Shopping Centres Australasia Property Group Re Ltd

ASX:SCP

Earnings Call Analysis

Earnings Call Transcript 2019-Q4

[Anthony Michael Grainger Mellowes]

Thanks very much, and welcome everybody to the FY '19 Full Year Financial Results for SCA Property Group. My name is Anthony Mellowes, and I'm the Chief Executive Officer. Presenting these results with me today is Mark Fleming, our Chief Financial Officer. Also in the room with me is Mark Lamb, our Company Secretary and General Counsel. Firstly, let me say we're pleased with our results that we've been able to achieve over the last 12 months and that we once again exceeded our initial earnings guidance. This has been achieved by remaining true to our core strategy of investing in and managing convenience-based centers weighted towards the nondiscretionary retail sector in Australia. Firstly, let me take you to Slide 4, which sets out FY '19 highlights. Our FFO per unit of $0.1633 per unit and distribution per unit of $0.147 was an increase of 6.7% and 5.8%, respectively, over FY '18. Our FFO, or funds from operation, was $141.8 million, an increase of 24.1% over the same period last year. Our NTA decreased to $2.27 per unit, a decrease of 1.3%. The reduction is due primarily to transaction costs for the 12 assets that we acquired during the year. The valuations of our existing centers remained relatively stable, and there was no cap rate compression during FY '19, as had been the case in previous years. Our portfolio occupancy is 98.2%, and our specialty vacancy is 5.3%, which includes the acquisitions during the 12 months to June. Excluding the acquisitions in the period, our portfolio occupancy remains at 98.5%, and our specialty vacancy has declined slightly to 4.7%.We made $678 million of acquisitions and also divested $60 million of assets during the year, and our weighted average cost of debt declined to 3.6% with a 6.1-year weighted average debt maturity.Onto Slide 5, which sets out some of the key achievements that demonstrate how we continue to deliver on our strategy. With respect to optimizing our core business, our supermarket sales continued to show improving trends with good growth from both Coles and Woolworths, and our supermarket MAT to June 2019 increased to 2.7% on a normalized 52-week period.Our specialty tenants continued to perform consistently with sales growth of 2.6% continuing. Our comparable NOI growth of 2.5% was achieved over the same period last June. With respect to our acquisitions, our project is progressing well, and we expect to be substantially completed by the end of June 2020. The sales growth from these centers are improving, and we have achieved our forecast cost savings, and we expect our acquisitions net operating income to be in line with acquisition net operating income by the end of FY '21. With respect to our growth opportunities, we are continuing to -- our strategy to consolidate the fragmented market that we operate in. This year, we acquired 12 centers, 10 centers from Vicinity for $573 million, Sturt Mall in Wagga Wagga for $73 million and Miami One on the Gold Coast for $32 million. With respect to our developments and funds management business, we completed 2 developments during the year, being Bushland Beach in Townsville, Queensland and also Shell Cove, just south of Wollongong in New South Wales. SURF 3 was also launched in July 2018. With respect to capital management, our balance sheet is in a strong position with gearing of 32.8%, which is comfortably at the lower end of our range of 30% to 40%. Our average cost of debt is 3.6%, with 70% of the debt being either hedged or fixed, and we raised $409 million of equity and $887 million of new debt during the year. And Mark will talk you through this in more detail. As I said, our funds from operations per unit of $0.1633 grew by 6.7% and our distribution of $0.147 per unit grew by 5.8%, all over the same period last year. Distributions have continued to grow in every period since 2014. I'd now like to hand over to Mark to present the financial results.

[Mark James Fleming]

