some of them can be, you know, you buy a packet of cigarettes. Not that I smoke. I do feel sorry for people that are addicted to nicotine. Obviously, this is an area where there's a lot of organized crime, where there's been a lot of fires. I haven't been involved in the investigation, but you know, [Lion Freddy] can see what's sort of going on. I do go into centers, I see a lot of it there. It appears to me that government, the health department, everyone's turning a blind eye to this for some reason, you know. If I went and broke the law, you know, I'd be in jail. These people seem to have immunity from what they're doing.
I'd probably suggest that you do have illegal stores there. I think an easy way is just go in and buy a pack of cigarettes and see how much they charge you.
Yeah, yeah, that.
Thank you.
Yeah, thanks. That actually doesn't relieve us of anything because you just have to understand it's a complex area. They have rights. Just us determining, we can't actually determine anything.
That's how the law is.
[Crosstalk]
That's how the law is.
You know, like if I went to you and you'd sort of say, "Sorry, we don't want you in our centre."
I think that's a different issue. We're actually, we do do some, we don't do nothing. We try to actually check out people before, especially if we're renting a new tenancy. We have a process for just vetting as best we can by talking to police and those sorts of things to make sure that we're dealing with, as far as we can know, people who are bona fide. Once they're in our centre, they have a lease. It's not really as easy as it maybe should be, or certainly than it is. It's a regular discussion, I can assure you.
I think you'll find the legislation's going through in both New South Wales and Queensland pretty well as we speak. The government takes time to get on to these. The legislation's going through, but these health officials are the ones that are going to be issuing these orders and doing audits, etc., to determine whether someone is really selling illegal tobacco.
So.
Not who we think they are.
If they are in your center, do you see any sort of outcome where the center could be liable for not properly vetting?
If we don't close them.
Yes.
As per the order that's going to be given, we can then be in trouble.
It's just wherever I go now that either the smoking rates are terribly high, or there's something sort of that doesn't add up.
We understand where you're coming from. Yeah, w e also walk the streets and go to shopping centers.
We don't disagree with you.
Yeah.
There are laws and you need to.
Part of the law is though that you can put in whoever you like as a tenant in your center.
Yes, but it's difficult to get rid of them.
I suppose you've got the, what is it, the wolf in the hen house already, I suppose you might say.
Yeah, yeah. Like it's, yeah.
Okay.
Thank you very much. Thanks, William. Yes?
Chair, my name's Ross Simpson. I'm a yellow card holder. My quick look at your annual report, I look at the consolidated cash flows and I looked at your rental income forecast for the next five years. The rental income that you've stated there drops about 8.9%. I'm not sure where all our growth is going to come from.
What page are you on?
What page? Is that page 82? Your A1 income, rental income goes from five years. Last year was AUD 1,637 million. This time it's, oh, sorry, AUD 1,637 million to AUD 1,491 million.
Their lease expires. There's natural lease expires in there that comes off, so it doesn't assume.
Renewals.
You're not assuming that they're going to renew or that you don't have them renewing. Okay. Our cash flow from operating activities has actually gone down from AUD 182 million last year to AUD 154 million this year. Without the recycling of or the selling of.
The assets.
The centers and purchasing others, you would have gone backwards. How are we going to address that?
Okay. Where did we go? What was the breakdown of that?
Yeah. Cash inflows last year was AUD 182 million. This year it was AUD 154 million. Some of that is selling properties and some is hiring workforce. Interest expense.
An interest expense, additional interest expense. As Steve said, there are three key components to it. We've sold some assets, which is part of it. There's timing of some accruals, which has impacted it. The third is interest has continued to increase this year. We believe interest is going to stabilize going forward. That's not going to be a headwind going forward. We are seeing that we're going to have continued comp growth out of our shopping centers of roughly 3%. That's why our forecast this year is showing some growth. Our forecast for the future years, with interest staying basically stable, is looking positive at around that 3% as well.
All right. Thanks. It wasn't a negative focus. I think it's a good organization. It's just that there's a few hiccups, I think.
Yeah. Thanks, Ross. Any other questions? All right. Are there any, moderator? Do we have any questions on the line portal of management?
We do, Chair.
Yes.
I have a question from security holder Stephen Main, who says that at last year's AGM, the CEO commented that we stopped doing individual property disclosures because it gave away too much information to competitors. However, Australia's property compendium disclosures by listed REITs are the high watermark of our overall excellent public company governance and disclosure system. Could the auditor comment on their view about removing this disclosure? Has it impacted the audit process now that less regular property data is being generated for public disclosure?
Yvonne, I'm just getting Yvonne to our auditor to respond.
Thanks for the question. I might just start with a little bit of a preamble just to explain the context of our audit to the shareholders. Our audit report is obviously taken as a whole, where management prepares the audit report, the financial report, which gets approved by the directors, and that includes the disclosures included in that. We issue our audit report to the shareholders, specifically in relation to our audit procedures in relation to investment property valuations. Our audit process is described in our audit report. If you refer to page, I think, 113 in the annual report, it stipulates the process that we go through in terms of auditing the valuation of investment properties. It's a key audit matter, particularly in relation to the judgments and estimates that go into determining the property values at your end.
One of those procedures you'll see include, or two of the steps in our process is firstly to consider external market trends and transactions. The disclosure of the information that the question alluded to didn't really impact the market trends and market transactions that we referenced. Those are still publicly available, and we obtained sufficient evidence to support the property values reported. The second part of that question around the disclosures around judgments included in the financial statements, I think if you reference the note number B1, it still details management's judgments and estimates that went into the determination of the investment property valuation. A combination of those two, we think as a whole, we still issued our unqualified audit opinion, and we obtained sufficient and appropriate audit evidence to give that opinion.
