Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Goodman Property Trust FY '22 Full Year Results Webcast. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [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 taking the time to be here and listen to the presentation today. We're going to have an overview from John Dakin and then Andy Eakin, will speak and then James Spence and then back to John for a summary and outlook and then question and answers. So the Board is very, very comfortable and happy with the year that's gone by, has been a long -- 31st of March, seemed a long time ago now with what's happening around the world. But I think the positives been our rental growth and our cash flow positivity over the last 12 months. So without any further ado, I'll pass you over to John.

Thanks, Keith, and good morning, everybody. So if I can take everybody to Slide 4, I just want to start by sort of just outlining some of the wider themes that we're seeing. And certainly, we're not seeing any slowdown in terms of the digitization around the world and the growth in the digital economy. And that's certainly underpinning the consumer -- customer demand for urban logistics space. E-commerce, in particular, has become an important demand driver not just for -- directly for e-commerce companies, but the influence on other business to consumer companies. And that's driven a lot of demand for well-located distribution facilities in large consumer markets globally with consumers seeking faster and more flexible delivery and essentially, the consumer wants more and more convenience. Many of our occupiers are certainly looking to improve, expand and update distribution networks to keep up with changes in consumer preferences and demand and we're also seeing significant increases in investment in technology and product handling systems to optimize delivery and absorb cost and time. So our customers wanting to do more with less. Higher inventory levels, certainly a feature of our market, as we've seen ongoing disruptions in global supply chains and that looks like it's going to continue. And that's certainly creating requirements for additional space. In terms of our portfolio, it's been deliberately positioned to focus on infill locations within Auckland. And that's driving increased development activity, some of that in time frames faster than certainly we originally anticipated before COVID. We're seeing larger, more valuable projects, and we're certainly seeing strong rental growth, which is flowing through to as Keith mentioned, strong underlying cash flows. Goodman, as always, very focused on the long term. Real estate is a long-term business. But with that, it's very important to have a sustainable capital structure. In our case, it features low gearing and a diverse range of funding sources, in particular, across the debt book. We believe that provides us with the financial resilience, particularly in these times to withstand market disruptions. So if I move now to Slide 5, the result itself. In terms of the portfolio, it's largely full at 99.4% capacity. The weighted average lease term has extended over the year and that's driven by the longer leases we're seeing in the development projects in particular, where people are signing up for 15 and 20 years. And James will talk about this, but we've seen probably a record level of leasing across the year as well. Underlying like-for-like net property income growth of 5% is very pleasing. The revaluation, I think, has been well flagged at NZD 660 million, leading to an ungeared property portfolio return around 20%. Work in progress remains elevated at NZD 426 million, again, reflective of unit demand exceeding supply. And that includes a couple of larger projects for NZ Post and Mainfreight and that we're very focused on the successful delivery of that development pipeline. We've also been active in terms of acquiring value-add sites for future production and redevelopment with NZD 300 million acquired over the year. On to capital management. We have in excess of NZD 0.5 billion of available liquidity. I think that's really important, particularly given what we're seeing around the world in terms of capital markets and that provides us with significant flexibility and capacity as well. Our year-end gearing saw very conservative, 21.3% and a committed gearing at around 25%, again, at the conservative end of the spectrum. On to the result itself, profit before tax of NZD 763.8 million, clearly driven in large part by the revaluation. That's reflected in a 22.6% increase in net tangible assets. But also I think importantly, cash earnings of NZD 93.1 million, up 6.1% on FY '21, which is where we're seeing the rental growth story come through. Distributions for the year are maintained at 5.5 cents, at the bottom end of our 80% to 90% band that we see it a couple of years ago. So I will now hand on to Andy to cover off the sustainability initiatives and the financial result itself. Andy?