Thanks, Anthony, and good morning, everyone. I'll start on Slide 7, profit and loss. Our statutory net profit after-tax was $109.6 million, which was down by 37.4% compared to the same period last year. The primary reason for this decline is that in the same period last year, we had an increase in investment property valuations of $74.1 million whereas this year, we've had a decline in investment property valuations of $40.5 million. The main reason for the decline this year is that we've written off transaction costs on acquisitions incurred during the year of $36.9 million, primarily stamp duty. We also expensed some one-off acquisition transaction fees of $3.7 million during the year, and in June 2019, we terminated our interest rate swap book at a cost of $17.7 million, replacing $425 million of older swaps with an average term of 5 years with $300 million of new swaps with an average term of 7 years at much lower rates. Once we adjust for the valuation movements and for these one-off expenses, underlying profit has actually increased significantly versus FY '18, as we'll see on the following slide. So turning now to Slide 8, funds from operations. This slide sets out the adjustments that are made to statutory net profit after-tax to determine our underlying cash earnings numbers. To get to funds from operations, or FFO, we reverse out the noncash and one-off components of our net profit after-tax, including fair value adjustments. FFO of $141.8 million is up by 24.1% on FY '18 and earnings per unit are up by 6.7% to $0.1633 per unit. The primary driver of this increase is the acquisitions and developments that were completed during the year.Adjusted FFO, or AFFO, includes deductions for capital items, being maintenance capital, leasing costs and fit-out incentives. Maintenance CapEx was $5.6 million, up by $2.2 million on the prior corresponding period, while leasing costs and fit-out incentives of $8.8 million is up by $3.6 million. The main reason for these increases is that we are spending more capital on the centers we acquired during the year as we go through our remixing and repositioning projects at those centers. As a result, our AFFO was $127.4 million, up by 20.5%. Distributions in respect of the year of $0.147 per unit, up by 5.8% on the same period last year. In dollar terms, the distributions were $135.4 million, which is more than AFFO due to the timing of acquisitions and equity raisings, but we'll return to less than 100% of AFFO on a normalized basis.Moving now to Slide 9 which shows our summary balance sheet. The book value of our investment properties is $3.147 billion, an increase of $693 million or 28%. The key driver of this increase were the acquisitions we completed during the period, which added $678 million. Excluding acquisitions, our investment property valuations were relatively stable over the last 12 months with NOI increases offset by cap rate softening. Our portfolio weighted average capitalization rate is now 6.48%, comprised of neighborhoods at 6.38% and sub-regionals at 6.75%. During the year, we raised $1.3 billion of new capital, primarily to fund acquisitions. We raised $409 million of new equity, including a $262 million institutional placement and a $111 million unit purchase plan for retail unitholders. We also raised over $887 million of new debt, including a $197 million U.S. private placement, a $365 million acquisition facility, $125 million of new debt facilities with existing bank lenders, and we also introduced 2 new banking partners for $150 million. Our successful debt and equity capital raisings during the period demonstrate the strong support we enjoy in both debt and equity markets, and we continue to be well placed to take advantage of investment opportunities in the future as they arise. Net tangible assets per unit decreased by 1.3% to $2.27 due to writing off transaction costs during the period, and our MER ratio has declined to below 40 basis points for the first time. Turning now to Slide 10, which deals with debt and capital management. Our gearing is 32.8%, at the lower end of our 30% to 40% target band. It's our preference for gearing to be below 35% at this point in the property investment cycle. Our weighted average cost of debt has now decreased to 3.6% due largely to the swap breakage I mentioned earlier. The weighted average debt maturity increased to 6.1 years, 70% of our drawn debt is fixed or hedged, and we had $180 million of headroom in cash and undrawn facilities. We're also well within our banking covenants. Looking forward, our next debt expiry is the Australian dollar medium-term notes that expires in April 2021. Thank you. And I'll now hand back to Anthony for the operational performance overview.

[Anthony Michael Grainger Mellowes]

