DEXUS (DXS) Earnings Call Transcript & Summary

Thanks for joining us for '25 Half Year Results Presentation. I'd like to begin today by acknowledging the traditional custodians of the lands and waterways on which we meet today, the Gadigal people of the Eora Nation, and pay our respects to elders past and present. Today, you hear from Keir on the financials; Andy on Office; Chris on Industrial; and Michael Sheffield on Funds Management. We're pleased to recently announce the appointment of Michael along with Jason Howes to lead the funds management business. Michael will be focused on driving the performance of our existing funds and Jason on the products we offer to meet the changing investment needs of our clients and partners. In addition, we have appointed Kirrily Lord to lead our shopping center business. Concluding today's presentation, I'll provide a summary and then open up to any questions that you may have. DEXUS is a unique investment proposition. We have scale across the real asset spectrum. We have a diverse capability set across all major real estate sectors and a meaningful infrastructure business. Each of these pillars are scalable with the potential for continued strong returns. We also benefit from deep access to diverse pools of capital through the cycle. Our executive team is now in place, and we're set up to drive sector and fund performance with average industry experience of over 25 years. Our strategy aligns with our strengths and the 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 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 a culture of constant evolution and improvement are the levers we use to unlock the potential in the business and enable us to deliver superior risk-adjusted returns over the long term. In August, I outlined our medium-term goals that align to our strategic priority areas of transitioning the balance sheet, maximizing the contribution from the funds business and unlocking our deep sector expertise. We're making good progress against each of these goals. Of note, we have contracted $515 million of balance sheet divestments since the full year result. We invested $50 million of retained earnings into DREP2 alongside further external capital. We finalized key executive appointments, reduced costs and invest in the systems and processes to support the investment performance and platform scalability. We've closed 2 subscale products, and we're in the process of reviewing opportunities to launch new scalable products. And we're actively assessing infrastructure opportunities and remain focused on stabilizing the AMP funds to position the platform for when the cycle turns. Turning to the half year result. We maintained high occupancy across our portfolio and delivered strong cash flows with AFFO of $252 million. Our active approach to divestments has ensured a strong balance sheet with gearing levels at the low end of our range despite the impact of devaluations over the past 2 years. A number of the core funds outperformed their peers and benchmarks, including our flagship Diversified Property Fund, the Shopping Center fund and the Diversified Infrastructure Fund. However, clients are adjusting their strategies and seeking liquidity as expected at this point in the cycle. And as a result, redemptions remain elevated, particularly for core products. Pleasingly, we continue to raise equity for growth-focused strategies like DREP. We remain committed to sustainable outcomes. Some of our sustainability highlights are outlined on this slide, including being recognized as the global and regional listed leader for diversified office and industrial by GRESB. I'll now pass you on to Keir to cover off on the financials.

