DEXUS (DXS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dexus 2024 Annual Results Briefing. [Operator Instructions]. I would now like to hand the conference over to Mr. Ross Du Vernet, Group Chief Executive Officer and Managing Director. Please go ahead.

Good morning, everyone, and thanks for joining us today for our 2024 full 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; Andy on Office; and Chris MacKenzie, who we welcome as our new EGM for Industrial. Chris has been with Dexus for 9 years, most recently leading the Industrial Transactions and Development Group. I'll cover funds management and our priorities ahead and then open up to any questions you may have. I feel very privileged to be leading Dexus at an important inflection point in its history. Dexus today is a unique, diversified real asset platform of significant scale and critical mass in each of our sectors. Geographically focused in Australia and New Zealand with access to diverse pools of capital. Our $14.8 billion balance sheet portfolio is largely invested in high-quality office and industrial real estate alongside third-party clients. Third-party capital accounts for almost 3/4 of the platform assets. The platform has a well-established presence in Office, Industrial and Retail real estate, and an emerging presence in the growth markets of Healthcare, Infrastructure and Alternative investments. We see opportunities in each of these sectors. This combination of balance sheet scale, multisector expertise, tight geographical focus and access to broad and deep pools of third-party capital is unique. The business is well positioned given shifts in the investment cycle with future returns expected to be driven by fundamentals, asset selection and creation and asset management. The recent addition of infrastructure to our platform presents tremendous opportunity for growth underpinned by macro tailwinds. We are actively exploring how we leverage expertise from other sectors to extract more value from infrastructure assets. This year, we took the opportunity to pressure test the strategy refining it to align with our strengths and market conditions. Our purpose, Unlock potential create tomorrow, reflects our unique ability to create value for our people, customers, investors and communities over the long term. Our vision is unchanged, to be globally recognized as Australasia's leading real asset manager. We aspire to be known for our deep local sector expertise, our active approach to management and as a trusted partner investing alongside our clients. Our people, our focus on sustainability and governance and our culture that promotes constant evolution and improvement are central to how we unlock potential in the business and will enable us to deliver superior risk-adjusted returns over the long term. Turning to the FY '24 result. In a challenging environment, we delivered on our guidance and maintained high occupancy across both our office and industrial portfolios ensuring strong cash flows with AFFO of $516 million. We continued our capital recycling strategy with $1.7 billion of Dexus divestments of which circa $700 million exchanged since the FY '23 result. These divestments have enabled a strong balance sheet with gearing towards the low end of our range despite the impact of softer-than-expected valuations. A number of the core funds outperformed their peers and benchmarks, our flagship diversified fund, DWPF, and the Shopping Center Fund are particular call-outs. It's pleasing to see the Shopping Center Fund outperforming since joining the Dexus platform. We raised new equity in growth markets, including more than $300 million for the second fund in our opportunistic series. We also sold $2.9 billion of fund assets during the year to facilitate redemption requests and to manage the capital position of the funds. And our people have worked hard over many months on the AMP Capital transaction to ensure its successful and full integration. We delivered on the priorities I announced in May this year, refining our strategy, refreshing our capital allocation framework including updating the distribution policy from FY '25 and implementing a sector aligned operating model. The sector-specific business units are supported by teams with deep sector expertise who are empowered to develop end-to-end strategies that drive investment performance in their unique competitive domains. In addition, our infrastructure investment management business is now embedded into the funds platform. We continue to be globally recognized for our leadership in sustainability. However, we are increasingly focused on initiatives that make both financial sense and have a positive impact for our customers, the environment and our communities. Our Waterfront Brisbane development provides an example of waste initiatives coming to life. The development is underpinned by circular economy principles with the goal of minimizing waste. 98% of the materials cleared from the site have been recycled or reused. This has been achieved at nominal cost, but it has required our teams to challenge the established way of doing things for ourselves, our partners and our service providers. This has been a big achievement, and we are excited at the learnings we can apply to future developments across all the sectors. I'll now pass you off to Keir to cover off on the financials.

