DEXUS (DXS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dexus 2024 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Darren Steinberg, CEO. Please go ahead.

Good morning, everyone, and thanks for joining us today for our 2024 half year results presentation. I'd like to begin today by acknowledging the traditional custodians on the lands on which we operate, and pay our respects to their elders past and present. Today, you'll hear from Keir on the financials, Deb on our funds business, and then Stewart on our portfolio performance, and Ross on transactions and development. We'll then finish with any questions you might have. Our vision is to be globally recognized as Australasia's leading real asset manager. Our strategy is delivered through our strategic objectives of resilient income streams from investing capital into a high-quality diversified portfolio and being identified as the real asset manager of choice with access to diversified pools of capital, which ensures our ability to operate through economic cycles. These objectives are enabled by our fully integrated platform and underpinned by a commitment to ESG and prudent capital management. In a challenging environment, we have maintained strong office occupancy in the mid-90s, significantly above the market average and vacancy in our industrial portfolio is minimal. We continued our asset recycling strategy, selling 28 assets at a total value of $2.6 billion across the platform. Our balance sheet is in strong shape, with gearing of 29.4%, and we continue to maintain high hedging levels. We achieved final completion of the AMP Capital transaction and are on track to achieve full integration onto our platform by 30th of June this year. Our funds are performing well, with Dexus Wholesale Shopping Center Fund outperforming its benchmark for the 6-month period since transitioning to our platform; and Dexus Wholesale Property Fund outperforming its benchmark across 3-, 5-, 7- and 10-year periods. We continue to be globally recognized for our leadership in sustainability. We are also progressing the delivery of initiatives against our 3 priority areas of customer prosperity, climate action and enhancing communities. I'll now pass you over to Keir to cover the financials.

Thanks, Darren, and good morning, everyone. Turning to the composition of the result. We have continued to diversify our earnings. Since FY '22, the contribution from management operations and co-investment income has grown significantly, now accounting for more than 20% of earnings combined, while office property income has reduced to 60% following the impact of divestments. The Dexus portfolio is independently valued every 6 months and has been impacted by the higher interest rate environment. The total portfolio decreased by $687 million or 4.7% on prior book values for the 6 months to 31 December, driven by a 34 basis point cap rate expansion, and higher discount rates, partially offset by market rent growth across office and industrial. The value of the office portfolio reduced by 5.4% compared to prior book values, which was driven by higher cap rates, partially offset by market rent growth. The industrial portfolio reduced by 2.2%, with strong rental growth largely offsetting the impact of higher cap rates. Turning to the results in detail. Despite the continued impact of higher interest rates, we delivered growth in underlying funds from operations. Office and Industrial property FFO both decreased this half, primarily due to the impact of divestments, partially offset by fixed rent increases. For the Industrial portfolio, recently completed developments and higher one-off income also made a positive contribution. Income from co-investments in pooled funds grew significantly, driven by new investments in AMP Capital platform funds. FFO from management operations also increased significantly to $72.5 million, mainly reflecting the AMP Capital platform acquisition, with performance fees this period largely offsetting development milestone related fees in half year '23. The AMP acquisition was the primary driver of the increase in group corporate costs with inflation also having an impact. Net finance costs reduced as high interest rates were more than offset by the impact of divestments on the average debt balance. Following an elevated trading result in half year '23, Dexus delivered $9 million in trading profits after tax. This movement was the primary driver of the 5.9% reduction in AFFO and 4.6% reduction in distributions. NTA decreased to $10.04 primarily due to property devaluations. Dexus securities are currently trading at a 21% discount to NTA, which does not take into account the $41 billion funds management business. Moving to capital management. Our balance sheet remains strong, which enables us to execute on our strategy and fund the committed development pipeline. Look-through gearing of 29.4% remains below the 30% to 40% target range. At December, we held $3.1 billion of headroom. This compares to the $2.1 billion committed development CapEx to be incurred over the next 4 years. Over the half, 95% of our debt was hedged with a weighted average maturity of 4.2 years, providing material interest rate protection over the medium term. I'll now pass over to Deb.

