Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust annual results conference call. [Operator Instructions] I would now like to hand the conference over to Mr. John Dakin, Chief Executive Officer and Executive Director. Please go ahead.

Thanks, Rachel. Look, good morning, everybody. With me in the room this morning for the annual results presentation for FY '20 is our independent Chair, Keith Smith; Chief Financial Officer, Andy Eakin; and Director of Investment Management, James Spence. So before we commence the formal presentation, Keith would just like to make a couple of comments on behalf of the Board.

Yes. Thanks, John, and good morning, everyone. It's actually great to be physically in an office again as opposed to looking at a screen. But in any case, I'm sure we've all had our various stories over the last 8-or-so weeks. On behalf of the Board, I would like to say that GMT, as has been the case with all businesses within New Zealand, has certainly had its strategy tested through the last few months. As you're aware that over the last 5 years, we have been working towards focused on the supply-constrained Auckland industrial market. And this has delivered strong returns for unitholders even in the more challenging times that we are currently experiencing. The other key, and a very key component of our strategy, is being to maintain low leverage and substantial liquidity in order to absorb shocks we thought were coming, but to be fair, I don't think any of us saw this COVID-19 hitting us on the back of the head. And we -- that strategy has certainly given us balance sheet strength as we sit here today. It also provides the trust with opportunities to continue investing at a time when we expect general liquidity will be reduced across the market. While the immediate economic outlook appears very challenging, we do remain confident in our long-term investment strategy, and the role that industrial property plays is a critical part of the infrastructure of the economy. I would like to finish by saying that the Board and the manager have had very high levels of communications, as you would expect, throughout this extraordinary time. And we do remain committed to ensuring that GMT continues to be a listed investment vehicle of the highest quality. I'll now pass back to John to lead us through the first part of today's presentation. Thank you.

Thanks, Keith. Look, if I can take everybody to Slide 4 titled, Changing Landscape. And look, firstly, as of Keith, I'd like to acknowledge, clearly, I mean, the word unprecedented has been used a lot. I know that we're experiencing and the impact that COVID-19 is having on people's lives and livelihoods. And clearly, the world that we find ourselves in today is remarkably different from that of the past financial year that we're going to be reporting on. Today's reporting operating outlook is more uncertain with the social and economic impacts of the COVID-19 pandemic likely to be far reaching, and it remains unknown just how broad that impact will be. But what we have seen with New Zealand's industrial property sector is that it is a critical part of the economy. It provides infrastructure for essential businesses and has enabled the distribution of critical supplies through the last few months. Goodman has been operating fully throughout the lockdown period as an essential service and supporting our customers through that time. And despite the challenging macroeconomic environment, both offshore and locally, has certainly shown an acceleration in the consumer take-up of online retail. But the trend continues to be a very positive driver for logistics property, supporting underlying fundamentals of the sector. We have seen an increased focus on timely and cost-effective distribution. And I think we've seen the stress in the New Zealand market with the demand exceeding the ability to deliver in a number of cases. We think that's going to drive -- continue to drive demand for greater efficiency. We're going to see and are seeing certainly internationally and the early signs of it locally, an increased use of technology and automation as distributors seek to maximize productivity from within their existing assets. And we also think that we will see a greater differentiation around location as occupiers become more sophisticated. So I think to sum up the change in the landscape, the industrial property certainly has demonstrated its resilience through the last couple of months, plus, I think, the impact of COVID is likely to accelerate some key trends that already existed from a demand point of view. If I can move then to Slide 5, strategic overview, the -- over the past 5 to 6 years, GMT has targeted its investment in the Auckland industrial and urban logistics market. At a real estate level, we're very focused on long-term total return through continued value creation and our underlying portfolio, and also redevelopment of other opportunities. And certainly, we'll continue to have a very strong focus on the long term. Second point there around the development program, and James will talk about this in some detail. We've created some very, very high-quality assets with strong businesses on long leases. And I think that those sorts of assets will continue to be very well bid in the market. And the creation of those is something that is a real advantage for GMT. The third point there, we have carried a low leverage model. I think we're being consistent with that for a considerable period of time. That provides us the ability to absorb shocks such as the one that we're working through now. But also provides us the opportunity to go on the front foot with acquiring good sites and good locations that are in line with our strategy. So I think we made good progress on the capital management. We're also announcing today an updated distribution policy, we will be distributing 80% to 90% of cash earnings. So we are returning more cash to better align the underlying cash flows from GMT's stabilized portfolio. And that's, in my mind, is just another step in creating a high-quality entity that has a much more sustainable policy in that particular area. Look, other points on that slide, I think, the story around Auckland and the congested distribution networks and its geographic constraints, I think, are well understood. And again, we think that people are going to be more discerning about the locations that they want to place their investment in. I'll just make a point about the industrial market in a broad sense, going into COVID-19, vacancy was very low. So I think you've got a market that's going into a situation in very good shape. I think the prime locations will continue to be in demand. But however, whilst relatively, I think industrial clearly has been the better performing of the property sectors. We are realistic that we do expect some impacts. Clearly, the economic outlook is looking pretty tough. And so we're realistic about the fact that there will be some impact. But we expect that probably to be more likely in the secondary part of the market. So that's an overview. Look, I think, having said all that, our statutory profit for the last 12 months of $284 million is a very strong result. And I'll hand over now to Andy to take you through the detail of that.