Thanks, Ross, and good morning, everyone. Turning to the composition of the result. We have continued to diversify our earnings this year with the contribution from management operations growing significantly, while trading profits reduced following an elevated result last year. Our high-quality and resilient investment portfolio continues to generate the majority or 83% of our income. Over time, the investment portfolio is expected to continue to diversify from active capital recycling and a wide investment opportunity set, including co-investments. Turning to the results in detail. Despite the continued impact of higher interest rates, our underlying FFO demonstrated resilience and was up 0.7%. Office and Industrial FFO both reduced this year, primarily due to the impact of divestments, partially offset by fixed rent increases and recently completed developments. For the Industrial portfolio, higher one-off income also made a positive contribution. Income from co-investments in pooled funds almost doubled driven by new investments in AMP Capital platform funds. FFO from management operations increased to $143 million, mainly reflecting the AMP Capital transaction and $28 million of performance fees during the period, partly offset by the impact of divestments and valuation declines on FUM as well as lower development milestone related fees compared to FY '23. Group corporate costs increased due to the AMP Capital transaction as well as inflation. And as part of the recent operating model refresh, we have done a lot of work to manage costs in this environment. Net finance costs reduced with the lower average debt balance more than offsetting higher interest rates. Other expenses also reduced driven by lower FFO tax expense as a result of interest costs associated with the higher debt balance within our taxpaying trust, DxO following recent acquisitions. As expected, when we set initial guidance, lower trading profits were the primary driver of the reduction in AFFO and distributions to $0.48 per security, which was in line with guidance. Higher interest rates and transactional evidence continued to impact valuations this year. The total portfolio declined by $1.9 billion or 12.9% on prior book values for the 12 months to 30 June. The value of the Office portfolio reduced by 15.6%, and while the Industrial portfolio reduced by 3.3%. Higher cap rates and discount rates were partially offset by market rent growth. Outside of the stabilized portfolio, devaluations were also taken on Office developments and held-for-sale assets. We have taken a pragmatic approach to both valuations and divestments. Our Office valuations are now off 25% from the peak and the current yield spread to bonds for key CBD office markets are broadly in line with long-term averages suggesting we are near an inflection point for office cap rates, and we expect transaction volumes to improve as the interest rate cycle turns. Moving to capital management. Our balance sheet remains strong with look-through gearing of 32% towards the lower end of the 30% to 40% target range despite the impact of valuation declines, which reduced NTA to $8.97. Pleasingly, we've arranged $1 billion of debt extensions during the year at attractive rates and tenors. We have a weighted average debt maturity of 4.8 years, $2.5 billion of headroom and manageable near-term debt maturities. 92% of our debt was hedged during FY '24 providing material interest rate protection over the medium term. Looking forward, there is $1.8 billion of remaining spend on the committed development pipeline with approximately $625 million to be spent in the coming year. From a risk perspective, our developments have fixed-price contracts and our city-shaping office projects are with reputable Tier 1 contractors. We expect the rising construction costs across the market will challenge the viability of future uncommitted supply, supporting the long-term outlook for market occupancy and incentives. For many years, we have taken an active approach to capital recycling to enhance the quality of the portfolio and the strength of the balance sheet. Despite a subdued transaction market, we've continued to divest assets and have now sold $7.4 billion from the balance sheet over the past 5 years. The portfolio is heavily weighted to prime-grade office assets in core CBD markets as well as core industrial assets. We will continue to recycle capital with a further $2 billion of assets earmarked for divestment over the next 3 years, which together with the completion of committed developments, will further enhance the quality of the portfolio while maintaining a prudent level of gearing. Thank you, and I'll now hand over to Andy.