Thanks, Keir, and good morning, everyone. Our diversified funds management business offers various products and caters to many investor types, including institutional, wholesale, high net worth and retail investors. And our real asset platform has embedded organic growth opportunities with a broad range of asset classes, investor channels and capability set, were fit for purpose to fulfill our investor strategies. Our funds benefit from our prudent approach to capital management, with average gearing across the pooled funds of circa 26%. And while our third-party funds under management was impacted by property devaluations and divestments in the period, we continue to deliver for our investors. Turning to highlights for the half. As Darren mentioned, we achieved final completion of the AMP Capital platform acquisition with fund operations and investor relationship management transitioning to Dexus. As an active manager of our clients' investments, we are focused on delivering liquidity for our investors who need it. We have satisfied $720 million of redemptions for our investors through our program of divestments, and we're confident of being able to deliver the remaining redemption requests. Our focus is on delivering fund performance and our flagship diversified fund, DWPF, outperformed its benchmark across 3, 5, 7 and 10 years. In addition, since transitioning to the Dexus platform, the Dexus Wholesale Shopping Center Fund outperformed its benchmark during the 6 months to 31 December, supported by proactive divestments of noncore assets and leasing success. Capitalizing on strong interest in our opportunity in health care funds, we've launched a second fund in our opportunity series and another equity raise for the health care fund. We've also raised equity in our wholesale airport fund. And importantly, our focus on ESG gained multiple funds and investments global recognition by GRESB. Capital raising activity slowed materially across the market for calendar year '23. In this environment, we are pleased with the positive response to our opportunistic and health care strategies, which I've mentioned. Our recent global road shows have provided valuable investor and market insights. And over the past 6 months, we've observed that. Australia continues to screen well due to its favorable fundamentals. However, larger markets, especially those that have repriced faster than we have here are being prioritized as we wait for Australian interest rates to stabilize. Dexus is seen as a leading real asset manager, with the potential to leverage real estate expertise to enhance the value of infrastructure assets. Investors are waiting until valuations rebase before deploying into core assets. And instead, are focused on higher return strategies, including credit. Opportunities that align with investors' ESG objectives and have strong returns such as health care, living, renewables and sustainable infrastructure are also of interest, and we have investment opportunities on our platform, which cater for this interest. And from a retail investor perspective, limited liquidity is hampering further deployment. I'll hand you to Andy.

Thanks, Deb, and good morning, everyone. Despite persistent headwinds, our portfolio occupancy remains relatively high at around 95%, well above the market average. Effective like-for-like income growth was 4%, supported by fixed rent reviews but is expected to soften by the full year. Incentives in the period were 29.4%, well below the market average, reflecting the quality and location of our portfolio along with a higher proportion of effective lease deals struck. We expect that market incentives will remain elevated in the near term, in line with market vacancy. Despite an increase in reported market vacancy rates, Australia CBDs continue to perform well, with vacancy concentrated in just 10% of the stock. Looking at our expiry profile, we expect lower average physical occupancy in the second half due to anticipated downtime in select assets. This, alongside the impact of higher incentives is driving our expectation of softer like-for-like at the full year. However, the portfolio remains well placed in terms of quality, location and diversification of expiry profile and customer base. There are mixed signals in the leasing markets with demand varying between cities and building types. Customers adopting flexible working models that combine office space with home or third spaces are more focused than ever on the quality of their office accommodation. We expect this dynamic, along with an increased emphasis on ESG performance may provide further tailwinds to demand for higher-quality buildings and central locations. Thank you. I'll now hand over to Stewart.

Thanks, Andy, and good morning. Turning to the performance of our industrial portfolio, occupancy reduced slightly to 99%, albeit remaining very high. Incentives rose to 18.6%, offset by face rent growth, with net effective re-leasing spreads in the double digits. Effective like-for-like income growth was 5.5%, benefiting from positive reversions achieved in FY '23. The portfolio is 14.9% under rented and continues to benefit from sustained market rent growth across key markets, creating the opportunity to grow income by resetting rents on upcoming lease expiries across approximately 28% of the portfolio by FY '26 and around 55% of the portfolio by FY '28. So let's take a closer look at the demand drivers. Vacancy rates remain low in major markets, driven by e-commerce operators seeking locations for last mile fulfillment together with the constrained supply of developable land. In this environment, vacancy continues to support rents and is driving companies to take up larger commitments due to the lack of available small spaces on offer. We enjoyed the leasing risk in these conditions, therefore. Population growth, growth in online penetration and low land supply in all key markets will continue to fuel demand for well-located industrial product, and around 3 million square meters of industrial space required each year to 2030, which compares to only 1.7 million square meters forecast to be under construction in CY '24. We're pleased with the relationships we have built with customers as we utilize our development capability and national platform to support their growth requirements across Australia, such as Amazon at Ravenhall in Melbourne and at Jandakot in Perth. Thank you, and it's over to Ross.

