Centuria Industrial REIT (CIP.XA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Centuria Industrial REIT FY '25 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Jesse Curtis, Centuria Head of Funds Management. Please go ahead.

Good morning. Thank you for joining Centuria Industrial REIT's 2025 Financial Year Results Presentation. My name is Jesse Curtis, Head of Funds Management for Centuria Capital Group. Also presenting today is Grant Nichols, CIP Fund Manager; and Michael Ching, CIP's Assistant Fund Manager. Also present in the room is Jason Huljich, Centuria's joint CEO; and Tim Mitchell, Centuria Capital Group's Head of Investor Relations. Starting on Slide 3. I would like to commence today's presentation with an acknowledgment of country. We are joining you from the lands of the Gadigal people of the Eora Nation. Centuria manages property throughout Australia and New Zealand and pays its respects to the traditional owners in each country, to their unique culture and to their elders, past and present. Turning to the domestic industrial sector. The outlook for Australia in urban infill industrial real estate remains extremely favorable with a national 2.8% vacancy rate, constrained supply and persistent tenant demand tailwinds. CIP's portfolio construction provides exposure to Australia's strongest performing markets with an 85% weighting to core urban infill markets. Further, CIP's average tenancy size of approximately 7,500 square meters aligns with the deepest pool of tenant demand. These characteristics underpin the opportunity to capture significant rental growth. In today's presentation, Grant and Michael will provide an overview of CIP's financial year '25 performance, analysis of the operational performance of the vehicle, an update on our development projects and pipeline, a summary of market conditions and conclude with an outlook and guidance statement. Moving to Slide 4. Centuria Industrial REIT is managed by Centuria Capital Group. Centuria has over $20 billion of assets under management and CIP is the largest fund managed by the group. CIP unitholders benefit from deep real estate expertise across the Centuria Group, including a fully integrated property, facilities and asset management platform, and in-house development capability. They also benefit from synergies from being part of the group's wider industrial real estate portfolio, which exceeds $6 billion, and strong alignment as Centuria is CIP's largest unitholder with a 16% co-investment, ensuring the managers' interests are strongly aligned with yours as unitholders. On to Slide 6. CIP's long-standing vision and strategy remains unchanged: we aspire to be Australia's leading domestic pure-play industrial REIT with the primary focus of delivering income and capital growth to investors from a portfolio of high-quality Australian industrial assets. Over the long term, we have executed on our strategy, differentiating CIP by growing a portfolio focused on Australian urban infill industrial assets that are relevant to our tenant customers, generating a greater level of tenant demand through cycles. These assets deliver superior returns to unitholders through favorable demand dynamics in markets with limited supply. We believe that the value of the portfolio is not properly reflected by the current trading price. The results that Grant and Mike will present today reflect the benefits of this urban infill strategy, supported by the deep real estate capability of the broader Centuria Capital team to drive value for unitholders. I will now hand over to Grant.

