Argosy Property Limited (ARG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Argosy Property Limited FY '21 Annual Results Briefing Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Mence, CEO. Please go ahead.

Good morning, and thanks for joining us for the FY '21 annual results. Just a quick agenda for today. We'll touch on some highlights, run through a progression of our vision and strategy with an increased ESG focus, talk about the portfolio. Dave will take us through the financials. Then we'll move to a leasing update and an outlook, then into the question and answers. So moving on to the highlights. I guess, it's best described as a less-than-normal year, but we're pretty pleased to deliver what we think is a good result this year around. The increase in distributable income with a good solid rental increase on the year, wouldn't have expected that 12 months ago. NTA up quite solidly over the 12 months. Great to see the third successful green bond issue and the full year dividend increase. So highlights, we think, pretty solid on the way through that. Moving to vision and strategy. Now there's no change of direction here. It's more of a progression towards a more over sustainability and focus. And I'd like to take just a couple of minutes to go through that. Building a better future as our vision is an aspirational focus, and it is founded on ESG philosophy. So from an environmental standpoint, we want to reduce our impact on the environment. We want to redevelop and build more green buildings, particularly focused on embodied carbon and what that means. Create a better, brighter and healthier environment for our tenants, vibrant and inspirational spaces for them, their visitors and their staff. To progress our carbon-neutral aspirations, and we've got some goals on that, which we'll talk about a bit later. And we want to seek, grow and develop the green culture. So we're building a better future from an environmental perspective. From a social perspective, we're looking to increase the engagement with all of our stakeholders and to deliver more than just the financial returns. And for us, that means engaging more deeply with all our stakeholders, improving our tenant satisfaction levels and staff engagement. And the last 12 months have been interesting in those areas where we've actually made some progress even in a COVID environment. We have a greater impact in delivering more meaningful social outcomes and initiatives in the communities. We're working on some social initiatives and to make better use of our staff volunteer days and to maintain a 0 harm focus from a health and safety perspective. So with that, we're looking to build a better future from a social impact and the stakeholder perspective. And lastly, from a governance perspective, we want to ensure that we maintain best practice, high levels of business behavior, accountability, transparency, So building a better future from a governance leadership and business perspective. So I think that we had some big corporate goals to look at for the 2031 period. And we're targeting to get 50% of the portfolio into green assets, working off our green framework. We've got a carbon-neutral target. And it's pretty pleasing to see that we got our first carbon-neutral certification or carbon 0 certification on the Wyndham Street property the week before last. We want to see 50% of our total debt finance being in green and nonbank funding. We're seeing an increase in the scale through acquisitions and green developments that are pretty much already loaded into the pipeline to $3 billion. A target to reduce carbon emissions by 30% by 2021 (sic) [ 2031 ]. And great engagement and a bigger contribution to social initiatives focused on changing lives and saving lives. So F '21, as I say, a less than normal year. We managed our way very carefully through the COVID-19 pandemic -- hopefully, through the COVID-19 pandemic, certainly, thus far. And we've minimized the financial impact on Argosy. And you can't always make everybody happy. But it's great to see that on our most recent survey, our tenant relationships actually improved on average during that year. Very pleased with the resilient operating results, reflecting a good high-quality portfolio of real estate and some good tenant feedback on the way through there. Still managed to continue to progress green developments. But COVID-19 impact on construction was challenging, continues to be so, particularly in the supply chain. So that we think we've got under control, but there are continued surprises in construction. Construction market is somewhat pressed across the country at the moment. The strong leasing progress at 7 Waterloo Quay, that's now 89% leased. That means there's 2 floors to go. We're well advanced on both of those to separate parties and expect that we'll get a lock away in the next 2 months on both of those floors. I've got some more to talk about on 7 Waterloo Quay a little bit later on. Capital management initiatives were delivered on recycling capital into green developments. And we executed on strategic industrial Auckland opportunities in line with our strategy and, most excitingly, the Mt Richmond acquisition that will enable us to put together an industrial estate in the coming years. Portfolio highlights, 99% occupancy; weighted average lease term, 5.5 years; solid like-for-like rental growth at 6.3%. And good cap rate compression, driven principally out of the industrial sector, has enabled a revaluation gain of 8.5%, $158 million over the year. The portfolio stats, the pie charts that we're used to seeing, with the sale of the Lifestyle Centre, we're within those target bands right through now. And at year-end, we had Lifestyle Centre and the Omahu Road Coolstore, both held for sale. Lifestyle has since settled, and Omahu Road is set to settle in September this year. Looking at the sectors. The industrial sector, in particular, we're seeing good growth across that sector during the year. And post year-end, some very sharp sales yields indicate that if nothing else changes, we should expect to see still more growth out of that, albeit those cap rates are starting to get particularly firm. In Wellington, we've got Transmission Gully, which is supposed to be finally delivered at