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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Retail REIT 2020 Half Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Thursday, the 20th of February 2020. I'd now like to hand the conference over to your host today, Mr. Greg Chubb, Retail CEO. Thank you, sir. Please go ahead.
Good morning, and welcome to the Charter Hall Retail REIT Half Year Results Presentation for the period ending December 31, 2019. My name is Greg Chubb. I'm the Retail CEO for Charter Hall and an Executive Director of CQR. Joining me this morning is Christine Kelly, Head of Retail Finance and Deputy Fund Manager of CQR. This morning, we're also pleased to announce the acquisition of an additional 17.5% interest in the BP partnership fund and an associated $90 million equity raise to fund this acquisition. But first, we'll start with our key achievements over the period on Slide 5. The first half of the financial year continued to be a very active period for the fund. The portfolio achieved NPI growth of 2.2%, and our underlying operating performance was strong. Over the period, we completed 222 specialty leases, delivering positive leasing spreads of 4.1%. Notably, this is up from the 0.008% as at June. For supermarkets in turnover, MAT sales growth was 4.5%. This is up from 4% at June. Total comparable MAT sales growth across the portfolio, when including specialty sales, was 3.6%, and this is up from 2.8% at June. Majors WALE over the period increased to 11.1 years. Aligned with our strategy, in September 2019, CQR acquired an interest in Pacific Square Sydney and Bass Hill Plaza, also in Sydney. Additionally, in December 2019, the fund announced an initial 14.7% interest in 225 assets in partnership with BP. We're delighted with these acquisitions, and I'll go into further detail on how they support CQR's strategy later in the presentation. And turning to Slide 6 and the REIT strategy. Our strategy remains unchanged, and we continue to deliver on being the leading owner and manager of convenience-based retail. Our focus is that our portfolio of assets continue to be the leading convenience offerings in their respective catchments. We achieved this through continued enhancement of the portfolio quality, active asset management and maintaining a prudent capital position. The result of our strategy is that we deliver a resilient and growing income stream for our investors. Now we'll move to Slide 7 and look at the execution of our strategy. The portfolio cap rate of 6.11% compressed from 6.18% as at June and reflects the stable shopping center valuations and the introduction of the initial BP portfolio investment. And over the period, 53% of the shopping center portfolio was externally revalued. As noted earlier, enhancing the quality of our portfolio saw us acquire an interest at Pacific Square and Bass Hill Plaza, both centers in Sydney. And in December, we invested in the BP portfolio, which consists of the majority of BP's owned and operated convenience retail properties in Australia, with long lease expiries and very efficient triple net lease structures, alongside annual CPI rent increases. The fund divested of 5 assets totaling $107 million at a combined 3.5% premium to their book values, and additionally, CQR has contracted a further 3 assets totaling $70.6 million. Subsequently, 2 of these assets have since settled in January and the final asset is due to settle later in the second half of FY '20. Portfolio occupancy remained stable at 98.1%, and as previously noted, NPI growth was 2.2%, and this is up from 2.1% as at June. During the period, we undertook 123 lease renewals and completed 99 new leases, with improved specialty leasing spreads at 3.8% and 4.6%, respectively. We continue to align our capital programs alongside those of our major tenants, and this has seen a further 3 new lease extensions and has contributed to our major WALE expanding now to 11.1 years. Portfolio WALE increased to 6.9 years. This is up from 6.6 years as at June. We completed solar installations at 9 assets, and I'll go into more detail on the importance of this initiative later in the presentation. We've maintained an active focus on our capital structure. The fund continues to have no debt maturing until 2022, with over $114 million of undrawn debt capacity as at 31 December, and this has increased following the settlement of Erindale and Carnarvon divestments in January. And finally, during the period, Moody's reaffirmed our Baa1 issuer rating with a stable outlook. And now moving on to Slide 8 and some more detail on the acquisition of the BP long WALE convenience portfolio. So we acquired an initial 14.7% interest in the BP