Thanks, Ross, and good morning, everyone. Turning to the results in detail. In line with expectations, total AFFO for the half was $251.8 million, with a distribution of $0.19 per security, reflecting a payout ratio of 81%, aligned with our updated distribution policy announced at the full year results. Office FFO reduced marginally primarily due to the impact of divestments, largely offset by fixed rent increases and the recently completed development at 123 Albert Street. For the industrial portfolio, the decrease in FFO was driven by divestments as well as the impact of higher one-off income in the prior corresponding period. Income from co-investments in pooled funds increased by 7.5% driven by the impact of new investments made during and post half year '24. FFO from management operations increased to $77 million this half, reflecting $23 million of performance fees during the period and the benefit from cost savings, partly offset by the impact of redemptions, disposals and valuation declines on fund. The impact of redemptions and disposals is expected to continue into next year. We expect further performance fees in the second half of FY '25 and have secured circa $20 million of performance fees for FY '26. Active management of the cost base has resulted in lower group corporate costs for the period. An increase in net finance costs was driven by higher interest rates as well as lower capitalized interest following completion of 123 Albert Street. Higher funding costs are also expected to impact in FY '26. As expected, trading profits were significantly lower following reduced trading volume. Circa $35 million of trading profits post tax have been secured for FY '26. And lastly, leasing CapEx increased as a result of the impact of higher incentives from deals struck in prior periods flowing through the portfolio this half. Data suggests that valuations are now stabilizing. The chart on the right of this slide shows that current office yield spreads are in line with historic averages, and we are seeing the reemergence of institutional buyer interest. We are also seeing this flow through to valuation outcomes in our portfolio where the quantum evaluation losses reduced significantly compared to recent periods. The total portfolio declined by 1.6% on prior book values for the 6 months to 31 December, with 97% of the portfolio independently valued. Office valuations declined by 2.6% as higher cap rates and discount rates were partly offset by market rent growth. Pleasingly, industrial valuations increased by 1.4% with rent growth more than offsetting higher cap rates. Moving to capital management. Our balance sheet remains strong. With pro forma look-through gearing at the lower end of the 30% to 40% target range despite office portfolio valuation declines of almost 28% since the peak in FY '22. We have been active with refinancing resulting in a weighted average debt maturity of 4.5 years, $2.9 billion of headroom and manageable near-term debt maturities. 83% of our debt was hedged during the period, providing material interest rate protection. Looking forward, there is $1.8 billion of remaining spend on the committed development pipeline, with approximately $1 billion to be spent in the next 18 months. 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. We have sold $7.3 billion from the balance sheet over the 5 years to FY '24 despite a subdued transaction market during that period. The portfolio is now heavily weighted to premium-grade office assets in core CBD markets as well as core industrial assets. Our $2 billion of divestments earmarked for FY '25 to '27, together with the completion of committed developments will further enhance the quality of our portfolio while maintaining a prudent level of gearing. Thank you, and I'll now hand over to Andy.

Thanks, Keir, and good morning, everyone. Location remains a key differentiator for performance in the office market. This continues to be demonstrated by our portfolio occupancy remaining well above market average at 93.5%, albeit reducing since the full year, predominantly as a result of the government departing 80 Collins Street in Melbourne. Effective like-for-like income grew by 1.6%, impacted by amortization and downtime on vacancies. On a face basis, like-for-like growth was 2.1%. Leasing volumes of 48,500 square meters for the half were weighted towards smaller deals in the Sydney CBD, and we also saw lower incentives on deals in Brisbane and in Sydney CBD premium assets. As a result, our average incentive reduced to 26.4%, reflecting the quality and location of our portfolio. We are seeing a positive shift in tenant confidence. In the half, 88% of customers who renewed, retained the same space and only 8% reduced their footprint. Atlassian Central and the first stage of Waterfront Brisbane are progressing well. 71% of income from these developments is derisked with average fixed annual increments of 3.7%, providing a secure income stream once completed. Looking at our expiry profile. For the next 18 months, we remain below the 13% threshold we have set portfolio lease expiries. Much of the upcoming expiry over this period sits in assets that are well positioned in their markets, including 1 Farrer Place in Sydney, 240 St. Georges Terrace in Perth and One Eagle Street in Brisbane. This slide further demonstrates the divergent performance across office locations. The chart continues to tell a strong story of materially lower vacancy in the Sydney CBD core which accounts for 77% of our portfolio, our Sydney portfolio, and 36% of our total portfolio compared with CBD noncore and suburban and fringe office markets. While both vacancy and incentives have increased in non-core locations, premium market incentives in the Sydney core have declined and more so in our portfolio. We are seeing the same trend in Brisbane. As a result of this dynamic, the spread and effective rents between the submarkets has continued to widen. The office market is at a turning point, and we expect the outlook to improve this calendar year. We are seeing evidence of the factors needed for a recovery, namely growth in demand and a shrinking supply pipeline. For the fourth consecutive quarter, there has been positive net absorption in the Sydney CBD, with calendar year '24, reflecting the largest year of net absorption since 2016. Population growth and employment growth will continue to drive demand over the long run, rising economic rents for premium buildings in Sydney have kept supply in check, and we see this continuing. There is now a circa 20% gap between market rents and the economic rent required to start a new building in Sydney. While forecast completions for the next 5 years in Sydney and Melbourne are less than 1% of total stock, this is well below the long-term average. With less competition from developments, this should support further rent growth in quality stabilized assets like ours. 33 Alfred street is 50% owned by our flagship diversified fund, DWPF. On the doorstep of circular key, it is a great example of the right asset in the right location. Notwithstanding a challenging leasing environment, we have had strong leasing success with precommitments at 85% ahead of completion mid this year. The building has attracted an array of high-quality professional services firms, including Allens and Maddocks, who are motivated to move to a landmark building in a premium location. Rents are 12% higher than the project underwrite and above the market rents that most tenants would have been paying on renewal of their previous space. Positively, the vast majority of tenants are expanding their footprint at this tower. Like its neighbor, Quay Quarter Tower, 33 Alfred Street is a shining example of reuse. The building is being rejuvenated to enhance its sustainability and modernize its functionality to a premium-grade standard. This approach minimizes landfill waste and extends the life cycle of the building, reducing carbon emissions significantly. Thank you. I'll now hand you over to Chris.

