Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust Annual Results Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Keith Smith, Chairman. Please go ahead.

Thank you, and good morning, everyone, and thank you for making the time to join us this morning. Just by way of brief introduction before I pass over to John and Andy and James to do various parts of today's presentation, I'd just like to say that on behalf of the Board, we're extremely pleased with the result, notwithstanding the very high reval figure, but also more importantly, the 5.4% increase year-on-year on our operating profit. That is a very good result in our view based on what has been a challenging year for everyone here. So on that note, I'll come back and take questions at the end, if there's any for me as Chairman. But I'll pass now to John Dakin to do the first part of today's presentation.

Yes. Thanks, Keith, and good morning, everybody. So if I take everybody to Slide 4, we just thought we'd just chat a little bit about the global logistics trends. And as Keith just mentioned, the pandemic certainly brought its challenges for all of us in the last 12 months with its effect continuing to be felt around the globe. One of the consequences of the global pandemic has been the structural changes to consumption trends resulting in increased demand for industrial real estate. The continuation around globalization and urbanization, the accelerated digitization in the world and sustainability trends has continued to shape the way people live, work and in particular, shop. So the growing importance of global and local supply chains is rapidly reshaping the industrial real estate market. Leasing inquiry remains significant globally right across the Goodman businesses with continued strong demand from e-commerce, supermarket, data center and 3PL customers anticipated to continue. The consumer-led forces are the key drivers of the significant growth in e-commerce sales and the digital economy. Consumers want faster and more convenient delivery options, and timely fulfillment forms a competitive advantage for online retailers. And all those trends, I guess, have flowed into an investment strategy focused on urban logistics, which has positioned GMT to benefit from the growing digital economy. There's a limited supply of high-quality, well-located space, and that's driving positive current and expected future strength and portfolio occupancy and rent growth and we'll talk through that today. So if I move to Slide 5, an overview of the result. Our portfolio occupancy at the end of the year was very strong, 98%, and I think the average through the year was even higher than that. The weighted average lease term of 5.5 years is something that we're very comfortable with, and a limited amount of income subject to lease expiry by the end of FY '22 at 9%. Also encouraging, I think, like-for-like NPI growth of 4% for the year particularly given the year that we had. And what we're also seeing is a lift in the development work in progress. We confirmed -- well, you know about the redevelopment of Roma Road, but we're also announcing today the redevelopment of the Favona Road estate. And I think at the half year, we talked about the brownfields redevelopment time frames being accelerated as a consequence of the trends I talked about before. Obviously, the standout number in terms of statutory profit is the $560 million revaluation, which gives you a return across the property portfolio on an ungeared basis for the year of 22%. On to capital management. We've got a good level of liquidity, provides significant investment capacity. Our year-end gearing, very comfortable, 19.2%, with committed gearing, including the developments that we are talking about today, lifting to 22.5%. We're also confirming today that we'll be lowering our gearing range to 20% to 30%. That's pretty consistent with Goodman partnerships all around the world. And we think at this time with elevated pricing, that gives us the ability to both absorb market volatility and also pursue potential opportunities. On to the result itself, the profit before tax at $648.9 million, NTA lift of 23% driven principally through the revaluation process. But as the Chairman mentioned earlier, importantly, cash earnings at 6.4% -- 6.4 cents per unit, sorry, up 3% on FY '20; and distributions at 5.3 cents per unit, reflecting a pretty conservative payout ratio at 82.8%. So I think with those changes around our distribution policy and the gearing level, they are really important steps in improving the long-term financial sustainability of the business. And on that note, that gives me the chance to hand over to Andy, who's heading up our sustainability initiatives across the New Zealand business. But what I will say is that Goodman Group is very committed to some pretty big initiatives around the sustainability of the operations of the whole group and also through its development process. So over to you, Andy.

