Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust FY '22 Interim Results Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. John Dakin, Chief Executive Officer. Please go ahead.

Thanks, Carla. Look, good morning, everybody. Thanks very much for joining the call as we go through the half year results for the 2022 financial year. Joining me on the line today is our Director of Investment Manager, James Spence; and our CFO, Andy Eakin, who's also leading our sustainability strategy, and we'll talk to that today. So if I can move everybody to Slide 4. I just wanted to talk a little bit about the structural trends that Goodman is seeing around the world and also here in Auckland. There's really 3 key points I'd like to make. One is around the acceleration of e-commerce, which we've seen from the beginning of the pandemic and throughout the latest lockdown in Auckland. I think we're all aware of the pressures on the supply chain there. But what we are seeing is a real change in lifestyle, and we're seeing our customers having to adapt to the demand for more convenience from consumers, and that's leading to greater demand for the locations where we invested. Secondly, what we're seeing is industrial in many ways being reclassified as part of the essential infrastructure of an economy, where inside our buildings is housing, food and medical supplies and all the things that are key to the ongoing sustainability of an economy. And finally, I'd just make the point that we are in a market where demand is exceeding supply, particularly in top locations. Vacancy in the Auckland market for prime industrial is below 1%, and the demand side looks like it's going to continue very strongly for some time. If I move on then to Slide 5 and the results overview at a high level. The investment strategy that we've had focused on urban logistics is coming through on some very, very strong numbers as we've positioned GMT to benefit from the growing digital economy and also the structural trends and changes that I've mentioned. This is manifesting itself in the portfolio with an occupancy at 99.5%, a weighted average lease term of closer to 6 years and a very strong amount of leasing in the first half. Pleasingly, we're also seeing like-for-like net rental growth of 5.1% for the period and very, very high levels of work in progress at $354 million with a very strong yield on cost of 5.5%, particularly when you consider where cap rates are. We've also acquired 34 hectares of industrial land adjoining the Villa Maria winery in Mangere, further adding to GMT's development pipeline, and we expect that will come into production in the next 3 to 4 years' time. In terms of capital management, we're maintaining a very conservative approach with gearing at 17.5%. And with our full commitments of that development workbook and others, we're still at the bottom end of our preferred range. So today, we have over $300 million of available liquidity, providing us with significant investment capability to reinvest in the development and/or other opportunities that are on strategy for us. On the result itself, clearly, the standout number is the interim revaluation, which I think is a result of all the things I've talked about with the industrial sector and effectively, a repricing of that asset class that's going on. And James will talk a bit more about the investment market in his section. So that gives you a profit before tax and the statutory sense of $570 million. NTA at around $2.50. But pleasingly also, we've seen very, very strong growth in our cash earnings, up 8% from $0.0304 per unit in the first 6 months of last year to $0.0329 in this period. Distributions of $0.0275 per unit, reflecting again a reasonably conservative payout ratio and in line with our earlier guidance. So I'll hand over to James now to talk about the portfolio.