Thanks, Jesse, and good morning, everyone. I'll start on Slide 7. CIP provided another strong performance in FY '25, delivering significant re-leasing spreads and solid NOI growth, enabling forecast FY '26 earnings growth. During the year, CIP divested $140 million of assets at an average 12% premium to book value. This significant premium once again highlights the disconnect between CIP's portfolio value and its trading price, which is currently at around 20% discount to net tangible assets. Further, the premium is indicative of the strong investment demand for Australian urban infill industrial real estate, which provides CIP substantial opportunity for future valuation growth. The FY '25 divestments are not a one-off. In FY '23, CIP has divested over $250 million of noncore assets at an average 8% premium to book value. As a result of this ongoing disconnect between CIP's trading price and its divestment metrics, today, CIP has announced a $60 million on-market buyback. Looking ahead, CIP has provided FY '26 FFO guidance of up to 6% higher than FY '25. Given the significant under-renting that persists across the CIP portfolio, there is significant earnings upside for CIP unitholders, which we've detailed on Slide 8. We believe the CIP portfolio is approximately 20% under-rented on average, and this is the under-renting that is yet to flow through into earnings. If we look at the lease expiry profile for FY '29, we estimate that about 65% of those leases expiring are under-rented, providing ample opportunity for positive reversion. Further, the forecast downtime associated with current vacancy and FY '26 expiries impede FY '26 FFO by almost $0.02 per unit. Given the strength of urban infill industrial markets, we are very confident vacancy is likely to be lower in future years, providing significant scope for an earnings kick. For FY '26, we anticipate that CIP's all-in cost of debt will be around 5%, which, though higher than FY '25, is now relatively consistent with the marginal cost of debt. After a number of years of debt costs being an earnings headwind, we expect total debt cost to stabilize from here. And if there were to be the expected interest rate cuts, it is conceivable that CIP's marginal cost of debt may reduce to the low to mid-4% range. With the debt cost headwind dissipating, we expect earnings growth to accelerate over the medium term driven by 5%-plus average annual NOI growth. When you couple the disconnect between CIP's divestment metrics and its trading price and this positive outlook for earnings growth, we believe the CIP value that is currently offered is very compelling. Turning to Slide 9. The outlook for Australian urban infill industrial markets looks equally positive with a low national vacancy rate and challenged supply pipeline. With ongoing sector tailwinds from increased e-commerce adoption, population growth and limited cold store and service center capacity despite burgeoning demand, there is strong potential for medium-term rental and valuation growth. The graph on Slide 9 reinforces this. As indicated by the graph on the left, the national urban infill vacancy rate remains a low 2.4% and its continued outperformance to urban fringe is clear. Notably, CIP's portfolio is 85% weighted to the outperforming urban infill markets. The graph on the right demonstrates why future supply is challenged. Despite the strong rental growth that has occurred in recent years, the economic rents required for new development is virtually, in every market, 10% to 25% above the prevailing market rent. Due to these conditions, we have already seen a significant amount of expected supply pushed out or delayed. And consequently, we do not foresee significant pressure on vacancy rates. Diving a little deeper into Australian industrial markets on Slide 10. Vacancy is concentrated among larger unit sizes. Significantly more lease deals occur in these smaller units with approximately 70% of all 2025 lease deals completed within the sub-10,000 square meter unit range. Importantly, CLP's average tenancy size of 7,600 square meters sits within the range incurring the highest volume of lease deals. Looking at a breakdown on the national vacancy rate in the graph on the right, 60% of total vacancy is concentrated in just 5 urban fringe submarkets that have incurred the recent big-box supply. CIP has limited exposure to these markets. Moving to Slide 11. CIP is very well placed to take advantage of these market dynamics, primarily because CIP's portfolio has critical mass in Australia's urban infill industrial markets and an average tenancy size that can attract the deepest pool of demand. Since Centuria assumed management of CIP in 2017, the portfolio has been methodically constructed with every asset evaluated by its unique market position and value-add opportunities. CIP's portfolio has a significant amount of embedded value, which can be unlocked through future real estate cycles. Exposure to urban infill markets is important because location is critical to a majority of industrial users. Outbound transport is generally 4 to 5x the cost of rent as a proportion of an industrial tenant's operational expenditure. So being located close to customer base is key to many tenants. Further, any automation or manufacturing improvements generally require a more highly skilled workforce, amplifying the need for a well-located facility. Another key portfolio attribute is CIP's average asset value of $38 million. A smaller average asset value increases the depth of investment demand, allowing CIP to execute nimbly at attractive pricing. I will now hand over to Michael to take you through the financial results and portfolio overview.