Thanks, Keir, and good morning, everyone. We own and manage the best office portfolio in Australia. The decisions we have made over the past 5 years in relation to divestments, asset management and derisking have enhanced the quality and resilience of our portfolio, and we are well positioned to benefit when the office cycle turns. Despite stubborn market vacancy, our occupancy reduced only marginally during the year to 94.8%, still well above the market average. Effective like-for-like income growth slowed to 0.5%, reflecting amortization impacts and downtime on select vacancies. On a face basis, like-for-like growth was 2.5%. Incentives reduced to 27.9%, again, well below the market average, reflecting the quality and location of our portfolio. We expect both market vacancy and market incentives to remain elevated in the near term. Construction progress remains on track at our city-shaping developments, Atlassian Central and stage 1 at Waterfront Brisbane, which will be completed in financial years '27 and '28, respectively. Looking at our expiry profile, we aim to have no more than 13% of the portfolio expire in any single year, and we are well below that threshold for the next 2 years. We are focused on the more challenging vacancies in 80 Collins Street in Melbourne and 30 The Bond in Sydney. However, much of the upcoming expiry over the next 2 years sits in assets that are well positioned in their markets. For example, Farrer Place in Sydney, 240 St. Georges Terrace in Perth and One Eagle Street in Brisbane. Our portfolio has proven resilient to challenging market conditions with occupancy and incentive levels consistently outperforming the wider market over time. These results can be attributed to the portfolio's high quality and heavy weight into core CBD markets where customers want to be. In our experience, smaller tenancies generate, on average, higher returns and present less volatility and leasing exposure than larger tenancies. Our scale enables us to invest in the systems and processes to service these customers efficiently. As a result, our customer base is more diverse with an average tenancy size of just 1,200 square meters. We have less exposure to large customers than our peers. We have proactively diversified our customer base over many years. And as I mentioned earlier, we manage our forward lease expiries within acceptable thresholds. We continue to see materially lower vacancy in the Sydney core and Melbourne Eastern core. The Sydney CBD map continues to tell a strong story for the core most of the market vacancy remains concentrated in the Western corridor and Midtown precincts. The premium buildings in our Sydney portfolio are located within the core with an average occupancy of more than 99%. This is evidence of the flight to quality and flight to core that continues to contribute to the resilience of our portfolio even in this environment. As a result of this dynamic, the spread in effective rents between the submarkets has continued to widen. Incentives are likely to remain elevated in the year ahead in both Sydney and Melbourne markets. However, we are approaching an inflection point in vacancy with Sydney market vacancy expected to peak in financial year '25, and Melbourne expected to peak in financial year '26. Thank you. I'll now hand over to Chris.

Thanks, Andy, and good morning, everyone. We have a proven track record of delivering high-quality industrial product in sought-after locations that is largely being created by Dexus. Our portfolio continues to perform well, albeit with some moderation as expected following the very strong run experienced by industrial markets over the past few years. Effective like-for-like growth was 3.9%, impacted by a slight reduction in occupancy. We are in active leasing discussions on the vacant space and remain focused on delivering strong total returns across the life cycle of our assets. We are willing to accept some downtime if it leads to better deals. And we have factored in reasonable assumptions for the coming year. Incentives rose to 16.5%, and we are seeing some evidence of market incentives increasing as customers look to invest more in automation and sustainability initiatives. The portfolio is 15.4% under-rented, creating the opportunity to grow income by resetting the rents across approximately 26% of the portfolio by FY '26. Margins remain attractive across the development pipeline with 150,000 square meters underway and more than 80,000 square meters leased this year. We also completed 160,000 meters of premium product at our estates in Ravenhall and Jandakot. While the vacancy has lifted in outer markets, supply under construction remains in check at around the same level as demand, which continues to be supported by e-commerce and population growth. Bifurcation is expected to play out further across the market with well-located quality stock continuing to outperform. Taking a closer look at our portfolio, which is located in high conviction areas, selected through unique market insights. The majority of our relationships are held directly with high-value customers who are growing and aspire to grow. We provide more than just property solutions. We partner with our customers to tackle supply chain challenges using our deep market knowledge and portfolio footprint. I'm really excited about the opportunities this brings. Developments have made significant contribution to our platform FUM, with large-scale, high-quality precincts developed and delivered by us accounting for around half of the portfolio. The ongoing growth of e-commerce has increased the demand for smaller format package handling facilities to facilitate efficient last mile delivery to consumers. These facilities are integral to our end-to-end property solutions and complement the large format facilities we have developed for our customers. Our assets are designed with flexibility to meet customers' long-term needs and include market-leading sustainability initiatives, focused on operational efficiency such as battery infrastructure to support rooftop solar PVs. This approach has enabled us to capture repeat business as we have done with the likes of HelloFresh and Amazon at Ravenhall and Jandakot, along with DHL at Richlands and Greystanes. Thank you, and I'll hand over to Ross.