Thanks, John. Good morning, everybody. Great to be talking to you today about the 2020 financial results. So move over to Slide 7, and just take a look at some of the key highlights of the results we've released this morning. As John mentioned, profit before tax, $284 million, very strong, but it is around 15% lower than we recorded last year. Two key contributors to that change. Last year, we had a $35 million profit recorded on our sale of the joint venture, our interest in the joint venture Wynyard Precinct Holdings. And revaluations this year of $166 million. That's also around $35 million lower than last year, and James will talk a bit more about those in a moment. Net tangible asset backing at $1.73. That's unchanged since we reported in September, but around 10% higher than it was at March last year. So still strong improvement through the year. Total unitholder return, 28%, was very strong for the year. And as a result of that, a maximum performance fee of $11.4 million is payable because of the very significant outperformance against the peer group GMT is measured. Cash earnings, consistent with our guidance and in line with the prior year, a strong outcome again given the portfolio changes that have taken place, in particular, over the past 2 years. The Board's declared fourth quarter distribution brings us to a total of $0.0665 full year. And as John mentioned, there's a revision to our distribution policy, and I'll talk a bit more about that in a moment. Move over to the slide on net property income. Look, slightly up on last year in total, very strong contributions coming through from both acquisitions and the developments that we've undertaken, together with around 4% underlying growth in the portfolio on a like-for-like basis. And those more than offset the impact from the disposals that have taken place in the last couple of years. Further $3 million of net property income results from the change in the treatment of ground rents under IFRS 16. Turning over to Slide 9, and take a look at a bit more detail at cash earnings. And just a reminder that FY '20 has seen the resumption of the best fee being paid in cash and the manager no longer being required to reinvest in units. As we highlighted last year, we looked at a restated position for consistency. So FY '19 that you see here is consistent with the presentation for FY '20. And cash earnings, $0.0622 per unit as we guided, materially consistent with FY '19. Total land, as a percentage of our portfolio, now stands at only 1.5% at the end of the year. And as a result of that, capitalized borrowing costs in land have fallen quite significantly, only $3.7 million. Our total CapEx in the stabilized portfolio for the year, $12.5 million. And within that, $2.9 million is considered to be maintenance CapEx. Looking forward into FY '21, most of you will be aware of the change with the reintroduction of building depreciation for tax purposes. As a result, we're expecting around $4 million of cash savings during FY '21, and the effective tax rate is expected to be around 15% for FY '21. Turning over to Slide 10 and just take a look at a bit more detail on the NTA. As I mentioned, unchanged since the interim, but up 10%, which is around $0.16 on March last year. $0.12 of that coming from revaluation gains, including developments, and those developments produced a margin on average around 16%. And the equity raise that we completed midyear, that was at a 23% premium to NTA, adding $0.03 to net tangible assets per unit. Slide 11 takes a look at our investment property. So our total portfolio now stands at just on $3.1 billion, $440 million higher than it was at the end of the last financial year. Settled acquisitions on Turners and Growers at Mt Wellington, Favona Road also occupied by Turners and Growers and a small acquisition adjacent to our Tamaki Estate contributed around $100 million. New developments undertaken through the year and completed in the year, along with the revaluations of those developments, $115 million. And the stabilized portfolio revalued up by around $150 million. We now include, within the total portfolio, a right-of-use asset relating to the ground leases, which are mostly at Westney. Slide 12 takes a look at the leverage that we've got in our balance sheet. And as John mentioned, we continue to be very lowly geared. Balanced debt sitting at just 18.9%, down from 19.7% last year. This provides us with very significant resilience and capacity for both acquisitions and developments. $175 million of equity raised midyear, you can see in the chart, has had the biggest impact. And fully committed gearing, taking account of acquisitions settled just after balanced debt along with developments that are currently underway, sits at 20.6%. LVR covenants, 50%. So very clearly comfortably in compliance with those with significant headroom. Move on to Slide 14 and just take a look at our debt book. This chart is pretty much unchanged from what we presented in November when we talked about the interim results. At that time, we just completed refinancing GMT's bank facility, and we added another $100 million to that facility, taking it to $400 million. We've only drawn $25 million out of that at balanced debt. So a very significant capacity, $375 million available to us. And you will note that we've got a maturity coming this year in relation to a bond that matures in December, and more than ample capacity within the bank facilities to refinance it that way, should we choose. But our preference does remain to access nonbank markets, although we'll make a decision on that closer to the time. Turn over to the interest rate risk side on Slide 15. And you will see we've got around 30% exposure to what are our historic low floating rates. Swap books and the money, largely as a result of the U.S. private placement cross-currency interest rate swaps that we've got. And we're forecasting a very significant fall in our WACD from 5% during FY '20, expecting to be around 3.7% in FY '21. Interest rate covenants got a requirement that our ICR is not less than 2x, and you will see for the year to 31 March, we sat at 3.9x. Turning over to Slide 16 and just have a look in a bit more detail around the distribution policy. As John mentioned, we're refining that now, and it takes effect from the beginning of FY '21. And following the de-gearing that's taken place over the recent years, we see this as another step towards a long-term sustainable business. Distributions will be set by reference to GMT's cash earnings. That's our preferred performance measure that we'll continue to refer to. And at a level of 80% to 90% of cash earnings, it ensures that we'll still be able to invest in a stabilized portfolio without having to debt fund part of the distributions, as has been the case previously. So I'm going to hand over to Jim to talk through the investment portfolio.