Yes. Thanks, John. Now we'll jump over to Slide 7. As John mentioned, recently, we were pleased to announce that we'd entered into a conditional contract to acquire 34 hectares of light industrial zone development land near Auckland Airport for $75 million. We have plans for a highly sustainable urban logistics estate that incorporates the natural features of the site and the unique cultural history of the area. We'll be engaging with local iwi and other stakeholders over the next few months as we refine the development master plan. As always, we are focused on the locations that will be desired by our customers, those assets which we feel will provide the strongest long-term total returns for GMT. We were excited about the acquisition as it will allow GMT to continue its development-led growth, providing flexible and quality solutions to its customer base. The acquisition remains subject to subdivision with settlement expected in December. Over to Slide 8. Today, we're announcing a further $97 million of developments, all at Highbrook. These developments include: a 3,300 square meter warehouse for NZ Blood on a 20-year lease term; a 9,000 square meter warehouse for Stanley Black & Decker on a 10-year lease term; and a build-to-lease 3,900 square meter office and associated car park building at its town center. Over to Slide 9. The new developments announced today mean we'll have 10 projects underway, which, when complete, will provide over 87,000 square meters of new space for GMT and its customers. The significant increase reflects the underlying demand we are seeing from our customers who are looking to strengthen and grow their footprint in the best logistics locations. The image highlighted on the slide is a render of Mainfreight -- of the new Mainfreight facility we are currently developing at Favona. We announced back in May this year that we will be commencing the redevelopment of the Favona site that we purchased back in September 2019. This involves developing 2 buildings, 1 of 25,000 square meters, which Mainfreight committed to upfront on a 15-year lease; and a further 10,000 square meter warehouse, which we are building on a speculative basis. I am pleased to announce that Mainfreight has committed to also take the second building also on a 15-year lease. Following completion of this development, Mainfreight will further consolidate its position as GMT's second largest customer, sitting at around 57,000 square meters of space or 5% of the GMT portfolio. We are delighted to continue to grow together with a company such as Mainfreight. Slide 10 provides an overview of our work in progress. Our accelerated development program is supported by strong leasing, with the M20 9,000 square meter warehouse building due to complete this month, having been leased to an IT distribution firm for 10 years. Our exposure to uncommitted build-to-lease product has now fallen to just 0.4% of the total portfolio. I'm sure those on this call would be aware of the increased cost pressures coming through construction. We are seeing evidence that the increase in cost for a building project may be as high as 10% to 20% over the last 6 months. It is times like these that the importance of a strong and capable development team really comes to fore. We are confident that we have made the appropriate allowances within our development feasibilities to cover these increases in costs. Including today's new projects, there is currently almost 24,000 square meters of development underway at Highbrook. These works will result in the completion of the town center and also result in Highbrook overall being 97% complete, with only 3.5 years of greenfield land remaining. Slide 11 provides a summary of our development pipeline. Despite the near completion of Highbrook, which has been -- which has formed a significant part of our development pipeline over the last 15 years, the ability of GMT to continue to grow organically going forward remains. Following the acquisition of the Villa Maria land, GMT has approximately 87 hectares of development land across the city and infill locations, with around 70% of this land being brownfield redevelopment sites. One of the strengths of these brownfield redevelopment sites is the fact they're all currently income-producing with an average holding yield of 4.2%. 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 up over time, both locally and internationally with the group, we are well positioned to execute on these more difficult development opportunities. Over to Slide 12. Following the acquisition 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, for both owners and customers, is a market with high barriers to entry, and our footprint provides plenty of options for existing and new customers with estate spanning the West, East, Central and South of Auckland. Turning to Page 13. The strength of the logistics market is coming through our leasing results. Almost 16% of the portfolio or 170,000 square meters of space was leased on new or revised terms over the last 6 months. On average, leases -- those leases showed an increase of almost 10% on passing rents and average incentives of around 3%. Pleasingly, and has been seen in other overseas markets, our average lease term continues to increase, largely as a result of development leases where customers are signing up to 10, 15 or even 20 years to reflect their additional investment into these assets. Our average warehouse rate on core product for the period was $136 per square meter. Over the last 3 months, we have been witnessing a significant uptick in rental rates for well-located warehouse space. Our proposal going out today on a large Highbrook asset would be around $150 per square meter, up perhaps $10, $15 per square meter from 6 months ago. This sharp increase in warehouse rental has been driven by a lack of quality supply, with vacancy, as John mentioned, sitting at less than 1%, and significant demand. Customers involved in the distribution of goods are often requiring more space for a number of reasons. These include having to hold more inventory following the issues and uncertainty with global shipping and also the significant increase in consumer demand for timely and convenient delivery that has come with more online shopping. Slide 14 provides an overview of our valuations as at 30 September. The valuation uplift of approximately 14% is the result of a number of significant sales results across Auckland over the last 6 months. The strength of the industrial asset class throughout the pandemic and its role in the increase of e-commerce has significantly increased investor appetite for available industrial product. While cap rates have continued to firm, significant rental growth has meant investors are still obtaining very strong total returns from their investments. Over to Page 15. Like-for-like NPI growth for the last 6 months has increased to above 5%. Following significant market rental growth, management have assessed the portfolio to be approximately 9% or $16 million under-rented, providing for further strong rental cash flows going forward. For the remainder of the FY '22 year, approximately 4% of the portfolio is expiring, which is in line with the normal expiry run rate. Over that same time frame, around 21% of the portfolio is subject to fixed rent reviews with an average increase of 2.6%. Further to this, by the end of March, 8% of the portfolio is to be reviewed to CPI with an average frequency since the last review of 1.5 years. Over to Page 16. We continue to do a higher proportion of business with our largest customers with significant developments underway through our top 2 customers, NZ Post and Mainfreight. Throughout this latest lockdown period, GMT has focused its rent relief on its most vulnerable customers, generally those linked with the hospitality sector. As investors would note, the New Zealand government recently implemented a new law, which allowed for a fair proportion of rental to be paid when customers or tenants cannot access buildings during lockdowns. The impact of this legislation to GMT we don't think is material, especially as there is a revenue test for those customers, and we've already provided plenty of support to customers that are the most vulnerable and heavily impacted by the lockdowns. Over to you, Andy.