Thanks, John, and good morning, everyone. So I'll turn to Slide 7, first of all, and just touch on some sustainability points. We're really pleased again to be certified Toitu carbonzero for our operations in FY '22 and with 50% lower emissions than our FY '20 base year. We also achieved a better climate score from CDP up to B from B minus previously. And one of the big highlights for us this year was the establishment of the Sustainable Finance Framework. And following that, in April, we had our inaugural green bond issue, NZD 150 million of retail green bonds. Distinct from some others in the market, financing new assets, not refinancing existing assets and targeting 5 Green Star properties for all of our eligible properties and that represents New Zealand excellence. Within the core portfolio, we set some new 2025 targets, aiming to have 100% of the core portfolio upgraded to LED lighting and all of the more climate damaging R22 refrigerants replaced with low emission alternatives by that date. As John said, we've got a record level of developments, NZD 426 million underway. All of those targeting 5 Green Star Built ratings and in all cases, offsetting the embodied carbon associated with the developments. The M20 development [indiscernible] during FY '22, and we've offset the embodied carbon on that, you'll see 3,241 tonnes offset. If we turn over to Slide 9, just look at a few of the financial highlights. So John mentioned profit before tax, NZD 763.8 million. That is a record result off the back of a record revaluation gain for the year of NZD 660 million. Included within that NZD 118.3 million of operating earnings, that's up a solid 3% on FY '21. On this page as well, just highlight the total return of 25%. That represents capital value growth in the portfolio and also the distributions paid. Turn to Slide 10. So net property income, up from NZD 153 million to NZD 157 million through the year. Developments at Highbrook, M20 and Westney contributing to that, acquisitions also in both FY '21 and FY '22. And you can see the impact there of taking both Roma Road and Favona Road offline for redevelopment, a reduction of NZD 4.5 million in NPI. As John mentioned, really strong underlying like-for-like rental growth, 5.1% through the period, and James will touch on property income more in a moment. Turn to Slide 11 and look at the cash earnings. So FY '22 cash earnings reported today is 6.66 cents per unit. At the interim, we updated our guidance for cash earnings to be at least 6.5 cents per unit. So it's pleasing to be able to outperform that. Strong 6.1% increase on the FY '21 cash earnings. Distributions that we guided through the year at 5.5 cents declared today, and that's 3.8% higher than it was in FY '21. For FY '23, we're guiding cash earnings to be about 4% higher at around 6.9 cents per unit and distributions are expected to be 5.9 cents per unit, a strong 7% growth from the FY '22 distributions. Really pleasing to note how the strength in the cash earnings and the revised distribution policy from a couple of years ago means that all of the CapEx on our stabilized portfolio and the distributions are covered from earnings. Turn to Slide 12 and have a look at net tangible assets. So increased 48 cents through the year, 22.6%. The portfolio value increase on the stabilized portfolio of 16% higher was the main contributor into that. But developments completing in the year also contributed NZD 27 million of revaluation gain. And it's worth noting that the NTA of NZD 2.60 per unit does not include any potential revaluations from the current workbook. GMT's strong relative performance compared to its listed peers, it means that there's a performance fee payable for the year. GMT recorded a performance of positive 7% and the listed peer group was negative 1%. Turn over to Slide 14 and look at the gearing. So LVR reported at 31st of March at 21.3%. And as John mentioned, fully committed LVR of 25.8%, that incorporates spend on all of the developments, the NZD 426 million program plus the settlement of Sleepyhead, which happens in the next couple of days. Worth noting though that, that development period takes about 2.5 years for us to reach that committed gearing all other things being equal. Pleased with the decisions that we've taken around gearing in recent years. The preferred range does remain unchanged at a conservative 20% to 30%. All covenants remain at 50%. As you can see, we've got good capacity for both acquisitions and investments and strong resilience within the balance sheet. Turn over to Slide 15 and the chart you can see there shows the current debt mix and the maturity profile. Continue with a really strong focus on maintaining significant liquidity and strong diversity within the debt book. Initiatives through this year; a further NZD 200 million of wholesale bonds issued in December, and we've now got NZD 400 million of domestic wholesale bonds on issue, extension of our bank facilities from NZD 400 million to NZD 670 million in total, and as I mentioned before, post balance debt, our inaugural NZD 150 million green bond issue. Following the Sleepyhead settlement this month and that NZD 150 million green bond issue, we've got over NZD 600 million of available liquidity. Turn to Slide 16 and the chart again shows the hedging profile. We've got a reasonably high level of hedging and that provides us with good protection in this current rising interest rate environment. The green bond issue completed in April. We left a portion of that fixed. So hedging over the next 12 months and actually out to the 5-year period is about 5% higher in each period than shown on that chart. Weighted average debt cost reduced in the year to 3.2%. And unsurprisingly, with the interest rate environment changing quite significantly. For FY '23, we expect that to be about 3.8%. ICR covenant compliance remains very strong, consistent at 5.3x compared to a covenant requirement of not less than 2x. I'll hand you over to James now.