I might just add that we've had feedback from competitors and people who want to deal with us on properties that they're very disappointed that we've stopped showing our book values of our properties in our annual report because they've lost a bit of competitive information. That's actually given us comfort that we've done the right thing. Any other questions from?
No further questions, Chair.
Thank you. Yeah. All right.
I'm Cas Kazim. I was at the very first meeting in 2012, and I asked whether, well, there were a lot of flat roofs, and I asked whether there were any solar panels. As far as I remember, there were none. I'm very pleased to say that Mr. Mellowes and the board have taken up the challenge in such a way that they're producing increasing amounts of electricity and not only helping the environment but helping the tenants and etc. I'd just like to thank Mr. Mellowes, or Anthony Mellowes, that he's done a good job. I know it's a tough gig, and the last five years have been particularly tough given the pandemic and all the movement of people that makes for the region, regional shops and areas that they are.
Just a big thank you, and thank you for taking up the environmental challenge that I posed at the very first meeting in 2012 in the InterContinental Hotel. Thank you, Anthony. The good job.
Thank you.
Thank you, Kazim. Any other questions? Okay. Are there any questions or comments relevant to the conduct of the audit or preparation of the content of the auditor's report for the directors or for the auditor? We've had one, but this is a specific request. Does anybody, any shareholder, have a specific question directed at the auditor? Anything online?
No questions online, Chair.
All right. Thank you. All right. I'll then finish that discussion, and I'll move to the adoption of the remuneration report. Resolution one is displayed on the screen and is taken as read. This resolution is an advisory, non-binding ordinary resolution and does not bind the directors of Region . On behalf of the board, I would like to take this opportunity to thank the Remuneration Committee and the Chair, Angus James, and each of the members for all the work they've done. I'd now like to hand over to our Remuneration Committee Chair, Angus James, to present the report. Sorry, can I? I'm just trying to get to.
Thanks, Steve. I'm pleased to present Region's FY 2025 remuneration report to our security holders. This report outlines our approach to remuneration for our executive key management personnel, which I'll refer to as executives here on in. I'll address the FY 2025 fixed pay, short-term incentives, the FY 2022 long-term incentives that are vested in August 2025, and changes to executive remuneration proposed for FY 2026. First, turning to the FY 2025 short-term incentives. The FY 2025 STIs were set by the board last year and designed to motivate and reward the achievement of specific short-term goals. For FY 2025, the STIs continue to include key earning measures such as adjusted funds from operations per security and growth in comparable net operating interests. These are critical to delivering growing distributions and long-term security holder value. Turning to AFFO per security weighted at 30%.
For FY 2025, this was achieved at 30.7%, representing a 0.7% increase over FY 2024, slightly above threshold. Comparable NOI growth weighted at 20% was achieved at 3.2%, slightly above the midpoint between our threshold and maximum levels. Of the FY 2025 STI measures targeting operational areas that support future earnings growth, carbon emissions reduction weighted at 10% was assessed at maximum, reflecting strong progress driven by solar PV installations, which also generate revenue and cost savings. Capital management and deployment weighted at 10% was assessed at maximum. This was a new FY 2025 measure to ensure appropriate investment in our centers to drive long-term sustainable property income while maintaining our investment grade credit rating. Growth in external funds under management weighted at 10% also assessed at maximum.
Introduced in FY 2025, this was to encourage the growth in our funds management platform to deliver sustainable earnings expansion in the future. Capital management and deployment and growth in external funds under management are new measures. These STI measures were chosen as they were within management short-term control, focused on delivering cash flow growth in FY 2025 and build a foundation for growth in the future. Individual non-financial STIs weighted at 20% were assessed separately for both the CEO and CFO . Overall, for the FY 2025 STI award to CEO Anthony Mellowes and CFO David Salmon, it was set at 66% or achieved 66% on those measures of the maximum opportunity, with David's STI pro-rated for his period of service over FY 2025.
Turning now to FY 2022 long-term incentives, the FY 2022 LTI was tested at and shortly after the FY 2024 result and vested in August 25 per the plan. It had two tranches. The first tranche, weighted at 60%, was based on relative total security holder returns. This was assessed just above threshold and was achieved an award of 50.8% of maximum. Tranche two, a 40% weighting, was based on AFFO growth, and this condition was not met and therefore awarded at nil return. Accordingly, the FY LTI vested at 30.5% of the maximum opportunity for executives. Turning now to FY 2025 remuneration reviews and adjustments. As foreshadowed last year, a market benchmarking review was undertaken in FY 2025 by an independent expert appointed by the Remuneration Committee to ensure the framework remains competitive and fit for purpose. The benchmarking showed that executive remuneration was below the comparable peer group.
As a result, the CEO last year received a 10% increase in total fixed remuneration from October 2024. When Mr. Salmon was appointed CFO, the same benchmarking was used to set his fixed remuneration at AUD 700,000, reflecting the benchmarking, as I said. Mr. Salmon also received a sign-on award right for FY 2025 compensating for unvested equity incentives forfeited when leaving his previous employer. These will vest on a similar timetable as those securities forfeited between 2025 and 2028. Non-executive remuneration was also reviewed in FY 2025. Directors' fees increased by 3% from 1 January , 2025, and the Chair fees for Remuneration and Audit and Risk Management and Compliance Committees were increased by 10% to AUD 30,000.
Turning now to FY 2026 remuneration framework. For FY 2026, the Board reviewed the STI metrics in line with the current economic environment. Region's plant portfolio priorities. Changes included a reweighting of two FY 2025 conditions downward by 5% to introduce a new FY 2026 condition, being the reduction of specialty retail vacancy to a 10% weighting. This reflected the importance of addressing higher vacancies following the failure of a national tenant last year across multiple centers. FY 2026 LTI tranches remain the same as FY 2025, however, the AFFO per security growth tranche will now vest at 30% rather than zero, a threshold consistent with many peers with income-linked LTIs.
