DEXUS (DXS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dexus 2022 Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Darren Steinberg, CEO. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us today for our 2022 half year results. Hope you're all well and keeping safe wherever you are across the globe. As an owner, manager and developer of property across the country, I'd like to start today's presentation by acknowledging the traditional custodians of the lands on which we operate and pay our respects to their elders, past, present and future. Today, you'll hear from Keir Barnes on the Financials, Deb on our Funds business, Kevin on Office, Stewart on Industrial and Ross on Investments in our development pipeline. We'll then finish with any questions you may have. Despite impacts from the pandemic, it's been an active start to the year. We continued the momentum in our Funds Management business, attracting new investors and delivering strong performance for our existing capital partners. We progressed leasing across our new developments, including the first milestone in precommitment thresholds at our city-shaping Waterfront Brisbane development, reaching conditional heads of agreement with 2 tenants. We've maintained high occupancy levels across both the office and industrial portfolios with strong leasing activity. Asset sales throughout the half have created capacity for us to invest in the next generation of Office through our development pipeline, including the future Atlassian development. And finally, building on our ESG track record, Dexus outperformed real estate companies globally to achieve a gold-class distinction, retaining its leadership on the Dow Jones Sustainability Index for the third year in a row. This activity reinforces our continued focus of leveraging our platform capabilities to embed future growth across our portfolio and in our Funds Management business. Our strategy is to deliver superior risk-adjusted returns from high-quality real estate and we invest in opportunities that can deliver sustainable income streams while growing and diversifying our Funds Management business. The key megatrends of Urbanization, Technology Advances and the Growth in pension capital flows that underpin this strategy have evolved and increased the importance as a result of the pandemic. We are well positioned to continue to leverage these trends to support investor returns while maintaining our steadfast purpose to create spaces where people thrive and vision to be globally recognized as Australia's leading real estate company. We expect that sourcing quality properties will remain competitive as global pools of capital increasingly chase the same assets that we invest in. As a result, we'll maintain our active approach of utilizing alternative ways to unlock and access opportunities. Looking at the composition of our $45.3 billion diversified property platform. Over the 6 months, we enhanced the scale of our platform through M&A, off-market transactions and development completions. Growth of our $24.9 billion Office portfolio was driven by the merger of DWPF with ADPF. Our Industrial portfolio at $11 billion represents circa 24% of our group platform after securing the large-scale, high-quality Jandakot Airport portfolio off-market in a highly competitive environment for industrial assets. Post the half, we secured additional third-party capital for Jandakot, aligning with our focus to grow our Funds Management business. A $6.6 billion Retail portfolio sits within the funds business and our growing $1.4 billion Healthcare portfolio now includes the North Shore Health Hub, which completed during the period. As we enhance our scale, we continue to provide further opportunities for our third-party capital partners. Our leadership across ESG continues to be globally recognized and our commitment in this space is aligned to our investors and capital partners. We continue to manage our properties for emissions reductions and are on track to achieve our net zero emissions target by 30 June this year. During the half, we submitted our inaugural Reflect Reconciliation Action Plan, which will drive opportunities for career development and economic participation the First Nations people within the property industry. And we enhanced awareness across our employee and customer base with our community partners, Black Dog Institute and Planet Ark. I'll now pass you on to Keir to cover the financials.