Yes. Thanks, Andy, and good morning, all. Now let's turn over to Page 18. It's been a busy year for our team on the acquisition front. We've been successful in picking up 5 sites covering around 50 hectares across the city over the last 12 months. One of the sites being the Sleepyhead site, which we're announcing today. Purchased under a sale and leaseback scenario, the site will provide a holding yield of around 3.5% to 4% in the short to medium term before being redeveloped. The site is very central within the city with strong connections to Auckland's transportation infrastructure. The acquisitions completed during the year form a significant part of our development pipeline with GMT now having many options for customers looking at last mile distribution to Auckland's population. Slide 19. GMT's portfolio is now 1.1 million square meters of logistics space throughout the city. Auckland is a market with high barriers to entry for both occupiers and owners and our footprint provides plenty of options for existing and new customers across Auckland. As John mentioned, the portfolio remains effectively at 100% capacity with the weighted average lease term extending to above 3 years, largely on the back of development leasing, where customers are opting to take longer leases to secure both their position and increased investment within the building. Slide 20 provides an overview of the stabilized leasing completed over the last 12 months. Around 25% of the portfolio was subject to a new lease or renewal in the year with an average increase in passing rents of around 11.5% with incentives remaining low at around 2.5%. Leasing inquiry following on from the year-end remains relatively strong with industrial vacancy in the Auckland market falling steadily since 2009, options for customers who are looking for more space are extremely limited and they're more expensive. This, combined with the pressure to fulfill increased demand for online, as John mentioned, is driving our customers to look at options to get more out of their warehouses using the latest goods handling tech and software. Over to Slide 21. Revaluations within the portfolio produced a significant part of GMT's underlying property return sitting at 16% for the year in terms of the capital side. Cap rates for the second half of the year remained steady with NZD 150 million coming through for the last 6 months, all coming from non-cat rate factors such as leasing deals and rental growth. Over to Slide 22. Like-for-like NPI growth, as John and Andy mentioned, for the last 12 months has increased to above 5%. We, as management, have benchmarked our passing rental versus market as at the 31st of March. And with continuing rental growth across the market, we have assessed the portfolio -- the core portfolio to be approximately 10% or NZD 18 million under rented. This provides the opportunity for further growth in rental cash flows for GMT going forward. Our portfolio has a real mixture of review types across its leases with a large majority of our revenue subject to some form of review each year. So we've provided a bit more insight into our FY '23 review profile, you'll see there on the slide. Approximately 50% of the portfolio by income is subject to a fixed increase within the next 12 months with an average of 2.8%. Around 12% of our portfolio over the next 12 months has a CPI rent review, around 14% to around NZD 26 million of our annual income is subject to either a market rent review or an expiry. And during the last year, we've also pre-agreed a number of rental increases that commence in the next 12 months, with the average of these rental increases being almost 11%. Over to Page 23. As John mentioned, we continue to do a higher proportion of our development business with our largest customers with significant developments underway for NZ Post and Mainfreight as they look to further expand and improve their networks within Auckland. For this result, we have decided to rework our customer exposure to provide more insight into the underlying operations performed at each site. In summary, around 75% of our customers are focused on some form of warehousing or distribution. While there's definitely more activity in and around our business parks, the second half of FY '22 remained a very tough time for many of our customers who are in the retail and hospitality area. That's where we've focused our rental relief. We've tried to support our most vulnerable customers through what has been a very difficult time. We jump right over to Page 25 and the development program. Currently, we have close to 100,000 square meters of developments underway across 7 projects. Almost 3/4 of these are brownfield developments, which involves the development and demolition of existing older improvements. The program continues to produce strong assets for the trust with these projects providing a weighted average lease term of 16 years and an initial yield on cost of around 5%. We may look to recommence the development of the future, provided we can get more certainty and comfort on the risk of construction and more line of sight on what the office market looks like in a post-COVID world. Jump over to Page 27. With a substantial volume of development currently underway, our team is fully focused on managing potential risks on cost and time. Some of the things Goodman is doing in New Zealand include bolstering our in-house development team with additional resource, focusing on adapting procurement to ensure longer lead time products are ordered well in advance, leveraging our connections with the wider [ group ] and ensuring we allow ample cost and time within our project feasibilities. Back to you, John.