Yes. Thanks, Andy. I'll move over to Slide 18. Now over the past 6 years, GMT has been repositioning itself to focus solely on the Auckland industrial sector, the sector in which we expect the greatest returns. This has resulted in the disposal of $1.2 billion of largely office assets. Over the same period, GMT has monetized its land bank through the development of over 300,000 square meters of NLA on 63 hectares of land at its industrial parks throughout Auckland. The result of this repositioning program has been a substantial improvement in portfolio quality, a reduction in the land weighting from 11% to 1.5%, and has assisted in the reduction in gearing from 36% to 18.9%. Slide 19 provides an overview of the location of our estates. 11 estates covering approximately 250 hectares of land and buildings. Our estates are well connected to the wider Auckland transport infrastructure and are close in to the consumer base. This is something that's becoming more and more important in a city like Auckland, which is becoming more congested and is seeing a real spike in e-commerce and home deliveries. Slide 20 provides an overview of our portfolio metrics as at 31 March. Occupancy at the year-end was 99.4%, and we had a weighted average lease term of 5.5 years, in line with the half year. Our land weighting of 1.5% reflects 8.4 hectares of land across Highbrook and Savill. Slide 21 provides an overview of leasing. The portfolio saw 140,000 square meters of leasing throughout the year, which is equivalent to around 13% of our portfolio. These new leases had an average term of 7.5 years. Expiries falling in FY '21 now total 80,000 square meters or 7.5% of portfolio income, which is half what it was this time last year. GMT's existing portfolio, again, provided a strong pool of customers for our development program, with over half of development leases coming from customers within the existing portfolio. Over to Slide 22 and portfolio reviews. FY '20 saw nearly 3/4 of the portfolio income subject to some form of review, providing for average rent increases of 3.7%. Of these FY '20 reviews, around 1/4 was subject to some form of market reversion producing an average increase of 6.3% or 3.5% on an annualized basis. In November last year, we assessed the portfolio to be 7% to 8% under rented. It's too early to make a judgment on market rents as at today. However, I think it must be noted that both in GMT's portfolio, as John mentioned, in the wider market, we came into this period with minimal vacancy. On Slide 23. GMT's 10 largest customers account for around 1/3 of portfolio income, and are generally focused on storage and distribution. We also provide a deeper analysis of GMT's customer base to provide a better picture of the underlying business. Storage and distribution makes up the largest segment of GMT's customer base at around 40% of income. Customers in this category provide distribution services and include the likes of NZ Post, DHL, Linfox, Freightways and Mainfreight. Customers focused on manufacturing within the portfolio include NCI, which is a package labeling business, Fletcher Steel, Schneider Electric. Commodities businesses account for another 9% of the portfolio, and include the likes of Foodstuffs, Turners and Growers and also 2 toilet paper businesses, which have been busy of late, Cottonsoft and Asaleo. Together, these 2 businesses account for around 50,000 square meters of space. We've also provided more information on our retail exposure. Those customers undertaking distribution for their own retail networks, for example, Kmart, Cotton On, Just Group equate for around 5% of the portfolio. Shop front retail exposure, such as cafés, restaurants, gyms, et cetera accounts for just over 1% of the portfolio. Over to Slide 24. The onset of COVID-19 has had a significant impact on many of our customers, with a number having to shut their doors during the lockdown. As many of our customers, particularly the larger ones, are involved in the distribution