Kiwi Property Group Limited (KPG) Earnings Call Transcript & Summary

Thank you all for standing by and welcome to the Kiwi Property FY '22 Annual Results. [Operator Instructions] I'd now like to hand the conference over to Chief Executive Officer, Clive Mackenzie. Thank you. Please go ahead.

Thank you, Tara -- Kiara, and good morning, everyone, and thank you for joining us for Kiwi Property's annual results announcement for the year ended 31 March 2022 or FY '22. I'm Clive Mackenzie, the CEO of Kiwi Property and today, I'm joined by our CFO, Gavin Parker; and our Head of Investor Relations, Cam Hodgetts. I just want to apologize upfront, I'm dealing with the tail of COVID at the moment, so my voice might be a little bit croaky through the presentation, so please bear with me. Assume you all have a copy of our presentation in front of you. If not, you can access one from the Annual Results section of our website at kp.co.nz. A quick reminder that as usual, we have included detailed financial and property slides in the appendices to this document, and I'll take the disclaimer as read, so please turn to Slide 4. Kiwi Property posted a strong financial result in FY '22 overcoming the impact of COVID-19 to report an uplift in all key operating metrics, including growth in profit, asset values, income, AFFO and full year dividend. I want to start this morning's presentation by calling out a few key figures that provide a snapshot of our positive operational performance. As you can see here, Kiwi Property's operating profit before tax grew 7.3% on the year before, climbing to $124.8 million. This is particularly pleasing outcome given the headwinds caused by the pandemic and reflects the resilience of our diversified asset portfolio. Net profit after tax also increased to $224.3 million, up significantly on the same time last year, assisted by $120.5 million fair value gain on our property portfolio, which also saw net tangible assets per share grow to $1.45. Adjusted funds from operations, or AFFO, rose 12.3% and to $6.39 per share, enabling the company to pay a cash dividend of $5.60 per share in FY '22, up almost 9% on the year before. Turning now to Slide 5. One of the most significant aspects of our FY '22 results has been the extremely robust performance of our assets over the past 12 months. The company drove robust rental growth, including a 4.1% increase in new leases and rent reviews across our office and mixed-use portfolio. Our ability to drive rental growth through the pandemic is testament to the strong tenant demand for space in our assets. Sales were also up, increasing 6.7% compared to the prior year. This uplift comes despite the fact our Auckland shopping centers were closed due to COVID-19 restrictions for around 15% longer in this financial year than the last one. You've likely heard me speak previously about the bifurcation of retail. And over the past 2 years, we've continued to see the best shopping centers get stronger, while others come under pressure. The sales performance of our high-quality core assets demonstrates this trend. Finally, as you see here, the occupancy level across our portfolio increased 10 basis points in FY '22, building on the growth we saw in FY '21. Despite concerns by some of the market about rising vacancy rates at the start of the pandemic, we've defined this trend, and our assets are now more full than they were pre COVID-19. Moving to Slide 6. Now, many of you are hopefully familiar with the diagram shown here, which outlines Kiwi Property's business strategy. This strategy is based on 3 priorities: the first of these is to intensify our mixed-use assets, particularly Sylvia Park, LynnMall and Drury to accommodate a broad range of complementary uses, including office, retail and residential. We believe that our focus on creating mixed-use communities has never been more relevant, helping to provide income diversity and smoother returns through the property cycle. Our second strategic priority is to grow with third-party capital. Kiwi Property has an expansive pipeline of opportunities, creating significant competitive advantage for the company. A variety of mechanisms are available to fund this program, including asset sales, funds management and the establishment of joint ventures across our mixed-use properties. We have made important progress on the strategic pillar over recent months, and I'll be sharing more information with you later in the presentation. Our third strategic priority is to empower the success of our customers. This pillar reflects our beliefs that we will only be successful if our customers and residents are too. To this end, we will continue to work with our tenants to identify opportunities for collaboration and growth as well as harnessing the power of digital and data to unlock business efficiency and performance. By successfully delivering on our strategy, we will help drive additional value across our business, which we do in 4 main ways: firstly, by investing in outstanding opportunities; secondly, by developing quality assets that align to our strategy, and thirdly, by curating sustainable and connected communities and finally, by optimizing our portfolio performance through active management. Turning now to Slide 7. Before I move on, I want to reiterate the important role that mixed-use plays in unlocking growth for Kiwi Property. Firstly, it helps diversify our revenue streams and build income resilience by bringing together several asset classes on our mixed-use sites, we're able to capture greater upside from outperforming asset classes, while simultaneously spreading our risk if one or more of these comes under pressure. Whether that's because of an event like COVID-19 or simply a stage in the property cycle. Secondly, mixed-use draws people to an asset, helping create a virtuous circle that supports the performance of each asset class. More offices and apartments result in more people on-sites spending money with retailers, which drives higher rental income, which we're able to reinvest in place making, which attracts more office and apartment tenants and on it goes. Next, mixed-use helps drive cap rate compression and valuation growth. As we've seen at Sylvia Park when we intensify the precinct with additional nonretail assets such as office and build-to-rent, the valuation benefits they deliver extend across the whole site, not just each new development. Given the tighter cap rates on office and residential, we expect continued uplift in the value of mixed-use assets as retail becomes a smaller proportion of the mix at each location over time. And finally, I want to call out one of the most important but also one of the most overlooked benefits of our mixed-use strategy, and that's a significant optionality and flexibility it provides Kiwi Property. We have 125 hectares of land across our mixed-use assets, of which only a relatively small proportion is currently fully developed. As a result, we have an unparalleled ability to redevelop these sites over time in line with tenant or resident demand and the availability of funding. We don't need to compete on the open market for new land or buildings. Instead, we have the flexibility to enhance our properties according to our own timeline based on the master plan and the highest and best use for each location. A plot of land used for a car park today could become a site for a build-to-rent tower in time, for example. The key point is that we are the masters of our own destiny, placing Kiwi Property in a unique and powerful position. On now to Slide 8. Let's now look at Sylvia Park where our mixed-use strategies are really coming to life, providing a blueprint for our other assets to follow in the years ahead. As you can see from this slide, we made substantial progress at the asset with development momentum, particularly evident late in the year. Firstly, in a groundbreaking move, Kiwi Property reached a conditional agreement to sell IKEA 3.2 hectares of land immediately adjacent to the East of Sylvia Park shopping center in late November 2021. The agreement marks an important step towards our ambition of welcoming IKEA to the precinct. An IKEA store would be a game changer for Sylvia Park, likely driving site-wide valuation uplift and attracting visitors from across the whole country. This occurrence would also likely to be the catalyst for us moving ahead with plans for a new 6,430 square meter large-format retail center directly adjacent to the land conditionally sold to IKEA in order to take advantage of the retailers' pulling power. Next, we got underway with New Zealand's first build-to-rent development -- sorry, major build-to-rent development. A 295 apartment complex that marks our entry into this attractive asset class and unlocks much needed housing for people in Auckland. Groundworks at the development are now complete and construction of the superstructure is underway. The $221 million project remains on track to begin leasing up in 2024, marking an important step towards Sylvia Park's evolution into a thriving mixed-use community. Also moving forward at Sylvia Park is the exciting new $63 million office development at 3 Te Kehu Way. The building's structural framing is now being erected and precast exterior panels being installed. 