Great. Thanks, Mark. So I'll move to Slide 12 and just the overview of our convenience portfolio. We now have 75 neighborhood and 10 convenience sub-regional assets, comprising 667,000 square meters with approximately 1,800 specialty tenants and 109 major tenants. As Mark said, our weighted average cap rate is 6.48%. And as you can see, our geographic diversification is well balanced across all states in Australia. 49% of our gross rent comes from Woolworths, Coles or Wesfarmers, and of the other 51%, there is a heavy weighting towards our core nondiscretionary categories being food, retail services and pharmacy and medical. Slide 13 describes our portfolio occupancy. Our target occupancy levels continue to be maintained at 98.2% and the total specialty vacancy is 5.3%, which is slightly above our target range of 3% to 5%. However, this also includes our recent acquisitions, which had a higher specialty vacancy than our portfolio. When we exclude those recent acquisitions, our specialty vacancy is 4.7%. Our specialty tenant monthly holdover has been a particular focus for the team, and we have reduced that from 1.1% on the existing portfolio and 3.1% on the acquired centers to just less -- to approximately 1% on both of them. We have 3 anchor tenant expiries in FY '20 with 1 option already exercised by Coles, and we expect Coles to exercise the remaining 2. Turning to Slide 14, talks about the sales growth and turnover rent. Our supermarket MAT has increased to 2.7% per annum, with both Woolworths and Coles showing good positive growth. Our discount department stores have also shown good growth of 3.4%, and this is due primarily to Big W's performance, which continues to be positive. Our Mini Majors sales growth has decreased by 1.5%, and this is primarily due to the discounters in our portfolio, and foot traffic has continued to increase, and this is reflected in the sales performance of our specialties at 2.6%. With respect to our specialty sales growth being steady at 2.6%, our nondiscretionary categories growth was 3.4% versus the discretionary categories at roughly 1%. And our convenient (sic) [ convenience ] neighborhood centers grew by 3.1%, outpacing our convenience sub-regionals at 1.5%. Our turnover rent continues to increase. We now have 34 anchors contributing turnover rent with a further 16 supermarkets within 10% of the turnover threshold. 12 acquired anchors and 2 existing anchors crossed over into turnover rent during the period.Specialty key metrics for our existing centers are outlined on Slide 15, and we're focused on ensuring that our tenants have sustainable rents that will enable positive rent reversions to continue, although they have moderated over the past 2 years. As a result of our specialty sales growth of 2.6%, our average specialty occupancy cost is 9.4%. We concluded 146 specialty tenant renewals during the period with an average rental uplift of 5.3% with no rent -- no incentives paid. On average, our specialty rent per square meter has increased to $726 per square meter. We completed 66 new deals, which is in line with our expectations, with an average rental uplift on replaced tenants of 2.4% and an incentive of 11 months. And we continue to bias our new deals towards quality national tenants. Slide 16 and 17 are the new slides that we're putting into our half year results, which outlines the key metrics for our existing centers, acquired centers and also the total portfolio. I'll talk to the acquisition columns. Although we've only owned the centers acquired from Vicinity for nearly 9 months, we've completed a lot of leasing works in that period. However, there is still a lot of work to do, particularly in completing the remix of these centers to be more biased to our core categories of food, retail services and pharmacy/medical. Seven of the 12 acquired centers have also been impacted by competition, which we were aware of at the time we acquired the centers, and that sales performance to date is in line with our expectations. The sales growth for these centers has improved over the past 6 months. Due to the implementation of our remixing strategy, the occupancy of these centers is lower than as at December 2018. The rental guarantee that we achieved from Vicinity should cover any short-term earnings that we may experience in FY '20. Particularly pleasing for me is the significant progress we made on reducing our near-term lease expiries from these acquired centers. We've lowered our tenants on monthly holdover from 3.1% to 1.1%. Overall, our remixing project is progressing in line or slightly better than our expectations at the time of acquisitions. Our occupancy cost ratio is moving to a more sustainable level of below 12%, and our rents are below $900 a square meter and our new tenants have a higher sales productivity. We expect our rents to grow off a more sustainable base. With respect to the remixing, we believe it's approximately 15% -- 50% complete, with 90 deals completed with an average rent reduction of 10%, which is in line with our expectations when we acquired these centers. Incentives are again at just under 12 months. We've had 5 centers that we've had particular focus on, being Bentons Squares and West End, Albury, the remixing is now complete; and Warnbro, Currambine and Lavington are also expected to be completed by the 30th of June 2020. Our operational integration and all the cost savings that we forecast have all been implemented and are being achieved, and our portfolio and net operating income is expected to be in line with the acquisition net operating income by FY '21. Slides 19 and 20 outline the 12 acquisitions and 5 divestments that occurred during the year, being the 10 assets acquired from Vicinity and the 2 other assets acquired from Dexus and a private vendor. We also disposed of the 5 assets into our SURF 3 fund in July 2018. Slide 21 again highlights the fragmented ownership in our sector, which provides SCP with further acquisition opportunities. We are now the largest owner by number of neighborhood centers, and we'll continue to consolidate the sector by utilizing our funding and management capability to execute these acquisition opportunities. Since listing, we have now acquired nearly 50 convenience centers for just over $1.6 billion in aggregate. Some themes that emerged during the year were that there were more institutional vendors and syndicators, and the privates and also other syndicators remain active on the buy side. Slide 22 outlines our indicative development pipeline over the next 5 years. In summary, we have identified and are working on 27 potential developments, totaling CapEx spend in excess of $110 million, and we also settled the development of both Bushland Beach in July 2018 and Shell Cove in October 2018. Slide 23 outlines our retail funds management business. As we've mentioned before, this new business does have the potential to deliver some additional earnings growth for SCP in the future. With respect to SURF 1, this was launched in October 2015 and is expected to be successfully closed hopefully by December 2019. We have already exchanged contracts on 2 assets being Inverell Big W and Burwood Dan Murphy's, and we are currently marketing for sale of the remaining 3 freestanding assets being Woolworths at Fairfield Heights, Woolworths at Griffith North and also Katoomba Dan Murphy's. SURF 2 and 3 are performing in line with our PDS forecast. There are no new funds forecast for FY '20, and we will continue to monitor the retail and institutional market appetite for these new products. The fee structures are all identical for all funds with one-off establishment fees of 1.5% of total asset value, annual management fees of 0.7% of total asset value and also a performance fee, if that is reached at the end of the funds. I'll now like to talk our key priorities and outlook, which is shown on Slide 25. Our core strategy remains unchanged. We will continue to seek and deliver defensive, resilient cash flows to support growing, secure distributions. We will continue to focus on the convenience-based retail centers with strong weightings to the nondiscretionary retail segment. We'll be seeking long-term leases to quality anchor tenants such as Woolworths, Wesfarmers and Coles, which were again demonstrated by our latest acquisitions. And we'll continue to explore both the core business growth opportunities, acquisition opportunities and also some fund management opportunities. Now I'd like to hand back over to Mark to outline our potential earnings growth for FFO in the future.