and supply of essential goods, they were classed as essential. This meant that approximately 40% of our customers or 70% by income, were open to some extent during the Level 4 lockdown period. As restrictions were eased, and the country moved into Level 3, around 90% of our customers by income were open to some extent. With the move to more online shopping and direct business-to-consumer delivery, there were some customers that have required more space. And this resulted in us leasing 2 warehouse vacancies, totaling around 11,000 square meters. Both these customers were involved in food supply and distribution. A number of customers have, however, experienced a significant drop in revenue with some requesting short-term rental relief. Going to Slide 25. GMT has received around 90% of rental due for April and May, which takes into account support provides to customers largely by way of deferrals. We have reviewed requests for relief on a case-by-case basis. And in trying to get the balance right, we have targeted our rental relief on our most vulnerable customers. It's those 35 to 40 customers who were generally closed during both Level 4 and Level 3, and have limited financial resources and flexibility. We have also looked to provide short-term cash flow to support to customers by way of mutually beneficial leasing deals, whereby a customer gets rental relief for an extension of their lease. This has resulted in a number of positive outcomes with nearly 30,000 square meters of leases signed since 1 April. We have also provided a number of short-term deferrals to customers to assess with customer cash -- with their cash flow in this period. In response to COVID, we have also paused a couple of larger speculative developments that were about to commence. We have assisted customers with marketing support, especially our retail customers. And we've also ensured we support our contractors and suppliers with cash flow, with expedited payments. Slide 26 gives an overview of the new investments made throughout the year. We invested $117 million in sites and infill locations, totaling 15 hectares. All sites have the benefit of future development potential, but also a holding yield of approximately 4.5% over an average lease term of 3.3 years. These sites are part of our development pipeline of over $500 million, which we expect to develop in the medium term. Over to Slide 27. Our full year valuation result was $165.8 million or 5.7%. The cap rate movement was the largest driver of the increase, with the cap rate for the portfolio falling from 5.8% to 5.4%. The increase in valuations was seen in the first half with the valuations largely flat in the second half. The second half movement saw development profits and a slight positive revaluation for the core portfolio, offset by a fall in value of our land book and also our value add assets, which are more closely aligned to underlying land value. Over to our development program. Slide 29 provides an overview of the developments completed during the year. The program has produced $158 million of new high-quality product for the trust, which has been leased for an average term of 10 years. Nearly 12,000 square meters of this product was developed on a build-to-lease or a speculative basis, and are now 100% leased, following an average let-up time of 1 month. On to Page 30 and our current developments. We have 7 projects currently ongoing across Highbrook, Savill, Westney and M20 business parks. Part of our development program for many years has been our build-to-lease program. This program has produced 120,000 square meters of warehouse space since 2012, and is 100% leased. We are constantly managing our exposure to this type of product, and have decided to pause our 2 largest developments that were being built on this basis prior to construction. This allows us to manage our exposure to uncommitted product, which currently sits at less than 1% when you put it in context with our wider portfolio. Back to you, John.