Thanks, John, and good morning, everybody. So look, if you turn over to Slide 7, before I get into the financials, I'll talk a little bit about some of the sustainability achievements and initiatives that we're announcing today. The first one, actually announced earlier in the weekend, some of you may have already picked up on this, we are now a certified carbonzero business. That's 4 years early compared to our original target of 2025 and certified by Toitu. We achieved a CDP score of B minus, again, this year. That's a management level assessment, and we've been contributors into the Carbon Disclosure Project since 2009. And very significantly, new commitments being made today around our development program. We will target 5-star Green Star certification for all of our new developments and will offset all of the embodied carbon associated with those developments. Turning over to Slide 8. Look, we're very committed in terms of reducing the impact of our business on the environment, and a major focus of that is on the operational carbon footprint. So the Toitu certification, that process started in FY '20. We had an audit completed on our emissions for that year. That set our base year. Through the course of the year just completed, we set out a carbon management plan, and that targets a 19% reduction in our emissions by FY '25. However, COVID impacts and lower emissions from HVAC systems helped us achieve a 40% reduction in FY '21 compared to the base year. We've completed a very large solar installed at OfficeMax during the year, and that provides them with around 374 megawatts of power each year. CapEx upgrades in future years will help our customers and GMT reduce emissions, and we're installing 2 public fast EV chargers at Highbrook and M20. Move over to Slide 9 and just look a little more at the development side of things. So the commitments that we're making today recognize the impact that construction has on the environment, and steel and concrete globally are estimated to contribute around 8% of all carbon emissions. John mentioned the redevelopment of Roma Road and today announcing the Favona Road redevelopment with Mainfreight there. And both of these will target 5-star Green Star rating and have their emissions offset. These are both brownfields regeneration, so they do help limit the expansion of the city. And given their proximity to consumers should mean fewer truck movements for deliveries, resulting in less congestion on the roads and fewer transport emissions. We turn over now to Slide 11 and just take a look at some of the financial highlights. So look, it is a record result at almost $650 million before tax. $560 million of that from the revaluation, reflecting the strong rebound post-COVID and also the investor preference for industrial. The revaluation drove the NTA lift of 23% to $2.12 a unit and also the total return of 26% for the year. As John mentioned, gearing sits at just 19%, so that's consistent with last year-end. Cash earnings for the year, 6.4 cents per unit and a full year distribution of 5.3 cents per unit. Slide 12 bridges our net property income from last year to this year. So NPIs increased by 5% overall, developments and acquisitions both contributing strongly, but also a very strong underlying like-for-like NPI increase of over 4%. COVID support provided during the year impacted by $1.4 million, and that was targeted at our most significantly impacted customers within the portfolio. Let's turn over to Slide 13 and take a look at cash earnings. But first, just to note, as Keith mentioned, the strong operating earnings result, up almost 5% to $115 million before tax. That was the key driver of the increase in cash earnings on a per unit basis of 6.4 cents per unit, 3% higher than last year and also 3% higher than the original guidance of 6.2 cents per unit that we gave at the beginning of the year. FY '21 saw the implementation of our new distribution policy that we announced a year ago, and we distribute -- we target distributions of between 80% and 90% of cash earnings. The 5.3 distribution -- 5.3 cents per unit distribution that we're making for the full year represents around 83% of cash earnings. You see on the slide as well that we've called out a small change to the calculation for FY '22 onwards, and we'll now adjust for straight line rental income and that will mean that the cash earnings we report will align better with the cash received from our customers. Over to Slide 14, just looking at the NTA growth. As I mentioned, up 23%. The stabilized revaluation was a 17% increase in our portfolio, and the average development margins of 23% also contributing to that. Slide 15 breaks down the components of the $715 million increase in our investment property. Revaluation, as I've already mentioned, the most significant contributor to that, but also acquisitions totaling $84 million at Savill and Mt Wellington and additional spend on our developments of $53 million. Turn over to Slide 17. Chart on this slide sets out our current debt maturity profile, and we've got an average term as at balance date of 5.2 years. Over 90% of our funding are currently sourced from nonbank sources. I'm sure most of you recall that we did issue $200 million of wholesale bonds in the domestic market with 8- and 10-year terms in the first half of the year. That was the largest and longest tenured domestic issuance in the property space. Doing that freed up our bank funding lines, and we've got $340 million of available funding at balance date. Turning over to Slide 18. And look, when we did the wholesale issuance, we made the decision to leave that fixed. Interest rates at that time were close to historic lows. And as you can see on the chart, over 80% of our debt is fixed for the next 3 years. Weighted average cost of debt during the year sat at 3.7%. And for FY '22, we expect that to be just under 3%. The ICR covenant now sits at 4.1x compared to covenant requirement of not less than 2x. If you normalize that to take out the one-off cash cost of swap closeouts during the year, it's at a very strong 5.3x. Slide 19 sets out the 5-year history of our 2 financial covenants, the LVR and ICR. For LVR, you can see the very positive impact from asset sales, the equity raise and more recently, the larger revaluations. And as John mentioned before, the Board has lowered its preferred gearing range. That now sits at 20% to 30%. Importantly, that retains very significant balance sheet resilience, but also gives us the capacity to continue to develop and acquire any opportunities that come around. At the same time as gearing being reduced, ICR has improved very significantly. But obviously, that's been helped more recently by the particularly low interest rate environment. Slide 20 sets out the drivers in our gearing movements. We ended the year at pretty much the same as we started, at around 19%. Debt-funded acquisitions and developments are offset fully by the significant revaluation for the year. Committed LVR, taking account all of the developments including those announced today, sits at 22.5%, so at the lower end of the new range. On Slide 21, I just wanted to reflect a bit on GMT's credit rating. So we've had a consistent investment-grade BBB credit rating since it was first issued in 2009, with secured debt one notch higher at BBB+. And this slide highlights 2 other key metrics that S&P consider in their rating analysis. Both of these have been consistently strong in recent times. Debt to EBITDA, S&P expectation that, that should be not greater than around 7.5x, and FFO to debt expected to be not less than around 9%. The revised gearing band of 20% to 30% will provide good support for both of these metrics. I'm going to hand over to James.

