Region Group Navigates Market Headwinds with Strong Tenant Retention and Capital Recycling

• AFFO guidance maintained at 13.7 cents per security
• Statutory net profit of $81.8 million, reversing prior loss
• Portfolio occupancy stable at 98.1% with tenant retention improving to 85%
• Completed $196.8 million capital recycling program reinvesting in higher-yield assets
• Sustainability initiatives include $9.6 million net zero investments and solar projects

Steady Financial Performance Amid Market Challenges

Region Group has reported a stable financial performance for the first half of FY25, maintaining its AFFO guidance at 13.7 cents per security and delivering a statutory net profit of $81.8 million, a significant turnaround from the prior period loss of $35 million. Funds From Operations (FFO) per security remained steady at 7.6 cents, reflecting resilience in the company’s core retail portfolio despite ongoing market headwinds.

The company’s portfolio occupancy held firm at 98.1%, with tenant retention improving to 85%, signaling strong tenant relationships and demand for convenience-based retail spaces. Average specialty leasing spreads moderated to 2.1%, down from 4.0% in the previous year, reflecting a cautious but stable leasing environment.

Strategic Capital Recycling and Portfolio Enhancement

Region Group completed a $196.8 million capital recycling program, divesting non-core, lower-yielding properties and reinvesting proceeds into accretive opportunities, including $138.5 million in acquisitions such as the strategically located Kallo Town Centre near Melbourne. The company also co-invested $36.8 million in the Metro Fund, enhancing its exposure to metropolitan neighbourhood centres.

Capital expenditure of $43.2 million was directed towards centre repositioning, developments, and sustainability initiatives, with projects underway at multiple centres and completion expected by mid-2025. These investments aim to improve asset quality and drive future rental growth, supporting the company’s medium to long-term AFFO growth target of 3-4% per annum.

Sustainability and Tenant Partnerships

Region Group continues to advance its sustainability agenda, investing $9.6 million towards net zero targets, including a 9.4 MW solar PV project and pilot battery installations. These initiatives are integrated into executive incentives, underscoring the company’s commitment to environmental responsibility.

Partnerships with anchor tenants remain a cornerstone of the portfolio’s resilience, with over 55% of supermarkets generating turnover rent and anchor tenant WALE (weighted average lease expiry) at 6.6 years. The company is actively collaborating with tenants to enhance e-commerce facilities and customer experience, further stabilising income streams.

Outlook and Market Positioning

Looking ahead, Region Group anticipates a full-year comparable NOI growth of 3%, supported by limited retail floorspace supply relative to population growth and a resilient Australian consumer base. The company’s high level of debt hedging (94% fixed or hedged in FY25) mitigates interest rate risks, providing earnings stability.

Region Group remains disciplined in its acquisition and divestment strategy, focusing on convenience-based retail centres with strong non-discretionary tenant exposure. The company’s funds management platform, including the Metro Fund, offers additional growth avenues through institutional partnerships.

Bottom Line?

Region Group’s disciplined capital recycling and tenant-focused strategy position it well to navigate market uncertainties and deliver sustainable growth.

Questions in the middle?

• How will Region Group balance capital recycling with new acquisitions amid evolving retail market conditions?
• What impact will ongoing centre repositioning projects have on rental growth and tenant mix in FY26?
• How effectively can the company leverage its sustainability initiatives to enhance asset value and investor appeal?