Thanks, James. So if I can take us now to Slide 29. Clearly, in terms of the macro environment, I think as Keith outlined at the start, is rapidly changing with increased interest rates, inflation, geopolitical risks, it's uncertain world as we've seen for a long time, and we still have some ongoing impacts from the pandemic as well. But I think we're very confident in the long-term structural drivers of demand and we're not seeing that changing certainly at the moment. The demographic changes, regional growth and the rapid expansion of online retailing have all contributed to the unprecedented level of demand for well-located and operationally efficient urban logistics space across Auckland, and we're still in an environment where demand exceeds supply. That leads to the next point around logistics and warehousing. The tight supply is outweighed by persistent demand and that continues to support leasing across our stabilized portfolio and is driving the development program as well with very, very high occupancy. Our customers, as we've mentioned a couple of times, are very, very focused on optimizing their delivery networks to improve efficiency and timeliness and are very interested in doing more with less, and that's an area that we're working on with our customers all the time. In terms of sustainability, certainly, a lot of our focus is around brownfield's development, and that's got greater sustainability benefits than the sort of the ongoing expansion in greenfield's use of land across the larger cities. But we're very focused on a built environment, the delivery of sustainable property solutions, and that's increasingly an area that the customers are asking for. We're working very closely with those businesses and other stakeholders to decarbonize and mitigate climate risk and boost biodiversity. So I think we're confident with the targets we've set. We're making good progress, but we totally acknowledge that we've got a long way to go on that journey. Finally, in terms of FY '23 guidance, we're very comfortable with the capital position and what we're seeing in terms of underlying growth and cash flows. We expect our cash earnings to be around 6.9 cents per unit, up 4% on FY '22 and distributions at 5.9 cents per unit, a 7% increase on FY '22 at a payout ratio of 85%. So thank you. That's the end of the formal presentation. If I can hand back to the operator to take us to questions.

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

Just first one on balance sheet. I mean, obviously, as you've mentioned, on a committed basis, you've got plenty of capacity and also resilience to asset values in that. Can you just talk about how you're seeing the risks to cap rate expansion from the levels you're at now? And just how you factor in that risk and when you're looking at committing the balance sheet further on growth sort of in the next 12 months?

Yes. Look, I might make a couple of comments. And then Andy, maybe you can talk a bit about the resilience and the sort of the sensitivity testing. But look, I think, Arie, I mean, clearly, with interest rates going to the levels they have gone to and your long bonds at sort of 3.5%, we're not naive enough to think that yields aren't going to change. The question is at what level are they going to settle. We don't know the answer to that. How much is offset by the strong rental growth that we're seeing is the other part of it. And clearly, what we're seeing is a major change in the public markets. We haven't yet seen how that's going to flow through to the private markets. But -- so that's a few high-level comments. But Andy, you want to talk maybe a bit about the actual sort of sensitivity.