[Mark James Fleming]

Thanks, Anthony. This slide sets out our medium to longer-term growth targets, which we include to help investors and analysts forecast our future earnings growth. Over the medium to longer term, we expect to achieve FFO growth of between 2% and 4% per annum through a combination of rental uplifts, expense control and growth initiatives. Historically, we've generally achieved earnings per unit growth at or above the higher end of this range. So for example, in the FY '19 results that we are presenting today, our earnings per unit growth was 6.7%, largely due to acquisitions. But for FY '20, our initial guidance is for earnings growth to be toward the lower end of the range at about 2.3%, which assumes that we won't complete any acquisitions this financial year. So while there will be year-to-year variations, we hope that this indicative long-term target range is helpful for those who are building long-term models. Anthony, back to you.

[Anthony Michael Grainger Mellowes]

Thanks a lot, Mark. So looking on Slide 27, our priorities and outlook for FY '20. With respect to our core business, we really are focused on completing our remixing project for our recently acquired centers. And we're going through remain really focused on leasing to sustainable tenants at sustainable rents. We'll also explore some additional other income opportunities that may become available to us during the year, and we'll have a key focus, as always, on managing our expenses at both the center and corporate level while also maintaining the appropriate standards of our centers. With respect to growth opportunities, we'll continue to explore value-accretive acquisition and divestment opportunities that are consistent with our strategy, and we will continue to progress our identified development opportunities, and we'll monitor our -- the funds management opportunities as market conditions allow. With respect to capital management, we'll continue to actively manage our balance sheet to maintain diversified funding sources with long weighted average debt expiries and a lower cost of capital that is consistent with our risk profile. Our FY '20 FFO per unit guidance has been increased to $0.167 per unit, and our distribution guidance has been increased to $0.151 per unit, which is 2.3% and 2.7% above our FY '19 results, respectively. In conclusion, I'd like to say that we'll continue to deliver on our clearly stated strategy and objectives. We'll continue to focus on and optimize our core business, with a particular focus on the remixing project for our acquired centers. Our occupancy is being maintained at sustainable range, and we're focused on improving our tenancy mix, maximizing our lease renewals, albeit at sustainable levels, while maintaining a disciplined focus on both our center and corporate costs. We build strong solid foundations to enable us to continue to seek out and execute on growth opportunities that are consistent with our strategy and risk profile. In summary, FY '19 was a particularly active year for our team. However, we still have a lot of work to do to enable us to deliver on our acquisitions. Acquiring the assets is relatively easy, delivering the expected results is where the hard work really is. Now I'd like to invite any questions.

[Operator]

[Operator Instructions] Your first question comes from Ben Brayshaw from JP Morgan.

[Benjamin J. Brayshaw, Analyst]

Just have a couple of questions on the VCX portfolio. You mentioned that the yield should stabilize by FY '21 in the order of 7.5%. Are you able to just talk about whether you see the 7.5% as sustainable beyond that? And any comments you have on the prospects for growth. And where I'm coming from is that I can see that the cap rate, presumably based on your estimate of market rent, is in the order of 6.7%, which would imply some potential negative reversion. So I'm just interested as to how you see the trajectory of that initial yield beyond FY '21.