While not part of the FY 2025 report, I would like to comment on Resolution 7 in this address, which is the LTI for FY 2026 for Anthony Mellowes, which is, as I say, addressed in Resolution 7. Anthony will remain at Region Group until May 2026. His FY 2026 LTI is not prorated and will remain on foot after his retirement, consistent with the plan rules. Anthony will continue to play a key role in ensuring Region Group's long-term success and a smooth CEO transition. The new CEO, Mr. Chubb, will not receive an FY 2026 LTI. The FY 2026 LTI will be tested for Anthony in the normal course following the FY 2029 results, with no acceleration of any awards to Mr. Mellowes, and all recidive rewards remain subject to malus provisions and normal board approvals.
Closing remarks: At Region Group, our policy is to reward executives fairly for a strong performance. We also aim to attract and retain high-caliber leaders, which means remaining competitive. A significant proportion of the total remuneration is at risk, meaning executives only receive the full opportunity if they achieve the targets set out by the board. This ensures focus on both short-term and long-term performance in the best interests of all security holders. We believe our remuneration framework effectively aligns interests of security holders with those of our executives in the current environment, and the board remains committed to adjusting the framework if it ceases to be fit for Region 's purposes. On behalf of the Remuneration Committee, we thank you for your ongoing support and look forward to achieving the best outcomes for security holders in FY 2026. Thank you.
Thanks, Angus. I'd now like to open this item for discussion. Are there any questions or comments? Yes.
David Kingston.
Yes, David.
Thanks for that presentation, Angus. Fairly comprehensive. It's a function of regulation, but there's 32 pages of the annual report that deal with the REM report. When we get to general questions later, Chair, I'll be making a comment that I do echo Stephen Main's comment. I do think the annual report would be more informative to shareholders if there was more information in certain areas, but we'll come to that in general questions later. I appreciate, Angus, it's almost mandatory these days, and it's very important, but it's long-winded and 32 pages and a lot of pages to get through. One question for either Chair or for Angus: very talented group of people on the board. I think I've known a few. Beth and Angus, I think I've met you in previous years. I haven't seen you for ages, but I've known a few, and Anthony's a great guy.
For a company like this that is basically collecting the rent, you've outsourced management of most of the properties. Do you really believe you need eight directors? I was at a very good board meeting and your general meeting yesterday where there were four directors, and I think that worked very well. I'm not suggesting you go down to four, but why do you need eight directors for a company of this nature?
I'm happy to answer that question. We're at eight temporarily because we're losing Belinda. It was my belief that, and Belinda's extremely experienced as a company director, that we needed to make sure that we, and I've had this philosophy for some time, not even prior to my period at Region , is that when you're losing somebody with that level of experience, it's good to onboard somebody for a period prior to their departure. That's what we've done. Jane joined with a bit of a lead-in so that, again, somebody with similar experience, not the same, but we also have Toni Milis, who's also a property person, but we wanted to onboard somebody, and that's what we did. We won't be appointing somebody once Belinda retires at the end of this meeting. We'll go to seven. That's six non-executive directors.
I stand corrected, but I don't find it, it's about par for the course as best as I can do it, but I don't have any statistics to prove that. That's been our reason for why there's temporarily a few as an extra director.
Okay. Look, the second issue, Chair, is bearing in mind the crucial importance of management, can someone provide a little bit more background on the incoming Chief Executive? Like, I'll give you an example. I think GPT has improved dramatically. Russell Price came in, and I think he's done a great job. I think he's sharpened the culture. The share price is up 30% since he joined. You know, Anthony's done a great job, terrific guy, but can someone give the shareholders a bit more of amplification on the background and the style of the incoming CEO, please?
Yeah, sure. I'm happy to start that process. I don't know who else will comment, but we've actually been talking to Greg and Anthony. By the way, this has been a, I mean, Anthony signaled to the board that he was thinking of retiring at some stage around now. The board's had a very open process with Anthony about considering other candidates. The board itself identified Greg along with Anthony's help, and that might be considered unusual. I don't think it is. I think Anthony's, we've always had a pretty open dialogue. Over the last 12 months, we've had a number of meetings with Greg. What we find is that Greg is, I think, going to bring a very consistent personality type, if you like.
I don't want to, you know, it's very dangerous to typecast people, but I think he's a very steady and a good guy who's going to fit the culture of the organization. I'm sure he has his own view of life after Anthony. I've been asked by shareholders, as I've gone around and done institutional shareholders, what can we tell people about what he's going to do? I said, I think that'd be really dangerous for the Chairman to start front-running the next CEO, so I'm not going to. I think he clearly is a different person, but he's still, I think, culturally a very good fit for this organization. I don't know that I can say a lot more than that. He's also, can I say this? He's a big guy. He's like, you know, he's in the room.
I think that he's got the right sort of cultural fit for the board. The board's had, I've had a number of meetings, I've had quite a number of meetings with him. We've had small groups of the board meet him. We had a full session with the board to meet him before we decided on finally appointing him. We've been through a process over virtually 12 months, I think. We were very happy that we were able to keep it amongst ourselves because it's unsettling to staff. Even this period now is unsettling to staff. Greg's already, though, met the staff and been introduced to them. That's all just to calm as many nerves as we can.
Okay, thank you. One final aspect on the REM. In my opinion, there should be a more significant weighting to TSR. There's plenty of weighting to AFFO, which is good. The return for everyone in this room is not based on AFFO. It's based on TSR. AFFO is nice, but if there's 5% annual compound growth, that's even nicer. It moves 6% to 11%, which I'm sure if we took a vote here, everyone would endorse that. Maybe the REM, the STIs, and the LTIs should move a little bit towards TSR. Some organizations do. I know the change in GPT a year ago, and Russell's driven heavily by capital growth and has delivered it. I think the issue for this company, Chair, you've been Chair for a while. You've got a decent shareholding.