the end of '21. That will allow further opportunity in the industrial sector. And interestingly, in Wellington, we're seeing more owner occupiers in the market in the industrial space. In the office space, clearly, we're looking at a bit of an oversupply in Auckland. There's a lot of sublease space still building more buildings. Our tenancy schedule here is looking pretty tidy, and we're not expecting a big blowout for us. But certainly, the market is dealing with what is probably more than 3 years' supply. In the retail sector, obviously, we've only got 4 buildings left there now. The majority of that is the Albany Mega Centre. And really over the year, anything that has got a tourism retail focus has dropped into a bit of a hole. Medium term, we're focused on structural changes with gray and dark stores still to have a significant impact on the market. Value-add opportunities. More on the big ones a bit later on, but it's about 17% of the portfolio. We did defer a couple of projects with the pandemic. They are looking increasingly positive, so likely to be introduced back in the next 6 to 9 months. Of the properties on the list 5 and 1-3 Unity Drive, that is in progress with Alto Packaging will be moving in on the 1st of June into the new building. They're already in 5 Unity. So we're basically putting those 2 together over a single lease option. It's a $2.1 million spend with about a $400,000 value lift and a 4.4% churn. 15 Unity and 133 Roscommon, they're both leased, but they're bare land. 25 Nugent Street is a bit further down the line for us. 224 Neilson Street, I think most people will be aware of that. It's a heavy industrial site, mass big site in Onehunga that is currently leased by Steelpipe. We expect that they will stay for the next 12 months. 8-14 Richmond is -- Mt Richmond opportunity and we're well advanced on our planning for that site. We're fielding some good tenant interest and looking to have a carbon-neutral or carbon 0 development at that site. 101 and 105 Carlton Gore Road, they are the 2 properties that we deferred and limited due to pandemic. And we're still working on the timing for those. 8-14 Willis Street and 360 Lambton Quay, I'll talk about it a little bit later on, but that's still progressing. And longer term, not on the list, of course, we've got the 80 Favona Road in Mangere, which is the general distributor central warehouse next to Goodman's on the same street, on same side of the street. So looking -- turning then to the Willis Street development. As you see, we've got some additional costs in there. The rate of return at the other end is still 7.2%, so that's still pretty solid. The development is still profitable. End value has gone up and -- but costs have gone up a little bit more than that. So out of that, we've added an extra floor to the top of the office tower, repositioning of the retail space so that what used to be Stewart Dawsons Corner was going to be 3 levels of retail is now only ground floor retail, and the rest of that is repositioned to offices. We've had, as a result of that, additional incentives with tenants. But we got a bit of additional counsel costs, procurement costs as a result of the pandemic and having to make some changes with that. Obviously, the COVID-19 delays, we spent a little bit more on convert -- on maximizing the Green Star focus to ensure that we're on target to hit that 6-star rating. And we're still building, of course, to an IL3 or 130% of structural code. The -- obviously, any delays carry with them costs and funding costs on the way through, together with insurance costs and other holding costs on the way through. So the timing costs a bit more. Still making about a $10 million profit or rather it is making about a $10 million profit and the rate of return pretty solid at 7.2%. The other green developments, I mentioned 101 and 105 Carlton Gore Road, getting increased interest in those assets at the moment in spite of the level of oversupply of office space in Auckland, particularly in the sublease space. It looks like, as I say, next 6 to 9 months, we should be able to get those back on the road. Turning to 7 Waterloo Quay. And you'll see that we've got the new color scheme with the façade works showing on there, and you'd be pleased to note that it does result in an aesthetic improvement for the property. You might argue that it would be hard to make it worse, but it's looking a lot tidier or will be looking a lot tidy when that work is finished. So as mentioned, the building is now 89% leased with a WALT of 8.8 years. That will be improved with the 2 leases we're working on at the moment. So over the ground floor in Level 1 or park ground and Level 1, we've got New Zealand Post; Levels 2 and 10, Department of Internal Affairs; Levels 3, 4 and 5, Kainga Ora; and Level 6, 7 and 8 is the Ministry of Housing and Urban Development. Level 11, we've just confirmed the Teachers Council there on a new 9-year lease with a 1 June start date. And as I mentioned, we expect to get those last 2 floors away being Level 9 and 12 in the next couple of months. We got a nice Christmas present with the settlement of the insurance claim on this building with NZI and QBE and received $23.5 million plus GST as a final settlement just immediately before we knocked off for Christmas. So overall, that was $65.8 million in claims, with claims that we have paid before that and deducting the $4.9 million deductible. That was a $48.7 million payout finally, giving us a rate of about 80%. The additional work to the façade of the building that we highlighted at the half year, as expected, cost $15.5 million. That budget is intact. The program is intact. And we're expecting to have that completed in FY '22. The annual revaluations, there's no change to those following the audit. We've got some data on what that looks like, but clearly, cap rate firming and Auckland, the largest -- sorry, industrial property cap rate firming and Auckland are the largest gainers. But even our large format retail gave us some growth. And whilst retail overall has shown negative rental growth in the last 6 months, our large format retail has been positive by about 2.2%. I'll hand over to Dave to run through the financials and will come back and talk about our leasing initiatives.