Yes. Thanks, Andy. And we jump over to Slide 23. During the year, we announced the acquisition of 2 sites totaling 14.5 hectares, which adjoin existing GMT estates. One is the extension of our site in Mt Wellington, where our holding has been extended to 7 hectares; and the other, as outlined on Slide 24, which is an extension to our Savill Link estate. Purchased for a total of $83 million and currently leased with existing improvements providing holding income, the 2 sites will add to our value-add portfolio and offer a range of longer-term redevelopment options. Slide 25. Our development team completed 7 buildings throughout the year, providing a further 34,000 square meters of quality logistics space for the Trust, with an average lease term of nearly 8 years and a yield on total cost of 6.2%. 5 of these projects were completed on a speculative build or build-to-lease basis, with 4 of these projects now leased for an average term of almost 6 years. In a constrained market like Auckland, where access to quality logistics space is limited both on the investor and occupier side, being able to consistently produce our own new product has been a significant benefit for both our unitholders and for our customers. Slide 26. Following the acquisitions and developments made throughout the year, GMT's portfolio has been further extended to 1.1 million square meters of logistics space throughout the city. Auckland is a market with high barriers to entry, and our footprint provides plenty of options for our existing and new customers with estates spanning the west, east, central and south of Auckland. Over to Slide 27. The portfolio itself was very active throughout the year. We completed around 146,000 square meters of leasing, which produced annual -- sorry, average rental growth of 5.3% alongside [ with centers ] averaging approximately 3%. As outlined in the half year result, part of our COVID rental relief strategy was to work with customers on mutually beneficial leasing deals to provide short-term cash flow support back in March, April last year. That might have involved slightly more incentive for short-term lease extensions, which has resulted in a shorter term for new leases of 3.5 years. Where we did have vacancy, the average lease-up time was 2 months. Average occupancy for the year was 99%, which dropped for a short period of time when Turners Auctions vacated the Penrose Industrial Estate throughout the end of March. All of the space has now been leased, and our occupancy as at today is back over 99%. Over to Slide 28 and CapEx on the stabilized portfolio. As Andy mentioned before, we spent $13.8 million of CapEx on the stabilized portfolio. Of this, around $3.8 million was maintenance related. $10 million of the CapEx spend related directly either to leasing deals or was spent upgrading buildings. An example of this is the ACC office upgrade taking place in Wiri. We are significantly upgrading the building, which is reflected in a marked appropriate rental increase [ and a new 9-year ] lease. Another example of this type of work is the CapEx spend currently going on at Tamaki Estate, and you can see before and after images on the slide. It's a value-add site for us in East Auckland where our decision has been to completely refurbish the premises, which dates back to the 1940s. Alongside this upgrade, we expect a significant rental premium to be obtained. Over to Slide 29. GMT is focused on creating strong underlying returns from our assets with the combination of income and capital growth. Over the last 12 months, this return was 22.1% with 4.7% coming from income and 17.3% coming from revaluations. Our portfolio cap rate has firmed from 5.4% to 4.7% over the last 12 months, producing the most significant proportion of our $560 million revaluation. Recent sales evidence post the result and substantial competition for industrial assets points to the continued firming of cap rates for industrial assets. Slide 30 provides an overview of our lease expiry profile. Just 9% of portfolio income is due to expire prior to the end of FY '22. The portfolio continues to be heavily weighted to fixed rent reviews with FY '22 fixed reviews having an average annual increase of 2.7%. Reversions to market rentals comes at either expiry or market rent review. We have benchmarked our passing rentals to market rentals as at the 31st of March, assessing it to be 6% under market. This continues to provide rental growth opportunity moving forward. Over to Slide 32 and our work in progress. In November last year, we announced the redevelopment of Roma Road, our 13-hectare value-add site in Mt Roskill. NZ Post has committed to the first building on the site, leasing an 18,000 square meter facility on a 20-year lease. As John mentioned, today we're announcing the redevelopment of another of GMT's value-add estates. Favona Estate, our 7-hectare site in Mangere is to be extensively redeveloped with the construction of 2 new warehouses. Mainfreight has committed to the larger 22,000 square meter facility, with a second nearly 11,000 square meter warehouse being developed on a build-to-lease basis. Following this development, Mainfreight will become GMT's second largest customer behind NZ Post. We are also underway with the construction of 3 build-to-lease warehouses at Highbrook totaling 8,100 square meters, which means the Highbrook Estate will be more than 95% complete. Over to Slide 33. These projects mean GMT's development workbook now sits at $250 million of active projects. The average yield on cost across these projects is 5.6%, which provides for a healthy return for investors. Slide 34 provides a summary of our pipeline, which is a mix of our greenfield and brownfield sites which total over 50 hectares. The ability of GMT to continue to grow organically going forward remains. In fact, despite our strong development work in progress, our pipeline as at today is actually larger than it was 12 months ago considering the acquisitions that have been made during the course of the year. We continue to look for appropriately priced acquisition opportunities that will allow us to keep providing for the growth of our customers. Often, these acquisitions will be complex. However, with the in-house know-how that has been built over time both locally and internationally, we are well positioned to execute on these more difficult opportunities. Back to you, John.