Thanks, James, and good morning, everybody. But before I move on to the results, I thought I'd touch first on some of the sustainability initiatives that we've got underway. So we'll move to Slide 18 first of all. And this one is just a reminder of the key commitments that we made 6 months ago with the annual result. First of all, targeting 5-star Green Star design build ratings on all of our new developments, and everything commenced this year is targeting that 5-star achievement. And then reducing and fully offsetting the embodied carbon associated with those developments, and the first one of those that we will do the offset for is the M20 9,000 square meter warehouse, which completes shortly. As James mentioned, around 70% of our pipeline will be in brownfield sites, so reusing existing industrial sites rather than expanding boundaries of the city out. The diagram below shows you typically the Green Star features that we do put into our new developments. Move over to Slide 19. And look, I think it's important to highlight that we're not just focused on the development, but also on the existing portfolio and aiming to lift the sustainability of those assets at the same time. Solar PV arrays are getting installed on developments and existing buildings. And currently, we've got 1.1 megawatts either complete or in progress. And that should produce around 1.4 gigawatts of electricity each year, resulting in a CO2 reduction from the electricity of around 160 tonnes. Across the whole portfolio, we've got about 400,000 liters of rainwater harvesting happening. That water is used for toilets, building washes, irrigation and in some cases, customers use it to wash trucks. We're going to focus on upgrading the lighting within the core portfolio. Currently, we sit around 60% with LED lights, targeting 90% over the next 3 years. And this provides a really significant improvement in costs for customers. That extra 30% of the portfolio sits around 4.2 gigawatt hours of electricity each year, and that's the equivalent of saving around 500 tonnes of carbon emissions on an annual basis. We've accelerated the replacement of R-22 refrigerant. That's the most planet-damaging one within our HVAC systems. If you drive around the portfolio, you'll see over the next 12 months or so that we start revegetating some of the pockets of land that we're not able to develop. And for our greenhouse gas emissions in the first half of this year, 56% lower than our 2020 base year, so very comfortably outpacing our 20% reduction target over a 3-year period. We've also partnered with EECA, who are subsidizing the cost of us installing public DC fast chargers for EVs. We're putting 2 charges in, 1 at Highbrook and 2 at M20. These are 150-kilowatt chargers to provide very fast charge rates for EVs and available 24/7 once they're installed. And for our own fleets, next month, we'll complete our transition so that the fleet is 100% EVs, and that will help us with our reduction in greenhouse gas emissions targets as we move forward. Turning over to Slide 20 and just look at how we're measuring some of these sustainability initiatives. So within the developments and also some of our existing stabilized portfolio, we're installing electrical submetering, which enables the customers to understand where they're using their power and look at the energy intensity of the building. We're continuing the Green Star performance pilot for the 5 industrial properties at Highbrook. Those properties rated 3 star -- 2 at 3 star, 2 at 4 star and 1 at 5 star. And one of the real benefits of this pilot has been understanding where we can really lift the performance of our existing portfolio. NABERSNZ assessments and office sustainability assessment energy performance assessment, we're currently reviewing how we can implement that at our Highbrook offices with an aim to lower the energy demand in those offices. Also at Highbrook, we're undertaking a new shared -- or developing a new shared work space. The set-out for that work space is targeting a 5-star Green Star rating as well. Look, if we move over to Slide 22 and take a look at some of the highlights from the first half financial results. First number you see there, $570 million profit before tax, obviously, very strongly benefiting from the $505 million revaluation that James and John mentioned before. Operating earnings at $60.2 million. That's 7.5% higher than the same period last year as reflecting the really strong operating metrics that we've got across the whole business. Net tangible