Thanks, Peter. So first off, I look at the top line. The last year, gross profit income was $103.3 million. And we had very strong like-for-like rental growth in the period. There's some rent review detailed in the appendix, but to summarize, we had 2 large market reviews, one at Stout Street and one at the [indiscernible] during the period, and that really drove this. And if you take these out, the annualized market rent reviews was still a very healthy 3.3% for the year. The vacancy and leasing up were positive. Smaller vacancies were more than offset by leasing up at 99 Khyber Pass Road and the Citibank Centre. 7 Waterloo Quay was strongly positive despite receiving less loss of rents insurance this year. This reflects the leasing up of 8 floors that are built into the Crown. And as Pete mentioned, the Teachers Council lease starts next month on Level 11. So that's good news and to drive this next year. Acquisitions contributed $1.5 million. And this is mainly due to 224 Neilson Street in Onehunga, which we bought back in January 2020. The recent acquisition of the Mt Richmond Properties will feed into this next year. Development income was driven by the completion of the development, the 5 Green Star development at 107 Carlton Road and the 12-year lease to Kainga Ora, which commenced in March 2020. Divestments included our former property in Whangarei, which we sold in December '19; and the Corner of Wakefield and Taranaki Streets in Wellington, which we sold in September of last year. On the rental rebates and deferrals, due to COVID-19. There was a $300,000 [indiscernible] deferrals in this number. And 2/3 of that will reverse in FY '22. 55% of the rebates were retail, 26% office and 19% industrial. So we all hope this doesn't drag on income next year. There was $10 million increase in the top line in FY '21 to $113.6 million. Next slide shows our profit for the year. As noted in the previous slide, gross rental income was strongly up. Property expenses were also up, mainly due to nonrecoverable insurance and rates at [indiscernible]. Administration expenses were up, and a few things to note here. Provision for holidays increased by $180,000, and that was mainly due to COVID-19 and people taking lease holidays. We increased the provision for doubtful debts in the year by $150,000. And we also paid a special levy to the Property Council during the year of $100,000. Salary increases and the annualization of previous year's hires made up the balance. The MER ratio for the year was 58 basis points, and that's down on 61 basis points last year. Interest expense rose from last year, and that's mainly due to lower capitalized interest this year as development is completed. Gains on disposal, mainly from the sales of 180 Hutt Road in Wellington and 960 Great South Road in Auckland. We recognized $24 million in insurance receipts in the period. $2 million was allocated to loss of rents, $20 million to material damage recoveries and $2 million to expense recoveries. It's great to have this long-running insurance claim behind us now. Profit after tax was $242 million compared to $119 million last year. On to distributable income. So after adjusting for revaluation gains, derivatives and insurance proceeds relating to reinstatement of expenses, gross distributable income was $71.6 million or $0.0861 per share. Current tax was lower than last year, reflecting additional tax depreciation on buildings and depreciation of 7 Waterloo Quay. And together, that's an additional deduction of $13 million in FY '21. Net distributable income was $67.7 million or $0.0814 per share compared to $0.072 per share last year. And if you adjust for the forfeited Albany Lifestyle Centre deposit, which was unusual, net distributable income would be $0.0759 per share, which is still a very healthy increase on FY '20. Next slide is AFFO. If you run through the various AFFO adjustments, capitalized tenant incentives and leasing costs are up. And that's due to leasing up at 7 Waterloo Quay and also 107 Carlton Gore Road. Maintenance capital is down, and that's mainly due to COVID-19. The last items were repeats to façade at 7 Waterloo Quay, $1 million there; a new roof and office re-clad at 3 Unity Drive, a new chiller at 147 Lambton Quay and roof and cladding work at 106 Springs Road. Audited AFFO was $60.4 million compared to $51.8 million in FY '20. This represents $0.0726 per share compared to $0.0627 per