Thanks, Darren, and good morning, everyone. Turning to the composition of the result. Our property portfolio delivered AFFO of $313 million. Excluding the impact of rent relief and provisions, office like-for-like income growth strengthened compared to the FY '21 results, up 4.4%, while occupancy remained relatively stable. Industrial like-for-like income declined 2.3%, impacted by downtime, which has been resolved, and Stewart will talk to that later. Management operations FFO grew significantly as assets were added to the platform as a result of the merger of ADPF with DWPF, the acquisition of APN Property Group and other successful funds management initiatives. Trading profits were lower than those realized in the first half of FY '21. The external independent valuations resulted in a total $487 million, or 2.8% increase on prior book values for the 6 months to 31 December. Cap rates drove 95% of the valuation uplift for the Industrial portfolio, while they drove 34% of the uplift to the Office portfolio. Pleasingly, the value of Dexus' quality portfolio remained robust in a COVID-impacted environment. And we continue to see growth in asset values for well-located industrial and logistics facilities, supported by strong investment demand. Turning to the results in detail. Office property FFO rose primarily due to fixed rent increases and the Capital Square acquisition, partly offset by divestments, including 45 Clarence Street in Sydney, 60 Miller Street in North Sydney and 10 Eagle Street in Brisbane. Industrial property FFO increased due to the Jandakot Airport acquisition as well as recently completed developments. As we flagged at the FY '21 results, management operations increased significantly, in line with the growth in our funds platform. And we have enhanced our disclosure with an FFO category reflecting distribution income that Dexus earned on its co-investments in pooled funds, such as DHPF and DXI. Group corporate costs were up driven by the addition of APN to the platform and higher insurance costs. While net finance costs were down as a result of interest reimbursement for the delayed settlement of Grosvenor and interest income from Capital Square. Overall, underlying funds from operations grew substantially on the prior year. However, AFFO and distributions reduced as a result of lower trading profits combined with higher maintenance CapEx and incentives. Revaluation uplift drove a 3.1% increase in NTA to $11.77, which doesn't reflect the embedded value of our $27 billion Funds Management business or our significant development pipeline. Moving to rent collections and rent release. Cash collections were strong at close to 98% for the half, and we were above 95% for the month of January despite the impact of the Omicron outbreak. We continue to work on providing rent relief for our small business customers impacted by the pandemic with lockdowns across both Sydney and Melbourne this half. Looking at the rent relief numbers, the direct impact on AFFO this half was $14.3 million. Within this, provisions were lower as we made further progress finalizing rent relief requests from prior periods. Despite the extension of the National Commercial Code of Conduct in some states and the continued economic impacts of the pandemic, we are confident of being able to deliver our FY '22 guidance with distributions continuing to be paid out in line with free cash flow. Moving to our capital management. Our gearing increased to 31.1%, mainly driven by acquisitions and is now at the lower end of the 30% to 40% target range. We have $1.6 billion of cash and undrawn debt facilities, with more than $1 billion of income in proceeds from contracted divestments due to settle over the next 6 months. Our percentage of hedge debt has reduced compared to FY '21 given the increase in debt to fund acquisitions, and we remain committed to maintaining prudent hedging positions through economic cycles. Overall, our balance sheet is strong, and we have sufficient capacity to continue to fund initiatives across the group. Thank you. And I'll now hand over to Deb.

Thanks, Keir, and good morning, everyone. As Darren mentioned, we continued the momentum in our Funds Management business during the half, attracting new capital partners and delivering strong performance for our existing investors. Taking a look at the characteristics of our Funds Management platform. Our full service platform has the structure that provides confidence for capital partners to invest with us. We have a large diversified investor base with established capital partners from Australia and offshore. As part of our platform, our funds have access to multiple real estate asset classes and can harness the Dexus platform's multisector capabilities to unlock strong performance and drive growth at speed. The funds platform is underpinned by high standards of corporate governance that is externally tested and focused on delivering outcomes in the best interest of our investors. ESG continues to increase in importance as an investment hurdle. And as Darren mentioned earlier, Dexus is a global leader in sustainability, which aligns to our capital partners' ambitions. Moving on to the composition of our investment base. This slide provides a snapshot of the vehicles across the platform. We have a comprehensive business that includes multiple vehicle types, where Dexus invests alongside like-minded capital partners. Speaking broadly, we group our funds into 2 categories: institutional joint ventures with Dexus partners with a third-party investor and pooled funds, which attract a number of institutional investors, including the new listed and direct unlisted funds and the real estate securities funds business. And turning to the highlights for the half. All funds and partnerships have performed well despite the market conditions with DWPF outperforming over 3, 5, 7 and 10 years. and DHPF [indiscernible] delivering strong 1-year returns. We continued strong investor support with $1.3 billion of new equity raised resulting in a number of new investors being welcomed onto the platform. $410 million was raised across our listed funds to support their acquisition strategies, DHPF raised $250 million. Dexus Real Estate Partnership One has neared its $300 million equity commitment target, including a $100 million commitment from [ MSA ] alternatives. Blackstone is welcomed as a new joint venture partner at DALT, and we secured Cbus Super as a third-party partner for the Jandakot Airport precinct. We continue to execute the investment strategies of our partners, including bringing a unique portfolio opportunity to DXI to meet its industrial investment strategy, securing value-add acquisitions for DXC and DHPF as well as the first 3 investments for DREP1. And finally, DWPF is on track to fulfill all the AMP Capital diversified property fund redemption requests as part of the merger deal, successfully completing over $1.7 billion of asset sales in the period. Thanks, and I'll hand you to Kevin.