[Mark James Fleming]

Yes. Thanks, Ben, it's Mark here. So the passing yield that we acquired it on which we disclosed at the time was 7.24% of $573 million. So you can do the math and work out what the passing NOI was, it's around $41.5 million. Our aim as it has been from the beginning and our expectation is that in FY '21, that portfolio will deliver $41.5 million of NOI. And the key thing is that while the NOI will therefore not have grown for a couple of years, we'll be on a much more sustainable base with a much more sustainable mix of tenants, and we expect to be able to achieve good growth from then on. In terms of valuations, if I can answer that this way, if we've got the same NOI that we did when we went in, I would expect that our valuations should start to approach the valuations that Vicinity had these assets in their books at. As at June 18, their values were about $613 million of this portfolio. So I'd expect that we'll start to see some valuation uplifts for this portfolio in FY '21 and beyond. We actually took $3.4 million of valuation uplift in the last set of vals, but we are being conservative on those valuations until we completed the remixing project.

[Benjamin J. Brayshaw, Analyst]

And just my second question was, Anthony mentioned on the call that there's a material amount of work that needs to be done prior to being substantially complete by June 2020. Are you able to just touch on the top key initiatives that you're focused on, expecting to complete over the next 12 months?

[Anthony Michael Grainger Mellowes]

Yes. Well, it's all about the leasing remix. So that is our key focus. You don't change a lot of tenants over in a very short period of time, it takes time. People have existing leases in place. So you want to move tenants around to get a better mix, and that's what takes a bit of time. We've already done and feel that we pretty well completed Bentons Square and that West End, Albury, so we're quite comfortable there. Where our major focus now is on Warnbro in Perth and Currambine in Perth as well and Lavington in Albury. And Lavington in Albury is probably going to take a little bit longer. The others were a little bit quicker than what we thought. But overall, we're ahead of where we thought we'd be. But it's all about the leasing. That's the key focus. Costs, we've already got the cost savings. They're already done and implemented. We're comfortable with that. So it's really about leasing that takes a while to change tenants around, find tenants. You also tend to do the easy deals first and the harder deals generally take a little bit longer. And that's certainly the case [ we're seeing here ], so.

[Benjamin J. Brayshaw, Analyst]

And how much CapEx are you forecasting, Anthony, for the next 12 months to substantially complete those works?

[Mark James Fleming]

Yes, I'll take that. So between maintenance CapEx and leasing and fit-out incentives, we spent a bit over $3 million in the 9 months of FY '19 that we owned these assets. And in FY '20, we're forecasting about $5 million to complete the project. About a bit over $8 million in total across the 2 financial years.

[Operator]

Your next question comes from Simon Chan from Morgan Stanley.

[Simon Chan, VP & Equity Analyst]

The first question I got, on your rental guarantees, how much rental guarantees were there in your FY '19 result from the VCX assets?

[Mark James Fleming]

Look, in terms of P&L support, the total rental guarantee that we got from Vicinity was $8 million for 2 years. We've used approximately half of that to date.

[Simon Chan, VP & Equity Analyst]

Okay, okay. And so I see on Slide 30, you've guided to comparable NOI growth of 1.6% for FY '20. That includes the remaining $4 million then? Or does that not include the remaining $4 million?

[Anthony Michael Grainger Mellowes]

No, that -- yes, do you want to...

[Mark James Fleming]

That's excluding acquisitions. So that's just the existing portfolio excluding the acquired centers.

[Simon Chan, VP & Equity Analyst]

Okay, okay. Cool. Makes sense. The other question I have, Slide 17, I thought was quite interesting. You called out the 12%, specifically, as the sustainable level of occupancy costs. I'm just trying to -- why 12%? Like how should we interpret this 12%? Because the other way I'm looking at it is, are you somewhat suggesting that across the whole of your SCP portfolio at some point in time, our costs could get up to 12%?