Thanks, Stewart, and good morning, everyone. As Darren mentioned, we continue to recycle capital, selling $2.6 billion in 28 transactions across the platform, showing up the capital position of the balance sheet and the managed portfolios. The transaction markets continue to be challenging with core buyers sitting on the sideline. As seen on the chart, market volumes were down 60% on 2021. In our platform, acquisitions were focused on high-return investments in the opportunistic space. With the interest rates approaching or close to approaching their peak and price discovery well underway, we expect transaction volumes across the markets will improve this year with a likely second half skew. We continue to deliver the high-quality development pipeline, building the next generation of assets that we believe will improve the long-term performance of our portfolios. The balance sheet has circa $2.1 billion remainder spend in the existing committed projects, around $800 million over the next 18 months. We've realized $9 million of trading profit in the half, reflecting the majority of the full year guidance. Thank you, and I'll now pass you back to Darren. But before I do, and Darren, this is not on the script, on behalf of the entire team at Dexus and more than 1,000 of us, I would like to acknowledge and thank you for your contribution to Dexus over the past 4 years. You have really been a force. The business is fundamentally and positively changed by your leadership over the years. You shaped what we are, you've nurtured our culture and created an exciting opportunity set for the future. Sincerely thank you on behalf of the team. We wish you all the best for what lies ahead.

Thanks, Ross. You shouldn't go off the script, mate, you know that. An investment in Dexus provides exposure to significant long-term opportunities across a range of real asset sectors. We have created an integrated real asset platform with strong capability across all major asset subsectors in the country. Our capital is invested in a $15.8 billion high-quality portfolio, which generates stable core type returns. Our balance sheet supports our capacity to invest in new opportunities alongside third-party clients and increasingly is being allocated this way. A $41 billion established funds management business has brought access to diversified sources of capital that will organically fuel growth over the next decade. And our $16.9 billion pipeline of city-shaping development projects, with flexible timing, provides embedded future value by improving the quality of the portfolio while providing inventory to grow out our third-party relationships. Our business model is positioned to benefit from long-term megatrends to drive sustained returns through the cycle. So to conclude, markets remain challenging as capital flows and sentiment continued to be impacted by inflation, interest rates and geopolitical risks. Despite the challenges, we have continued to execute on our strategy, maintaining a strong balance sheet and high occupancy. With the integration of the AMP Capital platform to complete by the end of this financial year, our funds platform is set up for growth. Barring unforeseen circumstances for the 12 months ended 30 June 2024, we reiterate our expectations for distributions of circa $0.48 per security. FFO, excluding trading profits, is expected to be broadly in line with that delivered in FY '23. This is my 26th and final Dexus results presentation. It's been an amazing privilege to have led the company for the past 12 years. One of my proudest achievements is building a talented team of people who have seen flourish. Together, we have positioned Dexus as a leading Australasian real asset manager, and I'm excited to watch the next phase of growth for the group. Thank you. That now ends the formal part of today's presentation, and we'll open it up for any questions.

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

Congrats, Darren, on your last presentation and for your time and help over the years. Just on the guidance, I noticed you put circa $0.48 from [ $0.48 ] and the trading profits are now certainly in line with last year. So I know -- okay, that's different, okay. What -- is there any change in guidance in that circa $0.48, so what was [ before ] or is it...

It remains as we stated at the start of the year, circa $0.48 per security.

And the trading on that guidance, trading profits is sort of all pretty much first half skewed. Is that correct?

Yes.

And then just on the NOI line, there any one-offs that you're in the result this period that you can flag out in the NOI line for Office and Industrial. I think you mentioned some of the core?

Sholto, it's Keir. Look, with the portfolio of our size, there's always a level of nonrecurring income. What we have called out this period is some one-off income within the industrial portfolio associated with one of the tenant surrenders.

How much was that?

Circa $5 million to $6 million?

The next question is from Simon Chan from Morgan Stanley.

My first question, if I think about your first half FFO of $0.27, full year guidance of $0.48, it implies there's probably a $65 million, $70 million downward move first half to second half. I was just wondering, perhaps this is for Keir. Like what are the main moving parts for the $65 million to $70 million delta? I think you've kind of in part addressed it with the industrial surrender. But what are the -- some of the other key factors that we should be mindful of?