Thanks, Andy, and good morning, everyone. Leasing remains a focus with volumes across our industrial portfolio during the half, more than double those in HY '24. Despite this momentum, effective like-for-like income declined and there was a reduction in portfolio occupancy by income due to the vacancy at select assets and the impact of disposals. We note that around 80% of this vacancy is known downtime in just 4 assets, one of which is undergoing major upgrade works and another in prospective tenant discussions. Our portfolio occupancy by area increased slightly to 97.4%, broadly in line with the national average. We remain focused on delivering strong total returns across the life cycle of our assets and are willing to accept some downtime if it leads to better deals. The 38% re-leasing spreads for this period, which includes leasing up some of the previously vacant space provides support to our approach. Incentives rose to 21.1%, which is in line with what we are seeing across most markets as customers look to invest more in automation and sustainability initiatives. The portfolio remains materially under-rented at 13.5% creating the opportunity to grow income by resetting the rents on vacancy and upcoming leasing expiries across approximately 1/3 of our portfolio by FY '27. We have developments underway across New South Wales, Victoria and Western Australia and 10 planning approvals achieved for activated shovel-ready projects. At Jandakot, we completed 20,300 square meters, all of which is 100% leased, with further success on pre-leased deals for assets under development post 31 December. Turning to the industrial outlook. There are some positive signs for 2025. Retail spending has been firming in the past few months and online spending is rising again. These trends should lead to increased demand from retailers and logistics providers in the year ahead. While vacancy rates have risen in outer markets, they remain low in absolute terms. Supply under construction is in check, and we expect supply to remain constrained across most cities and vacancy to hold. In addition, the recent uplift in transaction volumes relates to data centers which further constrains supply by competing for industrial zoned land. Our national portfolio is better placed as the market starts to diverge by location and quality, with the majority of our portfolio developed by us and located in Sydney and Melbourne. Perth has transitioned from a satellite market to becoming a sizable, self-sustained market. Jandakot has given us a large industrial footprint, positioning us well in this burgeoning market with the country's lowest vacancy at just 1.2%. With a large part of our portfolio located within 30 minutes of households, we are well positioned. Thank you, and I'll now hand over to Michael.

Thanks, Chris. Well, I'm excited to be leading the Funds Management business through its next phase of growth alongside Jason Howes. We are focused on ensuring the funds platform is well placed to continue to deliver for our clients. Our sizable funds management business is diversified across sectors and investor types with a proven track record of delivering performance for our clients. We have built deep relationships with more than 130 institutional investors. We've been actively divesting assets on behalf of our clients to facilitate redemption requests and maintain prudent gearing levels while enhancing portfolios. We are also working with a range of clients across the platform to explore potential deployment opportunities. The market for capital raising globally remains challenged and having access to pools of capital places us in a good position for when the cycle turns. Turning to funds highlights for the half. As Ross mentioned earlier, our flagship funds continue to outperform their benchmarks. Notably, the $13 billion diversified wholesale fund and the shopping center fund outperformed across all time periods. Multiple funds and investments also gained global recognition for ESG achievements. And despite redemptions and subdued capital raising markets, we continue to harness pockets of opportunity where we are seeing investor appetite. We raised funds for the second close of DREP2, and we also deployed funds from DREP1 and 2, including to acquire an office conversion to student accommodation opportunity. We continue to stabilize the AMP Capital funds and retain our focus on delivering strong investment outcomes for our clients. Thank you. I'll now hand you back to Ross.