[Anthony Michael Grainger Mellowes]

No, no, no. So with shopping centers, generally speaking, smaller neighborhoods sit somewhere between 9% and 11%. You get into sub-regionals, smaller sub-regionals, that sit between sort of 11% and 13% to 14% to 15%; the regionals, 15% to sort of 18%; and then the really big super regional shopping centers, 18% plus. So this portfolio that we acquired was it had a heavier weighting towards some of those smaller convenience sub-regionals. So their occupancy cost sits a little bit higher. It was over 12%, as we're talking. We want to get more sustainable rent. We want to get them down to about -- acquisition to around about 11% to 12% mark, and that's where it's heading and we're comfortable with that. But our existing centers will be sitting around that sort of 10% mark.

[Simon Chan, VP & Equity Analyst]

Okay. Fair enough. My final and it's on the same slide. I just noticed that for the FY '19 acquisition portfolio, the average uplift on renewals were negative 14.6%, but then the average uplift on new leasing were close to 11%. Can you just talk a little bit about the characteristics of the new tenants and how you've been able to get such massive uplift versus the renewals?

[Anthony Michael Grainger Mellowes]

Yes. Basically, the major new leases that we've done where we've had fashion or apparel tenants in there before or Vicinity had and they're on capped occupancy deals, so they're paying a percentage of their turnover. That's the rent that we took, which is the rent that they pay, not the base rent. So for example, and I'll just make it simple, a tenant's rent on their lease may have been $100,000, but they're on a capped occupancy deal, so the maximum rent they may pay because their turnover is not high could be $50,000. And we've done a deal at $55,000, which gives a 10% uplift on that $50,000. So we look at the renewal against the cash that a tenant actually pays in rent, not what is necessarily written on, at least, as a base rent. And so the majority of our new leases have been -- where we've been remixing away from the discretionary sectors to the more nondiscretionary sectors of our food, our retail services and our pharmacy and medical.

[Simon Chan, VP & Equity Analyst]

Right, right. Sorry. Just a follow-up on that then. So what I'm hearing is a lot of those -- a lot of the, I guess, old VCX deals had capped occupancy costs, which kind of inflates your re-leasing spread, is that right?

[Anthony Michael Grainger Mellowes]

Inflates that, yes. But we're doing -- we're getting more rent, actual rent out of tenants because of the mix that we're putting in there as oppose to the capped occupancy deals that were in place before.

[Operator]

Your next question comes from Stuart McLean from Macquarie.

[Stuart McLean, Research Analyst]

I just want to ask, to begin with, just on comp NOI growth expectations. So it was 2.5% this year. It's going to go to 1.6% next year. Just wondering what the key drivers there, of that deterioration.

[Anthony Michael Grainger Mellowes]

Yes, look, we've probably been, as we always are, a little bit conservative. But we -- look, it is tough out there in the retail environment, and it is softening. Notwithstanding the sectors that we focus on, those nondiscretionary, it's still hard. And even though the discretionary sectors are finding it harder with respect to rents, it does come back to the nondiscretionary sectors as well. So we're just forecasting -- the word that I've used throughout the presentation is really about sustainable rents. So we're probably being a bit more proactive in locking in probably slightly lower rents for really sustainable tenants at sustainable rents. We're hopeful [ it'd be ] a little bit better than that, but it certainly has been slowing our growth over the last few years. Two years ago, we had 7% renewals; last year, we had 6% renewals; this year, we had 5.3% renewals. So we are forecasting that to come back a little bit. But hopefully, we'll do better than what that is, but we're trying to be a bit more proactive in forecasting, remixing the tenants and getting sustainable tenants on sustainable rents and get the cash in the door as opposed to holding vacancies at potentially higher rents.

[Stuart McLean, Research Analyst]

Okay. So the other part then is occupancy. So on your existing portfolio, specialty occupancy is 4.8% at the moment. It's almost about 5% upper limit that you set yourselves. Are you trying to get that down to 3% by cutting more favorable deals?

[Anthony Michael Grainger Mellowes]

I wouldn't say it'll necessarily get to 3%, but we're hoping to improve it from that -- the upper end of our range to more the middle end of our range.

[Stuart McLean, Research Analyst]

Okay, perfect. And couple other questions, just on FY '20 growth and what's factored in. Just the timing of the CQR stake sale, are you going to look to collect all of the first half dividend, part of the first half dividend? Can you just give an idea around that?

[Mark James Fleming]

Yes. Our forecast assumes that we collect a half year dividend, not the full year. For [indiscernible].

[Anthony Michael Grainger Mellowes]

For the remaining stake.

[Mark James Fleming]

For the remaining stake. Yes, 6.8.