Thanks, James. Well, look, if I can take everybody to Slide 32, outlook and guidance. And as I mentioned at the beginning, while the operating environment has deteriorated, and the immediate outlook is very uncertain, I think, for all of us, we're very confident in pursuing our investment strategy based on the urban logistics market. I think we have seen the role that industrial properties plays in the supply chain, providing that physical infrastructure that allows goods and materials to be stored and distributed quickly and efficiently. And I think that's been clearly demonstrated in the consumer response during COVID-19. I think our prudent capital management, our low leverage approach, has provided GMT with substantial financial flexibility and liquidity, which, as I earlier mentioned, not only gives us resilience, but does give us the chance to take advantage of acquisitions and/or development opportunities in line with our strategy. I think also, look, we remain realistic that we are in a really difficult economic environment. There will be impacts. But however, I think the resilience we've got in our business and the key macro themes that I think will bring some demand into the industrial sector, all those factors give us the confidence to provide guidance to you today on what we see for the next 12 months. And based on the current economic outlook and our expectations for the performance of our portfolio, we expect cash earnings to be materially consistent with FY '20 at around $0.062 per unit. And in line with our new distribution policy, we expect distributions to be no less than $0.053 per unit, the midpoint of the 80% to 90% range that Andy talked about. This guidance, as always, I guess, but importantly, is subject to there being no further material adverse changes in market conditions or the occurrence of other unforeseen events. So that concludes the formal presentation. Look, we're very happy to take questions.