share last year. Dividend payout ratio to AFFO was 89% compared to 101% last year. If we exclude the forfeited deposit in the 7 Waterloo Quay façade, the adjusted cents per share becomes $0.068 per share, and the payout ratio increases to 95%. A quick look at the movement in the investment properties for the year. The acquisition was the Mt Richmond Properties, which Pete talked about. Capitalized costs were $64 million, majority relating to the projects at Willis Street, $40 million; and 7 Waterloo Quay, $11 million. The transfers are the Albany Lifestyle Centre coming back in from held for sale last year and then going back out again. And we sold 4 properties during the year with a book value of $70.3 million. So if we deduct the right-of-use asset, which relates to the ground lease here at 38 Market Place, probably just sneaks over the $2 billion mark year in. Next slide, moving to NTA. There's an 18% increase in NTA for the period. And the main driver as usual was due to the revaluation gains we recorded in FY '21. The insurance proceeds were also helpful and netted $0.03 per share. And NTA at 31 March 2021 was $1.53 per share. Next slide. Balance sheet remains in a strong position at year-end. We were sitting comfortably in the middle of our target gearing band at 35.9% compared to 38.8% last year. Most people will know we've, subsequent to balance date, settled on the Albany Lifestyle Centre. And as a result of this, gearing has reduced to circa 33.2% at the end of April. Next slide, interest rate management. The weighted average interest rate declined further in the period to 3.69% from 3.95% at March '20. Interest cover ratio also improved markedly. And one of the main reasons for this is the drop in capitalized interest, which is included as interest expense calculation. I expect there will be a further boost to this ratio when Willis Street is completed next year. Fixed rate borrowing remained steady at 51%. And the weighted average duration of payer swaps is 3.8 years. The average rate of payer swaps is 3.85%. And as I mentioned at the interim, there's some quite nasty ones remaining, which will all roll off by the end of FY '25, providing a good boost to income, provided interest rates remain low. On to our debt profile. Pete said we rolled out our third green bond in October last year. And this results in us canceling some bank debt and increasing tenure. Current percentage of bonds to total debt facilities is 40%. We also refinanced part of our bank facility in March of this year. $240 million was refinanced at very attractive margins, in fact, by far the sharpest margins I've seen. Yes. So the end result was to increase diversification and stretch the tenant to 4.2 years at 31 March. On to dividends? We announced today that our fourth quarter dividend will be $0.016125 per share and will be paid on the 23rd of June and the record date of 9 June. As mentioned previously, the full year dividend is $0.0645 per share, which is a payout ratio of 79% of NDI and 89% of AFFO. And if we adjust for the forfeited deposit in the façade, payout ratio is 95%. Based on current market conditions, we expect the full year dividend for FY '22 of $0.0655 per share. Last slide from me on our new dividend policy. A bit of history here, back in 2017, we made a commitment to move to an AFFO-based dividend policy in the medium term. And we described that as being 3 to 5 years. In other words, we needed time to grow into AFFO coverage. In the intervening period, we've done fairly well in terms of our payout percentages, as you can see from the chart, certainly a lot better than we expected at the time. We now need to draw a line in sand and commit to a new policy. The key criteria for investors were determined to be, it must be cash covered. We want to try and avoid volatility if we can and to keep it simple. The Board has settled on a new policy that provides for a payout between 85% to 100% of AFFO. And this policy will enable us to achieve the key requirements of investors, we believe. The policy will apply from next year, that's from April 1, '22. And the reason for this is pretty simple. We've got a significant maintenance capital project being façade at 7 Waterloo Quay, which is rather unusual in scale. At this point, the Board wants to look through this project into FY '23. And the dividend paid will fall within the new policy. I'll pass you now back to Pete to talk about leasing.