assets now standing at $2.50 a unit, up 17.5% since 31st of March. Net property income growth, 5.7% in the same period last year. And cash earnings, as John mentioned, $0.0329 per unit. That's 8.2% up on the first half last year. Slide 23 just looks into the net property income detail a little more. So a 5.7% increase, that's $4.2 million higher than it was first half last year. And you can see on the chart strong contributions, the underlying portfolio of 5.1% up on a like-for-like basis, developments that had completed in prior periods contributing strongly to the NPI growth and also the acquisition of the MetroBox sites at Savill Link. Both Roma Road and Favona Roads came off-line during the period, so a reduction in income as a result of that. Slide 24 looks in a bit of detail around cash earnings. And back in May, we signaled a small change to how we look at that calculation just to even more closely align our cash earnings metric with the actual cash received into the business. So we're now adjusting for straight-line rents. Operating earnings before taxes, as I mentioned, up 7.5%. The effective tax rate slightly higher first half this year compared to last year means that operating earnings after tax is 6% higher at $49.2 million. You see the adjustments then that we make to get to cash earnings, and worth noting that maintenance CapEx at $2.1 million, very consistent with the first half of last year; and cash earnings then of $46 million, 8.7% higher than the same period last year. On a per unit basis, that's 8.2% up. Distributions for the first half, $0.0275 per unit, represents 83.6% of the cash earnings, so within our policy band of 80% to 90%. Worth highlighting as well that our total CapEx for the first half on the stabilized portfolio of $7 million, that includes the $2.1 million maintenance CapEx more than covered by the cash earnings and around a $3.5 million cash surplus after that. Our full year FY '22 cash earnings guidance is that we are expecting that to be at least $0.065 per unit with distributions of $0.055 per unit, and both of those are around 4% higher than last year. Slide 25 just looks a little more at the NTA growth. So as I mentioned, 17.5% up since March. That's $0.37 per unit. The main contributor to that, 13.2% increase in the portfolio value. And within that, almost $15 million of revaluation gains on developments. But with most of our developments in very early stage, actually, the majority of them were not revalued so the gains on those to come in future periods. Move over to Slide 27 and look at gearing in a bit more detail. Back at March, we reported gearing at 19.2%. And again, that very strong revaluation coming through to help lower gearing to 17.5% at the 30th of September. Taking into account the commitments that we've made, so acquisitions being Villa Maria and all of the developments that we've got underway now, including the new commitments announced today, means that our committed LVR sits at 22.6%, still very comfortably at the lower end of our 20% to 30% preferred range. Worth noting as well that given the stage that those developments are at, in particular, the ones announced today, that spend period for the commitments on developments extends right out into FY '24. Slide 28 then. The chart just shows you the maturity profile of our debt. First maturity coming up in June next year at one of our retail bonds, $100 million. We currently have $310 million of available liquidity within our $400 million bank facility. So plenty of capacity for repayment of that existing bond and for the developments that we've got underway. It is, however, quite likely that we'll come back to the nonbank markets over the next 6 to 9 months. Weighted average debt term at September, still standing at a long 4.7 years. And over to Slide 29, just take a look at the interest rate hedging profile. Pleasingly, around 80% hedged for each of the next 2 years. Happy to have that protection of the interest rate environment that we're now into, with rates rising fairly strongly over the last 3 to 4 months. Weighted average debt cost for the first half at 3.2%, and that benefited from a couple of key items. There were some fixed rate debt -- more expensive fixed rate debt, which matures in the prior period. We've got the benefit of that now having matured. And also, we refinanced our bank facilities in August at lower margins than prior. Interest cover ratio now standing at a very strong 5.6x compared to a requirement for it to be at least 2x. I hand you back to John.