Thanks, Grant. Starting on Slide 13. Net property income for the year was $192.3 million, an increase of $11.5 million year-on-year. Continued leasing outcomes achieved across the portfolio resulted in a growth in like-for-like net operating income of 5.8%. High cost of debt over the year increased CIP's total interest expense by $7.6 million to $59 million during FY '25. As CIP's total cost of debt approaches the prevailing marginal cost of debt, we anticipate that interest expenses will stabilize, which may serve as a positive contributor to future earnings, particularly as we enter an interest rate easing cycle over the coming years. CIP delivered funds from operations of $110.9 million or $0.175 per unit and declared a $0.163 per unit distribution in FY '25, in line with guidance. Looking at capital management in more detail on Slide 14. During the year, we refinanced over $450 million in debt facilities and secured an additional $300 million in new facilities. These facilities were established to potentially fund the pending put option on our extendable notes in March 2026. The exercise and extent of this option will depend on prevailing market conditions. However, we have ensured that sufficient liquidity is available. CIP is now 86% hedged, and we will continue to actively manage CIP's interest rate exposure. Further details on CIP's hedge position have been provided in the appendices. CIP maintains a strong balance sheet with pro forma gearing of 33.2%, ample headroom to our debt covenants and continues to be well supported by our financing. Moving to Slide 16. CIP continues to provide investors with an exposure to 100% industrial real estate-only portfolio with 99% of assets held under freehold ownership. The portfolio remains geographically diversified with a favorable 88% weighting to Australia's East Coast. 85% of CIP's portfolio is located in core urban infill markets, close to densely populated catchments with limited future supply and where tenant demand is highest. Slide 17 details CIP's high-quality customer base. A significant 92% of our customers are listed national or multinational corporations. 99% of our leases are net or triple net, ensuring stability in our income streams from some of Australia's largest and most recognizable brands. Turning to Slide 18. CIP continues to optimize portfolio construction throughout FY '25, divesting 4 assets for $140 million. All these assets were transacted at or above book value, achieving a 12% premium on average. The sales comprise both on- and off-market deals executed with a diverse range of counterparties. In achieving the 12% premium to book value, it is worth noting that the assets that were divested consisted of some regional assets, all considered noncore and none were located in Australia's strongest transaction market, Sydney. Turning to acquisitions on Slide 19. CIP acquired 2 assets over FY '25, consistent with our strategy of consolidating land holdings in core urban infill markets. The acquisition of 876 Lorimer Street in Port Melbourne adds to our adjoining asset at 870 Lorimer Street, creating further scale for a medium-term redevelopment opportunity. The acquisition of 7-11 and 25-27 Gauge Circuit, Canning Vale in Western Australia is adjacent to CIP's 16-18 Tail Road assets. CIP acquired a 30% interest in this property in partnership with an unlisted fund managed by the Centuria Group. The joint management agreement and preemptive rights of the remaining interest in the property provide a capital-efficient structure for investment with future optionality for CIP. This is yet another example of CIP leveraging the broader Centuria platform to create value for CIP unitholders. CIP has a long track record of aggregating strategic irreplicable size of scale over time, providing significant opportunities for future higher and better use. I will now hand you back to Grant to talk through portfolio valuations on Slide 20.

Thanks, Michael. During the half, CIP's portfolio value increased by $57 million, while the weighted average cap rate remained relatively stable at 5.86%. This was the third consecutive reporting period of positive valuation growth. On this slide, we have also demonstrated where future valuations could be headed, providing a sensitivity indicating the potential portfolio value and NTA increase that could be incurred should the 12% premium achieved on recent sales translate to a 12% valuation growth. Notably, NTA would increase to $4.65, a near-20% increase over the current NTA. Another valuation consideration that should provide considerable comfort to investors is that based on assessment of comparable land sales, we also estimate that around 60% of CIP's portfolio valuation is underpinned by land value alone. Looking at ESG highlights on Slide 21. Under Centuria management, CIP has created a flexible and relevant sustainability framework, including a sustainability target of zero Scope 2 emissions by 2028, targeting 5-star Green Star design for all future developments; a continued partnership with Healthy Heads, an organization focused on mental health within the transport and logistics industries; and continued assessment on how to maximize roof space through solar installations across CIP assets. Moving to developments on Slide 23. CIP maintains a significant development pipeline that focuses on the limited competing development capability with urban infill market, urban infill industrial markets, and the key growth drivers for industrial markets. When thinking about CIP's development pipeline, it is worth considering 100% of the development pipeline is currently income-producing, providing optionality and timing flexibility, and 100% of the development pipeline is located within urban infill markets where supply is severely constrained. This means that proposed CIP developments may achieve higher rents than developments in the urban fringe, making them more feasible. And if not, CIP has ample capacity to wait until such time as they are. During FY '25, CIP completed 2 development projects. 15-19 Caribou Drive in Direk South Australia, a circa 6,700 square meter facility where lease terms were agreed prior to its recent completion, delivering a yield on cost of over 7%; and 102-128 Bridge Road in Keysborough Victoria, a fully refurbished 8,700 square meter cold store that was fully leased prior to completion, resulting in an $18 million valuation uplift. Looking ahead, CIP has 1 current project under construction, 50-64 Mirage Road, also in Direk South Australia, and the possibility of 4 projects commencing construction over the next 12 to 24 months. In an effort to be more prescriptive on our medium-term development capital requirements, we estimate the required DevEx for these projects to be about $140 million, an amount that could be easily satisfied by limited ongoing asset sales alone. Turning to Slide 24. Another valuable attribute of the CIP portfolio is its data center exposure. We expect that there will be significant growth in data center demand in the coming years, and CIP unitholders are well positioned to benefit from that growth. Approximately 12% of CIP's portfolio is already exposed to established operating data centers leased to blue-chip tenants. Further, CIP is assessing its power bank and data center development potential across 4 sites. This potential may provide an opportunity to convert certain industrial facilities to data centers or provide a substantial increase in underlying land value by securing power supply and development approval. We hope to provide further details on these assessments in coming reporting periods. Moving to Slide 26 for CIP's FY '26 priorities. CIP is well positioned to harness strong market fundamentals for Australian urban infill industrial markets. CIP continues to generate strong income growth and leasing spreads, maintaining significant under-renting that is yet to be realized. As CIP approaches a potentially lowering marginal cost of debt, we expect this will begin to have a meaningful impact on CIP's FFO in the coming periods. Additionally, CIP's current discount to NTA represents excellent value considering the significant proportion of portfolio value underpinned by land and the potential accretion that could be extracted by development. Continued assessment of subsector strategies, including the data center potential and proposition across the CIP portfolio and consideration of ways to further leverage Centuria's industrial capability, may provide further opportunities to benefit from the positive market fundamentals. Concluding on Slide 27. FY '26 and beyond, our focus is on maximizing CIP's earnings and valuation growth potential and maintaining a suitable balance sheet capacity. We are pleased to provide FY '26 FFO guidance of between $0.18 and $0.185 per unit and distribution guidance of $0.168 per unit. That concludes the formal part of the presentation. I will now hand back to the operator for any questions.