Yes, I have.
Mine's slightly bigger, but that's all right. Most of the directors have got a decent shareholding, which is positive. You know, the issue is whether you want to run a company that is basically a bond proxy or whether you want to run a company that's a growth REIT. At the top end, you've had Goodman's that shot the lights out, but Essenther, GPT, a lot of them have done 30%, 40% cap growth in the last year and a half. Region's recovered. It's recovered from a low in the low 2s to AUD 2.46, but I think it can do better. I think that's really incumbent upon the board, on you, Chair, to create that culture because I think it's a good company. It's a successful company, a REIT, but I think it can do better.
We'll take that on board. I mean, we're obviously different to some of those other REITs and what sort of business we have and how we manage ourselves. We're always, we're very conscious that we want to improve, not just have better income, but we want to have a growing share price. To be honest, I think the last, I don't want to make excuses. The last five years have been quite difficult for a company like ours with higher interest rates and cap rates under some pressure until just in the last, more in the last six months. I think I would, today, I would stand here hoping that we've got a better outlook over the next five years than we had over the last five years. Take it on board. I'm sure that, you know, the board's ambitious for the company to grow, not just to produce income.
Did you want to say anything, Angus, or are you?
David, I take your guidance. We have, in the last couple of years, moved away from AFFO and the short-term incentive for the exact reasons that you suggested because it's duplicative in the LTI. We've moved that to what I call more short-term building block elements in the short-term incentive, which build into AFFO into later years. We think it's important still because that's what provides the distribution to shareholders to have an ambition there. Whether we've got the weighting right, we'll certainly have a look at that. At 60%, we've also got a pretty good piece of compensation there for management on a TSR sort of basis across some sets. It's a balancing item, but we take it on board.
I think the results for management have been negative in a sense, you know, not been all that positive on TSR because of the TSR outcomes over the last five years. There's incentive there for it to be that way. All right, is there any other questions in the room before I just ask online? Anything online?
Chairman, we have a question from security holder Celestine Ekerik, who says, when will the Chairman and Board stop the practice of allocating unwarranted bonus shares, etc., to already well-remunerated KMPs?
I think we've had this question on previous occasions, but nonetheless, I do understand. Unfortunately, the marketplace for senior executives is what it is. If we want to have the best people involved in running the company, then we, to be fair, have to remunerate them according to that marketplace. Just like any of you in this room, if you've got a job, you want to be paid fairly, you want to be paid in line with your peers at other organizations, and that's called salary benchmarking. All we do is do exactly the same thing with the Chief Executive and the senior executive here at Region Group. We go to really quite detailed lengths through Angus and the work that he does of making sure that we're benchmarking and that we're benchmarking appropriately against the marketplace for the jobs that we're asking people to do.
If we want to have the best people, then that's the process we go through and that's what we do. I don't think that there's an alternative to that because if you get people and you don't pay them properly, then all you're doing is your competitor comes along and takes them off you. That's the process we go through.
No further questions, Chair.
Thank you. Okay. All right, I'm now going to proceed to the voting on Resolution 1, which is the adoption of the remuneration report. The proxy voting statistics on this resolution are shown on the screen. I put the motion to a vote. The directors unanimously recommend security holders vote in favor of this resolution. I'll just pause for a second. I'll now hand to Chair Beth Laughton for the next item of business. Beth.
Thanks, Steve. We now move to Resolution 2 in your notice of meeting, which is the reelection of Steven Crane as an Independent Director. The resolution is displayed on the screen and is taken as read. I'd like to invite Steve to make a few comments.
Thanks, Beth. Good afternoon again. Today, I'm seeking your support for reelection as an independent non-executive director of Region Group. Having joined Region seven years ago and being appointed as Chair of the Board and Nomination Committee in 2022, I believe I've made, along with my fellow directors and management, a purposeful contribution to deliver on the ongoing performance of Region Group, especially during the increased interest rate environment of the previous financial year. I also believe that my 20+ years of broad NED experience outlined in the annual report, including having previously chaired other publicly listed companies, will help me continue to offer the same steady governance you've seen in the past. Importantly, the change of leadership from Anthony to Greg Chubb will be an important time for the company.
On your behalf, I remain ambitious for us as an organization and believe we have substantial opportunities in the right mix of directors and strategic direction to grow over time. I appreciate the support of security holders who've given me, and now with your support today, I would look forward to continuing to chair Region for a further term. Thank you.
Thanks, Steve. I'll now open this item for discussion. Are there any questions or comments? David?
Thank you, Beth. Chair, you indicated before that you were hopeful that the next five years might be more remunerative for shareholders than the previous five. Can you give shareholders some guidance as to what your TSR guidelines are for shares? Like when you buy a property, and I've seen countless private syndications, usually the syndicators are targeting, you know, 10%, 12%, 14% on an individual property. Now, I think quite often they, to be frank, bullshit. The 10%, 12%, 14%, 15% they talk about might be a 6%, 7%, or 8%.
For a quality company like Region with competitive edge, being a major player in neighborhoods with real synergies, I would imagine that when you buy a property, maybe at a 5.5%, 6% running yield after stamp duty, throw in the rental growth, which I'd be surprised if you'd buy any property unless it had 3% rental growth going forward, that gives you 8.5%, 9% ungeared IRR. As we talked earlier on, you throw in some gearing, you know, put in some debt at 5.5%, thereabouts, it ramps the IRR up on a property to over 10%. If you could give shareholders who've basically only had the distributions in the last five years, no capital growth, could you give them some comfort that this is not just a bond proxy, Chair?
This is actually a company that's going to grow in capital value, which is basically what you expect in a property investment business. Thank you.