Thanks, Chris, and turning to Funds Management. The funds business is a key plank of our strategy and a differentiator against our global peer set. Third-party capital plays an essential role in improving our capital efficiency, enabling outsized scale benefits, which we share with our clients and providing avenues for diversification and risk reduction, be that project, sector or revenue type. We have a proven track record of delivering performance for our clients, which underpins the deep relationships we have with more than 130 institutional investors. Our $40 billion funds management business is diversified across sectors and investor types. We actively divested assets across a number of funds to maintain prudent gearing levels and facilitate redemption requests to meet client needs. An important part of our proposition as a leading fund manager and a reliable long-term partner. As you can see on the bottom right of the slide, it's been a tough market to raise capital globally. There is a cyclical aspect to this. As investor confidence returns, we have done the work to be in a preferred position with the right product suite and aligned model and a track record of delivering for clients. Turning to funds highlights from the year. As I mentioned earlier, our flagship funds continue to outperform their benchmarks. The $13 billion diversified Wholesale Property Fund outperformed over all time periods and the Shopping Center Fund materially outperformed for the 12-month period. Despite the subdued capital raising market, we continue to harness pockets of opportunity. As I already mentioned, we raised funds in growth segments, including the first close for DREP2, which has strong interest in future closes. We also gained independent recognition for the strength of our client relationships and our achievements in ESG. We want to be invested alongside our clients and funds, be that JVs, clubs, asset co-ownership or fund co-investments. Our balance sheet is increasingly being invested alongside our capital partners. More than 70% of the balance sheet is now co-invested with our funds or clients. This includes $1.5 billion of co-investments in funds across healthcare, industrial, retail, office, infrastructure, opportunistic and other investments, which contribute 8% to our earnings. These co-investments also enable us to align with investors and support the growth in the funds management business. The chart on the right-hand side shows how both the proportion of capital we have invested alongside clients and the efficiency of that capital have increased over time. We expect this will continue further as we execute on the strategy. The overarching principles guiding our priorities are to ensure the business is set up to drive long-term sustainable returns and to be in a position to capitalize on opportunities in the near term. Capital allocation is an important part of how we can create value, and we have evolved and formalized our approach. We've established a clear hierarchy for how we allocate, deploy and manage our capital to protect downside risk, promote active management and drive improved risk-adjusted returns for security holders over the long term. The principles and framework guiding our long-term decisions are outlined on this slide. Importantly, we apply these to how we think about existing investments as much as new ones. I appreciate the concept here are not new, but the application to our business is particularly important given the diverse opportunity set and our strong preference to organically fund growth. Our target settings and actions outlined on this slide. Our target gearing range remains unchanged. And over time, we expect any single sector to represent less than 50% of the portfolio. We have earmarked circa $2 billion of divestments over the next 3 years, which together with the completion of the committed developments will further enhance the quality of the portfolio while maintaining a prudent level of gearing. Consistent with our strategy from FY '25, our distribution policy has been updated to pay out 80% to 100% of AFFO, providing a sustainable source of capital to invest in growth alongside our clients. The new policy range seeks to achieve a balance of providing appropriate distributions to security holders and investing for growth. As we approach the bottom of the cycle, we are seeing attractive investment opportunities and in the near term, expect retained earnings to be invested alongside capital partners in high-returning strategies in infrastructure, industrial and alternative sectors, which continue to benefit from strong tailwinds and provide the opportunity to leverage our capability to enhance returns. A simple example is DREP2, where our $50 million co-investment will represent 5% to 10% of the fund with a target return of 15%, with the Dexus return to be further enhanced by the management fees, and so well above our cost of capital. We've set some clear medium-term goals to align with our strategic priority areas. First is to transition the balance sheet. We intend to increase co-investments alongside our fund clients, upgrade the office portfolio via divestment and development completions and continued capital recycling with circa $2 billion earmarked over the next 3 years. Second is to maximize the contribution of funds through providing liquidity and delivering performance for our funds clients, completing the final close for DREP2 and launching new funds and products to match investor demand, and modernizing the legacy AMP Capital platform products. And finally, to unlock our deep sector expertise by embedding our sector-orientated operating model across the platform, maintaining high customer satisfaction and position the infrastructure business for growth. While conditions remain challenging, we are confident in our future. We expect well-located quality assets to continue to outperform and clients to gravitate to stable aligned managers with deep sector expertise. As the interest rate outlook becomes more certain, direct investors should gain greater confidence to deploy capital. The higher cost of debt as well as the full year impact of valuation declines and divestments of funds under management will continue to impact our FY '25 result. Barring unforeseen circumstances for the 12 months ended 30 June 2025, we expect AFFO of circa $0.445 to $0.455 per security and distributions of circa $0.37 per security. Dexus is well positioned. While there are some near-term headwinds, the initiatives I have talked through today are focused on driving sustainable growth over the long term. We have solid foundations and a differentiated funds platform, strong client relationships and a diverse product offering. Our investment portfolio is high quality and positioned to benefit as liquidity returns to the office market. Thank you. That ends the formal part of today's presentation. We'll now take any questions that you may have.