Thanks, Michael. We're at a pivotal moment in the real estate markets as interest rates shift and the conditions for an office market recovery are emerging. Longer-term trends remain sound with demand underpinned by strong population growth. Barring unforeseen circumstances for the 12 months ended 30 June 2025, we reiterate our prior guidance for FY '25. Dexus is well positioned. Our investment portfolio is high quality and will benefit as the market turns. We have the opportunity for growth with a differentiated funds platform, strong client relationships and active client inquiry for new products and investments and we are progressing well on the actions to support our medium-term strategic priorities and future growth. Thank you, and 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 Lou Pirenc from Jarden.

Yes, first question, just on the disposals, you mentioned the $2 billion, I imagine that includes the ones that you already did in the first half? Or is it $2 billion on top of that?

Thanks for your question, Lou. Just a clarification. The $2 billion was the commitment we made at August last year results. So we're chipping our way through it with $515 million, so 1/4 of the way through.

And then maybe a bit of color on those trading profits that you've secured for FY -- sorry, I think '26 it is. Is that one asset? Is it a number of assets? And are you hoping to add more to that? Or do you think that will be it?

So that relates to one specific asset that's Brookhollow. And in terms of composition of trading profits for '26, it's probably too early to tell, but there are more assets in the pipeline.

The next question is from Howard Penny from Citi.

Just on the funds management side, just would you be able to provide us with color on where you're seeing sort of the greatest investor interest at the moment across the various funds.

Thanks for your question. I think it's an interesting time for investors as they're trying to probably calibrate where rates are sitting. So obviously, kind of this afternoon will be somewhat important. Investors generally are looking for higher returns. And I don't think that changes with the rate cut if we get it this afternoon, but I think the rate cut will certainly give investors a bit more confidence around the changing direction of the cycle. So I think high returns anything in the core plus value-add space, certainly, we're having success in our very focused strategies like DREP, so that's a high returning, absolute private equity real estate fund. So that's probably the color we can give you. I don't think it's not limited to one sector, it's probably more driven by the underlying strategies of each of the products.

Great. And just on the industrial side, just to understand the movements in occupancy and incentives there. Is that more of a specific -- a few specific projects? Or has it been a general sort of change in the market at the moment?

Yes, thanks for your question. In terms of industrial, that vacancy has really been focused in 4 assets. We call them and label secondary, we're repurposing 1 at the moment and actively leasing to tenants, but they're really labeled to secondary. As Keir said before, we've had some disposals. That's part of the earlier strategy, and this is really that vacancy is just those secondary assets is the longer call out. In terms of incentives, we've seen a spike in speculative activity in subleasing through the second half of last year and that's had an impact as well with a bit of flight to quality. But we're focused on that space and pleasingly getting great activity on it with the leasing.

Congrats on the results.

The next question comes from Ben Brayshaw from Barrenjoey.

I just had a query on industrial valuation gains this half of 1.4% the cap rates up 10 basis points, but the valuation has increased because of value as attributed in your slide to rent growth. I was just wondering how you reconcile the change in the book value for logistics, just in the context of generally downward pressure on net effective rents and lower occupancy levels across the broader market?

Yes, great question. So really, in terms of -- you've seen from our results, we've had fantastic leasing spreads of circa 38%. So that has really offset some of that cap rate softening. And certainly, from our expect -- from that leasing success we've had, certainly, it's been the better quality assets that we're seeing in Sydney and Melbourne that have helped that increased growth.

I think the short version is bringing forward some of that reversion into the valuations. And yes, there's been some softening in cap rates. But I think that timing of bringing that forward and probably a more solid view around what the longer-term growth prospects is, particularly for those high-quality assets, I think Chris' remarks, both today, but also at the full year last year, we were predicting this separation in performance between those better assets in the core locations and those secondary ones. And obviously, our portfolio is skewed to those high-quality assets. We've developed a lot of them in the platform. So you're seeing that play through in the valuations, and we expect that will continue.

Yes. Great. Okay. Just on office. I'm just interested, Ross, if you could maybe just discuss where you see return hurdles for the asset class today, medium to long term. And broadly speaking, just the transaction activity in the market, if you could perhaps just comment on whether you think those return hurdles are sort of reflective of those type of implied returns?