Thanks, James. So if we just move to Slide 36, summary and outlook. The events of the past year have really reinforced the important role that warehousing and logistics property plays in our national supply chain, particularly facilitating the distribution of food and other essential items. And I guess what it's demonstrated is that this type of real estate is effectively infrastructure in the economy. Our portfolio concentration in Auckland is deliberate. It's where the country's largest consumer market is and also where land scarcity is limiting new supply, so it has higher barriers to entry. As James mentioned, the scale of the portfolio now does provide significant opportunity for redevelopment of our value-add assets, providing growth in underlying cash flows, and that's very much our focus. We're also, in addition, constantly looking at sites for future production, be they brownfield or greenfield sites located within our target areas. In terms of guidance for FY '22, you'll see there cash earnings are expected to be up around 4%. And consistent with that, distribution is also up around 4% for FY '22, but still within the bounds of the distribution policy that Andy covered. Finally, just in terms of Goodman, management does -- will continue, and does on a daily basis, to leverage the global expertise of Goodman Group to remain at the forefront of logistics trends that may impact our local market and hopefully, make decisions ahead of those trends coming into our market. But to James' point, I think the ability to create assets through the development process has never been more important in this market where you've got significantly more capital chasing these assets than you do supply, and the developments are becoming more complex. Our customers are putting more inside the developments than they ever have in terms of spend in terms of automation, in particular. And we are continuing to leverage the skill base of our group globally to make sure that we can execute on these projects and create really, really high-quality, long-term investments for our investors at very, very good yields on cost. And finally, the -- I just wanted to mention that the -- I mean, clearly, with the year that we've had with COVID, it's been incredibly challenging for everybody. We feel very fortunate, I think, to be in a business that has been on -- has been a beneficiary, I guess, of some of the changes that have happened. But the -- we also acknowledge our responsibility to reinvest in the communities that we invest in as well. So the Goodman Foundation, which comes through the management of the Trust, has invested $0.5 million of real cash into initiatives and programs to help those that have found the last year more challenging, in particular, those facing food and security issues. So I guess, in summary, when I stand back and look at the past 12 months, we've had a real focus on sustainability around the whole business, be it the financial sustainability around the -- looking at what are the long-term right settings for us from a gearing point of view, what's the right sustainable distribution policy, what's the right thing to do in terms of our contribution to the climate issues and carbon emissions, and I think we've made some really good steps there. But we acknowledge there's a long way to go, but there's a high level of intent to be a leader in that space and also to reinvest in the community. So look, that concludes the formal presentation. I think we probably now can go to questions on the phone, and then we can also deal with questions that have come through from the webcast as well. So back to you.