Yes. Thanks, John. So look, unsurprisingly, we run a range of sensitivities over any of the new development proposals that are coming through to consider what the potential outcomes are if we commit to those. We also run extensive sensitivities around that resilience within the balance sheet. And I commented on that around how we're happy with the decisions that we've made over the last few years to deliberately carry lower levels of leverage than many others in the sector. That has allowed us to continue with the acquisition and development programs and still leave us in a very strong position.

And I guess just as a follow-up to that. I mean, obviously, we've seen balance very strongly through this last part of the cycle, where rates are compressing significantly. Is there a willingness to perhaps gearing push -- push out at this point? Actually, you can take advantage of any opportunities that sort of arise?

Yes. I think Arie, it will depend on the opportunities that are in front of us. But the values of the properties will go through a cycle, inevitably, they will fall at some point, but those cycles do turn as well. So depending on what the opportunity is in front of us, we may be prepared to let gearing move higher than it obviously has been for the last 4, 5 years, but still would be at levels significantly lower than you'd have seen historically.

Yes. Arie, the other point I'd make is that it feels like the time to be pretty contemplative. It's not the time to be cavalier. We -- it's very difficult to price anything in this market. So we'll be pretty careful about anything we do that, that adds to our gearing.

Just on the next question, I mean, obviously, a couple of landmark deals with NZ Post in the last 12, 18 months with Favona Road and Albany. Can you just sort of talk to where you're -- you talk to a high level of engagement with your existing customers in that? What's the level of engagement in terms of announcing the next stage at Roma Road? Should we expect to hear something on that in terms of commitment reasonably soon? Or do you think it might be a longer time frame?

Yes. Thanks, Arie. Look, I might get James to comment on that.

Yes. Thanks, John. So we've got a couple of [Audio Gap] actually, we can build at Roma Road, one of about [ 15,000 square meters ] and a couple around about 4,000 square meters. We are actually relatively close with a potential design build option on Roma Road, but we'll keep you updated if that does happen.

And then just final question for me. Obviously, there's a better process to go through on Roma Road. Can you just talk about what you've sort of done to date and where you're at and on what focuses sort of in the next 6 months?

Yes, sure. The -- I mean, I think as we announced at the time, Villa is a longer-term project. We're just working through at the moment, master planning, consultation process. And I think that will take the majority of the balance of this calendar year. And then we'll sort of take it forward with consent, et cetera, following that.

Your next question comes from Ben Brayshaw with Barrenjoey.

I was just wondering if you could talk a bit about the acquisition of Sleepyhead. And just step us through, if you don't mind, the existing tenant, the lease term in place. And if you could talk broadly about what you see as the higher and better use of that site. Any comments that you could provide on the density? And just in so far as the budgeted rents are concerned going forward, any color on that would be appreciated.

Sure, sure. Look, I might -- again, I might get James to comment on that specific acquisition.

Yes. Hi, Ben. So sale and leaseback with Sleepyhead is actually a ground lease. So they're responsible for the building for the next 3 years. That will yield us between 3.5% and 4%. And at that time, when they do leave, now that they're doing a development down country, we'd look to redevelop that site. It's 4 hectares. So it's a pretty good size and layout for a circa 20,000 square meters of warehousing. And we feel sort of bought it at underlying land value for that area because the improvements are probably a bit too specific for Sleepyhead and those improvements have been there for a long time. So [indiscernible] in 3 years, most likely, and warehouse development.

I was just wondering if you could perhaps just comment on one other aspect of I suppose the market over the last 6 months. Just in so far as rental growth has been strong over FY '22. I was wondering if you've seen the growth slow as the rate hikes have come through, just in so far as the under-renting of the portfolio is concerned, most of the increase in the under-renting would appear to have come through in the first half. I'm not sure whether that's being overly analytical. So I was wondering if you could just break that down for us, please.