[Stuart McLean, Research Analyst]

And on the cost of debt, so it came down, was it 20 basis points due to the breaking of the hedges. Is that the forecast cost of debt then for the remainder of the year? And kind of the second part is just as the yield curves have come down, obviously you're 30% unhedged, should you be attracting a better rate than what you achieved last year?

[Mark James Fleming]

The answer to your first question is, yes, that is our forecast, 3.6%. Every day, it seems to be getting lower. So but at the same time, 12 months ago, we were looking at a really steep yield curve. So there is uncertainty around that number. If current trends continue, I think we'll do better than 3.6%. But as Anthony said, we tend to like to be on the conservative side but realistic on our forecast. So I don't expect at this stage it to be more than 3.6%, put it that way. And yes, we are 30% unhedged and therefore, if BBSW continues to reduce, if there's another RBA rate cut, then that will obviously reduce our weighted average cost of debt.

[Stuart McLean, Research Analyst]

Okay. And maybe just the last one the growth side of things. Are we expecting a performance fee from SURF 1 to come through the P&L this year? And if so, what could the quantum of that be?

[Mark James Fleming]

As we're tracking right now, we do expect there'll be a small performance fee. I don't think it'll be significant. There's also the disposal fee. But on the other hand, we missed out on the management fees and the distributions from our stake. So when we take all those things together, we've not allowed any upside for FY '20. Again, that's probably conservative. In terms of the quantum of the performance fee, obviously, that depends on the prices that we achieve. But at this stage, I wouldn't expect it to be more than $0.5 million, for example, but we'll see how it all washes up at the end of the day.

[Stuart McLean, Research Analyst]

Okay. And then maybe just on the divi growth next year, slightly above FFO growth. I know there were some timing issues in regards to the dividends being above AFFO this year, but what does that mean for your outlook of maintenance CapEx and tenant incentives for FY '20? Is it that they're going to reduce, obviously, pro rata for the VCX acquisition?

[Mark James Fleming]

We're not expecting that they're necessarily going to reduce. So we spent $14.4 million on maintenance and fit-outs this year. Our forecast for FY '20 is in the range of $16 million to $18 million. As I said, approximately $5 million of that relates specifically to the Vicinity portfolio. But going back to what Anthony said, we are focused this year on proactively managing our tenancy mix. We want to make sure we lock in our key nondiscretionary tenants on sustainable rents in a soft retail environment. So for both of those reasons, we are expecting a slight increase versus FY '19. The results of that is, in terms of distribution growth, is that I expect distribution growth to be more or less in line with earnings growth, not to be in excess of earnings growth once we get to the end of the year, approximately. I mean we're guiding to 2.3% versus 2.7%, so they're not that far away from each other.

[Stuart McLean, Research Analyst]

Okay. So you expect it to be AFFO covered?

[Mark James Fleming]

Yes, we expect to be less than 100% of AFFO.

[Stuart McLean, Research Analyst]

Yes, yes, yes. And then maybe just a last question on the VCX rental guarantee. Just to get this correct, in response to an earlier question. I mean you said it was $8 million, was the total guarantee. You've used $4 million to date. We're not even halfway through that process as of yet, the remixing process. And then you also made some comments that some harder deals are to come towards the back end and that the rental guarantee should cover it all, but is there a potential that SCP ends up out-of-pocket, that rental guarantee doesn't cover all the remixing that needs to be done?

[Mark James Fleming]

We're not expecting that. As I said in the presentation, we're more than halfway through. We're really now down to just 3 centers that need work. And in terms of Warnbro and Currambine, that's well more than halfway through the remix on those centers. So yes, there are hard deals ought to be done, but I think Anthony's comment was also about the second half of FY '19. So if you look back at the first half of FY '19, which is the first 2 or 3 months of ownership, the renewals are running at negative 5%, and they were, if you like, [ inverted common behavior ] deals. The last 6 months there's been a lot of heavy lifting, and that's brought our renewal reversions down to 14.6%. So a lot of the hard deals have already been done. There'll be more hard deals to do in the next 6 months. But after that, we'll start to see the light at the end of the tunnel. So in terms of the rental guarantee, we do think that the rental guarantee will be sufficient to cover us for FY '20. We're not counting on any rental guarantee being there for FY '21. Even though theoretically, it's a 2-year rental guarantee that runs off the first quarter of '21, we're not expecting there to be anything left for FY '21.