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

Yes, first question just in relation to the redevelopment at Favona. What's the quantum of investment that you're expecting there? And when you incorporate the cost of acquiring the site, what yield on cost are you targeting for that redevelopment?

Yes. Arie, it's James. We're not disclosing projects' yield on cost on a case-by-case basis. But we've lumped the whole lot together, and it's around that 5.5% that we've put in for the whole $250 million work in progress.

5.5%?

Yes.

Yes. And then just on the lease term with Mainfreight, is it of a similar duration as New Zealand Post?

Yes, 15 years, Arie.

15. Okay. Great. Just on -- an update on Roma Road. Is there any sort of update you can provide on the progress for leasing further stages there and when we might expect to sort of see you extend out the development of that site further or make an announcement regarding that?

Yes. Arie, John here. Look, we're going to start demolition on that site in the next month, so that's still pretty early days. The inquiry levels are pretty sound. But clearly, we'll announce any new deals there as they come through.

Sure. Yes, I think you referenced it at the end as well as when you talked about the target gearing range. You made reference to sort of elevated pricing. Do you sort of see yourself focusing the balance sheet deployment in the next couple of years on redevelopment over adding sites to the value-add portfolio? Do you think that that's what we should expect to be sort of the dominant feature over the next -- while these conditions prevail?

Yes. Yes, look, it's a good question, Arie. I think the -- we're seeing some sort of quite irrational behavior all around the world, and I sort of picked this up in my weekly calls with the other Goodman CEOs. And the -- what's become pretty clear to us is it's much cheaper to create your own assets than to be competing in the market. The -- and so that's our, I guess, our preferred way of creating assets. And that leads you to, obviously, well-priced -- in terms of your allocation of capital, well-priced brownfields opportunities or greenfields opportunities if they're in the right location and investing in new developments because you use something like a high-quality warehouse with a Mainfreight for 15 years or 1 with New Zealand Post for 20 years, [ when in reality ] is you can't buy them, but they're incredibly valuable assets. So the -- so like I said, I think you can expect our capital to be allocated more in that space as opposed to if there's a warehouse on the market that's got a 5- or a 10-year lease on it, we're unlikely to be the successful buyer for that, highly unlikely.

Sure. And then just final one. You called out the $1.8 million impact on NPI from COVID, and that covered a range of things. I mean how much of that should we sort of expect to come back into the base in FY '22?

All of that will come back into the base in FY '22. We've still got a reasonably cautious outlook in terms of potential future impacts. But that, we recognize the COVID cost in the FY '21 year for everything that's happened today.

Your next question comes from Nick Mar from Macquarie.

Just following on from the development yield side. Just looking at that 5.6% you've got versus, say, the 6.2% on the ones that you completed during the period, could you just talk through what the drivers are of that low yield? Obviously, cap rates have come down. But can you just kind of break it down into either [ mark-to-market ] land values, the increase in construction costs or I guess lack of change of rents against that factor?

Well, it's probably a combination of those things. Obviously, there is about a year to 18 months between those 2 stats. Cap rates have come down significantly. As you've seen with our portfolio, it's about 70 basis points, and you've seen yield on cost come down by about the same amount. So the margins still remains.

And I think -- look, maybe just to add to that, Nick, I think clearly, we're seeing with yields coming down and if you look at -- obviously, clearly, we had a big revaluation as at 31 March. But it looks like since that time, things have even -- firmed up even further. And so land values -- yields are low. Land values are high. The -- we've got to be factoring in where we think construction costs are going to go. And clearly, we're seeing some pretty high commodity prices, which we expect will flow-through into the materials that we use, principally steel and concrete. So it's a combination of everything.