[Operator Instructions] Your first question comes from Howard Penny with Citi.

Just on funds management flows, are you seeing any subsector inflows and maybe some areas where the outflows at this stage within the various funds management platforms. And then you mentioned that you were looking into new funds and products, are you able to give any indication of where that interest might be?

Thanks for the question, Howard. As I alluded to in the formal remarks, it has been a tough capital raising market globally. And this is particularly acute in the core space. There hasn't really been a lot of money raised in core. So I think that bodes for how we think about our flows in our platform, but also how we're kind of thinking about new products and strategies and where demand is. So I think what we're seeing, different pockets with that capital, different segments are performing slightly differently but I think what is most pleasing to me is that for some of these high-returning strategies, DREP2 is a really good example. We've raised over $300 million in the first close, and there's really strong demand for future closures. So that final close, I expect that fund to be materially larger than the first fund, which was $475 million. So I think those high return strategies, those more active strategies, value-add asset repositioning, those sorts of things are well supported. Core capital has been pretty difficult, to be honest. I won't say it's thawing yet, but I think some of the data points that we look for is secondary trades and repricing there, those discounts have come in a lot over the last 12 months. So I think that gives us some confidence that pricing on secondaries is getting to a level that is more interesting, and that should see fund flow stabilize over the next 12 to 18 months.

And maybe just following on that. You mentioned co-investment as something that you're looking to drive capital into. Do you have a target of what that level might be in the funds?

The level of co-investment for individual strategies will actually depend on the strategy and in some circumstances, the predisposition or preferences of clients. Philosophically, we want to be invested alongside our clients. I think this is a really important point is we want to find interesting opportunities that we think we can create value in. We want to invest in them, and we want our clients -- we want to bring our clients alongside us. So that's not for us to dominate deals, but it's for us to have a meaningful amount of skin in the game. And then obviously, sort of the management economics are cream on top. So I would be surprised if it was anything less than 10%. Something more than 50% is probably too much. So it's probably somewhere in that range depending on the strategy.

Your next question comes from Tom Bodor with UBS.

I just was interested in the guidance on AFFO being down around 6% on this year. Just be interested in understanding some of the key drivers around that in terms of assumptions around trading profits, asset sales, debt costs and the like.

Tom, thanks for your question. If we look at the guidance range for '25, the impact of higher net finance costs alone is circa 6% headwind. Outside of that, trading profits are expected to be lower in '25. The management business will be broadly flat, maybe slightly lower depending on performance fees. But partly offsetting that, we expect to see some modest growth in the property portfolio and lower tax. Outside of those moving parts, we've made an allowance for divestments within the range, but that will ultimately depend on the quantum timing and mix of assets that we sell. So the range that we provided, there is some variability in there depending on divestments, performance fees and trading.

Okay. Just following on from that. The management being flat. There's obviously cost savings coming through, but then you have some one offs in this year's number. Is it sort of right to think that they kind of offset each other?