portfolio, consisting 225 long WALE convenience retail properties, with 87% of these assets being located in highly desirable and strategic metropolitan markets. The portfolio consists of a very efficient triple net lease structure, with annual CPI rental increases on 20-year average WALE, with no ongoing incentives, downtime or capital commitments. Notably, the addition of the BP portfolio has increased the fund's majors WALE from 10.4 years to 11.1 years. The inclusion of BP into the REIT's portfolio as a major tenant further enhances our covenant quality, whilst maintaining our clear bias on convenience-based retail assets. The acquisition demonstrates CQR's strategy to invest in high-quality, convenience-based retail assets to deliver a highly resilient and growing income stream for our investors. We are extremely pleased with this portfolio-enhancing acquisition. Now to Slide 9 and further fund acquisitions. So CQR continues to be very active in the continuation of our strategy to enhance portfolio quality by recycling out of lower-growth properties into assets that offer better quality earnings and growth prospects. We've been very active over the last 2.5 years, and the fund has disposed of some 23 properties for a total of $492 million and subsequently acquired 7 quality properties for a total of $461 million. This brings the total number of properties in the portfolio down from 71 as at June 2017 to 55 as at December 2019. That's also seen the average asset size across the portfolio increase from approximately $50 million to $70 million. During the period, CQR acquired a 20% interest in Pacific Square and Bass Hill Plaza, both in Sydney, with the existing investor Mercer retaining an 80% interest. Both centers are very well-established in strong trading metropolitan convenience plus centers and are both ranked in the top 20 Shopping Centre News, Mini Guns. Located in Sydney's Eastern suburbs, Pacific Square Maroubra is anchored by Coles, ALDI, with both majors recently expanding and refurbishing their stores, and both performed significantly above industry benchmarks. Located in Sydney Southwestern suburbs, Bass Hill Plaza is anchored by Woolworths, ALDI and Kmart. The Bass Hill catchment notably has one of the lowest provisions of supermarket floor space of any catchment in the country. Currently, refurbishment and upgrade of the center is underway, and this includes an expansion of the ALDI supermarket and a significant tenancy remixing exercise. Both of these centers are notable for the sales productivity and growth they enjoy. They're excellent additions to the CQR portfolio. Now I will hand over to Christine, who will run through the financial results for the period. Thanks, Christine.
Thanks, Greg. Our operating earnings and distribution can be found on Slide 11. For the half year, operating earnings and distribution growth is 1.7%, which is in line with market guidance and represents a payout ratio consistent with prior period of 91.4%.Over the past 6 months, we've divested 5 wholly owned assets and reinvested into 2 new joint venture portfolios of convenience retail assets, whilst delivering income and operating earnings growth. We have grown total net income over the 6-month period, with underlying NPI growth at a strong 2.2%. Importantly, this is up from 1.3% 24 months ago as a result of the portfolio curation we have undertaken. In addition to the same-property NPI growth, the increase in net property income was driven by our acquisitions in the second half of FY '19 of Rockdale and Campbellfield, additional NPI due to the completion of the Lake Macquarie Square redevelopment, offset by further divestments. The 24% growth in our net income from joint ventures was driven by the continued investment in portfolio growth, with the acquisition of Bass Hill and Pacific Square Convenience Plus centers and the BP long WALE convenience portfolio, resulting in a $178 million increase in joint venture assets. Finance costs have reduced primarily due to the continuation of the low interest rate environment, the timing of acquisitions and divestments resulting in a slight increase in management fees. The improving quality of their convenience-based portfolio delivered strong same-property NPI growth of 2.2%. This underlying growth, combined with the timing of acquisitions and divestments, finance cost savings and the full period impact of the equity raise associated with the Rockdale acquisition, has resulted in positive 1.7% per unit operating earnings growth for the period. Turning now to Slide 12 and the balance sheet. Our total investment properties increased $247 million over the 6-month period, including our wholly owned and joint