Business
Region : FY24 Annual Report (RGN)
Region : FY24 Annual Report
About this update from Region Group
FY24 Annual Report Supporting better communities through life's essentials. FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Contents Auditor's Report Historical Key Metrics Security Analysis Directory Corporate Calendar 1 About Us 2 Group Structure 3 Our FY24 Performance Highlights 4 Message from the Chair and CEO 6 Our Property Portfolio 10 Our Retail Partners 13 Our Strategy 14 Our Performance 16 Directors' Report 30 Remuneration Report 43 Consolidated Financial Statements 71 Notes to the Consolidated 77 Financial Statements Directors' Declaration 107 Independent Auditor's Report 108 Historical Key Metrics 114 Security Analysis 116 Directory 118 Cooleman Court, ACT Meeting of Security Holders This year's AGM will start at 2pm (AEDT) on Tuesday 15 October 2024. For further information, visit www.regiongroup.au/agm/ Corporate Calendar 15 October 2024 Meeting of security holders December 2024 Estimated interim distribution announcement and securities trade ex-distribution January 2025 Interim distribution payment February 2025 Interim results announcement June 2025 Estimated final distribution announcement and securities trade ex-distribution August 2025 Full year results announcement August 2025 Final distribution payment August 2025 Annual tax statement Security Holders Register Details You can view your holdings, access information and make changes by visiting investorcentre.linkgroup.com/Login/Login Responsible Entity Region RE Limited (ABN 47 158 809 851, AFSL 426603) Region Group comprises Region Management Trust (ARSN 160 612 626) and Region Retail Trust (ARSN 160 612 788), together, Region Group or RGN. Sustainability Our Sustainability Report is located on our website regiongroup.au/sustainability 1 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory About us We are passionate about making life's essentials easy and inspiring, enabling communities to thrive and grow. REGION GROUP STAPLED SECURITIES Region Group is an internally managed real estate investment trust (REIT) with 92 convenience-based retail properties, valued at $4,368 million. We remain the largest owner of convenience-based retail centres with 7% share of the market, which is dominated by private owners. This asset class has proven to be resilient due to its exposure to non- discretionary retail categories, including long leases with grocery-based anchor tenants. Region (originally SCA Property Group ASX: SCP) was created out of Woolworths Group Limited (Woolworths) in late 2012, when ownership in a number of retail properties was transferred. Since our announcement in November 2022, we have been operating under our new name, Region Group (ASX: RGN). Our portfolio benefits from long leases to Woolworths and Coles Group Limited (Coles), which act as our anchor retail partner at more than 96% of our properties. OUR PURPOSE Our ambition to do better for the communities we operate in, our people, retail partners and security holders inspired us to think deeper. In 2022, ten years after the creation of SCA Property Group, we became Region with a clear purpose: supporting better communities through life's essentials. We have defined critical pathways to our success - our people, our customers, our environment and our security holders. We believe in owning a portfolio of properties that are economically and environmentally sustainable. Our centres, directly and indirectly, provide employment for thousands of people and help support the economic resilience of their local communities. Our Region people are experts in their field, and place great value in trust, collaboration, innovation and leadership. At the heart of our strategy are 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. Operating responsibly is of great importance to our business, our communities and our security holders, and we are well placed in delivering our environmental, social and governance commitments. The value of our business is more than its physical properties. It lies in the wellbeing of our people and the prosperity of our retailers as we work together to provide for the essential needs of our customers. Our positioning means we are resilient as a business, capable of delivering growth to our security holders, people, customers and the communities we serve. Our values are what guide us in how we deliver on our ambition. ACHIEVEMENT Innovation We embrace doing things differently to get people what they need, when and how they want it. Leadership We stand for what people need and show the way forward. ONE TEAM Trust Our word is our bond. Collaboration We achieve and grow together as one team. Region Management Stapling Region Retail Trust 1 deed/provisions Trust 1 Region Region Australian REIT Operations Retail Holdings Pty Ltd Properties Pty Ltd Region RE Metro Limited 1 Fund 1 2 Region RE Limited is the