Thanks, Deb, and good morning. The Australian office markets have shown remarkable resilience. Despite the Omicron wave, business confidence and hiring intentions are still positive, white collar employment is growing and the most resilient of all industries. Take-up in the major CBD office markets has improved with vacancy rates plateauing across the country and falling in Sydney. We are seeing signs of leasing recovery in our Sydney portfolio, but more on this later. Conditions for the office sector are expected to maintain their momentum over the next year, supported by higher vaccination rates and further harsh lockdowns being less likely. As we transition through the Omicron outbreak, the other side looks like a great place to be with any lost growth quickly to cover. Moving on to office portfolio performance. Although the pandemic has been around for 2 years, and the operating environment challenging, our office portfolio has proven to be resilient with continued leasing activity, occupancy remaining above 95% and a like-for-like growth of 4.4%. This occupancy has come at a cost, however, with incentives trending in line with what we experienced in the second quarter of FY '21. Pleasingly, incentives have plateaued and are set to moderate in Sydney consistent with our forecast 12 months ago. Leasing activity was strong for the period with around 112,000 square meters secured across 151 transactions. While Omicron has delayed the return-to-the-office, we expect the return to take hold in the coming months. Our weighted average lease expiry is pushed up to 5 years as a result of our asset recycling strategy and some longer-term deals secured in Sydney CBD, Sydney Olympic Park. Our expiry profile is tracking well with only 3.5% of the FY '22 expiries remaining to be leased. We're in discussions with a number of tenants intending to renew leases. A diversified tenant base presents limited concentration risk with our top office customer in the State of Victoria, representing just 3.3% of income and our top 10 tenants combined representing 17%. Activity in the portfolio has provided us with confidence that companies are looking to the future. Global data shows that occupancy costs in Sydney are 1/3 of those global cities like Hong Kong and New York. In Australia, the office is a draw card to attract the best talent, and this is supported by the demand we are seeing for quality office space, representing a small proportion of their operational costs businesses have shown reluctance to relinquish office space and the longer-term impacts of work-from-home are still unknown. In fact, more companies are growing and taking more space than decreasing in size, with the finance, technology and professional services sectors proving the most resilient. We continue to see the strongest demand from small to medium customers and are encouraged by a number of larger customers in the portfolio looking through the current environment and extending their leases midterm. We've also had strong interest in our development pipeline, demonstrated by our announcement this morning that we have reached conditional heads across 19,300 square meters, contributing to development precommitment thresholds at our city-shaping Waterfront Brisbane development. Thanks, and I'll now hand over to Stewart, who will take you through Industrial.

Thanks, KG, and good morning, everyone. Looking at the performance of our industrial portfolio, where we had an exceptional 6 months of leasing activity, leasing circa 270,000 square meters across 49 transactions or over 40% of the amount of space leased in HY '21. Occupancy has hit another high of 98.6%, and our weighted average lease expiry also improved to 5.1 years. Incentives have declined markedly to 10.6%, excluding development leasing. Effective like-for-like income was down slightly, driven by downtime at a Business Park, which has now been leased up. Excluding Business Park assets, like-for-like income grew by 2.6%, and we are confident of delivering growth across the total portfolio for FY '22. Driven by strong market rent growth, it's good to see the portfolio's over-rented position reduced from 6% at FY '21 to 0.3% over rented. This creates the opportunity to grow income by resetting the rents on upcoming lease expiries, given the pace of market rent growth. Our portfolio delivered a strong 1-year total return of 26.3% til December 31, driven by cap rate compression and valuation uplifts, as Keir mentioned. We're actively building out our development pipeline at speed. And on completion, the group industrial portfolio will grow to $11.7 billion across 4 million square meters, representing 25% of our balance shape farm. Looking more closely at what's driving the strong take-up in Industrial. We're seeing record tenant demand from logistics firms and retailers investing in extra distribution space to cater for last mile fulfillment as well as the need to house extra inventory to protect against shortages. The online growth story with e-commerce tailwinds fueling demand continues. An observation here is a pure play e-commerce operator requires 2 to 3x as much warehouse space as a regular retailer, which plays into our hands. From Dexus' perspective, our development capability is supporting our customers' growth requirements across Australia. We are focused on growing our ecosystem in the West and have already secured new leasing at Jandakot with existing customers and new ones giving us a truly national platform. Thank you, and I'll now hand over to Ross.