[Operator Instructions] Your first question comes from Tom Bodor from UBS.

I'd just be interested in sort of the moving parts around guidance. It's a fairly large range compared to normal. I presume there's an element of the lease-up on the vacancy there as well as tech costs and buyback. Can you just sort of talk through the range of parameters you've assumed there?

Yes, you've hit the nail on the head there, Tom. There's probably 3 moving parts this year. There's a little higher vacancy than we've had in previous years. So there is a bit of uncertainty relating to the letup of some of that space. There is also the buyback that we've announced today. And finally, there is uncertainty as to what happens with the exchangeable note, particularly in relation to the debt cost. So they are the 3 things that are causing that slight uncertainty, and that's why we've put out a range this year instead of a specific number.

Okay. So yes, I mean in terms of the re-lease up, sort of what the range of outcomes there that you see?

Yes. So there's 3. Of the current vacancies, we've got 3 key current vacancies. So Fairfield, 22 Hawkins in Bundamba and the remaining vacancy at M80. For those vacancies, we've assumed between 6 and 12 months downtime.

Okay. And then just on your re-leasing spreads, I think it was 50% in the first half, 34% for the full year. I think calculating the second half, it sort of decelerated quite substantially to, call it, 18%. Maybe just a comment there on where you see that number trending over the FY '26. I appreciate it's going to vary, bounce around a bit depending on the leases that come due. But I guess, if one is to look at the deceleration from 50% to 18% as well as your vacancy bumping up, that could be interpreted as a broader weakness there or change in conditions.

Yes. Thanks, Tom. I appreciate the question. In terms of those vacancies, I just mentioned, we highlighted that those vacancies were coming back to us at the half year. So they aren't something that we were surprised to occur. If anything, our vacancy at 30 June is probably a bit better than where we expected it to be at the half year. So at 95%, we've actually had a pretty decent second half in terms of leasing. In terms of that velocity of re-leasing spreads, we've been pretty consistent that people shouldn't be caught up in that number and where it goes simply because the location of where leasing is completed has a material impact on re-leasing spreads. So as mentioned previously, some of the releasing spreads we've been doing in Sydney are over 100%. Now for the first half of this year, we did a fair bit of leasing in Sydney. In the second half, we did very little. The other thing that impacted the second half was that we renewed Fujitsu at our data center in Malaga. They exercised an option. Now the mechanism under that option is that they have a market review but in the second year. So they've effectively re-leased at a 0% spread. The spread will come in year 2, and that's having a drag on the second half as well. So looking forward, depending on where we do leasing, we expect that there will continue to be some very, very strong re-leasing spreads coming to CIP. As mentioned on the call, there is significant under-renting that is sustained across the CIP portfolio. And if we do get concentration of leases completed in Sydney, we could well see re-leasing spreads approach that 50% mark again.