Responsible Entity of Region Management Trust and Region Retail Trust Region RE Limited as Responsible Entity of Region Retail Trust owns 20% of SCA Metro Convenience Shopping Centre Fund (Metro Fund 1) Delacombe Town Centre, VIC 2 3 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory Our FY24 Performance Highlights FUNDS FROM DISTRIBUTION COMPARABLE OPERATIONS (PER SECURITY) NOI GROWTH (PER SECURITY) 15.4 ¢ 13.7 ¢ 3.0 % per security per security OPERATIONAL RESILIENT PORTFOLIO PERFORMANCE Record number of Portfolio completed leasing deals occupancy 552 98.1 % FINANCIAL DISCIPLINED CAPITAL MANAGEMENT WACD PRO FORMA GEARING LIQUIDITY 4.3 %pa 32.3 % $ 262.4 m with 94.2% hedged debt at lower end of target cash and undrawn 30-40% range debt capacity VALUE CREATION AND GROWTH RECYCLING CAPITAL INTO ACCRETIVE OPPORTUNITIES FOR SALE $176.7 m $34.1 m divestment of value-add capital non-core properties expenditure (since May 2023) (spent in FY24) $74 m acquisition of Cooleman Court, ACT (at an implied initial yield of 6.73%) $394 m establishment of Metro Fund 2 with six new centres (in September 2024) The Gateway Shopping Centre, VIC 4 5 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory A message from our Chair and CEO On behalf of our fellow Directors, we are pleased to deliver our annual report for FY24. We are committed to delivering on our strategy to ensure defensive, resilient cash flows to support secure and growing long-term distributions to our security holders. Operational Performance Our portfolio of convenience-based retail centres has proved resilient with its high-quality mix of supermarket anchor retail partners and focus on non-discretionary specialties. As at 30 June 2024, our portfolio MAT growth was driven by 3.0% supermarket and 4.1% non-discretionary specialty sales growth. Non-discretionary retail partners generated 88% of the gross rent and the portfolio weighted average lease expiry is strong at 5.1 years. Our retail partner's health remains sound with arrears at 1.0% of billings. Our leasing activity has driven higher occupancy at 98.1% and improved specialty vacancy of 4.7%. The team achieved a record number of 552 leasing deals in FY24 at an average uplift of 4.0% and delivered increased average annual fixed rent reviews at 4.1%. Essentially Local, our social impact pillar, is fundamental to how we deliver on our purpose. We have made a positive impact through our continued partnership with The Smith Family, where we have supported 208 students as part of their Learning for Life program. We are proud to have the opportunity to positively contribute to the prosperity of the local communities we operate in, with our teams implementing Local Community Engagement Plans resulting in more than 800 events held across our centres. Finally, we have embarked on our journey towards being fully aligned with the proposed Australian Sustainability Reporting Standards by FY27. More details around our sustainability framework and progress towards our commitments are set out in our FY24 Sustainability Report. Financial Performance Despite inflationary pressures on property expenses, we achieved: FFO 15.4 cps AFFO 13.6 cps Distribution 13.7 cps - in line with AFFO Value Creation and Growth Opportunities We have substantially completed our capital recycling program where we divested $176.7m of non-core, lower yielding retail centres since May 2023 at an average passing yield of 5.3%. Proceeds have been reinvested into accretive opportunities such as the $74.0m acquisition of Cooleman Court at an implied initial yield of 6.73%, and reinvestments into our existing portfolio, with any surplus proceeds temporarily used to reduce debt. Our first tranche of centre repositioning projects is underway, where we plan to spend $35m across three centres to enhance the customer experience and drive asset value. We will also continue to co-invest with our supermarket retail partners to roll out their e-commerce facilities. Finally, we are well progressed on the development of Delacombe Town Centre stage 2, which is expected to be completed in December 2024. Sustainability Prioritising our long-term resilience and sustained future remains paramount. In FY24, we completed an evaluation of our sustainability strategy to ensure it continues to focus on these ambitions. As a result, we introduced an increased focus on Governance including Procurement, and Transparency & Accountability. We have continued to progress on our sustainability targets, with 16.1MW of solar PV across 29 sites installed and operational at the end of FY24. We expect to reach our Net Zero (Scope 1 and 2) target by FY30, and as we progress our program, we are improving the data availability for our Scope 3 greenhouse gas emissions. • Comparable NOI growth of 3.0% Looking forward, we have mitigated our exposure to interest rates in FY25 and FY26 through our hedging activity. During the year we entered into $300m