Thanks, Stewart, and good morning, everyone. The contrast between how public and private investors are thinking about real estate markets could not be more stark than it is right now. And that is creating an interesting dynamic for us as we balance the long-term nature of real estate investment with the near-term focus of financial markets. Dunlop portfolio is in a transition phase as we ramp up commitments in the development book and look to improve our capital efficiency, holding more of our core investments in fee paying structures with capital partners. For the balance sheet, it has been a busy period of recycling and redeploying capital. At a group level, we sold slightly more than we acquired with some further asset sales like 12 Creek Street in Brisbane expected to settle in the second half. This will provide additional capacity to fund developments and support growth in the funds business. The group development pipeline sits at circa $18 billion with an end value of circa $23 billion, more than half of which sits on the Dexus balance sheet, including iconic next-generation office buildings, in prime locations in the East Coast CBDs. We've touched on these city-shaping projects previously. They have highly sought after by capital partners and office customers both of which are increasingly focused on sustainability credentials and ensuring that the built form and location supports new ways of working in the post-pandemic world. We expect Dexus will retain a long-term interest in each of these projects, which will contribute meaningfully to AFFO in the medium-term. There is an enormous amount of activity and growth in our development business beyond the major CBD projects. Our Industrial Development business delivered 280,000 square meters of GLA last calendar year in partnership with [indiscernible]. We continue to restock that business, adding circa 95 hectares of industrial land since August, which at current run rate gives us about 4 years of development inventory. We're making good progress in the Healthcare space as well. but this is a slower burn with longer lead times. We secured a number of exclusive positions on key parcels of land in current and emerging health pricings. The balance sheet currently has circa $1.3 billion committed into the current development line, which represents about 6.5% of the portfolio. As you can see on the slide, based on the current development programs and tenant inquiry, we expect a significant number of projects to commence in FY '23. And we're in the first hour of Waterfront Brisbane, 60 Collins Street in Melbourne, and Central Place in Sydney, while continuing to deliver the major industrial estates like Ravenhall and Jandakot and shorter-dated industrial projects in the infill markets. As you can see in the charts on the right, as we activate the development pipeline, we see our average development with more than double, and the average value of end product increased circa $1.1 billion per annum, this is before we sell down any of the balance sheet interest. While it will be lumpy, this means, on average, the group should be delivering more than $2 billion a year of high-quality investment product once the pipeline matures. Balance sheet currently has a little over half of the development book. We [indiscernible] interest in projects as they are de-risked and this will create profit events and free up capital to reinvest in the pipeline and other group initiatives. While there is uncertainty and risk in all developments based on current pricing, there is a healthy margin in our development book about 25%, which is in line with the margins we've delivered over the past 4 years. The development pipeline is an important part of our strategy in that it provides a new product for customers seeking or needing to upgrade, to provide a source of high-quality investment product for our fund clients, development is an important contributor to returns and ROIC, and it creates a significant opportunity to grow the management business via service and fund fees. The training part of our development business is a small but important contributor to earnings. We locked in the majority of trading profits for the year in the first half through the sale of properties like at Gladesville, Truganina and Botany, and we're not currently anticipating further profits this year. Our focus is on FY '23 and replenishing the book. The residual part of the site we developed at North Shore Health Hub in St. Leonards is being redeveloped as an infill industrial project. We will progress on leasing, and this is likely to make a material contribution to FY '23 trading profits. To join the acquired industrial project with DREP1 at Chester Hill is another project that could contribute to FY '23. In addition, we have 3 identified opportunities in the portfolio, which we expect will be added to the pipeline next year. Thank you, and I'll now pass you back to Darren.

Thanks, Ross. Dexus is an attractive investment proposition. Our strategy is supported by a fully integrated model of real estate ownership, management and development. Our capital is invested in high-quality real estate located in diverse and key performing markets, which generate stable core type returns. Our substantial Funds Management business enables capital-efficient investment alongside third-party clients with the platform growing by an average 21% per annum over the past 5 years. And our $17.8 billion development business provides embedded future value by improving the quality of the portfolio while providing inventory to grow our third-party relationships. So to conclude, strong momentum has continued across our diversified property platform in the first half. However, there is uncertainty in both Australia and globally with the pandemic continuing to impact business and consumer confidence. Despite this, we are focused on executing on our strategic objectives of increasingly resilience of our portfolio income streams while expanding and diversifying the Funds Management business. And we remain confident of being able to deliver long-term performance beyond the recovery. Taking all of this into account, based on current conditions and barring unforeseen circumstances, we maintain our guidance of delivering distribution per security growth of not less than 2% for the 12 months ended 30th of June 2022. Thank you. That now ends the formal part of today's presentation. But just before I pass back to the operator for questions, I'd just like to acknowledge David Yates. This is his 20th results period with Dexus. David's been with us for 10 years, and he's actually worked with me for over 15 years now. So everything we've achieved over the last 10 years has been a big part of that. We'll miss him, and we wish him all the best for the future. So thank you, David, and back to you operator for questions.