[Operator Instructions] Your first question comes from Arie Dekker with Jarden.

Look, you provided some good visibility on how the impact of COVID in the business has been dealt with. Just in terms of the conversation you are having with a small number of customers on abatements. Do you see any potential for those abatements to flow through into June and beyond? Or is that a conversation that sort of stops at May?

Yes. Arie, look, good question. I think, look, maybe I'll talk sort of broadly about how we've had to deal with requests for rent relief. Clearly, as James mentioned, there's a group of customers that have no potential flexibility, generally smaller in nature. And so we have supported them directly. So look, some of that may need to continue in further months. But I think we just have to work through that on a case-by-case basis. But look, we don't expect that to be material.

Okay. Great. And then, obviously, you've done a pretty good review and you've presented some of that in the pack on sort of composition of your tenant mix. Just in terms of, I guess, and going through that and sort of, I guess, the assessment you have made around risk in that? And I guess also with reference to your guidance of earnings being largely in line with FY '20, could you just sort of talk about whether you've made allowance and you see potential for some increase in vacancy from the very low levels in FY '20?

Yes. Look, the answer is yes. We have made allowances that we think are appropriate for the environment that we are heading into around let-ups, around vacancies.

And would that be sort of low percentage sort of levels? Or anything you can sort of share?

Well, look, we won't -- look, we won't put a number on it. I think we'll just we see how the year pans out. But look, we've -- like I said, we've made some allowances that we think are appropriate for the environment that we expect.

Sure. Just on the development program, just in terms of cash development spend in FY '20. What sort of level are you expecting? And I guess, within that, are you budgeting at this point for resumption on those paused developments in the FY '20 year?

Yes. We're about halfway -- Arie, it's James. We're about halfway through the spend on our current developments, and then how this year goes, it will sort of depend on a bit more pre-committed development. I can't see us push and play on those specular developments in the next month or 2, not potentially. But I doubt it. So potentially kicking those off at the end of the year. Whether we get to a normal $100 million level is probably a bit bullish, probably more between $50 million and $100 million what I would expect of development commencements, new development commencements.

Yes. And then just last one. Just could you just talk on the level of interest at Westney 4,500 and the Island Units developments. And also, just on those committed developments that you are continuing through to completion that you've had recommitment from the tenants in all those cases.

Yes. So on the 2 projects that are continuing on a speculative basis, Westney and the Island Units. Generally, with the Island Units, for instance, they're quite small. And we don't normally lease those until they are really coming out of the ground, and they're not due to be completed until around a year's time, Arie. So that's sort of very early days on those ones. In terms of the [ 4,500 ], that completes around about November. We have had some interest from customers within our own portfolio in that asset. But again, it's early days, still sort of, what is that, 5, 6 months away from completion.

Your next question comes from Nick Mar with Macquarie.

Just on the valuations. Could you give us any color on how the valuations looked in the drafts versus where they came out in the finals? A couple of other way to kind of give a bit of context around that.

Yes. Nick, look, it's about 5% was the movement from the draft to where we ended up.

Great. And what were the kind of changes that the value has made to kind of get that difference and, obviously, slightly softer than the first half [ wells ].

Sure. Look, I'll get James to answer that.

Yes, it was a combination of things, Nick. I think that probably the key one was removing rental growth for the first 12 months, completely stripped that out. I think everyone's a bit uncertain as to where rental growth would be. The first thing we'll get a real hold on is, obviously, where rents are when we see some deals come out, and then discount rates and cap rates with the rest of the movement.

And then you're kind of thinking on where the cap rates are given some transactions that have been through kind of around or a bit before COVID, particularly like the toll transaction and kind of a few other small issues you are going through in the kind of mid-4s?

Yes. Look, I think, Nick, I mean, there's been a very small number of transactions. And like you say, they're probably been pretty well. But I think my sense is the good quality stuff with long leases and good locations, nice shiny shed, I think will still be pretty well bid. And I think particularly given the interest rate environment. Look, you may even see a bit of compression on some of those as we go through the year. I think the value has probably been a bit tougher on the secondary stuff, which is more akin to -- has a bigger component of land in it. So you may see a bit of softness there. But I think we have all probably just got to wait and see what comes to market, because I think there's probably some quite good stuff coming to market from what we're aware of and see what the pricing is. But at the moment, we are speculating a bit. But like I say, I think our sense is -- and talking to Goodman globally that the good stuff is going to be pretty well bid.

Yes. And then just one on the kind of rent collection side. Does that 90% you talked about include those who were, I guess, obligated to narrow in to their bid lease terms that kind of sub-5% you talked about?

Yes. We -- look, that 90% takes into account where we, for example, provided a deferral on rent. But the cash collections are pretty close to that. There's not a huge difference between actual cash collections and that 90%.

The next question comes from Rohan Koreman-Smit with Forsyth Barr.

Congratulations on the result. Looks pretty solid across the board. A couple of quick questions. Just maybe following on from Nick's. When you say deferrals, what is the term? And when do you expect to collect on those? I'm just thinking about the cash impact over the next kind of 12, 24 months.

Yes. In general, we have asked for our customers to repay that from September this year till March next. So within the financial year, in general. There are some exceptions to that, but the bulk before March this year.

Perfect. And then...

Next year, sorry.