Yes, I think that's the right way to think about it. So we've got some headwinds flowing through from valuations, transactions and a bit of inflation. But what is pleasing is that we've done a lot of work on the cost base, both post the integration and the recent operating model refresh. And so that, combined with sort of circa $10 million higher performance fees in '25 means they should broadly offset each other.

Sorry, $10 million higher in '25 or lower?

Higher.

Okay. And then just a final one for me on the strategy to get each circa down to below 50% over time. Given you've got a pretty meaningful office development pipeline and a starting point that's well above that. Do you need to accelerate the pace of office sales to get there? What sort of timeframe are you talking about there?

Thanks for the question, Tom. It's a fair one. We're not going to be pressured to accelerate sales that destroy shareholder value. We have a very high-quality portfolio and a very high-quality development pipeline. So I think what we're outlining is sort of the goals and the aspiration that we're moving towards. What's pleasing for us is transaction markets look like they're stabilizing. There looks like there is, as I say, kind of a thawing of investor demand around office. And as that market normalizes, it will provide better liquidity for us to sell assets into. So we're not going to be rushed or pressured by and we're certainly not going to destroy shareholder value by trying to achieve some stated objective in the results presentation. So it will take some time. When market conditions are right, I'd argue office is probably the most liquid of the real estate sector. So we'll be able to move more quickly, as I said, when things normalize.

So is it right to think more 5 years than sort of 3, if that makes sense?

We don't -- I don't -- we're not here kind of predicting liquidity levels in the office market over the next 24 to 36 months. But I think what we're saying separately is we've got earmarked circa $2 billion of divestments, which is assets that we want to trade out of, which will improve portfolio quality. And in addition to that, if the markets are functioning normally, then we may be able to move and sell a larger proportion of the office portfolio to achieve that circa 50% objective. But it is going to depend on liquidity in the transaction markets. And our starting position is we have a very high-quality portfolio. So it's -- we've already done a lot of the heavy lifting on, let's call it, the rump, so to speak. So every asset we kind of selling now in is actually a pretty good hit.

Your next question comes from Simon Chan with Morgan Stanley.

Ross, can you just give me some color on redemptions across your platform? I think well, 6 months a year ago, you might have had $2 billion lined up. Has that been cleared pretty much? And you're all running at a normalized level now?

Thanks, Simon. Redemptions continue to be a feature of the marketplace, particularly for core managers. For us, we sold $1.3 billion worth of redemptions in the financial year. We sold $2.9 billion worth of assets within the funds platform in part for redemptions, in part for ensuring the capital position of the funds. Outstanding redemptions at the moment stands at about $2.5 billion across all strategies. It's not quarantined to kind of 1 segment. Whether or not we are required to kind of satisfy all those or investor sentiment changes as pricing stabilizes, I think the next kind of 6 to 12 months will tell, but that's the current state of play. I think the pleasing thing for us is where new demand is coming in from clients at the moment and these kind of high-returning value-add type strategies. DREP2 as we have already flagged is a really interesting case study. And there's new initiatives, which we're working on, which we'll be bringing to market over the next 6 to 12 months in that high returning space. And that is in part changes to the distribution policy will provide us with capital to invest alongside clients in those strategies. So I think there'll be a reasonable amount of flow out, but there'll also be flow in as well.

Great. And just a follow-up question for Keir in relation to FY '25 AFFO moving parts. What is the exact increase you're expecting in terms of weighted average cost of debt in FY '25 versus FY '24?

The weighted average cost of debt this year was 4.1%, and we're expecting that will move to mid 4s in FY '25.

And that's causing you the 6% headwind?

That's right. That combined with capitalizing interest on a lower cost base in '25 relative to '24.

Because 123 Albert Street's come out?

Yes, largely 123 Albert coming out.

Next question comes from Ben Brayshaw with Barrenjoey.

I was wondering if you could just discuss what potential there might be to become more capital-light on the development spend, which is committed. So just on Slide 12, whether you're expecting that $1.8 billion of development capital will be taken through to completion or whether you see opportunity to sell down your interest in that pipeline over time?