I'll take that one, Simon. Look, as you know, we typically have a skew to the first half in terms of our earnings this year. As usual, CapEx is more heavily weighted towards the second half. We have realized the majority of our trading profits in the first half. As Andy mentioned, we'll have slightly lower income producing occupancy during the course of second half. Interest rates are up slightly in the second half. And outside of that management business, net of group corporate, broadly flat half-on-half subject to where we land with respect to performance fees.

I will just go through the appendix. On Slide 35, it seems like you have transferred $60 million of assets into trading. Can you give us a bit of color on that? What it is and when it could come to fruition in terms of profit?

That is our asset at [indiscernible] was a data center. It's now gone vacant, and it sits right across the road from Norwest train station. So there is, we think, an exciting repositioning opportunity for that asset. We're not committing to time. It would need to go through planning. But that is why it's been transferred into inventory. It's unlikely to come back as a data center or industrial assets.

So that was a rent generating asset from your industrial book or something [ you shared ] and you flicked it into trading?

The next question comes from James Druce from CLSA.

Congratulations, Darren, on a wonderful time at Dexus and best of luck for the future. I just want to get a sense of where the rents are in the office and industrial portfolio relative to market. It's probably more what's expiring over the next year or so.

Do you want to talk to office and then Stew can talk to industrial?

Sure. So the releasing spreads on a face basis across the portfolio were 4.5%, office, CBD -- Syd CBD 8%. Looking ahead to key expiries next year, we've got some expiries in 80 Collins Street North and along with Australia Square. So we'll focus on those leasing risks at the moment.

Yes. In Industrial, 32% face spreads. So we're enjoying the conditions that you guys all know are out there in the industrial market. We're getting cautiously optimistic. I suppose we know that container freight traffic is normalized or stabilized. We know there's some subleasing activity out there. So we're still enjoying really good positive spreads, and that's going to mark for a solid like-for-like result in FY '24, bearing in mind that there's only 4.3% of the portfolio left expiring.

And maybe just put into Andy's answer on 80 Collins and Australia Square. Just -- how are you thinking about the rents there relative to market and the chances of retaining those tenants?

Well, I think if you look at the incentive strategy across our portfolio versus market with [ beat ] market incentives across the whole portfolio, it's a benefit of diversification. In relation to those 2 particular leasing risks, it's a competitive market. Australia Square is very well located, worked there for 10 years. It's probably the best location in CBD. So I'm quite optimistic about the outcomes we can achieve there. Looking forward to next year, we're seeing vacancy peak in Sydney in FY '25, Melbourne in FY '24. We're seeing a return to positive net absorption from next year and thereafter. So if interest rates stabilize and the confidence that comes from that flows through to leasing markets, I think that we can achieve some good outcomes.

That's great. And one more if I may. Just to comment on the transaction market and if some of the -- there's been a change in some of the players that are interested in office assets, typically, it's been the syndicators and select Asian clients, I suppose. Can you make -- is there any update to that story?

The market remains quite thin from a buyer perspective. I think the pleasing aspect, if there is one at this point is that there's been a lot more visits down to Australia from international capital in the first quarter either planned or underway. So there's a lot of people doing work, whether that leads to a lot of transactional activity in the first half is yet to be seen. But I think as I said last year, with the interest rates stabilizing around the globe, I do anticipate a much more active second half of this calendar year with regard to transactions. Ross, anything you want to add to that?

I think you've answered it well, Darren.

The next question is from Tom Bodor from UBS.

Darren, Ross, Keir and team. I was just interested in the like-for-like growth in office and the comments around it slowing into the second half. Just be good to understand where rent paying occupancy was in the first half versus second half given that sort of downtime piece and also I think your occupancy number includes future starts on leases. So just where was that? And how does that impact the like-for-like? What do you expect the slowing to be?

So we do see income-reducing occupancy dip at the second half. But by 30 June, we do expect off-the-market occupancy to sit slightly below today's levels. In relation to income-producing occupancy, the difference between off-the-market and income producing in the first half was about 2 percentage points.

I didn't quite hear the answer at the start there. Did you say around the impact on like-for-like. Can you just repeat that, please?

Yes. Sorry, I'll try again. So what's driving our expectation of like-for-like flattening in the second half is a change to occupancy in the second half, where it will dip, but by 30 June, we expect it to recover and see it slightly below today's levels.