Thanks, David. Yeah, look, that would be our objective, okay? It's certainly not to just be a bond proxy. We want to add growth, and I don't think I want to get into exactly what the numbers are, but I understand the numbers you just quoted. That makes sense to me, but we're certainly not looking to be a bond proxy. Any other questions? Sorry, it's not for me to say.
Are there any other questions or comments? Are there any online?
There are no questions online, Chair.
Thank you. We'll have the proxy and votes up on the screen there. I'll now put the motion to vote. The Directors, with Mr. Crane abstaining, unanimously recommend security holders vote in favor of this resolution. I'll return the chair to Steven.
Thank you very much, Beth. Thank you.
Thank you.
The next item of business is Resolution 3, which is the reelection of independent Director Michael Herring. We now move to the resolution displayed on the screen and it is taken as read. I would like to invite Michael to make a few comments.
Thanks, Steve. Good afternoon. Hello everyone. I'm very pleased to be standing here today seeking your support for my reelection as an independent non-executive director of Region Group. I was appointed to this board a little over three years ago. I'm a member of the Investment Committee, the Audit Risk Management and Compliance Committee, and also the Nominations Committee. Since my appointment to the Region board, I have endeavored to bring insights, mainly from my experience as General Counsel at Macquarie Group for over 12 years, where I advised on a large range of public listed company issues and matters, including, of most relevance to Region Group, the areas of funds management, business acquisitions and disposals, capital and debt markets, listing requirements, regulatory requirements, compliance, ESG, and remuneration.
Prior to my role as General Counsel at Macquarie, I had various senior positions at the law firm of King & Wood Mallesons. I worked as an investment banker at Macquarie Group for five years, working in the Industrials Group and then in the Financial Institutions Group. In all those capacities, I did frequently interact with and advise leading public company boards. I consider that I have very complementary skills to my fellow directors, and I believe that I've made a meaningful contribution to the governance and to the performance of Region Group since my appointment to the board.
I am fully committed to Region's business and its opportunities, and along with my fellow directors, and also the quality leadership of our Chair, our CEO, our retiring CEO, Anthony, and also his successor CEO, Greg, I do intend to meaningfully contribute to Region's growth and performance over the years ahead, and doing so in the interests of all our security holders. I appreciate your support for my election. Thank you, everyone.
All right. Thank you. I now open this item for discussion. Are there any questions or comments? Yes, David.
Thanks, Chair. Michael, given your background at Macquarie , you know, the IRR this company has delivered in the last five years of 5%, 5.5%, Macquarie wouldn't accept that, I'm sure. Is that fair?
Is this on? David, as you know, we are in very different businesses. The risk equation and the benefit equation are quite different. I think it is what it is for the reasons it is.
Macquarie has got a lot of property, Michael, as you know. They would not invest in any property enterprise for an IRR of 5.5%. That's fair.
I can't agree or disagree. It depends on the risk involved and the type of property. That applies to all the assets. David, I think we are in a situation where we know the assets we're investing in here. We know what the market's like. It's just a completely different proposition. The benefit I think I bring is more looking at not only the assets, but also compliance and governance, those sorts of issues, making sure we do that in the best way, making sure we observe the law, but also making sure we don't go overboard in terms of our compliance and our governance issues.
Michael, governance is a given. That's not what the shareholders are here for. They're here for a TSR, an income return, and a capital growth. Look, I'm surprised if you don't agree. I know the Macquarie seniors who run their property. They would laugh if I went to them and said, "Here's an asset, property asset, reliable defensive asset, 5.5% IRR." They'd laugh. I'd be thrown out of the room. I think they'd require a 10% , 12% IRR. At the end of the day, the performance of a company is a function of the culture of the board, whether the board is demanding performance, the quality of the management. Anthony's been a great manager. It's up to the board whether you want to cease being a bond proxy or whether you want to be a growth company.
Michael, I'm shocked at your answer about Macquarie's attitude, but I hope you use a bit more backbone in the future because I think if you're prepared to tolerate that, I'm not sure you're the right guy on the board.
I think you've misunderstood my answer. The key point is that I and the rest of the board here are keen for performance. I certainly understand what you mean about performance, and we look at that very closely. I'm as keen as anyone to make sure we perform and overperform in terms of our sector.
Yeah, it's very easy to come up with motherhood comments, Michael, about we like performance, but when you refuse to confirm Macquarie would not accept 5.5%, I'm surprised. Anyway, thank you.
David, I think the other thing is that Macquarie doesn't get everything right. You know, they get a lot of things right. They also have got some things, you know, not so right. I think we've gone through a period which has been very difficult for this, or not very difficult, very challenging for this group over the last few years. If you go back to our listing, I think the company's, I don't know what the IRR is off the top of my head, but it's certainly been a lot better than the 5%. I think it's just there's timeframe and there's circumstances which make a difference to these things. As I've said in my earlier answers, we're certainly more optimistic about the next five years than we would be about the last, given what we've experienced in the last five years.
Chair, the only reason I mentioned Macquarie is because Michael mentioned that as part of his CV. I can guarantee you there would not be a sensible property company in Australia that would invest if they thought the ungeared IRR of a property was 5% when they've got to borrow at that rate as well.
Sure.
I hope the board really does set the bar at a level that delivers a decent TSR to shareholders. It's a good company. It's safe and reliable. It's got a lot of very positives. Anthony's positioned it well, but I think the future's got to be better than the past five years.
We hope so too.
Thank you.
Any other comments in the room? Online?
We have one, Chair, from security holder Stephen Main. He says, "It was a pleasure voting in favor of Michael and all other items at 1:32 P.M. today via the MUFG Corporate Markets online voting system. Far too many companies wait for the anachronistic 'As Chair, I now declare the votes,' the polls open routine deep into an AGM. In order to get the sadly tiny retail shareholder voting rate up, maximizing the online voting window is a good move. Well done opening it half an hour before the 2:00 P.M. kickoff. As a lawyer, can Michael provide some legal arguments for doing this? I can take to other AGMs."