Thanks, Andy. And look, to sum up, clearly, occupancy is very strong across the portfolio. Development demand, very strong. The results of our repositioning, I think, are coming through in the numbers. Obviously, the repositioning will take a bit of pain along the way. But the market in a broad sense is -- it remains very strong. We intend to continue with a very tight strategy with making organic acquisitions where it makes sense within the city and infill locations. We'll be certainly looking to buy locations. We're not going to be buying customers. We are very focused on buying core locations, and we're seeing more demand and supply for these locations all around the world, and Auckland is no different. We've got, as Andy outlined, a very strong focus on ESG within the business and expect to be investing a lot of capital into that in the foreseeable future. So look, while the -- certainly, we're cognizant that there are risks around in terms of rising interest rates and uncertainties in the world. We're confident that our cash earnings will be, as Andy mentioned, at least $0.065 for FY '22 and distributions maintained at the level guided earlier in the year. So look, I think that sums it up. And I think we're very happy to take questions.

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

Just a couple of quick questions. Just in terms of the development program, should we expect to sort of see it continue to ramp up further over the next 12 months given how strong the demand dynamics are? And clearly, you've got very little development leasing exposure. And then, I guess, just related to that, are there any sort of capacity constraints you sort of need to be aware of as you look at the rate at which you sort of ramp that up?

Look, I'll start off and James might add a couple of comments. The answer to the first part of your question is yes, we expect the demand to continue. So we expect that to be continuing with some strong development starts, and that's what, again, Goodman is seeing all around the world. Around the capacity constraints, I think as James mentioned, we've seen construction increases over the last 6 months, anywhere from 10% to 20%. So we're very conscious of what that means going forward. So there's sort of 2 risks. There's cost risk and time risk. And we're making sure that we're managing that as clearly as we can. Sometimes we're having to order product well in advance of starting buildings and things like that. I think those issues are going to be with us for a while. And -- but we just -- the reality is with the demand and the rising rents that's more than absorbing those increases. Did you want to add anything to that, James?

Yes. And I just think on that coming developments, obviously, with a pretty low exposure to spec in the portfolio at less than 0.5%. I think you can see us taking advantage of some of the demand we're getting from our existing customers to maybe accelerate the balance of Highbrook. There's a couple of sites there left. I can see them already coming up pretty quickly.

Yes. Good. And then just in terms of next stages in Roma Road, can you just sort of talk about sort of the leasing interest you're seeing there and whether you sort of expect to push further on that in the next 6 to 12 months?

Yes. Yes, we've got 3 buildings remaining at Roma Road. Obviously, Post is taking the first one. There's another building of a similar size that we're marketing at the moment and 2 smaller buildings in the current master plan that you'll see in the presentation. I think there's an image of that development. We're marketing at the moment. We've put it in front of a number of customers, the other big shed. Obviously, it's a great location. But it's not super urgent, Arie. We still got sort of about 18 months until that first building is complete. So time is up our sleeve on that. So we just market it as is and market it based on a strong location.

Yes, I think maybe to add to that, Arie, I think James is right. Look, it's a key location. We think it's a premium site that deserves a premium rent, and we're happy to be patient.

Yes.

Your next question comes from Nick Mar with Macquarie.

Just to clarify on the like-for-like rental growth, does that include any changes in average occupancy for the period? Or is that purely from reviews?

No. We strip out anything out of that calculation that was vacant in either year to try and get to the underlying what's happening on new leasing and market rent reviews.

Yes. No, that's great. And then when you're kind of going forward and setting fixed reviews and new leases from here, have you seen those move up at all given the stronger outlook over the next 3 to 5 years?

Yes, good question. Over the last 24 months, we've probably been doing 2.75% to 3% in our new leases. I'd say proposals in the market are going out at 3.5% at the moment, taking into account that CPI is coming at 4.9% for the year and market rental growth is really strong. So you are definitely seeing that fixed rental growth proposals are going out with higher numbers than they were 6 months ago.

Yes. No, that's great. In terms of your developments and the yield coming down a little bit to 5.1% on those new ones, can you just talk through how much of that kind of construction cost escalation versus mix, you've got the car park and the office building in there, and then also just land costs going up for those?