Thanks, Dave. Just having a look at some of the strong leasing outcomes during the year. Obviously, leasing has been somewhat of a challenge over the year, and it's worth observing that leasing inquiry has picked up again in the last month and almost, the guys are telling us, back to pre-pandemic levels. That applies to domestic-related businesses, businesses that are headquartered offshore, particularly in the states, are still somewhat reticent. So we're getting a shorter-term initiatives from them. Of those notable transactions, we've talked about the Teachers Council. Obviously, that was a good one for us. The renewal of the Iron Mountain lease -- industrial lease in Wellington, that was our largest industrial expiry. So it was good to get that one locked away. Renewal at 39 Market Place for NIWA. Parliamentary Services, a new 3-year lease, and we're already working with them on an extension to that term. And Van Lines 3-year renewal in Barnes Street. Peter Baker Transport, extension for 1 year, and again, we're really working on them on a longer-term option going forward. So overall, and a less than normal year, a pretty good leasing result. Again, if we look at the lease expiry profile, relatively stable over the medium term, and I don't need to spend a lot of time on this except to note that with our current negotiations and play would indicate that FY '22 is going to demonstrate some leasing resilience across the portfolio. And we're not expecting to have any particular difficulties going through with that. I'd note that our largest single expiry in the next 10 years is in March '27, and that's the Stout Street building with MBIE. And current feedback is they've absolutely no intention of looking at leaving that building at that time. So we'll keep working on that. Looking at the market update. I've already picked up on most of this. This is my way. The -- in the industrial sector, the net absorption continues to drive additional supply. Land prices are being pushed through -- excuse me, a limit of land supply availability, both Auckland and Wellington. I noticed there'll be some more opportunities for industrial land in Wellington once the new motorway system is open. Getting good rental growth, and some of that rental growth you will see has surprised a little on the upside based on what we had projected this time last year. Our vacancy remains very low and, with the industrial sector, very little effect from the pandemic. I think I've noted earlier on, particularly in Wellington, we're seeing an increased trend to owner occupiers, people wanting to run their own space in that sector. In the office sector, Wellington market continues to show some good solid demand. There's quite a bit of new stock that is likely to hit the market in the next 18 months to 24, and that may have an impact. As a result, we're pretty comfortable that we got our leasing done at the right time, and we're bridging through that period. That was always what we expected to see. And that's why we pushed the Waterloo Quay project to get it on the market when we didn't have much competition. In Auckland, I mentioned we're looking at an oversupply, basically a lot of sublease space available in the market and quite a bit of new space being developed. So you're really looking at 3 to 4 years of excess supply sitting in that market. And we'd be looking to see some good solid net absorption figures to pick that up. On the positive side, I mentioned that leasing inquiry is stronger. We're actually getting good rentals with some of the leases we've done, higher than expectations. And the traffic volumes coming into the city, particularly on Monday mornings, are well above now the pre-pandemic levels. So there is a reasonable chance that net absorption could surprise on the upside. Our large format retail portfolio, we've noted that the rental growth has been negative for the sector over the last 6 months, but that is more retail in general. The large format retail for us has still given us about a 2.2% increase. Realistically, anything in this retail sector that has a worth of a tourism reliance is not in great shape. So we are looking through to a structural change in the retail property market, which will see an increased focus on semi industrial facilities with showrooms and distribution facilities. And then we're expecting to see more gray and dark stores that will have a structural impact on retail across the market. So looking ahead, one of the things that we've noticed and that has come out of the post-pandemic discussions with tenants is an increased reliance or focus from tenants on the quality of their landlord. Tenants are probably more focused now on the sort of landlords they've got than they have been in my time in the market. So no real secret, the current domestic and global economy still looks pretty challenging, and it's going to take a while before we see countries open for tourism in the near term. I know there was some discussion on Hosking Breakfast this morning about how we could possibly achieve our vaccination rates that are targeted in New Zealand. Low monetary policy settings could rise in the interim, and -- albeit we're not seeing a lot of that in New Zealand just yet. But the -- obviously, property and income stocks will be heavily affected by a change in the interest rates. Against that, as I've already mentioned, sales that we're seeing go through in the last couple of weeks, one in particular, have been particularly firm and cap rates and likes of return. Focus areas for us in FY '22 include the normal addressing key lease expiries, leasing up vacancies and our construction -- continuing construction in the green development pipeline. Much of that is already looking pretty positive for FY '22. So we're optimistic for the year ahead. Property fundamentals are still looking pretty robust and particularly well into an office -- government-focused office, so at the northern end of the CBD. And Auckland industrial continues to present attractive dynamics of demand, but very expensive if you want to try and acquire them rather than develop them. So in summary, the excess office supply in Auckland, with more to come, is likely to have an impact on Auckland offices. Tourism-based retail is still some distance away. I won't run through the appendices, but we're happy to take any questions.