The vast majority of that development spend relates to the 2 office development projects. There will also be some of the industrial land banks in there. With the exception of Atlassian, all of those projects are held in some sort of structure already with third-party capital. The Jandakot Airport interest, for example, we have a third interest alongside DXI and a domestic pension plan. Waterfront, we own in joint venture with the diversified wholesale property fund. So Atlassian is probably the big needle mover. As we've said pretty clearly, selling a hole in the ground is probably not a value maximizing strategy for that project. So I think as the project gets closer to completion and transaction markets stabilize, I think that product will present well and there will be opportunities for us to reduce that spend, but it's probably not saying that's going to happen in the next 12 months would be a reasonable working assumption.

And just on incentives and CapEx that have come in at $185 million to $190 million for last couple of years, do you see those as being stabilized going forward? Or just how you're thinking about the trajectory of the capital declines, say for the next 12 months?

Andy, do you want to pick that one up?

Yes, sure. So we spent more [indiscernible] with leasing skewed to the last quarter. And we also invested to improve some spaces in terms of their leasing appeal. So I would expect to see lessors works as a component of maintenance CapEx come down next year. But on the whole, same business CapEx, I expect will be broadly flat due to higher incentives, much of which has already been committed from leasing completed in prior years.

Your next question comes from Richard Jones with JPMorgan.

Just in relation to the flag to bill of asset sales over the next 3 years. Can you give us a rough breakdown of what you expect will be office? And secondly, whether you expect any of those assets will be sold within the Dexus platform?

Thanks for the question, Richard. I think given the existing portfolio is 2/3 office, it's fair to assume that the vast majority of those sales will be Office, will also help contribute to that objective we talked about, which is getting us every sector below 50%. Will they stay in the DEXUS platform? To be frank, it depends on the asset and why we're selling it and pricing considerations. If we're selling the asset because we think it's got return challenges, it doesn't make a lot of sense to sell that problem to a client. That would be inconsistent with our vision of being the leading real asset manager in the country. So I think those assets will leave the platform. There will be some assets that are really good assets that clients are looking to recycle capital out of and if we can bring new capital in, then we'll do that. So I think it will certainly kind of a bit of a horses for courses approach.

Okay. Second question, just the access point of difference as a global stock for investors has been regarded as in Australia and in particular, Sydney CBD office specialists. Your strategy is clearly diversifying away from that arguably competitive advantage. Do you think you're making the call at the right point in the cycle to be doing this?

If the question is, are we looking to step back from office? I think the evidence is to the contrary. If anything, we're investing heavily into office and our expectations of what is going to drive returns out of office is going to be much more nuanced in this next part of the cycle than maybe what it has been in the past. And that is to be frank, it's true in office as it is in many of the other sectors that we're seeing. We're seeing much more bifurcation and variation in asset performance. And so I think for us, as we think about the office portfolio, we're making big investments, we're big investors in office. We have a great platform, ably led by Andy. Office will continue to be a very meaningful part of our business for the foreseeable future. So we're not stepping back from Office. I think what is exciting for our business is we have a very diverse and deep platform, and that is presenting a number of opportunities that we have access to. And we're very excited by those and we think we can generate really attractive returns by investing in those opportunities alongside our clients. And we have a good track record in that space as well. If you look at funds like DWPF, which has outperformed the index and benchmarks over 1, 3, 5, 7 and 10 years, I think we've got the runs on the board that we can deploy and invest across sectors other than purely office.

Your next question comes from James Druce with CLSA.

A couple of questions. Firstly, just on the payout ratio being reduced to 80% to 100% of AFFO. Is the message there that you'll largely be reinvesting in new products, and that's your co-invest share? And if so, you're sort of saving around $100 million a year. Are you expecting to deploy that in guidance this year?

Look, I think the change in policy just to put in context, it's not something that we do every year. But the last time we looked at the policy was 10 years ago. And so the change in policy is really a reflection of kind of the change in business mix and really the successful execution of the strategy to date. In terms of what we're guiding towards, obviously, guidance -- distribution guidance implies we're paying out at the low end of that range. We've already made a commitment into DREP2 of $50 million. So that's circa kind of half of or a bit over half of what that retained earnings would be. And as I flagged on the call, there's other initiatives that we're working through as well. So I think it will be in that range. And I think the pressures on the team to generate attractive opportunities for us to be co-investing alongside clients. And I think if there's a positive in here, I think I'm very excited that we have clients who want to deploy capital with us right now in many of these high returning opportunities and strategies. So that's what the team are focused on. And hopefully, we'll have some news report on that over the next 6 to 12 months.