And then maybe one for Ross, just on the various infrastructure processes underway. There's been some pressure around airports and various other infrastructure assets. How do you see that playing out? Do you expect to be participating in those processes? And then maybe more broadly, where you expect your FUM growth to be over the next 12 months factoring in new wins, devaluations, redemptions and all the things that are going on in that business?

We're very excited about the infrastructure addition from the AMP transaction, and we have been looking to bet that team in and look for opportunities to leverage not just that capability but also how we can bring other capabilities in the real estate side to the benefit of our infrastructure strategy. So that is work in progress. In relation to, I guess, the live market processes, we are keen to work with clients on those opportunities. These early days, we're active on a number of them. I don't think it's appropriate at this time to kind of be providing a forecast on FUM growth for that business. There is some stabilization, I would kind of flag and some asset divestments, which we are working through, which were known at the time of acquisition. So we're focused on growing that business. And I think we've been very clear that this is a long-term play for us. And I think everything we're seeing in the market is supporting that move to invest in infrastructure, and we're getting a very strong audience from our clients in that regard.

All the best, Darren.

Thanks, Tom. Just before we take the next question, I think, Ross, your answer to [indiscernible], Norwest, could you repeat that? I think we had a bit of a technical issue.

I think they might have had my microphone off. And so Norwest is an old data center. It went vacant. It sits literally across the road from Norwest train station, that's an asset that has been moved into trading and something that will be subject to redevelopment and does require various planning approvals. So it's not going to contribute to trading imminently, but is a very large and scalable trading opportunity for the platform. I think we're very focused and [ excited about that ].

The next question is from Howard Penny from Citi.

Darren, all the very best for your next challenges, and thank you very much for your contribution. Just my first question, Dexus has a great scope of investment alternatives these days with both the direct side and the funds management platform. Where are you seeing the greatest investor interest? And are there any specific areas where there is lower or reduced demand?

Deb, do you want to talk to that one?

I think it's fair to say that investors are keenly watching valuations and trying to understand where opportunities lie. So as we said in the presentation, areas such as health care and then opportunistic across asset classes where there's some dislocation or opportunities is really the highest priority at the moment. And as we talked about at our Strategy Day, we're certainly seeing investors considering whether or not it's an equity or debt investment across any of those asset classes. I mean, Darren touched on this before in terms of transaction activity. Office is probably not flavor of the month, but interestingly, we are having some good conversations with investors around retail assets, which would be certainly the first time in a little while that they have been of interest. And then looking at areas such as health care and more multipurpose rather than just living but looking at the repositioning of assets and the opportunities that a development repositioning may unlock for an investor is certainly of interest.

And then just looking at your development pipeline and the committed pipeline remains skewed towards office with some industrial as well. But looking beyond this pipeline, how do you see it evolving? Do you see it evolving further towards industrial? Or do you still see office playing a role in the next kind of 2 to 3 projects coming online?

I'll pass it over to Ross to respond to that one.

I think one of the strengths of the platform right now is we actually have really good development capabilities right across the platform, office, industrial, retail, health care, in particular. And interestingly, there's actually a lot of growth opportunities within the infrastructure portfolios as well. So I would expect to see the development pipeline for the group to more broadly reflect the footprint of the organization that we have today.

And just one last one for me. So you're seeing the cap rates shift out specifically. I think the interesting one is office now 5.53%, and maybe perhaps getting closer to peak cap rates. How do you see this evolving over the next year?

I think it's -- at the moment, we're about -- on office 15% peak to trough where we are today. Look, there's potentially a little bit more movement to go in the office. I think we're probably closer to the bottom of the cycle now, particularly with the interest rate stabilizing. So I think you'll see that play out between sort of now and 30 June. And that's, as I said sort of before, that should then see the transaction market start to open up a little bit as well.

The next question is from Ben Brayshaw from Barrenjoey.

I was wondering if you could give an update on redemption requests and how that might have changed over the last few months. Deborah, I recall you saying at the Investor Day, we're probably in the order of $2 billion to $3 billion outstanding across a handful of vehicles. Perhaps you could just comment on those, please. DWPF, SCF and the [ team for fund ] as well.