venture properties. This is due to the net impact of acquisitions and divestments of $217 million and positive valuation movement of $30 million. We continue to invest in our assets through capital spend, aligned with our major tenant lease extensions and associated refurbishments, improving convenience and amenity for our customers. In addition, we've invested in our infrastructure relating to our energy and waste management strategies, mitigating forecast cost pressures and delivering sustainable outcomes. Net borrowings have increased $84 million due to the impact to the acquisitions over the past 6 months and our capital spend, offset by the divestments over the period. Borrowings will reduce post the divestments of the assets held for sale, of which $55 million settled on the 31st of January. Our key valuation metrics are shown on Slide 13. 53% of the shopping center portfolio is externally valued at 31 December 2019, following 83% of the shopping center portfolio externally revalued at June. During the period, the shopping center portfolio cap rate compressed 2 basis points to 6.16%. When combined with the acquisition of the BP portfolio, the total portfolio cap rate compressed to 6.11%. The revaluation outcomes at December 31, 2019 reflects the quality defensive attributes and the income growth of our portfolio and reinforces the ongoing active asset management strategy. An example of our active management strategy is shown here with the installation of 5,000 solar panels on our Bateau Bay Convenience Plus shopping center on the Central Coast of New South Wales. Slide 14 shows key highlights of our capital management. We continue to have no debt maturing until 2022, with over $114 million of undrawn debt capacity as at 31 December, which has increased following the settlement of Erindale and Carnarvon divestments on 31 January. During the period, Moody's reaffirmed our Baa1 issuer rating with a stable outlook. Our hedging levels of just under 79% supports our weighted average cost of debt in what continues to be a low interest rate environment. We expect that as the portfolio is delevered post divestments, that the 2.7% weighted average cost of debt as at 31 December will return closer to 2.9% at the full year. Our balance sheet gearing of 33.3% sits comfortably at the lower end of our 30% to 40% target range. The look-through leverage of our shopping center portfolio of 36.7% would return to the middle of the policy range following any further divestments over 2020. This leaves our balance sheet in a strong position to continue to enhance the portfolio quality and fund future activity. Now back to Greg to present the operational performance of the fund and our outlook.
Thanks, Christine. And if we can move to Slide 16 and the portfolio summary. The CQR portfolio continued to deliver defensive and dependable performance. We have a well-balanced geographic spread of assets. And when we include the recent acquisitions, our New South Wales exposure has risen slightly, and importantly, our weighting to the Eastern seaboard is now at over 81%. At an operational level, this translates to delivering consistent performance and income growth. During the period, total MAT sales growth was 3.6%, and this was largely driven by our supermarkets, up 3.9%; discount department stores, up 4.3%; and in the specialty space, retail services, up 4.4%. As noted earlier, portfolio WALE increased from 6.5 years at June to 6.9 years during the period, with majors WALE also increasing to 11.1 years. Continuing to increase WALE across the portfolio remains a core strategic focus for the fund, and the chart on the bottom right-hand side of the slide demonstrates this increase over the past 4 years. The portfolio occupancy remains stable at 98.1%. And these results translated into a resilient 2.2% NPI growth, and this is up from 2.1% at June. And we look at our tenant customer profile in more detail on Slide 17. And the defining characteristic of our portfolio is the focus on nondiscretionary, convenience-based everyday needs. And this delivers the solid and reliable nature of our rental income. Nearly half of all rental income is derived from our major tenants, namely: Woolworths, Coles, Wesfarmers, ALDI and BP businesses. During the period, we grew our partnership with ALDI, increasing from 9 to 11 stores across the portfolio. Importantly, when we look at our exposure to any one specialty retailer, it remains limited, and we retain a clear bias towards everyday needs and convenience-based retail, food and services. Now on Slide 18 and looking at our supermarkets into some more detail. And clearly, supermarkets remain the foundation of our convenience-based retail portfolio