James, do you want to talk to that?

Yes. Yes. So the limited availability of stock is really still pushing along rents and pushing down incentives. To give you an example, we've got 2 buildings at Highbrook, which potentially could come available with -- we've got existing customers in at the moment. And there are about 3,000, 4,000 square meters each. We're actually running a process where sort of like a bit of a reverse tender where customers actually have to pitch for the building because when we told the market they are available, we had 10 people ring up within the first couple of days, 10 businesses, actually looking to take those buildings. So market is still really tight. I wouldn't say our rental growth has slowed or definitely hasn't gone backwards since the end of the year. You could be looking at 170, 175, 180 plus for a building of that nature, which is, as you would imagine, quite a bit more than it was 12 months ago. So there hasn't been any slowdown, but it's probably a combination of the demand, but also not a lot of supply coming into the market. You're not seeing a lot of [ SPAC ] product at the moment, especially on the smaller size, which is just remaining, which keeps the pressure on rents.

Your next question comes from Nick Mar with Macquarie.

Just on those rents. When does it become economic to sort of go up and do possibly multilevel for industrial?

Yes, it's a good question, Nick. The -- I don't know if there's a specific number on that, but we are seeing -- we have seen one other developer put a multilevel into the market. But I'd expect you probably need to be a couple of hundred bucks a meter, but that's all dependent obviously on all the other factors as well around construction costs and funding, et cetera, et cetera.

And then just more on the kind of order strategy. For a while, it's been sort of accumulating kind of larger estates and now you've sort of got a lot of stand-alone sites with sort of long leases to a single tenant and even sort of going up North Shore for one property. What's the kind of strategy for ownership of those stand-alone assets where there's not a lot of, I guess, estate value in them?

Yes. I think we talked a bit about this the last year. We've been very, very focused on buying the location because I think if you get that piece right, then the demand will follow you. And the site on the North Shore is a good example. Roma Road is also a good example, as is the Favona Road estate. So I think we're very comfortable to own those assets. Finding something of scale in Auckland is very difficult and very rare. So -- but like I say, they're really, really strong locations and we're getting good demand from really good customers. So we're very happy to own them long term.

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

Just a couple questions from me. Maybe just following up from Nick's one about what you need to get to go up. What do you need in terms of economic rents just to, I guess, build a shed given where land costs have got to at the moment?

Yes. I might get James, maybe to comment a bit on that in terms of where we're at currently.

Yes. Hi, Rohan. It really depends on the size and scale of the facility. You look at people who are building into this market at the moment and are building a 10,000 square meter shed just to give you an example, rents, asking rent is probably 180, 185 a meter, can come down a bit if it gets to 20,000, can be 160. That sort of really depends on size and it also depends on what the cap rate will be when it completes and that's a little bit uncertain at the moment.

That was kind of my next question. Given what's happened to [ yield ] costs, it's pretty dilutive to do what you did in the last few months or last year when you look at those yields on cost. I'm just wondering, what are kind of the new hurdle rates or kind of where do you kind of -- what would you need to see in terms of yield on cost, I guess, for you guys to kind of get more comfortable with developing more stock?

Yes. Look, that's a good question, Rohan. I think the -- like I said earlier, look, we're not naive enough to think that the world is changing pretty quickly. And at the moment, look, we're not sure where things are going to settle and I think we'll be very patient about what we're doing going forward. At the moment, if you look at the direct markets, very, very little transacting and agents aren't really pitching on much. So I suspect we'll see a period of that's pretty quiet. And then it won't be until we start to see some, I guess, some markers in the ground that lead to making some decisions around pricing. We've got to see how construction costs unfold, the obvious part of the market to be affected as land values. And I suspect that if you had bought land at really, really top prices last year, for example, I suspect that probably just doesn't work at the moment. So long answer, but I think the answer is that we don't know where pricing is going to sit. What we do know is we've got a low leverage. We've got a lot of financial flexibility and we're going to be very patient and contemplated about how we take -- go forward with any opportunities.