Yes. So not getting into specifics on each fund because the redemption profiles are very different, the way they work at windows versus constantly being open. But we're still sitting around that $2 billion mark having met $720 million of redemptions in the half. The plan for those and what is clear to us is that the investors are wanting to ensure, so most investors are not 100% coming out of a fund. And I think that's the important piece to look at. They're wanting to get some liquidity, but they're considering the performance of the fund as well. So we're very clear and our fund managers are very clear with investors what the divestment opportunities are and what the impact on the fund performance will be when those divestments occur. So we're quite planned in that way and openly communicating with them and making choices and decisions that way. There's also some opportunity for investors actually to come into those funds, which is playing out quite nicely where there are secondary trades occurring, they seem to be certainly becoming of interest to investors, which helps balance out whether or not they need liquidity through a redemption or they can trade on the secondaries market to gain whatever cash that they're requiring. I think the other thing that's -- what we're waiting for as well is for redemptions to occur across the market, so that the rebalancing of certainly some of the Australian super funds, real estate and infrastructure portfolios can occur. And the pleasing thing for us is seeing the number of investors currently coming into due diligence on a number of our funds and starting to do the work on when to invest. So look, I feel really confident that we have the redemption process under control. And I feel very confident that we have a small but growing number of investors considering particularly reinvesting into the pooled funds.

Just my second question perhaps is to Andy. Like-for-like base rental growth this period was circa 5.2%, a bit above fixed indexation and broadly occupancy is unchanged. So does that imply that face rent spreads were positive for the last 6 months?

I think there are other items considered in that like-for-like number one-off income items, not just the face rent spreads, but the face rent spreads were 4.5% positive across the portfolio for the half, yes.

And are you able to say what those one-off contributions were? Or they just make good payments? Or are there other things in there as well?

It's mostly make good payments and things like that. We don't -- there's nothing material.

The next question is from David Pobucky from Macquarie.

Darren, congratulations and best of luck going forward. Just a first question around the balance sheet and developments, if I may, please. So look-through gearing was up a bit 1st June, you've got that $2.1 billion of remaining spend on the committed pipeline. So if you could please just talk to your comfort around the balance sheet and funding developments as well, please.

Sure. I'll take that one. And look, the gearing at the moment, 29.4%. So we're still remaining below the target range. Obviously, you've seen for a number of years now, we've sold on average, $1 billion or more of assets, which has ensured that gearing the balance sheet more broadly is in good shape. The $2.1 billion that you referred to is important to keep in mind, that will be spent over the next 4 years. So the spend over the next 18 months is only $800 million. So we think from a balance sheet perspective, we're still in very good shape.

And just a second one on MC and PI. Is your expectation for the full year to be broadly similar to FY '23, please?

I expect they'll be slightly lower than FY '23.

The next question comes from Richard Jones from JPMorgan.

Ross, just in the Atlassian project, just wondering if you can talk us through the ability or potential to -- [ seems ] a lot of market conditions at the capital spend, obviously, no capital partner and the tight yield on cost. Just -- basically within -- as you have to pause that project. Has it been discussed? And is it something that you're thinking about?

I can appreciate the question. And as a management, we are very focused around capital allocation and ensuring that where we allocate the capital, we're getting attractive returns. The decisions around that capital commitment was made some time ago, and aborting that project or terminating that is not something that is currently considered or contemplated at this point in time. I would put in context that, that project plays to all the strength that we're seeing and hearing from our customers at the moment on the office side. Transport enabled, Central has the best transport infrastructure, arguably, of any location in the country and the amenity that sits on that doorstep. So we're very excited about the precinct. We have a long-term lease to Atlassian, 15 years, attractive increases. And we're very committed to that broader precinct. So in terms of taking capital off the table in terms of selling down, there's nothing in any of the arrangements that's kind of restricting us reducing our exposure through the development, whether or not that makes financial sense is really going to have to have regard to what the redeployment opportunities are because our experience is trying to sell a half-developed project is generally not the value maximizing strategy. So it would have to be a pretty attractive redeployment opportunity for us to be doing that at a heavily-discounted price.

So is the build above ground, like have you actually passed that point of not being able to hold it?

I think the stage of the construction is irrelevant to the determination of whether or not we would stop the project. It's not something that we're considering.

Richard, just to reiterate, if Dexus stopped that project, we would never do another office development again because you've got a commitment, a major commitment to a major international tenant. Can you imagine the brand damage that, that would cause for this business going forward? You're also in partnership with the New South Wales state government. So there's a lot of deep relationships here -- that we have commitments made 3 years ago. If you breach those halfway through with the half-completed development, you can imagine what that would do for our brand. It's certainly -- it's not something that would ever be contemplated.