with 74 supermarkets across our 55 centers now generating nearly $3.5 billion in annual retail sales. Supermarkets across the portfolio delivered strong MAT sales growth of 3.9% over the period, with supermarkets in turnover achieving an even stronger 4.5% growth. The performance of CQR's portfolio of supermarkets is demonstrated with productivity per square meter 12% higher than Urbis industry benchmarks and averages, and this demonstrates the defensive and resilient nature of our portfolio and the dominant position of our centers within their respective catchments. And I'd refer you to Annexure 6 in the pack for more details on this. Demonstrating the portfolio curation undertaken and the quality of our portfolio, the number of supermarkets in turnover increased to 58%, and a further 15% of supermarkets are within 10% of their turnover thresholds. Our portfolio of supermarkets, including those in turnover, continues to be evenly balanced between Coles and Woolworths, coupled with an increasing exposure to ALDI. During the period, we completed a further 3 supermarket new lease extensions, and this further demonstrates our ongoing commitment to preserving and extending our WALE proactively. Over the last 18 months, Coles, Woolworths and ALDI have refurbished 16 stores across the portfolio. This ensures supermarkets within our portfolio continue to provide their best level of customer satisfaction and, in turn, sales performance. And now we'll move to Slide 19 in our specialty tenants. The half year was a very active period for us with a total of 222 specialty leases completed, consisting 99 new leases and 123 renewals. Pleasingly, we delivered strong leasing spreads at 4.1%, with new leases achieving 4.6%, and this is up from 2.4% at June. And additionally, renewals delivered positive leasing spreads of 3.8%, and this is up from a flat spread as at June. Incentives for new leases increased slightly to 13 months due to our strategy of converting fashion-related users into food and service, enhancing the quality of our specialty mix. The depth of demand for food and service-related tenancies has made up a significant amount of leasing activity in the period. This focus on continuing to increase our nondiscretionary tenancies saw our tenant retention rate reduce slightly to 77%. Specialty MAT sales growth improved to 2.1%, and our specialty occupancy cost remain very sustainable at 11.2%. We've included information regards to specialty MAT growth mix by category and geography in Annexure 10 of the appendices. Now on to Slide 20 and sustainability. Sustainability remains a critical part of enhancing our portfolio quality and is central to Charter Hall's approach to property management. Across the CQR platform, we continue to explore opportunities to introduce sustainability initiatives that enhance returns for unitholders. As referenced 12 months ago, we've entered into a power purchase agreement, or PPA, to deliver our solar roll-out program. Today, we announced that we have increased our commitment from 14 assets now to 27 assets. Pleasingly, solar installation is now complete at 9 of the initial 14 assets. On completion of the program, this will deliver some 35% of CQR's total energy needs. Additionally, industrial scale batteries are currently being installed to increase the amount of solar energy consumed on site, reduce grid demand costs and support CQR's climate change adaption plan. These batteries will be installed at an initial 4 assets within the portfolio. Importantly, the PPAs provide electricity price certainty for the operation of our centers at a lower cost than the prevailing electricity market. We also aim to ensure our centers provide support and engage with the communities in which we operate. During the period, we raised nearly $200,000 for drought relief. Partnering with Rural Aid, these funds purchased 27 semi trailer loads of hay and 50 truckloads of water that were delivered across 20 drought-impacted farming and rural communities. Proudly, we also continue our long-term partnership with Two Good. During the period, our team donated 2,000 hours of volunteering to support our -- at the Two Good table campaign, and this raised over $200,000 to support Two Good in their continued efforts in working with domestic violence refugees. Now moving to Slide 22 and today's acquisition and equity raising. We're very pleased to announce that we've entered into an agreement today to increase our investment in the BP portfolio. As previously mentioned, the BP portfolio is a great addition to CQR and is consistent with the REIT's strategy to invest in high-quality, convenience-based retail assets that deliver a resilient and growing income