Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Region Group (ASX:RGN, Financial) reported a strong portfolio occupancy rate of 98%, indicating high tenant retention and demand.
- The company completed a record number of leasing deals, totaling 552, with an average leasing spread of 4%, showcasing effective leasing strategies.
- Region Group (ASX:RGN) has a healthy balance sheet with $262 million in cash and undrawn debt capacity, providing financial flexibility.
- The company successfully issued a $300 million seven-year medium-term note (MTN) in February 2024, enhancing its capital management initiatives.
- Region Group (ASX:RGN) has a diversified portfolio with 92 centers across Australia, reducing geographic risk and enhancing stability.
Negative Points
- The weighted average cost of debt increased to 4.3%, impacting overall financial performance.
- FY24 funds from operations (FFO) per security decreased by around 9% compared to FY23, indicating a decline in profitability.
- Interest expenses increased by 29% due to higher debt costs, affecting net income.
- Leasing incentive costs rose by close to $2 million, reflecting higher expenses associated with securing tenants.
- Discretionary tenant sales growth was negative at -4%, indicating challenges in the discretionary retail segment.
Q & A Highlights
Q: First, on FY24, you missed on your guidance from February. So you could talk through what caused kind of where would be the price?
A: Look, it's not too far off where we were. And the key movements there is some of -- the interest cost was in line with what we expected. Some of the property expenses, there was timing on that. And some of the leasing deals were done a little bit later than we expected. But we're seeing that flow in effect to FY25.
Q: Just to do with that debt funded, it looks like you picked up a mandate from another manager, which is always good. Can you maybe just talk about opportunities out there to maybe do more of that or to grow the deferred funds more organically by buying assets in there?
A: Yes. Thanks, Lou. Yes, look, we have a very good relationship with our joint venture partner. And yes, we did pick up that mandate from another partner which was very pleasing. So there is still more opportunities in this space, whether it's with this partner or other partners, we'll wait and see. But we've got -- our main focus is to bed this Metro 2 Fund down and we will obviously be looking at all other opportunities. But certainly, we're very pleased that we're able to get this portfolio across, but there is a fair bit of work to bed it down and put it into a shape that is reflective for our -- the returns for our partner.
Q: Just quick on '25 guidance. If I look at the MER in line with the long-run average, should it be trending lower with some of the asset management initiatives, you guys have been undertaking?
A: Look, FY24 was lower than normal. So we're about -- roughly about $2 million lower than normal and there was a couple of things relating to that. And one is rent and there was also some management costs that was a bit lower. But essentially, we're expecting that to be back in line with normal dollars.
Q: As far as the R&D goes from here, what are you expecting for that from '25 with the impact of that?
A: A lot of those savings will be built into the property level, not at the corporate level.
Q: Maybe just on the repositioning, it's been called out for a while, but it wasn't flagged as a headwind in '24 guidance. Can you guys have detailed the impact you're expecting in '25 on that front?
A: Yes. So look, in the '24 guidance there, we had -- we were setting up for that rather than spending a lot of dollars within in '24. In '25, the impact really is as we started to do work around those areas is we've got the -- loss rent from that -- those areas and additional costs, which aren't related to centers. So that's the main impact there.
Q: We expect that you tell us the lost rental date for '25?
A: Look, I think if you take the -- in the guidance, there was $0.002. That's including all of those above.
Q: On the property expense piece, if I may, that's probably expense inflation, an ongoing theme, but something like the spending on security. To what extent is that going to be recurring and ongoing?
A: Yes, I'll talk to that. Look, security is being hit by two areas. One is just wages increase but the other is more hours. You'd read in the press. There's a lot more knife crime. There's a lot more issues, youth crime all around Australia and we are not immune from that. So security, I think, will continue to increase. It's a big issue for all of our retailers. It's a big issue for us as shopping center owners. And I think we've built in where we think it's going to be this year and that's more than just a straight wage. We're also increasing additional hours there as well.
Q: I suppose that that's going to change where you'd look to buy asset (inaudible)?
A: Look, on a case-by-case basis, that's definitely one of the areas that we look at whenever we look at an asset, how much security they have, what is the type of area that it's in. So that's certainly a consideration that we look at for or acquisitions.
Q: Just a follow up on the property expense line. In the past, you've spoken system strategies, particularly around restructuring leases to increase the recoverability and therefore, reduce that headwind going forward? Can you provide an update on that restructuring?
A: Yes. Look, it's on the edge, any of that restructuring that we do, where we bought assets and their specialty tenants and they're on gross leases. We've been converting them to net leases. But there, that takes a lot of time. There's a lot of tenants and there's over five-year of leases. So that's where we do it. With the majors, we don't recover that from the majors and you can't just go and change a major deal, at least because it's 20 plus -- well, in some cases, 20 years old, obviously, there's 10 years to go 5 years, but the market for the mergers is pretty well that they don't pay their contribution to expenses except for increases in rates and taxes and insurance, all those statutory costs. So it's on the edge with the specialties where we bought an existing center that the previous owner had a gross rent, and we try and convert that to a net lease.
Q: Just following up on the center of repositioning of the flag of that headwind into '25, should we think about this as more of a one-off? Or as we go through more and more of the reconditioning projects, is it more, I guess, a permanent shift down as things go in and out of that existing bucket so to speak?
A: Look, the negative reduction to earnings is a one-off. So we should be expecting that the spend we're doing this year, we'll see that revenue starting to flow through in the next year. But as we do other projects, there will be, obviously, those impacts going forward. So it will be a negative offset by a positive.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