Thank you very much, Steven. We are trying to make sure that today is an opportunity for people to ask questions and challenge us, and we seek to respond too, of course. Michael, I don't know whether you've got any comment.
Steven and I have had a lot of correspondence over the years on this very point, so I won't go over it. I think there's arguments formed both when you disclose the proxy accounts. I think today we've done it in a very sensible way and a timely way, and I think it's a good way we've done it.
Okay. Any other questions?
No further questions, Chair.
All right. The voting proxy statistics on this resolution are shown on the screen. I'll now put the motion to a vote. The directors, Mr. Herring abstaining, unanimously recommend security holders vote in favor of this resolution. I'll now move to the next item of business. We now move to Resolution 4 on your notice of meeting, the election of Jane Lloyd as an independent director. The resolution is displayed on the screen and is taken as read. I'll invite Jane to make a few comments.
Thank you, Steven. Good afternoon, everyone. My name is Jane Lloyd. I would like to thank you for the opportunity to present my credentials today. In seeking your support for my appointment as an independent director of the Region Group, I would like to extend my thanks for the confidence that my fellow directors have shown in appointing me in November of 2024. I currently serve on the Investment, Remuneration, and most recently, the Nomination Committees of the board, in addition to the broader involvement in board committees and the board. I come to the board with 35 years' experience in commercial property. My career has been in three parts. Firstly, my formative experience with Lend lease, 11 years at Lendl ease in construction and development, mainly in retail and residential sectors.
Secondly, my executive career, also 11 years at Dexus, where I was Head of Retail and served as Managing Director of U.S. Investments based in Southern California. Finally, for the last 13 years, I've consulted to a number of clients, as well as serving on a range of boards, private, publicly listed, and government, all in property. My property experience includes all of the property food groups: office, industrial, residential, retail, albeit that most of my experience has been in retail. My retail career covers a range of experience from asset level through to portfolio construction level. Throughout that journey, I have developed specific skills in strategy, risk management, and portfolio composition through development, asset management, acquisitions, and dispositions. Through my board career, I've broadened my understanding of enterprise risk management, corporate governance, and compliance.
Prior to joining Region, I was reasonably familiar with the portfolio and the markets in which we operate, and I look forward to continuing to contribute to the thinking of our strategy as we move forward. I am excited to be part of the next phase of Region story as we welcome a new CEO, and I believe that with my skills and experience, I can make a valuable contribution with my fellow directors to the growth and performance of the Region Group. Thank you again for your consideration.
Thank you, Jane. I now open this item for discussion. Are there any questions or comments? Yes, David.
Briefly, Jane, you've obviously got excellent experience, albeit I must say Lendlease and Dexus have had a few challenges recently.
Not while I was there.
I appreciate that. You out at the right time. Blame Steve McCann. Just a quick one, it's repetitious, but I really do want to clarify whether the board is committed to delivering a proper TSR. We accept that there were some challenges in the last five years, and I accept, Chair, that from inception, Anthony's delivered much higher TSR. He's done a good job, no doubt. Good guy, done a good job. Going forward, let's wipe the past. What is your target? Targets are any targets. Can't guarantee them. What's your TSR? You've got a lot of experience. What's your TSR target that can give the shareholders here some hope that the returns are going to be much better in the next five years than the past? Thank you.
I would say, look, I'm not going to talk in terms of those numbers because I mean, I know that in the last year, our TSR has been 15%. Correct? Yes. Which is, you know, not a bad outcome. I do think it is a business which operates on a number of different levels, and we focus on each of those to create the value for the shareholders. We have to be diligent and deliberate, which is what this board is, on focusing on each of those aspects: leasing, capital management, balance sheet, maintenance capital, and future growth through acquisitions and recycling of capital.
Jane, the TSR in the last year has inflated because it's coming off a very low base. I've tried to be fair and to average it out over the last five years, which are the figures in the own annual report. I think if you eliminate the last year, the TSR in the previous four years is probably about 3%.
Yeah.
I don't think that's fair. It's been 5% roughly. In your excellent experience at Lend lease and Dexus, both great companies, they've had some challenging times, and you were there at the right time. In your experience, I would be really surprised if you would have endorsed a new property investment if the target IRR was sub 10%. Is that fair at Dexus and Lend lease?
It depends. It depends on the asset and it depends on, you know, where you think the growth is.
On average, Jane, I'm not looking for chapter and verse compendium on every, you know, we can talk about it depends, it depends, but as a generalization, would a sensible property company invest in it hundreds of millions unless the target IRR is 10% or above?
I think it depends on what your risk profile is and, you know, what your target is through the cycle. Property is a cyclical business. It goes up and down. You know, we've had a pretty rough time and everybody has had a rough time in the last five years.
I'm not having much luck. Michael evaded my questions. Jane's doing the same.
I just want to say, we obviously target a return. I actually think I responded to you. We do target a return that's more in the higher, you know, it's higher than 5% or 6%. That's not, we definitely don't go into deals to target 5% or 6%. The answer is that's what we're targeting. We've had a particular set of circumstances in the last five years, and right or wrong, that's had an impact on us in the particular business we operate in, as opposed to being just a pure fund manager, but being an operator. We're keen to see as much return as we can and make every proposal that comes forward has a whole set of hurdles it's got to meet. We don't buy anything that we don't think is going to meet that hurdle. Yeah.
Thank you, Chair. See, that wasn't too painful, Michael or Jane. Chair's acknowledged the target is much higher. It's been achieved. That was all right. It's not crying.
Okay, thanks, David.
Thank you, Chair.
Thank you. That's okay. Thanks, David. Are there any questions online?
No questions online, Chair.