3 Te Kehu Way will capitalize on strong continued demand for office space at Sylvia Park, especially in the wake of COVID 19, where haven't-spoke office configurations have become increasingly sort after. While COVID-19-related lockdowns have disrupted leasing activity, we are pleased with our progress and 30% of NLA is now committed, including several exciting medical tenants. We continue to expect the building to be fully committed when it opens in early 2023 and look forward to announcing further deals over the coming months. Before I move on, I just want to touch on the way we're dealing with the cost pressure being felt across the construction sector. It's no secret that price inflation is a reality in the current market, and we're responding to the situation in 4 key ways; firstly, we're embedding significant contingencies in all our development costing assumptions and are currently operating within these parameters; secondly, we're ensuring early procurement of long-lead items to mitigate supply and escalation issues; thirdly, we're working closely with our contractor and quantities of our teams to develop robust procurement strategies; and finally, we focus on locking in a high proportion of fixed cost contracts as early as we can. Because of our significant landholdings, we're the masters of our own destiny and can time development activity when we have the right funding, input costs and market conditions in place. This provides significant flexibility and helps us mitigate current cost pressures. On now to Slide 9. As I mentioned earlier, Kiwi Property's extensive land holdings and mixed-use strategy, make the company the master of its own destiny and provide significant optionality about when and how we proceed with our development program. Not surprising, though, we've got our eye on the future and have a range of exciting opportunities ahead, which have the potential to deliver significant value for the business. At the start of May, our private plan change application at Drury was approved, unlocking development at our 53-hectare site, including 35,000 square meters of large-format retail, 7.1 hectare of land for residential development and setting the platform for the creation of a new Drury town center. Drury will be a transit-oriented development that brings together retail, office and residential all within easy walking distance of each other and the new Drury Central Train Station, which is scheduled to open in 2025. An earthworks consent has already been granted for the first stage of the project, and this work is underway with the potential for construction of houses and large-format retail to begin as early as 2023 pending funding. We are also primed to bring our mixed-use ambition to life a little more with the resource consent now in place for a 25-level mixed-use development, which will integrate ground floor retail, 3 commercial office levels and 245 BTR apartments. The proposed development is expected to become the tallest structure in the West Auckland and will connect directly into the existing shopping center offering residents unparalleled access to a wide range of retail, dining and transport options. We're focused on proceeding with the LynnMall development at the appropriate time, particularly given the well-publicized challenges in the building supply chain. With no expenditure committed to the LynnMall mixed-use development, we have ultimate flexibility on when to move forward and will ensure input costs, market conditions and the macroeconomic climate are conducive before advancing construction. Consistent with our efforts to ensure we are ready to progress opportunities. Planning has begun on the second build-to-rent tower at Sylvia Park with the preferred site now identified at the northeastern corner of the main site currently serving as car park 6. It's still early days, but this progress highlights both our belief in build-to-rent's potential as well as our commitment to becoming a leader in this asset class in the country. Turning to Slide 10. Kiwi Property's current development pipeline is one of the most exciting in the company's history, featuring opportunities to expand both asset classes and locations position the company for significant growth in the years ahead. Ensuring the optimal funding of that development pipeline is a key consideration and something we are highly attuned to. Today, I'd like to advise that following the detailed analysis to identify our preferred initial funds management project, we have begun the process of establishing a stand-alone CBD office investment platform. This important move will achieve 2 important goals; firstly, it creates a sector-specific office vehicle with its own source of capital. This will enable us to pursue new opportunities and help grow our portfolio of office assets over time while also delivering funds management income. Secondly, it will enable us to recycle the capital from our CBD assets to fund the intensification of our mixed-use assets in line with our strategy and unlocking significant value for our shareholders over time. As this activity is now underway, we're unable to share further information other than to say that we'll continue to retain a strategic stake in the platform going forward, and we expect the opportunity to track strong interest. I look forward to updating the market in due course. Of course, funds management is just one funding lever at our disposal, including the introduction of capital partners at one or more of our mixed-use properties, such as Sylvia Park, LynnMall or Drury. In parallel, our capital recycling program is ongoing with COVID-19 having caused the process to take longer than initially intended. While the process continues, we look forward to making the announcement about Northlands at the appropriate time. We have temporarily withdrawn The Plaza from the market while we conduct seismic assessment of the center. While this delay is disappointing, we believe it is the right move and will ultimately enable a more certain transaction. Over to Slide 11 now. We made a number of strategic investments in data, analytics and digital technology in FY '22 that will support our progress and the opportunities that will come from it. Work has begun on the implementation of a new enterprise resource planning or ERP system. This once in a decade outlay will see our existing infrastructure replace with a new, more fit-for-purpose solution that will unlock greater business insights, enable us to manage our assets more effectively and support our BTR and funds management programs. In addition, development of a range of customer-centric digital tools is currently underway, including the creation of a Kiwi Property customer hub designed to enhance the way we engage with, manage and provide experiences for our consumers, residents and tenants. Turning now to Slide 12. During FY '22, we continue to make strides towards our goal of becoming carbon negative in our operations by 2030. Full details of our ESG highlights for the year are available in our stand-alone sustainability report which was released as part of our annual reporting suite. I urge you to take a look. While there were several significant activities undertaken in FY '22, one of the most impressive recent initiatives is the agreement we've just signed with the Meridian last week to build New Zealand's largest rooftop solar installation at Sylvia Park. The array will cover almost 1 hectare of roof area about the size of a rugby pitch and produce enough electricity annually to power the average household for over 200 years or charge over 60,000 electric vehicles. The new installation will power approximately half of Sylvia Park's common areas and reduce Kiwi Property's total emissions by around 7%. That's a snapshot of some of our business highlights for FY '22. I will now hand over to Gavin, who will take a closer look at our financial results commencing on Slide 14.