Maybe just a comment, just a subpart, I know I'm done with my 2 questions, but where is the re-leasing on an upcoming basis? And also that data center piece, is that a '26 event or a '27 event? And what do you expect for that?

So the Malaga, that re-leasing will occur at the back end of FY '26, the market review. And in terms of where we see things happening, like I think we made mention on the call, we think that about 65% of lease expiries that occur between now and FY '29 are under-rented. Now there is obviously some variety in how much under-renting those leases have. But as we mentioned, on average, we think we are 20% under-rented. So there is some significant opportunity for NOI growth in the coming years.

And then the data center market rent, is it going to be significantly higher? Or what is your view there?

Tom, until we actually nail that lease, I'd be hesitant to give you an outlook on that. We think it will go up. As to how much, I'm not sure.

Your next question comes from Richard Jones from JPMorgan.

Grant, just to clarify guidance, you're assuming your weighted average cost of debt goes from 4.5% to 5%. Is that right?

Correct.

Okay. And you still think you can get 4% growth in earnings despite that WACD headwind?

Correct.

Okay. Good one. In terms of the FY '26 expiries that you call out, is there any that you know of those major tenants that are vacating?

So no, the only call-out I would have there is that 680 Boundary Road is noted as a lease expiry. That's one of the assets we have exchanged on but not settled. So that won't be an issue. FY '26 is a relatively benign year in terms of lease expiries. So we don't have any significant lease expiries occurring in this current year that we think will cause a significant earnings headwind.

Okay. And maybe just to clarify that weighted average cost of debt, what are you assuming in terms of exchangeable notes?

Yes. So as Michael alluded to on the call, we have put in place debt facilities that will completely offset that exchangeable note if it is put to us. What we have forecast for this year is that the exchangeable note will be put to us and those debt facilities that have been put in place will replace it. Now just to reiterate, we have no refinancing risk associated with the exchangeable note. It is simply a matter of whether it is put to us or not or whether we find an alternate financing arrangement in relation to that exchangeable note in the interim period.

Your next question comes from Callum Bramah from Macquarie.

Just looking also at guidance, so are you assuming the buyback is completed within guidance in both the high end and the low end of the range?

Yes.

Okay. And so just on that exchangeable note, I assume so it's basically going from being 3.95% coupon to 5%. Is that fair?

That's fair, yes.

And I think you're 86% hedged, isn't it? So ultimately, I suppose, are you assuming cuts in rates, but it won't really impact '26, is that right?

Not significantly, no. I mean the exchangeable note as well, it wouldn't be put to us until March. So it hasn't got a significant impact on FY '26 either.

Okay. And then just a couple of other ones. So can you just talk to, if you were to go ahead with the $140 million of development, what sort of yield on cost or IRR hurdles you have and perhaps just the hurdle for the SA one? And then my last question was just in your 2026 priorities. You talked to potential opportunities with Centuria funds. I just wondered, are there any liquidity events that will provide those opportunities known in fiscal '26?

Yes. So I'll just touch on that point to start with. I think when we're talking about the opportunities with Centuria, it relates to some of the deals we've already done with Centuria, particularly Gauge Road, the acquisition we made this year, we did a JV with another Centuria vehicle. Just having Centuria alongside us does give us opportunities to co-invest at times where CIP potentially couldn't afford to take the entire asset itself. So it's just to highlight that there are opportunities that Centuria provides that potentially other managers can't. I forget the first part of your question, Callum, what was that?

Just the other bit was just around development, the $140 million and yields on cost and what you're seeing?

Yes, yes. So the minimum target we're seeking for development is 6.5%. For the development that we completed this year at Caribou Drive in Direk, we achieved yield on cost slightly above 7%. For the development that is currently underway on Mirage Road in Direct in South Australia, again, we'll be seeking yield on cost approaching 7%. And if we actually achieve the rents we think we can get, we will be above 7%. So really, it's a minimum 6.5%, but we are certainly seeking to achieve yield on cost, in some cases, quite a bit above that.

Can I just ask one last one, sorry, just about the absentee land tax and impact on Victorian values and transaction volumes. I hear you on the premiums you've achieved, but I suppose it was no premium in Victoria, but you saw substantial premiums in other states. Is that reflective of that? And do you think your valuations now fully reflect the impact of that absentee land tax?