Are there any further questions in the room? Okay, I'll now open this item. Sorry, I'll now move to the statistics which are up on this item, which are up on the screen. I now put the motion to a vote. The directors, Ms. Lloyd abstaining, unanimously recommend security holders vote in favor of this resolution. I'll now move to the next item of business. Okay, Resolution 5, the approval of issue of shares under the executive incentive plan. Resolution 5 is displayed on the screen and is taken as read. I now open this item for discussion. Are there any questions or comments? Any questions, moderator, online?
We have a question, Chair, from security holder Stephen Main. He says, "There was a 10% protest vote against the remuneration report based on the proxies. Was that in any way related to this executive incentive plan resolution? Have there been any other remuneration-related protest votes today? What is the issue and which proxy advisor recommended against?"
I think there's certainly some votes. Yeah, go on.
In respect of all resolutions, all proxy holders, with the exception of Ownership Matters, recommended for all resolutions except Resolution 7. Ownership Matters recommended against Resolution 7.
Yes, we'll come to that. We'll talk about that. Is there any other questions?
No further questions, Chair.
Thank you. Any further questions in the room? Okay, we'll take that item as dealt with. Voting on proxy statistics on this resolution is shown on the screen. I'll put the motion to a vote. The directors, Mr. Mellowes abstaining, unanimously recommend security holders vote in favor of this resolution. I'll now move to the next item of business. That's Resolution 6. It's displayed on the screen. I take it as read. I open this item for discussion. Are there any questions or comments in the room? Are there any questions online?
No questions, Chair.
No questions. I'll just give everybody one more, any more questions? No? A voting statistic for this resolution is shown on the screen. I'll now put this motion to a vote. The directors, Mr. Mellowes abstaining, unanimously recommend security holders vote in favor of this resolution. I will now move to the next item of business. This is Resolution 7, the issue of long-term incentive rights under the executive incentive plan to the Chief Executive Officer Anthony Mellowes. It's displayed on the screen. I'll take it as read. While not part of the FY 2025 remuneration report, I note that comments have been made by some security holders that Anthony is receiving an LTI for FY 2026. Resolution 7 is on this matter. I'd like to speak to this. As noted earlier, Anthony will be with Region until May 2026.
Resolution 7 is on this matter. I'd like to speak.
Hello, we've got the feedback. Yeah, it's okay. This will also allow time for a smooth transition to his successor. It was all part of, to be honest, the planning that hopefully this works successfully. Anthony's FY 2026 service period will therefore be until May 2026, which is quite obviously almost the entirety of financial year 2026. His FY 2026 LTI is also not pro-rata as it forms part of his FY 2026 package. It was part of his financial year 2026 package, and he's going to be here for all of FY 2026, and therefore it hasn't been pro-rata. We also note that Anthony has led Region since its IPO in 2012 and has always had a long-term focus on building Region , and without his commitment, Region would not be what it is today. Anthony is retiring and not joining a competitor.
Greg Chubb, the incoming CEO, is not receiving an LTI grant for FY 2026, and as such, there's no double up of FY 2026 LTI for shareholders or for unit holders. Anthony's proposed LTI grant is in accordance with the plan rules and will remain on foot when he retires and be subject to testing and board approval, which will include consideration of malus or forfeiture prior to divesting. I now open this item for discussion if there are any questions or comments. No? Moderator, do we have any questions online?
Not at this time, Chair.
In that case, I'll show the voting proxy statistics on this resolution are shown on the screen, and I'll now put the motion to a vote. The directors, Mr. Mellowes abstaining, unanimously recommended security holders vote in favor of this resolution. I'll now move to the next item of business. Appointment of the new auditor. Resolution 8 is displayed on the screen and is taken as read. I open this item for discussion. Are there any questions or comments? Any questions online?
No online questions, Chair.
Okay. The voting statistics on this resolution are shown on the screen, and I'll now put the motion to a vote. The directors unanimously recommend security holders vote in favor of this resolution. I'll now move to the next item of business. Online security holders are reminded that they can submit their vote online until five minutes after the meeting closes. Ladies and gentlemen, this concludes the formal business of our meeting. MUFG representatives will now collect the yellow voting cards and tally the results for the meeting. I'd now like to open the floor to general questions or comments that haven't been addressed in other parts of the meeting and invite our online security holders, if you haven't already done so, to please send through any general questions or comments for the board and management. Has anyone any general comments? Yes, David.
Look, I congratulate the board on an annual report that focuses closely on AFFO, which is the right thing to do. Some REITs, I think, wrongly focus on FFO. I do think, as Stephen Main mentioned earlier, that the information in the annual report can be improved. I know Westfield, for example, have a detailed property compendium on all their properties. A number of REITs do. I do think it's something that gives the investors some comfort. I've read every page, scanned anyway, every page of the annual report, apart from the REM report, Angus, I did give that a wide berth of 32 pages of it. That would have put me to sleep. I'm glad it's you, not me. I do think that in an annual report that gives 32 pages to the REM report, you could provide some very useful information, Chair.
Like in the P&L, you talk about the revenue of AUD 320 million plus recoverables, but then operating expenses AUD 137 million. I don't think it's giving away any competitive information to break that operating expense down into meaningful breakdowns, cleaning, rent, rates, all the expenses you pay, security, a million expenses. It would certainly be helpful. I think you're doing a good job of breaking out the maintenance CapEx and the leasing expenses. A lot of REITs don't do that. I'm surprised they're so low, but I think well done on providing that information to the investors. I've focused closely on the difference between the operating cash flow, the P&L, and then in the director's report, the AFFO analysis. In my opinion, the AFFO analysis is the most powerful one. Overall, I think it's a pretty transparent company.