[Operator Instructions] Your first question comes from Arie Dekker from Jarden.

Yes. Just firstly, on the development side, obviously, you're getting close to finishing the current program. I mean just looking at the offices first on the value-add list, you noted the progress you're making. Clearly, Carlton Gore is close to sort of coming to end of term. So just with regards to that progress on the conversations with tenants there, what should we sort of expect in terms of level of redevelopment based on the feedback you're getting? And what are you sort of planning to progress over the next 6 to 9 months, particularly at those 2 Carlton Gore sites?

Yes. Good question, Arie. Probably I should have cover that off. The current expectation is that we would see very similar developments with those 2 buildings to the one we just completed for Housing New Zealand [indiscernible], so in that $10 million to $15 million type upgrade with a green focus. At this point, that's what we'd expect to see.

Yes. And in terms of the immediate one being 105 Carlton, is it more likely -- like do you envisage that sort of kicking off in this financial year? Or do you think there could be some rollover of the lease in the first instance?

Okay. I do expect that we'll get a short-term rollover of that lease because clearly, timing is not working for the tenant there at the moment. So they'll need our help with that. But at this point, I'd still expect to get commencement date just at the end of the financial year, but before we roll over.

Great. Yes. Obviously, you're reviewing the portfolio regularly. You've sort of divested a bunch of noncore. It doesn't look like there's anything sort of sitting in that bucket at the moment. Just as you look across sort of, I guess, with a focus on the office portfolio, have you sort of considered moving any of those assets into noncore? Or do you expect to continue to own that office portfolio as it is over the medium term?

Yes, Arie, I suppose, firstly, we -- every quarter, we review every property in the portfolio. So yes, we've reviewed. At this point, we're not expecting to be adding anything into the noncore focus, but subject to review every time we roll it around.

Sure. Just in terms of Willis Street, I think you called out around $7.4 million of net rental. Obviously, substantial amount of that is let. Can you just sort of talk about what still needs to be finalized by way of leasing on that development? Yes, that would be helpful.

Sure. Basically, it's the retail levels. So the ground floor retail is what needs to be dealt to. On top of what was Stewart Dawsons Corner, we've got 3 levels of stuff that Willis is going to be predominantly retail is now going to be office. And that is still to go.

Yes. So those 2 office floors as well?

Yes.

Okay. Great. And I mean, approximately how much of the net rental is accounted for across those 3 floors?

Pete, can you add on that? I'd come back to you on that one, Arie, I haven't got that number right here.

Sure. No. That's fine. And then just in terms of the remaining -- obviously, you had a lot of tenants moving into 7WQ during FY '21. And there's sort of a couple of floors remaining, as you mentioned, and you're close to locking those away. You called out the FY '21 incentives associated with 7WQ. I mean what sort of cash incentive in FY '22 is likely in squaring away those last 2 floors? But presumably, it's substantially less than the amount you called out in FY '21.

Yes. The ratio, though, is largely the same, Arie, in terms of months per year of lease and net rental. So the net effect of rental transaction is almost identical. Given that unsurprisingly, your primary tenant is the Crown and they know exactly what happened on the other levels in the building, it's kind of hard to do a different deal.

Yes. Okay. So pro rata-wise, it will be similar.

Yes.

Yes. Okay. No, that's cool. And then just final one just on maintenance CapEx. It looks like that's sort of taken a little but longer to sort of fully kick in. Do you expect to spend that remaining $14.5 million in FY '22? And then, I guess, just in terms of across the rest of the portfolio, what should we expect on the CapEx side?

Yes. I think -- I mean the completion date for the façade is February '22. And so we've got $14.5 million to spend this financial year. So yes.

Yes.

And the balance would be similar -- we expect to be similar to previous years around the $5 million mark.

Yes. So the low maintenance CapEx this year was occasioned by uncertainty and then lockdowns and ability to get contractors and supply chain through the construction industry.