Just a clarification there, Ben. Are you saying is in our return hurdles or what we kind of think the market expected returns are?

Yes. So unlevered long-term market type returns that are used to underwrite assets. I'm just wondering how close you think the market is in terms of transaction activity, in recalibrating asset values in line with those returns.

Yes. So look, if you just -- if we use discount rates as a proxy here. Discount rates on average in our portfolio, let's call it low 7s. What is interesting for us in the transaction market is the flight to quality we're kind of seeing on the tenant side. We're certainly seeing it on the investor side as well. So I think for those better quality assets, I think you will see investors being prepared to price that quite tight. It wasn't that long ago, it was very difficult to get set in high-quality office. So we're not seeing enormous depth on the bid right now. But I think selectively for the right asset, we're seeing reasonable levels of inquiry. And we've got -- I think it will be an interesting 6 months, particularly if we kind of see a rate cut this afternoon. I think that's what investors are looking to see. They're looking to have confidence that they know that the cycle is turning, but the rate cut will be quite I think, important to the psychology of that and seeing that we're actually in an easing cycle.

I think Andy mentioned on the call that there was a 20% gap between rents in Sydney and the rent needed to justify new construction. Is the market looking at longer-term growth as having improved for office? Or is it a little bit too early to say in your opinion?

I think the realities of a very significant slowdown in supply does bode well for what rental growth looks like in the medium term. I think that will play both in terms of what face rents do but also incentives needed to come down. One of the most pleasing stats for us in this half year result from at least my perspective is the level of over-renting in the portfolio reduced by about 1/3 in the half. And so I think that gives you some sense of the direction of travel and the speed of travel around how some of those fundamentals are changing. . Again, for us, these are kind of the better quality assets in the core market. So I think where you see that delivering in the physical market, I think you're going to see that demand coming through from investors because they will be prepared to pay for some of that, I believe.

The next question is from Simon Chan from Morgan Stanley.

My first question, just hoping you can give us some on the funds management business. You mentioned, I think, in your prepared remarks when you were introducing Jason, about the changing investment needs of clients and partners. Just wondering what that actually means, like in terms of the stuff product they want. Does it mean the likes of DWPF is going to shrink because partners want other stuff. Can you just give me some insights into that please.

Well, thanks, Simon. And it's a great question. So I think part is probably a reflection around our business and our product suite and part of the decision is really around our view of the changing needs of customers. So our platform as a whole, we're pretty focused around core. And we have, obviously, the special sits fund at the other end of the spectrum. So we've recognized the need for us to broaden our -- and there's a great opportunity for us to broaden our product suite into the core plus value-add space. And so you will see some of the new initiatives that we bring to market is just kind of rounding out that gap. In terms of the changing needs for what investors want, generally speaking, core has been very difficult to raise money. This is not just for us. This is a global phenomenon. It's not a surprise as investors are recalibrating their expectations. Also, how they want to invest. Do they want to be in into commingled funds, do they want separate accounts, JVs and those sorts of things. So we certainly see a place for commingled funds and pooled funds. These can be very efficient ways for investors to get exposure to a market with low transaction costs, significant diversification. And so they're going to have a place. But as we're expanding our footprint and our relationships and our channels, we just said that there's going to be opportunities to do new things in new ways, and I'm really excited to have Jason joining our leadership team and the separation of responsibility, he's really going to be working with clients around those new initiatives. So it's in part a reflection on our business, but in part, kind of maximizing the opportunities that we see in the marketplace.

Can you remind us the structure of the construction contracts you have at a couple of your bigger projects, for example, Waterfront. Like you entered into these contracts a couple of years ago, 100% of the work secured now and the deal with John Holland, is that fixed such that you're pretty much protected?

Yes. So we're not a principal contractor. I think it's the first point. And so yes, we do look to lay off that risk to top Tier 1 contractors. We have done that with Atlassian, we've done that with Waterfront. Cost and program risk lie principally with them. So there may be a small amount of provisional sums that need to be worked through as is the case with projects when you can't get all that detail done upfront, but the risk ultimately sits with them.

Just back to my original question for funds. Can you confirm for us how much is still sitting in the redemption queue at the moment?