[Operator Instructions] Your first question comes from Sholto Maconochie from Jefferies.

Just got a quick question. On the CapEx went up quite a bit on the leasing side. [indiscernible] is that expected to be slower, less leasing maintenance CapEx in the second half? Or is it going to be equal in the first half because it was quite high in the first half.

Sholto, it's Keir we had more leasing this half, so elevated certainly compared to last year. But we've also our maintenance CapEx is probably more evenly spread than what it traditionally is a bit more maintenance CapEx this half.

Okay. Lower leasing and equal maintenance okay? And then on the gearing, it's sort of 31%, you've obviously done a lot of acquisitions and divestments and there's still some proceeds to come in from delayed settlements, which have been staggered. How do you look at -- you've got a big pipeline. I think, Ross, you said it's going up $70 million per annum spend and you're being capital partners. But obviously, the 14% discount to NTA, I assume you wouldn't look at the buyback given your capital commitments and gearing levels at the moment?

Yes, absolutely right. I mean -- what we're doing a buyback, obviously looks very attractive at current pricing levels, we do have substantial capital commitments with that pipeline. So we'll continue to monitor the situation, particularly as we play greater clarity on the timing of some of those key developments. But the good thing is we've got great flexibility as Ross and Deb had both alluded to. We've got great demand from capital partners. But it will be a big way for Dexus shareholders if we can't take more on the balance sheet. So we'll just have to see how that plays out.

Yes. Understood. And then just on the office portfolio. So you -- I saw the vacancy is pretty much flat, the occupancy is flat. Where is -- where do see -- you got the leasing in Melbourne, where do you see sort of upside risk to the Office to improve that vacancy in the next sort of 12, 18 months?

Yes, definitely, Melbourne, 80 Collins Street North where we've got about 17,000 square meters to deal with 385 Burke Street in Melbourne as well. We've made some inroads with the [ Dexus' ] Australia tenancy lease a couple of those floors and some interest in the balance. So that's a focus. And also 52 -- 25 Martin Place, with about 4,000 square meters there that we think with the completion of the retail and the ground plane that's going to go well for us in the next 12 months as well.

Okay. And then just sort of broadly, KG, on the leasing market, you touched on it before, you've seen any trends emerge sort of one of your peers had space being sort of handed back by large tenants, but I just want to see a trend by occupancy type by small or large tenants, what you're seeing in terms of space requirements as we sort of come out of the pandemic?

Well, as I said, most of the leasing we did our observation was same space or more space and probably only 3% or 4% by area of the deals involved a reduction. In terms of larger tenants have been flagged for some time, Telstra in Melbourne out of our QV asset had progressively for many years, been reducing their footprint. And -- but beyond that, we're seeing pretty positive signs across the board in terms of occupancy. Our sub-lease vacancy has come back substantially. It's now down to 1.5% in the portfolio. So we observed lots of organizations either effectively sub-leasing their space or withdrawing.

What was that June the sub-lease KG, the 1.5 -- what was that before June?

I think it was 1.7 next month. Just come back to 1.5. Yes.

And then just finally, on the debt. Cost of debt is down 2.7%, hedging 64%. What's your policy going forward given the steeping of the curve and expectation of rising rates going forward? And what do you expect costs that will for the full year?

In terms of costs for the full year, assuming current interest rate increases implied by the market, we'd expect our average cost of funds for the next 12 months remain at or below 3%. In terms of our hedging levels, it's something that we continue to monitor very closely. We stay within policy, and so we'll continue to monitor the market and hedge through the cycle.

Great. And David, thanks for your help over the years and good luck in your new endeavors.

Your next question comes from Ben Brayshaw from Barrenjoey.

All the best as well, David. It's been great to deal with you over a number of years. My first question is just on EPS guidance. Darren, could you discuss the factors that you take into account in electing not to provide guidance?

Well, we have provided guidance of at least 2%.

EPS guidance?

We never provide EPS guidance. We provide distribution guidance.

Okay. the operating margin for the Funds business. So in other words, management operations, just the property management margin has declined a bit for this period. Are there any factors that have contributed to that? Or is that just a little bit of volatility? And could you discuss your expectations for margin expansion going forward as the Funds business continues to add scale in terms of AUM, please?