of interest rate swaps at zero cost and issued a 7-year, $300m Medium Term Note (MTN). The MTN orderbook was 4.6x oversubscribed, which allowed us to achieve a margin of 1.45%. Following these transactions, we are 96% hedged in FY25 and 82% hedged in FY26. Our balance sheet is well positioned for growth with market capitalisation rates stabilising during the second half of the year, pro forma gearing of 32.3% at the lower end of our target range and $262.4m of available liquidity. Anthony Mellowes (left) and Steven Crane (right) 6 7 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory The Next 12 Months We remain concentrated on delivering defensive, resilient cash flows to support secure and long-term distributions to our security holders. To achieve this, our focus for FY25 will continue to be on: Serving our local communities for their everyday needs Partnering with our anchor retailers to improve their online offer Reinvesting in our centres to drive portfolio value Curating our portfolio based on our disciplined investment criteria and growing our funds under management Executing on our sustainability strategy The productivity of our portfolio is positioned to increase, with continued strong population growth and limited new supply of retail space. With our planned centre reinvestment program and our low specialty occupancy cost, this provides the opportunity to increase specialty rents. We are pleased to announce the establishment of Metro Fund 2 in August 2024 with a global institutional partner, which more than doubles our funds under management. The management rights for this new fund were acquired at zero cost and consists of six new centres totalling $394m at a cap rate of 5.7%. We are focused on completing this transaction as well as remaining disciplined with growth plans in Metro Fund 1. Supporting better communities through life's essentials is the foundation to our strategy. Our balance sheet remains strong and positions us for growth, our strategy is sound, and our properties remain resilient. On behalf of our team, we thank you for your continued support and confidence in Region. Steven Crane Chair Anthony Mellowes Chief Executive Officer 8 9 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory Our Property Portfolio AT 30 JUNE 2024 We are the largest owner of convenience-based retail properties within Australia. Our portfolio comprises of 13 sub-regional and 79 neighbourhood retail properties located in all states and territories across Australia. During the year, we divested four and acquired one retail property as part of our capital recycling program, with an additional three held for sale at 30 June 2024. We also manage an additional seven neighbourhood retail properties located across four states on behalf of Metro Fund 1, bringing our total portfolio to 99 retail properties under management. Sub-regional Neighbourhood Metro Fund 1 Sold - approaching settlement Sub-regional Neighbourhood Metro Fund 1 Sold - approaching settlement 10 11 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory Our Property Portfolio continued PORTFOLIO OVERVIEW 88% of gross rent is generated from non-discretionary tenants. Our Retail Partners Tenants by Category The resilience of our portfolio is largely driven (by gross rent) by our non-discretionary retail partners. 92 owned retail properties 2,109 number of speciality retailers $4,368 million total owned portfolio value FOR RENT 794,425 sqm gross lettable area Specialties/Mini Majors 53% Woolworths Group 28% Coles Group 11% Wesfarmers Group 5% Other Anchors 3% Specialty / Mini Major Tenants (by gross rent) Food and Liquor 31% Pharmacy and Healthcare 2 20% Services 3 19% Other Retail 4 14% Apparel 7% Discount Variety 6% Petrol 3% Our portfolio comprises of convenience-based retail properties with a strong weighting to non- discretionary retail categories. Proactive leasing deals have reduced prior anticipated FY25 expiries from 11.1% to 9.6%. Anchor retail partners represent 47% of gross rent, with the remaining 53% of gross rent coming from specialty and mini major retail partners. Overall lease expiry (% of gross income) 41.0% 15.8% 9.6% 11.7% 10.5% 11.4% FY25 FY26 FY27 FY28 FY29 FY30+ Majors Non-Discretionary Discretionary 1. Non-Discretionary includes ATM's, offices and other non-retail tenancies 2,488,771 sqm land 5.1 years weighted average lease expiry1 Geographic Diversication (by value) NSW 29% QLD 25% SA 6% TAS 10% VIC 16% WA 11% NT 1% ACT 2% Weighted average lease expiry (WALE) years by gross rent Pharmacy & Healthcare includes pharmacies, medical centres/doctors, dentists, optometrists, audiologists and other healthcare service tenancies 3. Services includes hairdressing, dry cleaners, gyms/fitness centres, banks, post office and other services tenancies Belmont Shopping Centre, NSW 4. Other retail includes jewellery, leisure, homewares, gifts/florists/newsagents, communications, travel and other retail tenancies 12 13 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory Our Strategy Our commitment to supporting better communities through life's essentials is fundamental to the successful delivery of our strategy. 