Thanks, Clive, and good morning, everyone. So as Clive said, I'll start on Slide 14. You can see here that net rental income increased 7.8% to $187.1 million underpinned by the addition of Sylvia Park's Level 1 expansion. This income growth drove a corresponding uplift in operating profit before tax, which rose 7.3% to $124.8 million, a pleasing outcome given the challenging macroeconomic climate and presence of Omicron during the latter half of the year. Net profit after tax was also up, growing 14.1% to $224.3 million following a $120.5 million fair value gain on our property portfolio. AFFO increased 12.3% to just over $100 million, supported by a reduced COVID-19 impact and lower maintenance CapEx costs compared to FY '21. Turning now to Slide 15. As Clive mentioned earlier, we maintained our track record of delivering rental growth in FY '22 with rental uplift of 4.1% achieved from deals completed over the past 12 months. This uplift was driven by a positive movement in both new leasing and rent reviews which increased 3.6% and 4.2%, respectively. New mixed-use leases achieved 3.5% uplift, while office was up a strong 8.5%. Our weighted average lease expiry was 4.9 years at year-end. Turning now to Slide 16. Retail sales bounced back strongly from the year before, assisted by a full period of sales at Sylvia Park's Level 1 expansion. Total sales were $1.38 billion for the period, up from $1.29 billion last year. On a moving annual turnover or an MAT basis, total sales were up 6.7% across our mixed-use and large-format retail centers combined or 5.8% across Sylvia Park, LynnMall and Te Awa, The Base. While on face value specialty sales declined marginally from last year, contributing to a rise in gross occupancy costs or GOCs, when we adjust for the figures to remove the impact of lockdowns, the FY '22 GOC comes back to 10.1%, in line with the year before. We expect the specialty sales and GOC numbers to fluctuate somewhat until we get a full period of lockdown-free trading. However, based on current levels, we have headroom to continue to drive rental growth in FY '23 and beyond. Turning now to Slide 17. We undertook several capital management activities in FY '22 with a view to enhancing our overall debt profile. Earlier in the year, we released our sustainable debt framework, greened up our existing bonds and then issued a new 7-year green bond carrying a coupon of 2.85%. Bank debt facilities were also refinanced and increased by $25 million during the year. With MUFG being added to our banking syndicate post balance date unlocking a further $100 million facility. These steps enabled us to take advantage of favorable lending terms, reducing our weighted average cost of debt by 34 basis points and increasing the weighted average term of our debt from 2.9 years to 3.4 years. Turning now to Page 18. The company's diversified property portfolio was worth $3.6 billion at 31 March '22, up from $3.3 billion at the close of the previous year. Gearing remained largely stable at 31.6%. Net asset backing per share increased to $1.45 and $0.09 uplift on the prior year driven by the fair value movement on our property portfolio. Turning now to Slide 19. AFFO increased to $6.39 per share, up 12.3% from a year ago. As a result, the company will pay a final cash dividend of $2.85 per share for the 6 months ended 31 March '22, bringing the total cash dividend to $5.6 per share, up 8.7% on last year. The dividend payment represents a payout ratio of 88%, with the balance being retained to fund future growth. Looking ahead, we expect to pay an FY '23 cash dividend of no less than $5.7 per share. Despite the challenging macroeconomic climate and potential impact on earnings of asset sales, we are focused on executing on our strategy and delivering sustainable dividend growth in the years ahead. That's it on the financial update. I'll now hand back to Clive, who will wrap up with a look at our FY '23 priorities.