Sure. In terms of property margin revenues, they were broadly in line with last year. So we've had some growth in acquisitions and through leasing activity. That's been offset by some of the asset recycling that we've been doing as well as assets moving into the development phase. The costs have increased slightly, just driven by resourcing to support upcoming leasing activity, particularly with the development pipeline and our industrial portfolio. So I'd expect PM margins would remain sort of similar levels for this year. margins more broadly, though, from the Funds business. There's been a modest uptick this period. And certainly, as we reinvest in our platform going forward, we expect that, that will continue to grow in due course. I think just coming back to question around earnings and distribution. It probably just worth keeping in mind. We pay our distributions in line with free cash flow, and we will continue to do that.

Your next question comes from James Druce from CLSA.

Just on the AFFO for the second half. You paid out a pretty decent dividend for the first half of $0.28, it's implying a fairly steep contraction in cash flow for the second half apart from perhaps trading profits. Can we just go through some of those drivers, please?

Sure. The issue is not unusual that we have our distribution skewed to the first half. I think the key move is that you've mentioned one of them trading profits. They've been secured in this first half. I think the second component really is around our CapEx and this is a little bit unusual in that CapEx is more heavily skewed to the first half just off the back of leasing and some of our maintenance CapEx spend. So we'd expect that to be lower going into the second half.

So your cash flow is actually is getting slightly better on the CapEx front is what you're saying second half?

Correct. So we would expect CapEx in the second half to be lower than the first.

Okay. Then I'm just looking at the DPS guidance. I mean, it looks pretty soft. Is that a fair -- well, is it conservative? Is that a fair comment?

James, there's so many moving parts in our business, and there's still a lot of uncertainty in the open markets both here in Australia and globally. So I think we'll watch and we wanted to see how things go over the next half, and we'll see how things go.

Okay. And then just on the asset recycling story. You've done a hell of a lot over the last 12 months. Are we sort of at the tail end of that? Or how much is there to go?

I think we've been very upfront with where we're heading is that over time, you'll see more going into the third-party funds business and it will be determined as we create new product. That's what we are doing currently in the business. So timing will be dictated to with how quick Ross gets this development is moving and when we're in a position to -- with our partners to move assets across into that business.

Okay. It's probably more just asset sales from the balance sheet that was more focused on in those remarks.

Yes, some of these balance sheet assets will end up with our third-party partners.

I think what we've hopefully telegraph today in the results presentation is there is a pretty significant funding ask as we activate the development program. We're in a good position today with the contracted asset sales and the headroom that we have. We're not looking to materially change our policy position around leverage. So funding that growth is we need to do progressively as we bring those assets online. We 2 options. We are to sell interest in those projects, or we sell existing core assets. I think as much as possible if we can manage the unit we'd like to keep a larger interest in those projects as we can because they're going to be top-performing assets and the sort of assets that we think are going to be very, very resilient long term. So I think that's certainly our preference, and that's titer going to navigate over the next tier. So I think expect to see more capital recycling. And as we also have talked about in past presentations, where we have core investments that are low returning, we do want to hold them in structures, fee paying structures with third-party clients. And that's certainly something that we are very focused on between the balance sheet and working with our fund clients.

Yes, that's clear. And then one more, if I may. I think Ross in your prepared remarks, you talked about sort of de-risking developments, and that would be a profit event. I know it's sort of early days, but what structures should we be thinking about? Is that the profit in the change of land value? Is it forward funding model? Is it all of the above?

Yes, I think it's going to depend on the project. Clearly, projects like Atlassian is a very significant commitment and very significant concentration risk for us and -- so that is something, for example, that we would look to at probably an earlier stage in the development cycle, sell down an interest in. And that is largely de-risked from the sense of fixed price contracts with builders and obviously 100% leased to a license. I think that suits a certain transaction structure. Things like 60 Collins Street down in Melbourne, depends on probably where we get to on the leasing and how much risk we're happy to take and we kick off that project, reminding everyone that, that is 100% balance sheet asset at the moment again. So it's going to be a bit horses for courses. And it's also going to have regard to overall risk in the portfolio and [indiscernible] capacity, we'd probably sort of talk to.

Your next question comes from Simon Chan from Morgan Stanley.

I know you maintained your guidance today for at least 2% growth. Well, I was just reading this operation -- operating and financial review you put out, where you said the current surge in COVID-19 cases expect for the reduced economic growth and expectations for Q1 '22 and have some effect on forecasted FY '22 full year growth. What's the meaning of that statement down? Like is that warning us up for a potential downgrade. Or should I interpret this, you would have upgraded but for Omicron?