Yes. Look, I think there's probably a couple of points that are worth calling out there, Callum. The asset we sold in Victoria was a regional asset. And this is probably worth highlighting, I know Michael mentioned it on the call, we've achieved a 12% premium on the sales that we incurred in FY '25 on regional assets, noncore assets in Brisbane, and no exposure to Sydney. Sydney has been by far and away the strongest transaction market, and we've achieved that 12% premium without selling in Sydney. So I think that just reinforces that there is plenty of value across the CIP portfolio. Now as to what impact the foreign owners landholder duty will have on Victorian transactions. Look, at this stage, I think it's probably still too early to tell what impact that will have, if any. But it is worth noting that Queensland has a similar mechanism in place, and we've sold assets at a pretty substantial premium to book value in that state.

Your next question comes from Lauren Berry from Morgan Stanley.

Just trying to marry up your comments around how strong the fundamentals are in industrial versus the increasing vacancy. I mean you've got downtime, which is equivalent to about 10% of your FFO at the moment. Incentives are ticking up. Like, is there anything specific in the bunch of assets that have the vacancies at the moment that is causing issues? Or yes, could you just talk about that disparity, please?

Yes. Sure, Lauren. It really comes down to the point that we raised on the call. There is divergence in leasing outcomes for small units versus the large units. So FY '26, we've got 2 vacancies that we're looking at in Fairfield, in Bundamba, and they're at the upper end of unit sizes for CIP. Now CIP hasn't got a lot of large units, but these are 2 that we are dealing with, and that's why we're incurring longer downtime. So really, that's the divergence we're seeing in virtually every market across Australia at the moment. Smaller units are leasing pretty well. Large units are sustaining a bit longer downtime and probably a bit higher incentives. But in saying that the vacancies that we've got at the moment, we have got good interest on all of them. I think we've got inspections on all of them this week, all of those 3 large vacancies I've called out earlier. But we have seen delayed commitments on those larger spaces. There is impact from the geopolitical uncertainty, particularly around trade. Some of these large users have been a bit slow in making commitments, and that's why we have forecast extended downtime for those 3 units.

Are these issues about box size and demand? Is that shaping at all how you think about portfolio creation and noncore divestments?

It is to an extent, I think Jesse before me, there's been a strong push since Centuria took over CIP management to look at buying in urban infill markets and, by that nature, generally smaller unit sizes. So I think we've been basically beating the drum for a while. There's always been stronger velocity for leasing in smaller unit sizes, and that's something that we think will continue into the future. The other element of the urban infill strategy that we have had is that we have been doing land consolidation, which certainly does provide optionality for the fund into the future. We will have continued development sites that will roll out of our portfolio just by the nature of having large land holdings in urban infill locations.

Great. And last one for me. Just on the development pipeline, there's been quite a big shift in previous presentations. You were talking about $1 billion plus. At the moment, you're talking about $140 million CapEx. Can you just talk about your evolution in thinking about the medium-term pipeline?

Yes. So the change is to be more prescriptive on our development CapEx requirements. So on this, we've called out that we think we've got about $140 million of DevEx over the next 12 to 24 months. The $1 billion pipeline hasn't dissipated. I think I made mention on the last half call, we have got developments in planning at the moment when we're not expecting an outcome for 3 years. So not all our developments are short to medium term. And I think we made mention that $1 billion pipeline was spread over about a 5-year period. So I don't think there's any material change. We're just trying to be a bit more prescriptive of what that immediate capital requirements will be.

Your next question comes from Daniel Lees from Jarden.

Just following on from Lauren's question. Can you give any color on where you're seeing incentive levels actually at in percentage terms?

Sure. So for the full year, our average incentives across our leasing was 15%, which was relatively consistent with FY '23 and FY '24. Now the reported increase in incentives, not to harp on to the point, but that divergence between large box and small box is where you're seeing divergence in incentives as well. So the higher incentives that are being reported in the market is generally always coming in the urban fringe for larger boxes. That's where supply has occurred. And that is also where we've seen, to the point we've already talked about, probably the weakness in tenant demand. So I wouldn't say that those larger incentives are consistent across all markets or all unit sizes, and that's probably evidenced by the incentives that we have delivered in FY '25.

Great. And just one more from me. Obviously, logistics rents up substantially since pre-COVID levels. Are you seeing any evidence of tenant affordability pressure at all across the portfolio? Or what's your view on that, just maybe across the market more broadly?