Yes. Look, that's a bit of everything. I think the -- and on the other side, obviously, you've got end yields coming down. But I think with an average of 5.5%, if you see what assets are -- good assets are pricing up at in the mid-3s, there's a fairly good inherent spread in there. But just on that, I think I'd expect probably in the market, Nick, if you've got developers competing for a customer and I think their exit yields are 3.5%, then I would expect that number is likely to come down.

Yes. And to do with the split on the new developments, Nick, like that's 5.1%. And as you pointed out, sort of half of that is warehouse, half of it is office and car park. Obviously, office and car park are higher than 5.1%, which then lends you to see that the warehouse ones will be below 5% already. But there's still strong margin there.

Yes.

Right. And then on sustainability, you've got a lot of things underway, including upgrading the rest of the LED lighting and the likes. And John, you mentioned a significant investment. Could you talk through how much CapEx you're planning on spending on some of these initiatives over the next sort of 3 or 4 years and how you view that in terms of the stabilized spend, whether it's kind of sort of maintenance or kind of growth CapEx?

Yes. Look -- Andy here. Look, a lot of those -- so the LED lights are a good example where, over time, we would be upgrading anyway. Particularly as customers move out, the expectation is that you would -- when you re-lease that property, it would have LED lights. And what we're doing is, where possible, we're accelerating that so that the current customers get the benefit of it. So it's spend that we would normally expect to be doing, but just being brought forward a little. LED lights, look, it's not material. You'll see that come through in our normal CapEx spend disclosures. I don't think you'll see a significant bump up in that compared to what you've seen. On the solar side of things, look, those are often wrapped up in lease deals, where we've got a customer that wants to extend the lease and we put a bit of investment to upgrade the building from its current state in return for getting some lease term out of them.

I think just to add to that, Andy, on the LED piece, often, customers are accepting an LED upgrade in lieu of incentives end of year.

And the benefit for them comes from the lower operating costs. Those LED lights save a lot in terms of the electricity that's consumed. They get a direct cost saving.

And probably finally, the other piece is on the development side, which is the embodied carbon, which at the moment we're looking to offset and absorb that cost in those developments. And also, we expect to be pushing over time for better products with lower carbon footprints on our development.

Yes, that's great. So for example, on the M20, how much is the embodied carbon relative to the total project cost?

Yes. Look, it's pretty insignificant. The total carbon on that we've estimated, and we're just finalizing, around 3,500 tonnes. So you can work out roughly what you think that offset cost is. But when we announced development yields, we're including within that the cost of the offset of the carbon that's now part of our core project costs.

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

Four quick ones from me. Just firstly on the rental growth, it's obviously very strong. Could you just provide a bit of color as to where that came from, whether or not it was broad based or whether or not it came from Highbrook or certain types of customers in particular?

Broad-based, Jeremy. It's right across both our core product, all the locations we're invested in. We don't really have an outlying location, which isn't what we would call one of our favorable location. So it's broad brush. It's both across both core and secondary. We got older product at the likes of Tamaki, which are seeing probably even stronger growth than the 10% because they're coming off quite cheap rates, but it is generally broad brush.

That's clear. And then could you also just talk about some of the market evidence and market transactions that you're seeing, particularly in the last quarter or 6 months as interest rates have started to rise? Do you think that's going to be reflected in cap rates any time soon? Or do you think you're starting to see that being reflected in market evidence at this point in time?

Yes. It's a good question, Jeremy. Look, maybe I'll just make a few high-level comments and James might be able to talk about the cap rates in the market. Ordinarily, I mean, clearly, you'd expect yields to be easing out. We haven't seen that as yet. But I suppose people are factoring in the growth that they're seeing on top of the yield. So at this stage, we haven't seen that easing out here in Auckland or, for that matter, anywhere around the world with Goodman at the moment. But James, do you want to talk about maybe some of the transactions?