I certainly hope not. I think as I said before, there's a lot of uncertainty going on across the globe and in the country. With regard to that comment, I suppose, what we did see was rent relief extended in the first half of the -- of the first quarter. So we were anticipating early on that we'd be back to normal by March. I think it's now going to be probably late March, early April before things normalize. And what's really important to us is to continue to support those small to medium businesses that are the lifeblood of the CBDs across the country. And we want to make sure to the best of our ability that they will be in place at the end of Omicron and when things do start to normalize. And pleasingly, we have seen a lot more activity, particularly in the Sydney CBD in the last couple of weeks. That's a good sign.

Okay. Fair enough. And why did industrial rent collection dropped from 98.3% last half to just 93.9% in January? Was there something funny going on there?

Look, it's just slightly lower collection figure this month across the group of tenants, but there's no individual tenants that are of concern to us. So we're comfortable we're on to stay on top of that.

Okay. Cool. And my last question, maybe more for Ross. Just on Slide 30. I think Druce asked a similar question before, but can you walk us through, I guess, what the market should expect over the next, say, 12, 24 months? Like when are you going to get up to a point where annual production will be $2 billion at year-end. When will this development machine be humming along rather than being ramp-up phase. I'm just trying to figure out how long this ramp-up process is going to take?

Well, we're not going to do your homework for you. I think you've given you some really good disclosures in terms of the costs associated with those projects. And in our remarks today, we've been pretty clear that we're reasonably confident that Waterfront will be next financial year. Some free likely towards the end of next financial year, we think will commence. Atlassian is obviously subject to, I guess, some various state agreements, which we think will be finalized probably this -- certainly this calendar year, but it's most likely this financial year. So I think we've given you the dare on the base to make some assumptions. Development, as is always the case, is subject to leasing and other sort of conditions. So I think what we telegraph today is they are meaningful and significant projects. We are reasonably confident they're going to start in the next, call it, 12- to 18- months. And we're in a strong financial and capital position to be able to fund those projects.

Is it fair to assume that you guys will hold a minimum 50% stake in all your projects post various sell-downs?

But we're not committing to minimum percentages. It's going to depend on a whole range of circumstances, be it our financial capacity at the time, the opportunity cost of having that investment, other opportunities that might exist in the portfolio? And how much saying how we just think about the risk return trade-off of that deployment of capital. So I think what is really exciting for us right now is it's not there's been a lot of focus on these bigger projects, but the development pipeline is actually quite long dated and increasingly diverse. I know we've got some very large chunky projects. But as we talked about, the industrial development business is very, very strong. We delivered 280,000 square meters of GLA last calendar year. And there's lots of early shoots in what we're trying to do in these bigger health care precincts and not be very disappointed if we didn't have some significant scale projects in that business in the next couple of years.

Your next question comes from Suraj Nebhani from Citigroup.

So firstly, on the guidance. Can I just check if there are any asset sales apart from what has been announced that are assumed in the guidance?

No, there's no further asset sales assumed in guidance from what we've announced to-date.

And just one more for you Keir. The gearing at 31%, is that pro forma including the proceeds from disposals.

No, it's not. So we haven't made any pro forma adjustments to our gearing. But the asset sales should bring that down absent to anything else.

Okay. So just -- so I'm assuming the gearing probably comes down a fair bit given you had a decent amount of asset sales. And you should probably get some proceeds from Jandakot as well as Cbus comes in. I'm just wondering in terms of deployment, is development the only sort of deployment opportunity that we are looking at near term? Or are there sort of other opportunities that Dexus might look at as well?

Yes. Look, obviously, the returns on those developments as alluded by Ross are very strong versus buying on market. But we'd be open depending on what we see with regards to some industrial product with our capital partners. As we said, we didn't get fees on that as well, which will increase the returns, but industrial is getting very expensive out there. So for the most part, it will be spent on development.

Okay. And just one last one for maybe Ross or Darren. So on the Slide 30, the development with increase I'm just wondering if you can help me in quantifying the earnings upside, like what sort of earnings upside should we think about on an annual average basis. So is it just as simple as taking the difference in WIP and multiplying it by the yield that you talked about, 5% to 6% yield or there may be some other streams as well over here?