The redemption queue, it does move around. And so it is kind of a factor of client requests, us satisfying through asset sales and also secondary transactions. So I think at the full year last year, we said it was circa $2.5 billion, it's moved a bit higher since then. I think the kind of the pleasing things for us is we are seeing some traction in some of those newer products and strategies. And at this point in the cycle where we see the discounts on secondary starting to tighten up, we would expect to see a significant portion of those redemptions met through secondary trades at some description.

The next question is from Adam Calvetti from CLSA.

I mean occupancy has fallen this half, and you've got 4.4%, it looks to be expiring in the second half. What's the outlook for office occupancy and how we think about that going into FY '26 as well.

Yes. So occupancy at 93.5% did step down from the prior half. It was 94.8%. That's as a result primarily of the Victorian government coming out of 80 Collins along with an exploration at 30 Hickson and 222 Lonsdale in Melbourne. I think the thing to note is the vacancy in our portfolio is highly concentrated. So the cost of that vacancy really sits in 3 assets: 80 Collins Street, 30 The Bond and Australia Square. Looking forward, we do expect with a couple of expiries that occupancy will step down again before the full year. Those expiries are at 30 Hickson Road and 80 Collins Street South. And so occupancy at the full year, noting that we don't guide occupancy will probably be closer to 90.

Yes. Okay. Okay. That makes sense. I mean, I'm just trying to think -- I mean, I know you [ give ] guidance in FY '26, but just the direction of travel for FFO in FY '26. If you were able to allow -- well, if you get some higher trading profits, retain your performance fees, limit redemptions, have some high net operating income. Does FFO go up?

Thanks for your question. Look, I think it's certainly -- it's too early to provide guidance for FY '26. What we can say is that there are a number of moving parts. So this year, we are cycling a year of elevated performance fees. So pleasingly, we have secured circa $20 million of performance fees in FY '26. Conversely, trading profits will be lower in '25. But as we mentioned earlier, we've secured circa $35 million post-tax of trading profits for '26. Outside of that, finance costs will be higher in '26, and we'll continue to progress the asset sales and are conscious that there are some market headwinds that will continue to impact. But when we look at positive contributions, I mean, pleasingly, the data that we're seeing indicates that we're approaching the bottom of the cycle. And we'll see where we land today, but certainly expectations of rate cuts, office valves stabilizing and office market starting to improve along with investor appetite. So I think it's too early to say what the contribution from growth initiatives will look like, but there's some interesting things in the works, and we'll provide an update in August.

The next question is from David Pobucky from Macquarie Group.

The first one on fund management. If you could provide a bit more color on your infra exposure and what opportunities you're seeing in that sector, please?

Thanks for the question. So the existing platform is got a concentrated exposure around transportation and a pretty diverse portfolio of PPPs and energy. In terms of the areas that we're focused on, it is obviously leveraging on those existing footprints, but also areas that to be frank, we can bring the rest of the platform to bear. So student accommodation is really interesting, and we've seen an example in our special sits fund where we're using the infrastructure team and our special sits investing team to kind of create some value there. So I think it's -- anything that's infrastructure that has real estate-like characteristics where we can kind of bring the platform to bear is where we're prioritizing our time at the moment.

Thanks, Ross. Second one is on developments. Just wanted a bit more color around how committed developments are progressing like Atlassian, like Waterfront, please?

I might ask Andy to touch on Office and then Chris on the industrial.

Sure. So Atlassian, it's progressing well. I mean they're pouring level 7 as we speak, the core's up to level 13, so it's well and truly out of the ground. And we're expecting PC late 2026. Waterfront Place, we're expecting PC early 2028. They're not quite out of the ground. But if you've gone past it you would have seen that they're very nearly out. And once they're out of the ground, it's far more straightforward but PC is still early 2028. And as we said earlier, that's sitting at 52% leased.

In Industrial, we've got approximately 10 projects nationally at the moment, and they're progressing well in Jandakot, New South Wales and Melbourne -- sorry, Perth. And majority are committed in terms of project and principal contractors, and we're certainly seeing great progress on those and a number of that speculative activity as well. So yes, highly active sites.