Okay. No, that's clear. And in terms of the change in preferred gearing, do you think that has at all any impact on how you go about deploying capital? Obviously, the revaluation has given you more capacity, so that's probably an offset part of the change in target. But does it actually affect your business at all? Or is it just kind of nice to have a lower number out there?

Look, I think it's a -- no, look, I don't think it really affects our operational flexibility given we've got substantial capacity, and sort of an excess of $300 million is a lot of cash in this market. The -- as I said, the Goodman partnerships around the world have [ settings ] at around that level. And I suppose what we're trying to do is create a very high-quality set of assets, but also very high-quality financial structure around it as well. Did you want to add anything to that, Andy?

No, [ I think that captures ] it well.

And then just lastly on the maintenance CapEx, sort of a step-up but it can vary year-to-year. But is that a newer level? Or is that just some one-offs in there?

It's sort of 12 basis points, which anywhere between 10 and 15 basis points is quite common, Nick, I think, long run for industrial.

I don't think you can read too much into that. It's a very low number in the context of the size of the portfolio.

But it will go up and down [ over time ].

Yes.

Your next question comes from Rohan Koreman-Smit from Forsyth Barr.

Just hopefully a couple of quick ones for me. First one, just the underlying like-for-like rental growth of 4.1% for the period. When I look at the underlying portfolio growth in net income bridge of 3.3 and there's a bit of a vacancy impact, just struggle to get to 4.1%. Can you just maybe help me out there a little bit?

Yes, you've got to take out of it as well developments that have come onstream, vacancy. Look, there's been -- there's quite a lot going on within that. So it strips it back to literally fully leased in both periods and [indiscernible] rental growth across those.

Okay. Okay. And then just also like thinking about the cost of the swaps that were broken this year, how much of that benefit -- or I guess, the guidance looks very light in the context of acquisitions, developments, swap benefits kind of coming through. Are you able to bridge some of maybe the things that are going against you?

Yes. Look, there's nothing in particular going against us. We -- the breaking of the swaps hasn't given us a huge benefit. It was more that we were with the decision to [ lean ] the $200 million wholesale bonds fixed that we were over-hedged. And our preference was to keep those sort of 8- and 10-year fixed rates in the debt profile. And we broke some shorter-term ones, but it hasn't -- that breaking of them hasn't had a huge impact.

Perfect. And then I guess at Favona, so just to circle back to that one [indiscernible] questions on [ the lease ] to Mainfreight. I'm guessing it's similar to Roma Road where you needed a significant step-up in rents. Just wondering if, I guess, the kind of premium, if you're prepared to give it, that Mainfreight [ paying versus ] rents in the area or it's across Auckland, because the market understanding is New Zealand Post was quite a bit higher. I'm just wondering if there's a similar situation there.

Yes. It's James here. Look, we have talked a lot over the last 12 months that sort of rental reflects that premium location. But Favona is not sort of the last mile for this facility that Mt Roskill is or Roma Road. So rents reflect that location, but it does suit Mainfreight's business. So it's appropriate for that location for Mainfreight, Rohan.

Yes. So look, Rohan, I'd call the Mainfreight deal a pretty standard market deal. They're [ pretty heavy ] operators, those [ good guys ]. And the other location you talked about is very unique and specific to that customer.

Perfect. And then the final one, just inquiry on spec build that you currently have underway and also inquiry level was good. It seems that some of that stuff has had 0 tenant commitment for a while now. I'm just wondering [ how you're ] going.

No, inquiry is definitely strong, especially for that sort of larger, more complicated demand, which is sort of might be 2, 3 years out. So inquiry is strong on that basis. In terms of the spec builds, the 3 at Highbrook that I talked about, the 8,000 square meters, that's still sort of 9 months away from completion. The diggers are just getting in there. So we haven't really ramped up our marketing program just yet, Rohan.

Yes. I think it's fair to say, Rohan, that the demand has actually -- this calendar year has been very strong across the board, and that's not -- we're a bit concerned, I suppose, that some small businesses, for our unit type product at Highbrook, may not have the confidence to commit. But that -- we've been wrong about that. So at the moment, I think we might have one small unit at Highbrook available in the new development. And clearly, the demand at the larger end of town is very, very strong as well.