And then final question is you talk about a lot of demand. I was just wondering these new tenants in this demand, what is their underlying exposure? Are they predominantly kind of exposed to the New Zealand consumer in retail? And also how much of this extra demand do you think is just supply chain issues and holding more stock? And I guess I could view that as more transitory as shipping rates hopefully come back at some point?

Yes. Look, I might throw that to James, that question.

Yes. So you look at the [ 10 ] customers, as an example, that are looking at a couple of opportunities with us at the moment. There's a real mixture in there. There's a couple of pharmaceuticals, there's a couple of 3PLs. I think at this time, with shipping being quite difficult, a lot of companies having some issues, trying to get goods into the country. A lot of them are going to the likes of Mainfreight or other experts to go actually you've got bigger buying power in this market. So there's a bit of a flight to those kind of guys. So we're seeing them look for more space. And you've actually seen it come through our pipeline as well with significant developments for the likes of Mainfreight. In terms of holding more stock, businesses that held a bit more inventory before the pandemic came have actually done pretty well over this time, obviously. The demand for goods over the last couple of years has been strong from consumers. And a lot of people -- a lot of businesses have missed out on being able to capitalize on that. So I'm not so sure it's as transitory as some would suggest. The last couple of years have made people think, well, it's just in time, the only thing I'm going to rely on or should I hold a bit more inventory sort of medium, long term. So I would expect that to provide a little bit of pressure on the market, even with a smaller portion of our businesses that start to do that.

Your next question comes from Shane Solly with Harbour Asset.

Once again, thanks for leading the charge on sustainability, great to see. Just a couple of quickies, if I could. First one, under-renting, thanks for the color in the next 12 months. If you look forward, how long does it take to catch up? Actually, there is 10% under-renting in the core. When do you catch that up?

James, do you want to answer that?

Yes. So if you look at that 10% on our core portfolio, about 90% of our assets is our core portfolio. Those will revert when there's either an expiry or a market rent review. Sometimes there's caps in place, but most of the time, they go fully to market. So the average on those in terms of those under-rented facilities coming -- under-rented coming through is probably around about 3 to 4 years, I'd say, Shane.

Going back to high inflation, high interest costs, lower cap rates. Does that mean you dial back into development pace?

Well, I suppose it's going to depend on the demand. I mean I think the thing that we're watching very, very closely and having daily discussions with customers is how are they feeling. And we all know that if things get very, very tight, if we do get into a recession, the U.S. heads into a recession or New Zealand does, the world does, that people are going to back away from big capital projects. So at the moment, we're not seeing that. And as James said, we're seeing demand across the portfolio be very robust. But I think we've got to watch the consumer really closely because if they get hit very, very hard, that will have some flow-through impact. But at this stage, there's more demand than supply, but that's -- that probably will become very location-specific I suspect if things get a lot tighter.

In terms of land values, John, you touched on that, they will obviously be hot. Your view on where they go and what that means for acquisitions in the near term for the group?

Yes. Yes. Look, I think if you look at the cost of construction, we talked a bit about that. We think that's going to be elevated for at least the next 12 months or certainly the balance of this calendar year. Rents are getting pricey for customers and the yield equation is changing and the cost of money is changing. So land prices have to give in my view and will do. I think if you're a highly leveraged player that head into that market recently, you're probably underwater. And I think that what -- I mean, obviously, what happens in this time, is that you sort of denied time and space if you've got too much debt. But I think, for sure, land values will be impacted.

Just one last question. Any signs of onshoring in terms of uses at all coming through?

I would say James might have a comment on this, but certainly, around the world, Goodman is seeing a trend towards onshoring.