Your next question comes from Rohan Koreman-Smit from Forsyth Barr.

Congratulations on a solid result. Just a quick one from me. Just looking at your value-add pipeline, and I'm guessing you're doing feasibilities pretty regularly on this and given what's happened at Willis Street with the yields coming down, are you seeing similar things with strong construction cost escalation impacting and compressing yields on your other planned feasibilities?

Yes. Fair. We're certainly seeing the compressing yields on completion. That's a given. Interestingly, the first time we got value was acknowledging that a properly constructed quality green investment is going to give you a firmer cap rate than one that is not green. So that's the first change there. In terms of construction price escalation, we're only seeing what we have projected at this point. The increased costs are predominantly related to supply chain itself. I don't think that [ Chippy ] is getting a lot more in his pocket at this point. But supply chain is certainly an issue. We overall have limited that impact at this stage by being very careful on the material selection that we're putting together and being well advanced and well planned. So I think some of the stuff that we have seen increases with in the last 12 months, were put down to COVID, but realistically is because of that level of uncertainty, people didn't know what was going to happen and didn't have the time to plan accordingly. We now do have and so we're mitigating a lot of that effect.

Okay. And just -- sorry, circling back to Carlton Gore. You just made a comment about at 105 the tenants lease expiry maybe not lining up or you're potentially rolling that over. Are you expecting them to stay or sign on with a new -- to the new development that you're planning there?

That's not our central theme at the moment. It's possible, but our view is that would be unlikely. We expect them to go -- to leave the building and to go to some of the sublease space that's available in the market. They have got a right of renewal, so it's not certain. What we're expecting is a short-term extension, 3 to 4 months, giving us a commencement on site early in the new year.

Perfect. And then the one at Richmond Road redevelopment there, that's got a bit of a longer WALT. So that's probably a longer-term opportunity? Or is there some kind of development you can kick off near term there as well?

Yes. The expiries on that site are phased. So that means that over the next 12 months, we'll have our first opportunity to start putting something together. And we do have some interest that we're working on, on that site already. So our big focus there is to ensure that we can hit carbon 0 over the whole site. And that work is really well advanced. And interestingly only, it's getting quite a good [ bid buying ] from potential tenants in the market.

Your next question comes from Craig Tyson from ANZ.

Congratulations on a solid year results, given these circumstances. I'm particularly interested on Page 8, the big corporate goals. I suppose it's really good that you've put them out there, and it's aspirational, and I think it should be congratulated. I suppose I'm really, as an investor, really interested in the sort of the -- whether you've got any AFFO growth goals or DPS growth goals as something that management are working towards, and the Board has signed off on? Have you got anything that you could share with us in that area?

We have solid AFFO and earnings growth goals definitely. I don't know if we can share it with you. But certainly, we plan out 5 years, and we have very solid aspirations in that area. But we can't really share them, I think, on this call. But definitely, we have earnings goals. And I think we've stated many times in our annual report that our modus operandi is consistent in measured dividend growth.

Right. But is there a target? I mean is it 2% to 3%? I mean it's all very well, saying we want to get bigger, which I think is $3 billion, which is a 50% increase in size. We've had 100% increase in size over the last 10 years. What does that actually deliver in terms of EPU growth and AFFO growth?

The $3 billion comes out of the pipeline of development that we've got -- we're aspiring to complete, Craig. So that delivering as a good return in each of those cases. Quite clearly, it's smarter for us to develop our own assets than it is to acquire in the open market at the moment, a completed asset. Two reasons: one, you're paying quite a bit to [indiscernible]; two, when we develop it ourselves, we find that we end up with a much better quality asset and we have less maintenance costs going forward.

Your next question comes from Shane Solly with Harbour Asset Management.

Well done and a really solid result in what was a very tough period. So your team has done a great job. I was actually going to ask something similar along the tunes of getting to $3 billion is pretty easy if you go and pay up for everything out there. So I'm glad to hear that's not the plan. There's lots of other people doing that already. Can I just pick up on -- you talked a little bit about this, I guess, surplus and Auckland office in particular. I'm just interested in terms of the -- and during the period, the tenant incentives that were paid away for leasing. And what you think those tenant incentives are going to creep up to? And then period -- obviously, on my focus is on office, but happy to talk about the wider portfolio as well. What are you seeing in tenant incentives?