[Stuart McLean, Research Analyst]

Yes. But also, you're not expecting to need any further guarantee because the NOI should be stabilized at your expectations. So you use it all up early, but it doesn't...

[Mark James Fleming]

[indiscernible] our forecast [indiscernible]of NOI, which is a guarantee basically. The passing NOI that we acquired it on.

[Operator]

Your next question comes from Adrian Dark from Citi.

[Adrian Dark, Director and Analyst]

We touched on the leasing environment a little bit, but could you just talk about whether you are taking a view that retail sales growth is likely to pick up over the course of FY '20? There is some positivity in the market post-election, post-rate cuts and so on, is that something that you're seeing or something that you're anticipating over the course of the year?

[Anthony Michael Grainger Mellowes]

There's no doubt since the election and also the RBA interest rate cuts, so May and June, we did a lot of deals just in volume. So there is certainly more confidence from the retail as to commit to longer terms, and that sort of continued at the moment. Again, this is mostly now our space. So we're confident that things will move along at a relatively level pace. But it is hard out there. There is no doubt about it. Retail sales are still there, but they're changing retail. It's changing in lots of different ways. But certainly, we think our focus is on ensuring that we get the right tenants at sustainable rents. And if we can do a deal now to lock that in, we're happy to do that.

[Adrian Dark, Director and Analyst]

Okay. And then just in relation to the SURF 1 assets, could you talk about the decision to look to sell those assets and whether you're thinking similarly about assets on the balance sheet or whether that's more specific to SURF 1, please?

[Anthony Michael Grainger Mellowes]

Yes, well, SURF 1, quite simply, was a 5-year fund that the PDS said that we'd be selling those assets within that 5-year period. So we're coming up to the fourth year anniversary. I'm going to take a while to sell assets. So an appropriate fund manager just doing exactly what we said we would do. We got offered a good price on Inverell Big W and Burwood Dan Murphy's, and then we put the other 3 on the market. There's a campaign that's going now. We're hopeful that, that campaign will be concluded in the next couple of months, which will enable us to close the fund in December 2019, which is roughly 4.5 years after we started the fund, and we said it was a 5-year fund. So that's SURF 1, just doing exactly what it was said it would do. With respect to SCP's other assets in the balance sheet, we'd like to do another SURF at a particular point in time when the conditions are right. It still is pretty tough out there for retail assets. So and we predominantly have retail assets. Although under $50 million, there are still some very strong prices being achieved, notably there were 2 in Perth, $27 million, $28 million price points, and they both sold for sub-6%, which is really encouraging. That makes SURF assets difficult to sell in the market, in terms of sell a fund in the market, rather. But certainly we, at SCP, have some assets that are probably lower IRR that we could look to divest, if we got offered a very good price for them. And as we have sold assets right the way through our life, New Zealand, all these SURF assets, we continue to look at them. And if we get offered appropriate prices, we'll certainly dispose of assets.

[Operator]

Your next question comes from Edward Day from Moelis Investors.

[Edward Day, Research Analyst]

I'm just wondering if you can talk about the cost savings that have been achieved on the portfolio acquisition, sort of the quantum and what they are and how much of that benefit came through in FY '19?

[Mark James Fleming]

Yes. So broadly speaking, the cost savings that we've achieved are in the quantum of $1 million to $2 million and probably at the higher end of that range. Obviously, that's the gross cost savings, and it does impact the recoveries as well, so the net benefits to the P&L is less than that. In terms of the nature of those cost savings, it's essentially that we run a lower management cost structure than Vicinity, both the above center and at center costs, if you like. So not so much cleaning, security, those sort of things, it's really management costs.

[Edward Day, Research Analyst]

Right. Okay. And just on your specialty tenant average uplift of 5.3%. In the context of your comments around your sort of softening environment expectations for your FY '20 NOI, where do you see that 5.3% trending in FY '20?

[Mark James Fleming]

Our forecast is for that to come down to 2% to 3% in FY '20.

[Operator]

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to Anthony. Please continue.

[Anthony Michael Grainger Mellowes]

Great. Well, thank you very much. I hope that's a good start to an earnings season for everybody. And if you want to get caught busy over the next couple of weeks, Mark and I will be around seeing a lot of investors and speaking to the analysts, et cetera, over the next 2 to 3 weeks. So I hope everyone has a great season. And I'm very pleased that the cricketers wrapped everything up quite early last night for us to get an early start today. So thanks very much and have a great day. Cheers. Bye.