We're happy to maybe sit with you off-line and work through your modeling assumptions. I think for us, part of that development with -- as it grows is going to manifest itself in -- let's call it, an attractive yield on cost that's going to exist in the stabilized portfolio. Some of that may create profit events that will contribute to AFFO and earnings in the year that we transact. So it is going to be a little bit of a mix. I think the overarching point I just sort of stress is there's healthy margin in those projects. And so we have sort of set on current metrics today. Margins in that development book is circa 25% or better. So whether it comes through NTA or it comes through AFFO, we think that's quite value accretive to shareholders.

Your next question comes from Richard Jones from JPMorgan.

Just [indiscernible] to those key office projects. Just -- can you discuss the leasing hurdles you need to get to the kick off Waterfront, 60 Collins and Central Place?

They'll be varied depending on the project and on our capital partners for those projects. So there's no one specific terms. But for the most part, somewhere between sort of 30% and 50% on average would be what we'd be looking for. But once again, it -- it comes down the line of sight on what we think the market is going to do.

Okay. And is there a significant loss of income on those projects from moving from I guess, currently income producing to development assets?

We would expect some loss of income naturally that goes into development, but equally, there will be some capitalized interest as we start to progress those developments.

Okay. And just one final one. 123 Albert, when did that go offline?

Yes. I think we'll get there. I think it was no August, sorry, August '21.

Your next question comes from Stuart McLean from Macquarie.

First question might be just on Office. The effective like-for-like income, the growth of 4.4%. And probably a bit above where at least we thought that might land. Can you just talk to the drivers of the plus 4.4% given that the soft occupier markets? And then also expectations to that going forward, please?

Sure. Well, the corresponding half was obviously a lower activity half. So that explain some of it. But the combination of fixed bumps, obviously, we had some upside in some of the parking revenues in the period. We had a small amount of one-off income. We also -- the gap between physical occupancy and reported occupancy closed a little bit period-to-period, so that the effect of lease-up or early income was a contributor as well.

And so going forward, would you expect that for the next 6 months to be a similar type of level? Have you taken some more one-offs there that's going to be hard to replicate. Can you just comment on the outlook for like-for-like growth in office fees?

The full year like-for-like position will still be in positive territory, but we're not giving a forecast at this stage.

Okay. And second question is just on -- in relation to ADPF. Dexus is going to inject $400 million of liquidity there. It doesn't seem like that's occurred yet. Can you just provide an update on that $400 million of liquidity and if that will go ahead, please?

Yes. So look, unfortunately, the Board of that vehicle decided they didn't see Dexus as a suitable investor. And also fortunately enough, we were able to generate enough profit out of the sales that we did to deal with the redemptions in that fund. So at this stage, we won't be putting that $400 million to work on the balance sheet.

Okay. And then a final question for me, just in regards to the asset recycling that has occurred. And what you've acquired, just looking at some of the industrial transactions there. It seems like there's been sort of a few hundred on balance sheet acquired in the last 6 months, give or take. Can you just give some so maybe some yields there that you're acquiring assets on place? Is that maybe AFFO yield, if not an FFO yield or cap rate?

Depending on the asset, we can come back to you in [indiscernible] if you want, but typically ever buying into an asset, we think that has got a good reversion we buy as tight as 3.5% on a cash-on-cash yield. We bought stuff as high as 4.5, 5. So it really it depends on the asset -- on the office side. Obviously, Capital Square in Perth was quite high yielding and there is a reasonable of detail in the appendices and we will note that year.

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

I was just wondering with 123 Albert Street. The full year project estimated cost was $168 million, and that's gone to $560 million in this disclosure. I'm just wondering what's changed there on that project?

And this goes for our entire development, I'm Ross here. We have included the existing land so that we had some issues with I think some brokers were missing the yield on costs and missing the income contribution. So across the entire development book, we've added the existing land bank and I think that added about $1.9 billion to the growth in the development pipeline in the half.

Okay. So when looking at the yield on cost, so it's just on the cost to complete essentially?

You can do it on the overall. Yes.

Okay. And then the other question I had was just around DREP and just was interested in what sort of things have you been investing in? Or do you plan to invest in there? I think you mentioned sort of opportunities across the capital stack. I know you've got some investments? What have they been? And what's the outlook for transactions there?

And the great thing about that vehicle, Tom, is we're agnostic and we're just focused on making money and as I said, identifying those inefficiencies through the capital stack. So that vehicle so far has done some resi deadstar deals. It's done a small Suburban office project. It's done small industrial -- it will be a multiunit estate infill project. So it's going to look at a whole range of projects, and I think that's it's just upped its design right a constraint.

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

Thank you, everyone, for your time this morning, and we look forward to catching up with many of you over the coming weeks to discuss the results in further detail. Thank you. Have a good morning.

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