Your next question comes from James Wallace from Craigs Investment Partners.

Just had a question on construction costs. And I guess, kind of what's your kind of share and exposure there and increases in building costs in your construction contracts?

Well, what we do there, James, is obviously is we sort of tender each job as it comes through, and we'll lock them into a fixed price construction contract. The actual volume of dollars at the moment is actually not that high because we're sort of coming to the end of a few projects. So our exposure really is between now and the tender time. And we've got a couple of big projects we'll be tendering, which will be interesting. But as I've mentioned earlier, I think we're very aware of the -- what's happening with commodity prices and how that's flowing through into steel and concrete, and we're making sure we're factoring that into our feasibilities.

And just the second question, just in terms of your dividend payout. I guess a bit more on the conservative side in terms of the -- within the policy range, but near to the bottom end. And with your accretive development pipeline ahead, just wonder what was your kind of thinking there in terms of that conservatism?

Yes, James, it's Andy here. Look, we said it last year when we come out with that policy at around the midpoint of the range, and that guided us to the 5.3 cents for the year that's just completed with the tweak to how we view cash earnings. We still set it around that midpoint of the range. We think that's an appropriate level. It is still. It's 4% up on the year that we've just completed, reflects the growth in the cash earnings that we're expecting. And I think that was one of the key things around that change to policy 12 months ago was to provide us with that platform to grow distributions as the earnings grow as well. So we think it's at an appropriate level. It's sitting around the midpoint of the range.

And I think maybe just to add to that, too, that 1 of the reasons that we made that change is that real estate is a total return business. You do have to reinvest in your portfolio. Yes, there's less investment in warehousing and logistics than other asset classes. But I really think you've got to get your payout ratio set, I think, for the long term, and that's why we've done what we've done.

[Operator Instructions] Your next question comes from Jeremy Kincaid from UBS.

Firstly, congratulations on the result given the last 12 months. Just one question from me. You talked about a lot of competition or a lot of money floating around at interest and obviously the space. But I was just wondering about the supply side. Like are there more or less opportunities that you're able to run your [ roller over ] compared to pre-COVID levels?

Yes. Jeremy, yes, in terms of number of opportunities, look, they're probably similar. Look, we participate in most things that pop up, obviously, that sort of fit within the strategy. So I don't think this is any necessarily more or less opportunities. But the ones, I think, that we tend to be successful on are the ones that are more complicated in nature, which is either maybe short leases on brownfields redevelopment sites or maybe it's more complex greenfield opportunity or something like that, but something where we can bring our capability to the table. [ Whereas, look ], as mentioned before, if we're lining up for a pretty plain vanilla asset, whilst we may bid on it, we're usually somewhere down the pack.

There are no further phone questions at this time. I now hand the conference back to your speakers for any webcast questions.

Yes. So just got one on the webcast from Shane Solly, which is, is there near term to risk to occupancy that you're watching for? So I might get James to answer that.

Yes. Yes. Thanks, Shane. So there's probably 3 things that we talked to there. One is the expiries over the next 12 months, so that sits at about 9% of portfolio income. And if you look historically, I think that's a pretty low number. It's still on the low side, so that's a positive. The other topic would be speculative development, making sure that you're not building too much vacancy into the portfolio and that your portfolio can handle it. So at the moment, that sits below 3%. So pretty confident in that number. And the other one is probably customer strength. We stay -- we do stay close to our customers, especially over the last 12 months, where it's been difficult for a lot of them especially a year ago. I think there's a bit of a theme at the moment among our customers of strong domestic and local demand for their products. But the supply difficulties definitely do remain for a lot of them, getting their goods into the country for a number of different reasons. But we don't have any [ red flag ] of arrears. We don't have any arrears for logistics companies that are linked to any distress. So we do keep an eye on it definitely, but our occupancy profile is looking pretty strong at the moment.

Okay. Thanks, James. The -- that probably brings us to an end. Back to you, Keith.

Well, thanks, everyone, for taking the time and to the guys that presented. So I'm sure there'll be other questions that you can deal with on a one-on-one basis [ with the guys ]. But in the meantime, thank you all, and that will finish the call.

Yes. Thanks.

Thanks.

Thank you.

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