Yes. I mean there's been a few transactions now that have really helped sort of solidify the valuations as at 30 September. Large assets up to sort of $90 million, but not only with long lease terms, but short lease terms as well, and they're generally coming out at 3.5% and they're well bid. The valuation increase over the last 6 months happened in a period where interest rates actually went up. So I think that probably points to the rental growth story. And as I mentioned before, if you are paying 3.5% for something that you're expecting 4% or 5% rental growth, well, there's a strong IRR coming through. And I think that's probably more of the thought behind these acquisitions by investors as opposed to what's happening with interest rates. It's more about the total return and the rental growth that they're getting in overseas markets. Like L.A., John, rental growth is sort of 10%, 20% per year. So if that happens here, then, of course, those initial yields are still going to be -- provide strong total returns.

And probably maybe the final point on that, Jeremy, is that if you've got a property for sale that's got a good long lease, it doesn't seem -- a good covenant, it doesn't really seem to matter what location that's in. It's going to be really strongly bid, whereas our focus is very much on buying the location rather than the customer or the cash flow. And that means that the sort of stuff we're buying tends to be the more difficult stuff with higher barriers to entry.

Sure. Okay. And then, Andy, maybe one for you. You mentioned with your funding mix going forward, you're looking to potentially get more nonbank debt. Is that because the interest rates are a bit sharper? And if so, could you give a bit of color on the difference between bank versus nonbank debt?

Yes. Look, the bank debt will always remain a very strong core part of funding mix. I've likened it before to working capital for us. So it allows us to acquire new assets and to develop on our existing portfolio, and that's what you'll see over the next extended period. As we draw down on that debt, then we look to refinance it out into the longer-term nonbank markets. We like to have a good mix across the different markets. You've seen us in the U.S. We did a wholesale issuance last year, and we've been strong in the retail market as well. So as I say, as we build up that bank debt's drawn balance, we look to where we can refinance that into another market. It's not specifically interest rate-driven, but bank debt does tend to be the cheapest but also the shortest duration.

Your next question comes from Shane Solly with Harbour Asset.

Congratulations on a fantastic result. Well done. Can I just -- the work in progress, you've piped -- the current pipeline is completed by August '23. Is that right?

The developments that are underway currently, they spread out into FY '24. So if you take like the office building at Highbrook that we've announced today, that's into -- it's a couple of years before that's complete.

You're right. It's about August '23. Yes. Yes.

Okay. So that's the $354 million you've announced. And in terms of the residual there, what's the spec do you think would be in that mix? What's the development component?

And that mix is nothing. As I mentioned, it's only sort of 0.4% of our whole portfolio. So it's really only building 7, the office building at Highbrook. And then there is 3 units, the Riverside units at Highbrook, which are completing at the moment, but they've all got terms agreed with customers on them.

Okay. In terms of gearing at peak production, Andy, what do you think this is going to be like?

Well, gearing, as you can see, the committed gets up to about 22.5% with what we've got in front of us. We've been pretty conservative with our gearing range. We lowered it recently to 20% to 30%, and we're pretty comfortable with where it's sitting at the moment.

So just -- so just to go back, you talked about an equivalent of 400,000 square meters of NLA in your overall land bank. Over what time period do you think that is likely to be realized?

Yes. Well, if you look at the lease expiry profile that we provided, Shane, you'll see the actual expiry profile of the value-add side of the portfolio, which is 70% of our development pipeline. And you can see when those leases expire. And it's actually -- it's quite spread over -- right up to FY '30 plus. We've got assets there that will yield for us -- we got a lease signed up for the next 10 years. So that will be a long-term development pipeline. But we've got stuff in the short, medium term, too. So it's quite evenly spread, to be honest. But you'll be able to see the proportions on Slide 15 as to when those expiries line up.

Okay. Just a final one, just in terms of the guidance you provided today, that includes performance fees?

Okay, so performance fees that site cash earnings. So as you know, Shane, that only gets measured on the 31st of March so we don't forecast what we expect that's going to be. But it sits outside that cash earnings guidance. It's not part of that measure.

We are showing no further questions on the telephone or online. I'll now hand back to Mr. John Dakin for closing remarks.

Well, thanks very much for joining the call this morning. And management are available for any one-on-ones in the next few days or a week or 2. So look forward to talking to a number of you one-on-one. Thank you very much.