No, I appreciate that, but the world changed a lot in 3 years. So just wondering whether maybe the tenant had different motives around what the future occupations would be and whether that was an angle you might be able to explore that...

Look, the tenant, you've got to remember the tenant is also an owner of the development as well. So I think that needs to be taken into account. So Dexus is under no balance sheet pressure and at the appropriate time, which we said for the last couple of years, we'll be looking to sell down that project. To Ross's very point, this is going to be an excellent asset with 4% bumps to our major international tenants. So that will be attractive once the cycle turns again. And I look forward to seeing that project developed and a good sale at the appropriate time.

And the additional context I would add is we divested a lot of assets in preparation for making that commitment and Keir touched on that. And that is how we thought about the capital recycling, the relative allocation of capital. Would we rather own assets in the Western corridor, for example, or that profile of asset. And I think we stand by that decision, that relative allocation of capital, we acknowledge our benefit of hindsight in absolute terms. To be frank, any investment you made in the last probably 2 to 3 years, there may be some different decisions made, but that's hypothetical.

Just on 60 Collins, just similarly, just where are you with the development there? And again, can you maybe just discuss whether that will -- when a decision may be made on either developing that or potentially releasing that?

60 Collins Street is, we think, the best office development site in Melbourne. That asset is in what we kind of call a predevelopment phase. The team we are working hard to ensure we have the option to start that project when we have confidence around the market conditions. And we have been very clear, I think, with investors that we wouldn't start that project without having third-party capital support with us and having our leasing teams confident around the rental profile that we need to achieve. So that is still the case. We're not committing to a timing re-leasing those buildings, we don't believe makes sense in the current environment given where all the trends we're kind of seeing around kind of, let's call it, secondary assets, notwithstanding the location. So we are preparing the asset for development, but no commitment has been made at this stage.

The next question is from Winston Sammut from Euree Asset Management.

Darren, firstly, I just want to add my thanks for your time and your input. You've always been [indiscernible] available and so on. And from my perspective, I'd like to thank you for that. I have 2 questions. The first one is related to the office situation at the moment. And obviously, there is a spread between what the buyers are looking, willing to pay and what the seller is looking to get. Has that -- in the last 3 to 6 months, has that spread actually narrowed, or is everybody still sitting on the same parameters?

Yes. I think as I said earlier, there's very few buyers. So you need willing buyers and willing sellers to have a proper market interaction. So there is more people doing the work. There are more people doing trips down from other overseas. So that will create a bigger market to sell into at the appropriate time. But I think they're still waiting for the next round of valuation. So I think as I said earlier today, I anticipate by about the middle of the year as interest rates have truly stabilized, valuations have reset that you'll see a far more active market as we move into Q3 of the 2024 calendar year.

And my second question is primarily for Ross again. Once you get in the chair, is it going to be a pace of steady as she goes, very little change? Or are there any areas strategically that you're looking forward to add your input going forward?

And I can appreciate the change in CEO as a call for investors to ask questions around change in strategy. Fortunately, I've been in the organization a long time, the way we think about strategy development is as a collective amongst the executives. So we have articulated our strategy quite clearly at the Investor Day last November. There hasn't been a change in market circumstances that would cause us to revisit that. What I think Dexus does very well and will continue to do is evolve our tactics as to how we execute as the market conditions there, and Darren just given some commentary around kind of the uncertainty in the market from that respect. So I think we'll continue to evolve and innovate how we execute, but fundamentally, strategy remains unchanged at the current time.

The next question is from Alexander Prineas from Morningstar.

Just one from me. Just on Slide 20, there's a statistic there that says the industrial portfolio is 14.9% under rented. Just wondering what that statistic would be for the office portfolio?

So on a face basis, we're about 4.6% underrented. And are effective -- yes, so that's reflective of the higher incentives. In Sydney, we see the face under renting at about 10%.

And do you measure that on an effective basis as well?

In Sydney, for example, the face under renting is 10%. On an effective basis, we're about 9% over rented. And that's reflective of the higher incentives that are coming through the market.

And congratulations to Darren on your tenure at Dexus.

Thank you.

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

Thank you, everyone. I think that was my 48th results period overall since I started back in 2021 with my first one. So thank you all for your support over the years and your many questions, and I look forward to catch up with many of you, with Ross and the team over the coming weeks as we go through the result in more detail. Thanks, everybody.