stream for our investors. CQR's commitment is approximately $77 million, and this takes our interest in the Charter Hall managed partnership to 47.5%. This is being acquired from the Charter Hall Group at the same price paid by the Charter Hall Group as at the partnership's creation. To fund the acquisition, we are today announcing a fully underwritten institutional placement of $90 million and a retail unit purchase plan. Following the acquisition, CQR's balance sheet gearing is forecast to reduce to 32.1%. The look-through shopping center portfolio gearing will move to 36.3% and total through gearing will be 37%. Now we'll just look at the sources and uses of funds on Slide 23. New securities will be issued at a fixed price of $4.81. This is anticipated to raise approximately $90 million. Proceeds of the equity raise will be used to fund the acquisition of the BP stake, associated transaction costs and the repayment of debt. Proceeds of the UPP will also be applied to repayment of debt. So looking at the portfolio impact on Slide 24. The acquisition increases CQR's exposure to the BP portfolio, consisting of 225 long WALE convenience retail properties located in highly strategic and desirable metropolitan markets. This portfolio consists of a 20-year average WALE, annual CPI increases and a very efficient triple net lease structure, with no ongoing incentives, downtime or capital commitments. Notably, the increased stake of the BP portfolio will further increase the fund's majors WALE from 11.1 years now to 11.7 years. This now sees BP becoming the third largest tenant customer across the portfolio and will represent 9.5% of the fund's rental income and increases majors income as a proportion of total income across the portfolio to 51.1%. The expansion of BP within the REIT's portfolio as a major tenant further enhances our covenant quality, whilst maintaining our clear bias on high-quality nondiscretionary convenience-based retail. We're extremely pleased with this portfolio-enhancing acquisition. So we'll look at the indicative timetable on Slide 25. It's there for your reference. For Australian investors, the book build will close today at 5:00 p.m. Please contact the joint lead managers at UBS and JPMorgan. Also, on Slide 26, the pro forma balance sheet is there for your reference. And finally, moving to Slide 28 for our summary and outlook. Our continued focus on convenience-based retail will continue to deliver long-term sustainable growth in earnings for our investors. This growth is underpinned by the strength of our supermarkets, coupled with food retailing and nondiscretionary needs and services. We forecast supermarket sales will remain strong, underpinning customer visitation growth and underlying portfolio performance. Going forward, we will maintain our commitment to shape the portfolio, both in terms of tenancy mix, place experience and enhancing the assets within the fund. This is all central to the REIT strategy. So barring any unforeseen events, the REIT's FY '20 guidance for operating earnings is now to grow by 2.3% per security over FY '19, and the distribution payout range is expected to remain at 90% to 95% of operating earnings. And with that, I'll now open the line for any questions. Thank you.
[Operator Instructions] Our first question comes from Stuart McLean from Macquarie.
Firstly, a couple of questions on the further acquisition of the BP portfolio. I'm just wondering what's changed between the allocation in December and today wanting to increase that.
Stuart, so as you are aware, we announced the initial 30% interest in December. That point in time, the acquisition was funded through divestments. We've had very good response from the market regarding the incorporation of BP into the portfolio. So subsequently, we've made an offer to Charter Hall to acquire an upscale interest in the fund, and that's where we are today. And we're able to do that through the placement that we've announced to the market this morning.
Okay. And then just trying to break down the upgrade to earnings. And your presentation materials say that BP portfolio has a yield of 6.6%. Was that true or have I misread that?
No. That's the yield on the equity raise.
Okay. Perfect. So the yield on the equity raise, it sounds then, either way, it's going to be pretty similar to that of the equity yield from the BP portfolio, a little bit of pay down of debt is -- potentially make it slightly dilutive. Is that a way to think about it? Or is it still, in isolation, accretive?
Yes. So I think you'll see on the sources and uses, we are planning to raise more than what the acquisition price is. So that is, from that perspective, there was the deleveraging there.