I think you've got a decent collection of people, providing they don't evade questions in the future, which is very disappointing. Fair enough for Jane. She's a newbie. She can't put a foot on it. Michael, come on. The Chair rectified that. Overall, it's a good company. All I'd say to the board is, every company, the performance comes from the board and the senior management. The culture is driven by the board. The expectations are determined by the board. Whether the board has been too complacent, I don't know. It's a comfortable company. It's very defensive, whatever. At the end of the day, I do think the board has to really move forward, Michael and Jane, and put forward a proper TSR target, which the Chairman has endorsed. In five years' time, you'll have nothing but congratulations. Thank you. Good luck.
Hopefully, it is not just a bond proxy, which is disappointing because they're great assets. Anthony, you leave the company in good shape, great assets, but the potential is there to improve. Thank you.
Thanks, David.
Thank you.
Any other comments or questions? Yes.
Cas Kazim again. You mentioned the appointment of a new auditor, but you don't say who it'll be.
Sorry, I didn't do that. KPMG.
Oh, okay. Because auditors have been in the news recently. Deloitte got a pretty good mention, and not a pleasant one altogether. I wondered whether Deloitte had been engaged for some strategic advice and whether any reports they had produced had used artificial intelligence. If they did, did they acknowledge it?
Right. I think first of all, the reason the change of auditor, we've had, Deloitte had done a terrific job for us for 12 years since we listed. There is a view in the marketplace that you should change your auditor more regularly than that. We've stayed with Deloitte for 12 years, and we're happy with their service. We did one once before, I think some years ago, and we decided to stay with Deloitte at that time. We just did another one recently. It was not a negative against Deloitte . It was just really that we thought that KPMG had a few other attributes that were important to us that would add to the audit. That was why we went with KPMG. Deloitte were right there in terms of the analysis.
There is some concern that auditors should rotate a bit more, the firm should rotate a bit more regularly. That was all that was there. We've enjoyed our relationship with Deloitte . It's been very good, and we wish them all the best going forward.
Okay, thank you.
Thank you.
Any other questions? Comments? No? All right, thank you everybody.
Sorry, Chair, there are some online comments and questions.
Sorry, sorry. Yeah, no, not unfortunately. That's okay.
The first question is from security holder Edmund Ansell. Thank you for your help reducing the effect of climate change on your customer owners and staff. Could you please accelerate the move to renewables whenever you can?
I think we are trying to do it as fast as we can. Sometimes the state regulators are not our best friends when it comes to doing this stuff. Basically, look, we're trying to move as quickly as makes sense, really. Thank you.
The next question comes from Victoria Elwood, security holder. Will the board consider doing a video, not slides, at the next meeting for the online people?
It's a webcast, isn't it?
Yeah, a webcast, yeah. We have, sure. We'll have a look at it. I'm not sure what the dynamics are. I'm looking at all the staff who've got to organize this day, and they're all going. We'll take it on board though. We'll take it on board.
A number of questions from security holder Stephen Main. The first one is, I was looking to email someone from Region Group yesterday to request early disclosure of the proxy position along with the formal addresses and scheme-like headcount data in the poll results to highlight the tiny retail turnout rate. Alas, I couldn't find an email address for anyone at Region anywhere. Who still puts their head office landline numbers on the bottom of ASX announcements? Is there a reason why you make yourselves unable to be contacted via email? Is it because tenants tend to have a crack at whoever's email address is listed?
I'll ask, do you want to answer that?
Yeah, sure. Our email address is available on our website, and I believe our investor relations email address is on the bottom of all our ASX announcements. No, it's not to avoid tenant feedback. I'm happy to take that too. It's easily identifiable.
Chair, Stephen Main's question again. Why did you wait until 11 minutes before the 2:00 P.M. kickoff to lodge the formal addresses with the ASX? Last year it was 12 minutes. Surely best practice is to treat the AGM formals as a disclosure event and get them out before trading commences at 10:00 A.M. Also, did you discuss including the proxy votes along with the formals as this is increasingly becoming the market norm? Stockland did it for the first time last week. Were the proxy advisors in favor of everything, or has there been a protest vote on the remuneration report?
I think we dealt with the process, who voted against the remuneration report earlier and why. Sorry, you want to deal on the before trading? I don't know. I mean, we can have a look at it, I guess.
We have a board meeting prior to the commencement of the AGM, and the Chairs' addresses and proxy statistics and all the rest of it are approved, are reviewed at that board meeting. We release it as soon as we can once that board meeting has concluded.
Right, thank you.
This is the last one, Chair. Again, Stephen Main, security holder. He says, "I have had a bad day with multiple Chairs elsewhere claiming proxy advisory recommendations are confidential and can't be discussed in an AGM. I've seen it happen hundreds of times, so thank you for naming Ownership Matters for recommending against the resolution." What was their problem with this?
It related to the fact that we weren't pro-rating Anthony's FY 2026 LTI. The argument was that we should have only received 1/3 of that LTI. That's their position. To be honest, I have personally, and Angus has had a long, I think, healthy and good relationship with Ownership Matters. We disagree with them on this point. We think that it was Anthony's FY 2026 remuneration we're talking about, and it's just part of his package. He will be here for FY 2026, and therefore he's entitled to all 100% of it, not to 1/3 of it. That was the issue. They did quote us some examples of people who've apparently done what they were suggesting, but unfortunately, we don't see it that way. As I say, it's part of the whole package for FY 2026, and that's how we treated it.
We would have had to have exercised negative discretion to have not paid him his entitlement, and we weren't going to do that. Any other questions?
No further questions, Chair.
Thank you. All right. Anything else from the room? Thank you all. It's obviously a special day. It's not a special, special day, which will be the day he leaves, but you'll see him again at the half year. Obviously, Anthony retiring, but also somewhere there, I can't see you, Belinda. Belinda, there you are. Belinda, you know, 12 years, fantastic contribution, and we wish her all the best too. Thank you very much, Belinda, for your contribution. Thank you, everybody, and happy to join you for something outside. Thank you.