Yes. And then just one, looking at the Slide 9, when you talk about the cash earnings. Just a comment there, $12.5 million spent on the stabilized portfolio versus $2.9 million as maintenance. Are you able to provide a little bit of color about what the $9.6 million difference is? Was there a return on it? Did it result in some sort of leasing transactional? Or was it dropped out of some sort of leasing transaction?

Yes. Yes, it's James again, Rohan. So we go through our CapEx spend every year. Our total CapEx build, that $12 million. Where it's just maintenance CapEx, i.e., you were just replacing like-for-like and not getting any value or rental or anything out of it. We class it as maintenance CapEx. So that's how we come to that number. I'll give you an example of some other projects that were in the $12 million. We did some yard upgrade works at The Gate, which allowed us to rentalize it, for example, or we spend money on an office, which allows us to get $30, $40 a meter more in rent as an example. So value-add stuff is in that $12 million.

Okay. And the returns that you achieved, just kind of have a similar yield on that as you achieve on your other development projects. Is that an easy way thinking about it?

Yes. Some of it's not tied directly to yield though. Obviously, you're trying to reposition an asset, and it's not just about rent collection. It's about sort of value, long-term sort of leases as well, not just an increase in rent.

Okay. All right. So I'm just trying to figure out, you've spent some money, just whether there's a return associated with that, just maintenance CapEx looks relatively light versus the total spend. So just trying to figure out, is there an ongoing benefit from it that you wouldn't have achieved otherwise, [ initiatives ].

And look, I think, while it's not tied directly to financial return and often in the cases where we make a decision to invest in that stabilized portfolio. It's about maintaining a very high-quality portfolio and the aspect that is beyond maintenance is lifting that quality from what it was before and improving the assets that we had. So yes, in some cases, like James' example, it is tied to a direct financial return. But in other cases, we make a decision to invest to improve the assets.

But that's why we gave you the whole number anyway, you can make your own call on where you see those amounts.

[Operator Instructions] Your next question comes from Adam Lilley with Craigs Investment Partners.

Just a couple of quick ones from me. So just kind of looking at this new COVID world, and things such as social distancing, which are now front of mind. Can you just kind of give your thoughts, your early thoughts as to how you think it's going to impact on warehouse utilization? Is that going to mean increase automation? Or are people going to need more space to allow for greater social distancing?

Yes. Look, good question, Adam. Look, I think, generally speaking, if you look at warehouses, not a lot of people certainly compete to, obviously, an office or a shopping center. So the -- our customers, if you look at our customer base, around half of them are open during Level 4 and operating effectively. About 90% of them opened during Level 3 and following the new COVID protocols. So that seemed to be -- I think there might be some productivity impact of that. But I think that probably leads to the second part of your question around automation. And certainly, we are seeing an increase trend in the investigation around that. I think, look, 4 or 5 years ago, if we spoke to our customers about that, they would say, look, no, it's not going to happen. It's too expensive. But I think people are also looking increasingly at getting more productivity out of the facilities that they do run. So we expect that trend to continue.

And just another one from me. Obviously, you've got reasonable balance sheet headroom and your amendments to your distribution policy going forward ensures that you preserve that balance sheet. Where do you see the opportunities coming up over the next kind of 6 to 12 months? And then particularly, you're thinking there's going to be an increase in sale-leaseback opportunities in the market?

Yes. Look, I think there probably will be some leaseback activity, because I think some businesses will look at that as a way of improving their balance sheet. So I think there will be some opportunities there. On the development front, we're already working on some projects that are probably more aligned to that sort of the e-commerce theme and distribution to consumers. So I think we'll see development opportunities coming through that. And -- but we're going to be still very disciplined about the types of assets that we acquire. We'll be looking for sites that are well located, the brownfield-type sites that we have acquired recently, the Turners and Growers sites, the Roma Road site and Foodstuffs, those kinds of things. I think the very, very new industrial product with long leases, I suspect, as I mentioned earlier, I think, though, there are a lot of competition for those sorts of assets. But the other thing is it more broadly as we work our way through this thing, we think there may be a little bit less competition in the development space potentially just from -- because I think it's difficult for people to get funding. And I think we've got the capability to take on large-scale development projects when others may be struggling with it.