Okay. And the upgrade is then coming from the lower cost of debt, which is now expected to be 2.9%?
So it's outlined, Stuart, on Annexure 1. We've got an annexure there for your benefit, which will step you through the different component parts to the 2.3% growth.
Yes. But sorry, what's changed between the 2.2% to the 2.3%? I'm sorry, is that FY '19, FY '20 acquisitions of 2.9%?
That's correct. Exactly.
And then the changes thereafter?
Yes.
Okay. Perfect. And then final question. Just on the leasing spreads appear to be quite good, particularly compared to some peers. Is there a impact there from moving towards the food tenants as opposed to the apparel tenants you'd be moving away from?
Yes. I mean there's probably 2 contributing factors here, Stuart. One is the work that we've done on the portfolio construction over the last 2.5 years and the quality of the portfolio that we have today. And second is the composition of the deals that we're doing, moving out of lower-yielding, lower productivity categories into high-yielding, higher productivity categories. So that's driving the underlying spreads that we've been able to report this morning.
Okay. And the tick up in incentives on a 1-month, on a 5-year deal, it's about 2%. What are your kind of effective deal spreads?
So if you look at it, Stuart, one of the reasons why the incentives have ticked up is because of the leasing we've done to food and service-related tenants that have greater capital requirements on establishing their businesses. But what has happened also is the average lease terms for those tenants have increased. So on a percentage incentive of the lease term, it's remained fairly constant.
[Operator Instructions] Our next question comes from Adrian Dark from Citi.
I was interested in the BP acquisition. If you could just talk through, I suppose, the thinking about what fits within CQR's mandate and whether we should be perhaps considering CQR as a buyer of other types of property that perhaps haven't been part of the portfolio previously. And whether there is any sort of target or limit allocation to service stations like the BP portfolio, please.
Adrian, so look, we're very, very comfortable with the weighting of the BP portfolio. About 9.5% of the portfolio's income. We will continue to position ourselves as the leading owner, manager of convenience-based retail across the country. But what I will say is that we're very, very comfortable with our exposure to the very high-quality BP portfolio and covenant at 9.5% of the fund's income.
Okay. Should we be anticipating that to increase over time then? Or are you saying that you're comfortable with it at the current level?
Not at this stage. Not at this stage.
Okay. And then in terms of the decision on funding for the second slice. Obviously, a number of things have changed since December, but was interested in the decision to fund the initial portion with disposals and today's acquisition with equity. Could you just talk through the rationale for that, please?
I mean, I guess, we were always looking at the most effective way to run the portfolio and maintain appropriate levels of growth and the decision to fund the initial tranche through divestments, and the subsequent tranche today via the placement has been the most appropriate way to go in our minds.
So it's a function of a change in the share price primarily? Is that the way to think about it?
Yes.
Okay. Fair. And then finally, on operating conditions, we've seen impacts from some of your peers called out for the coronavirus and/or retail administrations. Could you talk about what you're seeing and what your expectations are for any impact from those items, please?
Firstly, I would say that, I mean, the whole focus of the portfolio of our shopping center properties is around the supermarkets. So the supermarkets drive the performance of the operating portfolio. Fortunately, we haven't seen any impacts to our portfolio from the coronavirus. We've reviewed the January sales results that are very similar to the December sales results. And just from talking to our center teams, we've seen no drop-off in trade during the month of February. With regards to your second question on retailer administration events, the only event that we're working our way through at the moment is Jeanswest, where they have closed 2 stores within our portfolio. And we've re-leased those tenancies already at or above the passing rates.
[Operator Instructions] Our next question comes from Krzysztof Kaczmarek from JPMorgan.
Sorry, it's Richard Jones here. Sorry, just jumped on Krzysztof's line. Just a question about convenience-based retail assets and how you're seeing the environment for those assets in terms of investment demand and, I guess, the flow on impact, do you think, that will have in valuations moving forward, Greg.