Yes. Yes, it's a question we get asked all the time with people looking to rework their distribution networks and rely less on the likes of China or a time line right now. I'd say from our customer base, it's probably less onshoring. It's more looking at redundancies in other markets, they can sort of look to and fulfill their orders from, not just to market like China. So it's a bit of diversification, but it is, as you can appreciate, pretty difficult for a lot of onshoring to take place in a market like -- in a market like New Zealand, which is relatively small.

We are showing no further questions on the phone. I will hand over for webcast questions.

Okay. We've got a -- sorry, Anton, do you want to read them out?

You've got 3 questions, John. So are you comfortable you've got those, or would you like me to read them out for the audience?

Yes. No, I can read those out. So first question, I might get James to answer this, but it's from [ Nicholas Heller at Craigs ]. New Zealand Post Albany looks to be our first acquisition in the North Shore. I can understand your acquisition south of Britomart with the maritime and inland port, state, highway port, inland port, et cetera, but could you please provide some color as to what would attract you to an acquisition north of the Harbor Bridge over somewhere south? James?

Yes. Thanks, John. Thanks, Nick. Yes. So we've always liked the North Shore market, very, very tight market, not a lot of land available, occupancies, sort of next to 100%, but very tightly held and difficult to get a footprint. But we've liked it because it's next to a big consumer base, right? And our customers want to be close to that sort of last mile trip because it's the most expensive. You have the most fans going out to your end consumers on that last mile piece of the puzzle when it comes to distribution. So that's what the North Shore is. It's not sort of either or. It's not either North Shore or South. It's a customer that said to us, look, we want to be on the North Shore. It works for us and we were the chosen partner. So really fantastic location for last mile delivery. And we'd invest more on the shore if we found the right opportunity.

Yes. Very good. So the next question is from Katie Thompson at JBWere. With Amazon recently on the record saying that they are looking to reduce their warehouse space, clearly, a different market, but how does this affect Australia's industrial market? And how does this contrast to what we are seeing in New Zealand? Which tenants have committed to expanding floor plates in the last few years? And is the additional space still required given supply chain issues are easing. Look, I'll get James to comment. I'm not sure that supply chain issues really are easing, particularly given what's happening in China with the lockdowns. And I think if you see what's coming through the port of Auckland Tower, I think that say the same thing. So -- but I think Amazon clearly have -- are on record, effectively have built too much space. We all know they've been very aggressive. But we're still seeing strong demand from a lot of other customers. But James, do you want to just maybe just add to that?

Yes. I think with our e-commerce sales sitting at about 12% or 13% of all sales here in New Zealand, we haven't seen that sort of dynamic shift of demand like you see in other markets from e-commerce companies. The U.K., U.S., where e-commerce has gone to 20% or 30% of all sales, demand has doubled or tripled in those locations, and it's been driven by those e-commerce type companies that have taken a lot of the warehouse stock. We're at the start of that process, we think, been at 13%. And as e-commerce gets to that sort of late teens, 20%, 30%, we think e-commerce will drive our market. But with the likes of Amazon sort of turning off the tap a little bit, we don't think it's going to have an impact here because they haven't driven our market here in the first place. We're at the start of that journey.

Yes. No, I agree. Thanks, James. And next, and I think Anton, final question.

That's correct.

From Angus at ANZ, if not already asked, what construction cost inflation are you experiencing? And what's your best estimate over the last 12 months? And we have chatted to all our contractors in the last couple of weeks that James covered in his section. So I'll get James maybe just to square off that question.

Yes. Yes. Thanks, Angus. So we think over the last 12 months, it's been around 20% to 25%. So relatively big number. So as I mentioned, with such a big development workbook underway at the moment, we're really, really focused on that. And we're making sure we're covering off those increased costs in our future projects and in these existing projects by allowing for more time, allowing for construction cost increases and a lot more contingency within those projects.

Great. Thanks, James. So unless there's any more questions online or through the operator, just check that there aren't any.

No further questions.

Great. Okay. Well, thanks very much. Look, really appreciate everyone dialing in and taking the time this morning. Have a good day and a good rest of the week. Thank you.

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