Great. And sorry, just one more there, somewhat dovetails on to your reply there. Just on how you're thinking about return hurdles? You kind of mentioned that definitely it's front of mind. Can you give an insight as to how that thinking has changed or developed over these past few months?

Well, look, I think we have taken a look, a bit of a wait-and-see approach. I mean, look, no one's -- there's very few data points in terms of where rents are going to land, where cap rates are going to land. And consequently, your building cost is going to be higher because of the COVID restrictions, things like that. Our sense is it probably -- that's not going to be a major factor, but we need to see the data points, see it all in terms of our quantitative hurdles. We look at sort of 200 to 250 basis points over our WACC on investments. But like I say, I think we've got the ability to be patient and just see how the market unfolds. Because we think, obviously, we're in the early stages of this economic correction. So I think we will probably just need to wait and see how it pans out.

Your next question comes from Shane Solly with Harbour Asset Management.

Well done on traversing what's been a very challenging period. So just a couple of quickies. In terms of provisioning for bad and doubtful debt, Andy, are you starting to -- what have you done in terms of that? Is there specific provisions in the numbers?

Yes. Look, within our guidance that we have given, as John talked about before, and I mentioned some things, we have looked at a whole range of different aspects of it as we do every year, and formed some judgment around that. I think there's -- it will be fair to say there's a [ wave ] of more uncertainty around some of those judgments that we have made this year. But we've got a reasonably good degree of confidence of the guidance that we have given as that $0.062. So yes, we certainly looked at whether we think that's necessary or not.

All right. Just picking up on the acquisition and development component. In terms of the land valuation moves, the values as you put through versus what you're seeing in the market. Where do you see the risk to land their use in the immediate 12 months or so?

Yes. I think -- it's James here, Shane. I think that's also quite early. What we are hearing is that there's been some land transactions that have gone to unconditional buyers, and often you see unconditional buyers that are sitting there at sort of 10% below where the conditional buyers are. So that could be driven by sellers that need the cash at this point in time or making a judgment. So whether that sort of conditional buyer comes back is really to be seen. But as you can see, our lands come back slightly, but not a significant amount, Shane.

Just a final one then, just picking up on the construction cost, too early to see a response or freeing up of capacity?

Yes. Look, I think there's a couple of things there. I think the first thing is the -- obviously, we had a number of projects that were underway. So we've had to relook at programs and any COVID-related costs. But I would class those as immaterial and costs that we can absorb in the contingencies of those projects. I think, going forward, I'd be inclined to say that there probably will be some capacity. So our expectation would be, all else being equal, that we would see some easing in construction costs. But again, that may take a little while to find out. But yes, I think given the economic outlook, you would expect there to be somewhat of a contraction there.

Just a final one for me. In terms of -- it is a tough time for businesses to commit, that obviously help your retention in terms of people staying. But in terms of getting a gauge on when you think your [ business ] will look to grow again, is it sort of a 6-month thing or a 3-month thing? Or what's the sort of you then?

Well, look, again, I think it's very sort of case-by-case. If you -- some businesses are -- grew through Level 3 and 4, as James said, and we lease space and particularly in the food area. So there's that group. I think a lot of other businesses, like you say, I think will stay put and not look to make any decisions for a while. Others will be in the contraction phase. But I think , broadly speaking, the industrial sector, I think, has demonstrated that those occupiers are probably getting more economic activity than other property sectors. But I think, look, I think it's really too soon to tell when we'll see a general growth in demand. I don't think at the moment that the businesses and customers we're talking to are generally in a bit of a wait-and-see mode.

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

That's great. Thanks, Rachel. Look, thanks, everybody, for dialing in. And we're -- management are available for one-on-one calls for a number of those booked over the next few days. So feel free to get in touch if you'd like to have a chat. And stay safe and stay well. Thank you.