Good question, Richard. So I mean we've been pretty active on the buy-side and the sell-side over the last few periods, and it's fair to say we've seen the market dynamic change quite considerably. And there's significant depth in buyer demand for convenience-based supermarket-anchored assets. There's no two ways about it. So that, I think, is flowing through to very stable valuations in our space in the universe that we play. But certainly, the market has changed over the last 12 months in terms of depth of buyer demand for our style of assets.
Is that demand change by dollar value? Can you kind of talk us through how deep the buyer demand?
Yes. I think it has. I mean, yes, we've seen the transaction of an asset here in Sydney, which is a neighborhood convenience asset that sold at above $150 million to a private investor. So yes, I think it has changed in terms of price points and the scale that investors are prepared to go to.
And do you think there's cap rate compression happening?
Look, I think in some instances, yes. We've been able to divest of the assets that we've divested at premiums to book value. So that would imply potentially a bit of cap rate change there. But certainly, I would probably point you to the fact that our view is that the market is stable in our universe.
[Operator Instructions] If there are no further questions -- we've had a last-minute question come in from the line of Peter Davidson from Pendal Group.
Look, just a question about turnover from online sales through the supermarkets. So do you clip that ticket? Are you able to get that in your turnover conversions? And is it turnover delivered to the -- picked up in the store or turnover at home, could you just walk us through that one?
Quite simply, Peter, we do. We reported at the full year results our strategy with regards to expanding click and collect facilities for Coles and Woolworths. And as you know, ALDI don't have an online presence here in Australia. So the online sales component relates to Coles and Woolworths. Look, in the overall scheme of the market for Coles and Woolworths, I think, online makes up about 2%, 2.5% of their total sales volume. And what we're endeavoring to do is to ensure that our assets are the most convenient for our shoppers. And if that includes the incorporation of click and collect into our facilities, that's a good thing in our mind. And yes, we do have the flow-through to percentage rent and the sales attribution from the store.
Okay. And just a second question about your specialty tenants. I mean, if you look at something like Pacific Square at Maroubra, you've got some very good quality specialty tenants there. Are you trying to expand those tenancies sort of to get more of a chain effect from them? Or are they typically local?
Yes, I mean, if you look at part of the strength of the Pacific Square asset at Maroubra is the fresh food tenancies there and mostly their individual operators. But we are seeing the benefit of the improvement in quality in the portfolio and the ability for our leasing team to work across the portfolio. So it's an ongoing piece of work for us, Peter.
The next question comes from Edward Day from Moelis.
Just a quick question on your gearing. I think you previously said you'd like to get look-through gearing down to around 35%. Does that change just given the nature of the BP portfolio investment?
Ed, it's Christine. So post this acquisition, we're looking at a look-through gearing of about 37%. We've also factored into our guidance further divestments. So post those divestments, again, we'd be looking to head towards the middle of that range from a look-through perspective.
Okay. Great. And then just on the specialty leases, the $222 million. Just with the switch from apparel to food and retail services, what kind of percentage of that leasing does that make up?
It's a reasonable part of it, Ed, and it's something that we've been working through for a while. And an example is with the merger of the Specialty Fashion Group and Noni B businesses in recent times, it meant that we had too many [ fee issues ] with that group and they had too many [ fee issues ] with us in some of those larger Convenience Plus centers. So we've worked through those progressively. And it's still a work in progress for us so -- but most of the major licks that we've had in upticks in the spreads has been from the conversion of apparel to food service, and it makes up a reasonably significant part of the new leasing activity.
And so we can expect to see more of that going forward?
Yes.
Thank you. I've had no further questions come through, Greg, so I might pass back to you for any closing comments.
Great. Well, thanks for joining us this morning, everybody. We look forward to one-on-ones in coming days. And please contact either UBS or JPMorgan for further details on the underwrite this morning -- for the placement this morning. Thanks for your time. Good morning.