Just my final question on office, you spoke to lower office incentives in Brisbane as well as Sydney, Sydney CBD core premium. But just curious to know what you're all seeing more directly in Victoria, please?

Look, good question. Victoria is definitely the weakest of the national office markets. And our portfolio in Melbourne is currently -- well, at the half, it was 89% occupied. And so that's where we've got a lot of work to do, especially at 80 Collins Street. Incentives in Melbourne are quoted on a net basis, and it's not uncommon to see 45% to 55% incentives struck in the market.

The next question is from Richard Jones from JPMorgan.

Ross, just post the adjustment in the carrying value for Atlassian 6 months ago, just wondering if you can provide an update on the potential sell-down progress on a stake in that development and/or third-party incoming interest that you've had on it?

Richard, thanks for the question. I think we did -- I think telegraph to investors at August that we didn't envisage a sell-down event certainly in the next 12 months, and I think that continues to be the case. We would like to maximize value on that exit, and that sell-down, selling an asset in the construction site in an increasing rate environment is probably not the best thing. So I think the next few months will be interesting with investor sentiment and does that change around if we see kind of rates cutting. And I think it's something that will certainly be on the agenda second half of the calendar year for us.

Okay. And second question is on the trajectory of funds management earnings ex performance fees. I note there's a $5 million loss that you take on development management in the first half, which is, I think now 18 months of loss-making in that part of the business. Is that a cost allocation issue? Or is it an activity level that, that side of the funds business is loss making.

I'll let Keir, maybe. I think it's more milestone-driven.

Yes. Thanks, Richard. Ross is right. This is milestone-driven. So the cost allocation is often more stable, albeit we have done a lot of work on the cost base. But in terms of the revenues, because they're milestone driven, they do tend to be lumpy. But broadly speaking, over the life of a project, it washes its face.

Okay. So trajectory over the next 18 months, how does that look in terms of milestones?

Look, certainly, we think for DM next half, it will be better than what we've printed for this half. FY '26 is too early to provide guidance at this stage.

I think just development management as a business line, generally for us is not a huge profit-making exercise. We do it for a few reasons. One is it's creating a product that we can't buy ourselves; two, is actually the performance that ultimately is driven by those assets and giving that stock into clients is really important to the funds management business. So it's an important activity. And obviously, we make fee streams from the property management leasing and funds management once we complete those assets. But as a line item in the P&L, it has never been and is unlikely to be kind of a material profit contributor.

The next question comes from Tom Bodor from UBS.

I'd just be interested in where the re-leasing spreads were in office on an effective basis and also on a face rent basis?

Yes. No problem Tom. So as Ross mentioned, we've -- the over-renting improved, and so you'd expect the re-leasing spreads to also have improved. On a face basis, the re-leasing spread was 5.9%, call it, 6%, that was 4%. On an effective basis, it stepped down 11.5%, and that was 16%.

Okay. Great. And then maybe just -- so I know you gave good color around the Waterfront progress. But I guess I'd be interested just in where that sits relative to your budgeted timing of program given the known productivity issues in Queensland, are you getting sort of -- are you on track essentially from a timing perspective there?

Look, there are some market productivity issues that we're not immune from. And it's been really like a lot -- a lot of the challenge in that development is actually getting out of the ground, given the nature of it, building in the water. And so to get to this point without any material delays is actually a real credit to the team and to the contractor. And throughout the program, there will be times where the construction program and PC date can be adjusted under the contract. We haven't had one of those yet. So it hasn't been adjusted. And look, the delays getting out of the ground to this point are really material, and there is time for the team to make it up before the program is reviewed. .

And have there been any conversations about variations with the contractor or request for extra payment because of unforeseen conditions be it at the project level or more market-wide issues?

Look, that's an important partnership that we're managing. And the contract does pass those risks of program and cost through to the contractor. And so we don't want them to hurt unnecessarily, but they're in the business of pricing these contracts, and we're working closely with them to manage a great outcome for the project. Waterfront Brisbane is going to be the most amazing addition to the Brisbane CBD Skyline. And I'm really optimistic for the leasing of the balance of that space.

Thank you. There are no further questions at this time. I'll now hand back for closing remarks.

Thank you very much for your time today, everyone, and we'll see you over the course of the next few weeks. Thank you.