Shane, I've gone through earlier and predicted that incentives would increase, and that would reduce our net effective rentals. We haven't actually seen that yet. Obviously, if you're kind of Manson, then you're paying a bigger incentive. That's -- their model is somewhat different. But the pressure in the market is not there yet. And we've sort of been a bit surprised it doesn't seem to -- haven't pushed out. So It's a tough one to answer at the moment, but I'm not seeing the change just yet. I would expect that there will remain pressure on it. At the moment, we're still sitting at about 1 month per year of lease, won't be surprised to see that get to 1.5.

Okay. So how much sublease space do you think you've got in your portfolio? And then particularly, I'm obviously [indiscernible] office, but -- and I'm interested in whether you're actually seeing that sublease space come to market or being with your own?

Well, it's interesting. Across the market, there's quite a bit for us. We've only got about 680 square meters of sublease space that we're working with the tenants to try and resolve. And we're getting good -- some good successes there on the way through. But in the market in general, there's quite a bit of space. And just anecdotally in the last week, I heard that some of that is being removed. So -- not -- removed from listing. Don't know whether that means they're reoccupying or whether there's an occupier for being removed from listing.

Okay. And look, finally, just well down, really appreciate the move to an AFFO-based distribution. So I know it's been a long time in the making, so good to see.

Your next question comes from Jeremy Kincaid from UBS.

Just one from me, and I may have missed this. Are we -- should we expect any more COVID-related abatements into FY '22?

Well, I wouldn't think so.

We're not expecting it at the moment. Well, incidentally, [indiscernible], congratulations. Not expecting to at the moment. And where we have a Level 3, the impact across the portfolio is minimal. We have a Level 4, it's more severe, not expecting Level 4s, so we're not expecting any material changes.

We haven't budgeted.

Your next question comes from Nick Mar from Macquarie.

Just on 8 Willis Street, could you just spell out the exact increase in costs from the last time you updated us on that project?

I can't actually say a hell of a lot more than I've already mentioned in the press. There's an extra floor, the repositioning of retail to office, some additional incentives, additional counsel and changing costs.

Just the absolute dollar, total amount from what you reported at the half year to what you reported today as the total cost.

Sum of all those parts is $26 million.

Okay. That's great. And then just in terms of FY '22, with the façade CapEx, will you be counting all of that as maintenance?

Yes.

Hard not to call it maintenance CapEx, Nick.

Yes. I mean, basically, it's just falling concrete and fixing leaks in the window and repainting. So.

It will look better when it's finished, but it's not going to add any income.

[indiscernible]

So what do you think your AFFO payout ratio will be for '22 based on that?

Well, I can't -- we don't really want to disclose it on this call. But it will be less than that, it will be more than 100%.

Okay. So why do you feel the need to grow the dividends when the dividend is not sustainable on an AFFO basis and you continue to run your Dividend Reinvestment Plan?

Well, I think we sort of canvassed this topic with a lot of investors. And the key thing we got from that is, one, they don't want volatility. And you really got to -- you've really got to look through this because the scale of the project is so significant that, and many of you've seen yourself, the last 5 years, our maintenance capital is right around $5 million mark. And certainly in our budgeting going forward, that's a very similar number with us. We've got sort of this unusually big project, which the Board had determined to look through into FY '23. So from FY '23 onwards, we will be AFFO covered [indiscernible]

Your next question comes from James Wallace from Craigs Investment Partners.

Yes, Just on my follow-on in terms of the movement to AFFO dividend policy. Just kind of wondering what was the thinking behind the range that was actually decided?

Yes. Well, 100%, the top end is pretty clear, I think. The bottom end was to give us just a little more wiggle room or more of a buffer, so we can sort of manage the volatility aspect of payouts. That's the reason we chose 85%. Just gives us a little bit of a range to manage things like maintenance capital and incentives and leasing costs and so on.

[Operator Instructions] We now have a follow-up question from Shane Solly from Harbour Asset Management.

Can you just give us a bit of a range on maintenance CapEx, basis points, through the cycle? I appreciate you've given us an absolute number. But what's a range in terms of basis points? Or how do you guys...

We'll be running at around 30 basis points. Yes, 30 basis points.

Okay. So your come toward doing that going forward?

Yes.

Sorry, 30 to 35 or 30?

25 to 30.

Okay. 25 to 30.

[Operator Instructions] There are no further questions at this time. And this does conclude our conference for today. Thank you for participating. You may now disconnect.