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 customer value we deliver security holder value. In our pursuit of delivering our strategic pillars we aim to ensure defensive, resilient cash flows to support secure and growing long-term distributions to security holders. Focus on convenience-based retail centres Weighted to non-discretionary retail segments Bentons Square, VIC Long leases to quality anchor tenants Optimise value through targeted reinvestment in the portfolio Grow through deploying capital into accretive opportunities ELEVATING OUR CORE PORTFOLIO We believe that access to life's essentials enables and inspires communities to thrive and grow. This belief drives our continued focus on optimising our portfolio through partnering with our supermarket retail partners to enhance their e-commerce experience, elevating our portfolio composition through our considered divestment program of lower yielding properties, and deploying recycled capital into accretive opportunities that drive portfolio performance. DISCIPLINED CAPITAL MANAGEMENT We maintain a conservative approach to managing our balance sheet by focusing on diversified funding sources and maintaining appropriate level of gearing within our target range of 30-40%. OPERATING SUSTAINABLY Operating sustainably is key and how we deliver on our purpose. We continue to build on our strategy as we place greater focus on Governance, particularly Procurement, and Transparency & Accountability across our business operations and our commitment to positively impact the communities in which we operate. SCALING FUNDS MANAGEMENT Our funds management platform through Metro Fund 1 and the establishment of Metro Fund 2 provides growth opportunities through acquisitions in the medium to long term. 14 15 FY24 Annual Report Contents About Us Property Portfolio Retail Partners Strategy Performance Directors' Report Remuneration Report Financial Statements Directors' Declaration Auditor's Report Historical Key Metrics Security Analysis Directory Our Performance FINANCIAL PERFORMANCE Resilient Portfolio Performance Our underlying FFO per security was stable compared to the prior year, driven by a 3.0% increase in comparable NOI. However, this growth was outweighed by the increase in cost of debt driven by the increase in market interest rates and headwinds from inflationary pressures. Balance Sheet Positioned for Growth Cap rates in the convenience-based sector have stabilised and our conservative balance sheet provides the flexibility for growth opportunities. As at 30 June 2024, we have $4.8 billion Assets Under Management, which includes the recent $74.0 million acquisition of Cooleman Court, ACT, and $67.7 million disposal of non-core retail properties during the period. Our gearing remains at the lower end of our 30-40% target range, sitting at 32.9%, and we have increased our liquidity with $262.4 million cash and undrawn debt capacity as at 30 June 2024, enabling us to remain agile in our pursuit for growth. Property Valuations Stabilised During the year, our portfolio valuation was impacted by a $74.4 million like-for-like fair value decrease. However, our income growth and stable cap rates drove a like- for-like fair value increase of $13.8 million in the second half of FY24. The portfolio has a weighted average capitalisation rate of 6.07%, a 3bps movement since December 2023. Portfolio Value ($m) Total $74.4m like-for-like 91.5 (153.2) decrease in FY24 6.8 4,411.6 (88.2) 13.8 4,282.3 June 2023 Acquisitions Disposals Capital 1H 2H June 2024 portfolio (including (including expenditure like-for-like like-for-like portfolio value transaction assets and other fair value fair value value 1 expenses) classi•ed fair value decrease increase as held adjustments for sale) 1. Excluding assets held for sale at 30 June 2024 Proactive Capital Management FY24 capital management activity provides a secure platform for growth. Debt Facilities Expiry Prole ($m) 103.3 330.0 325.0 39.4 106.5 150.0 250.0 7.0 143.0 100.0 92.1 65.8 20.0 FY25 FY26 FY27 FY28 FY29 FY30 FY31 FY32 FY34 FY36 Bank debt undrawn Bank debt drawn MTN USPP (including bank guarantee) During the year, we increased the amount of fixed debt to mitigate the impact from increased interest rates going forward. This comprises of 94.2% of debt fixed hedged in FY24 and 96% in FY25. We entered into an additional $300 million of interest rate swaps and issued a new 7-year, $300 million Medium Term Note (MTN) at a coupon of 5.55% including a margin of 1.45%. Hedge Expiry Prole Based on Debt Drawn ($m) 94% 94% 96% 82% 57% 43% 41% 41% 21% 21% FY24 FY25 FY26 FY27 FY28 % Hedged post new MTN and swap transactions % Hedged pre new MTN and swap transactions 16 17