Yes. Look, we probably haven't noticed any material change in the last 12 to 24 months. And I think it's worth reiterating that rent as a composition of total operating costs for a lot of our tenants is not a significant part. In many instances, it's dwarfed by staffing costs and transport costs. So it's probably not as acute as what people potentially would perceive.

Your next question comes from Murray Connellan from Moelis Australia.

I was wondering whether it might be possible for you to just drill into the under-renting in your portfolio. And just maybe just comment on the, I guess, timing to realize some of that. Just noting that a lot of the leases that you would have done more recently would probably be a lot closer to market, whereas some of the more long-dated leases that are probably more likely to come up for expiry soon are probably the ones that are quite materially under-rented. I guess how are you thinking about how that rent reversion leasing spread profile matures over time? And how many more years do you think we still have of these materially positive leasing spreads?

Yes. Thanks, Murray. I think when you break down the CIP portfolio, we perceive about 50% of our leases are under-rented, about 40% are at or around market, and about 10% are probably above market. Now that portion that's above market is generally our long WALE leases, a component of the long WALE leases. So we don't think that, that has got a flow-on effect in the short to medium term. As mentioned on the call, we've got about 65% of the leases, expiring between now and FY '29, we perceive to be under-rented. So we think there is certainly ample scope for some positive reversion to come through in the next 3 to 4 years. In terms of when the under-renting will dissipate, this is a question I don't think is static because I think the opportunity for medium-term rental growth across a lot of industrial markets is -- when you've got a national vacancy rate in urban infill markets of 2.4% and really very limited supply, you don't need a material change in demand dynamics before you start seeing some material rental growth come through again. So we're pretty optimistic that we can see some strong rental growth over the medium term, which will accompany the existing under-renting and hopefully sustain that under-renting long into the future.

I was wondering whether you could just comment on your payout ratio, please. Obviously, given that incentives are a bit higher at the moment, and you've obviously commented on that a few times so far on the call. But just given where the payout ratio is at the moment, would you expect it to reduce much from here? Or do you think this is relatively close to steady state?

Yes. Pretty consistent with what we've been saying recently. I think we're going to level out at about 90% payout ratio. If you look at FY '26 guidance, we're somewhere between 91% and 93%. So as mentioned in prior calls, you probably will see FFO growth slightly higher than DPU growth until we get to that 90% level. At 90% payout ratio, we are pretty comfortable that we'll be able to cover our maintenance CapEx, which for a portfolio like ours is pretty low in that generally 20 to 30 bps of gross asset value and our CapEx requirements relating to incentives.

How long do you think it might take for you to get down to 90%?

It could well be FY '27, Murray.

Your next question comes from Liam Schofield from Morgans.

Two questions. Just on the buyback. Can you just sort of comment on the gearing, the pro forma gearing, post settlement of outstanding transactions and the buyback? And also, just what's the sort of the justification given that you've got $140 million of required CapEx?

Yes. Thanks, Liam. So in regards to the CapEx question, we've been tripling out assets over the last few years, and I think we'll continue to do that through FY '26. So in terms of our ability to fund both the buyback and our DevEx, I don't think there is going to be an issue. We could easily do that through continued asset sales. Now in relation to where the pro forma gearing is post the sales we've announced today, it's 33.2%. The buyback is the $60 million in total. It would probably impact gearing by about 1.5%. But as mentioned, we are very cognizant of where gearing is. We think that asset sales will continue to mitigate that as a risk. And coming up with a $60 million amount for the buyback, we have looked at the proceeds that we will receive from the 2 sales announced today at circa $80 million, and we haven't used that full amount so that we can offset that DevEx requirements going forward as well. So we're pretty comfortable with where we currently sit on gearing, noting also the valuations for the third consecutive period have increased as at 30 June.

Yes. And you sort of flagged that you're achieving values about 12% above book value, portfolio is 20% under-rented. Where are the valuers wrong? Are they wrong on the rent side? Or are they wrong on the cap rate side?

Well, I'd argue the equity market is even more wrong than the value of late. So I think it's up to interpretation. We can only point to hard metrics.

There are no further questions at this time. I'll now hand back to Mr. Nichols for closing remarks.

Well, thank you for your interest in the Centuria Industrial REIT. We appreciate you listening in this morning and wish you a very good day.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.