Okay. And then secondly, on the asset [indiscernible] so the office portfolio has come back a bit. Some of the more recent transactions like Martin Place, it seems like there might be a bit more to go. Can you just talk to how you sort of see the outlook for valuations? And also just touch on maybe the write-downs or the [indiscernible] you've made to the development portfolio, et cetera.

I might just provide some kind of general comments on market outlook and then we might pass to Andy or Keir to talk about the specifics. I think there's a general proposition -- we kind of see valuation is going to be much more nuanced in this part of the cycle and you're going to -- what we'd like to talk and generalities. Asset-specific performance is going to be driven by kind of macro factors and asset-specific factors. And that's certainly is what drove us or encouraged us into the divestment of 5 Martin Place. It's a great precinct, but there are some certainly some asset-specific factors that caused us to consider the sale or execute on the sale. In terms of the cycle more broadly, I think we're not calling the bottom, but there's certainly a lot of signs and data that give us confidence that we're certainly approaching the bottom. Rate expectations, office valuations were 25% below our peak. The occupier side is certainly improving. You saw our incentives this year actually were lower than last year, and that trajectory is continuing. We're kind of seeing peak vacancy in Sydney in FY '25 and clients are looking to invest and are seeing more liquidity emerging on the transaction side. So I think all of those things point to a -- we are approaching the bottom in terms of pricing. But I think the actual outcome is going to be quite varied depending on the asset-specific characteristics, and we kind of -- we see that in the leasing outcomes, and we're going to see that in the transaction market as well. Andy, I don't know if there's anything to add on the development book or write-downs or Keir?

Maybe I'll take the development book more broadly to start with. Thanks for the question. And if we look across the board, we've written down close to $400 million for the development book. That's predominantly office assets, as you would expect, industrial developments were broadly in line. The actual result asset by asset varies. So whilst there's been cap rate expansion across the board, there's been a material impact for something like Atlassian whereas Waterfront, we've been able to recoup that with the rental growth that we've been achieving with leasing at that asset. So we think fair to say [indiscernible] are having an impact. But as I said earlier, credit office yield spreads are now approaching long-term averages, which is, I think, a pleasing sign that we're reaching an inflection point.

Your next question comes from David Pobucky with Macquarie Group.

Just the first one around if there are no value enhancement opportunities present at any given point in time. You've mentioned you'll potentially use excess capital to reduce debt or return capital. So I just wanted to ask around how we should think about potential capital returns. For example, if you're at the bottom end of your target gearing range, have some growth opportunities, could we expect capital return that could potentially move you back to the midpoint of the gearing range? How do we think about it?

I think that's a fair kind of description of how we think about the capital allocation model. What those -- that decision is really going to have regard to what the medium-term outlook is in terms of deployment. And so it's not something that we're envisaging right now. I think if transaction markets free themselves up and liquidity returns on mass, then I would say kind of the opportunity set and the calculus will change materially, particularly given kind of where the share price is trading. So I think all of those things are things that we're actively considering. But right now, with where we sit, gearing is edging up higher. We've got a divestment program we're working through. And we've got clients that want to invest with us in high-returning opportunities at the moment, and we've got sectors that are identifying some really interesting opportunities. So I think deployment and balancing that kind of rate of deployment is probably going to be the challenge in the short term.

And just the second one for me is on the industrial portfolio. I think it was mentioned that you had some higher one-off income in there. So I just wanted to ask what that was and if you could quantify that, please.

Yes. So the one-off income, David, was related to GE in Jandakot Airport in Perth of circa $9 million.

Sorry, just to clarify that one. So this was -- we announced this at the half year, Dexus share for that is about $6 million. So just a touch lower.

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

Well, thanks, everyone, for joining us this morning. We look forward to catching up with you through the various meetings over the next few weeks. So have a great day. Thank you.