Thank you, Gavin. Kiwi Property has delivered a strong operating result in FY '22 and took important steps forward in the delivery of our strategy. Our priority is to maintain this pace of execution in FY '23 while continuing to unlock additional growth, development and funding opportunities. As we heard -- sorry, as we head into the new financial year, we have 5 key priorities; firstly, we will focus on launching the standalone CBD office investment platform. This important activity will unlock an important funding pathway and help accelerate our growth. Secondly, we'll strive to maintain development momentum at 3 Te Kehu Way, Sylvia Park BTR and the Stage 1 earthworks at Drury. These have the potential to be transformative projects for Kiwi Property and we're focused on moving the work forward with a view to generating income from the assets as quickly as possible; and thirdly, we'll make progress -- we will progress our capital recycling program with the aim of executing a successful sale of Northlands and potentially The Plaza depending on the outcome of seismic assessments at the center. Next, we'll continue preparations for the LynnMall mixed-use tower and second Sylvia Park BTR development to ensure we're ready to proceed at the optimum time. And finally, but perhaps most importantly, we will continue working tirelessly to create value for our shareholders. In the first instance, that comes down to growing the dividend sustainability -- sustainably over time. However, equally, we recognize the importance of driving share price appreciation and bringing the value of our stock back closer to pre-COVID levels. Kiwi Property is a robust business. However, as it stands, the market isn't recognizing the true value of our company or its assets. Some of this mispricing is due to macroeconomic factors that are beyond our control. In FY '22 -- sorry, in FY '23, though, we will focus squarely on those that are with a commitment to delivering on strategy, unlocking funding and intensively operating our properties. Thank you for joining today. That concludes my overview of our FY '22 financial results. I'll now hand back to the moderator, who will open the phone lines for questions. Thank you.

[Operator Instructions] Our first question will come from Arie Dekker at Jarden.

Can I just move at the divestments firstly? Can you just give some more detail on the status of Northlands, which has obviously been -- continues to be held for sale just in terms of whether you've got it contracted with a party or anything like that? And then do you expect The Plaza to be off the market for all of this year? Or would your hope be that you can work through the site can have it back on the market in FY '23?

Yes. Thanks, Arie. So yes, just on Northlands, we're working through a sale process with a potential buyer at the moment. Obviously, COVID didn't help potential buyers being able to view some of the assets, especially if they were based offshore and we're now obviously through that and people can return back to the country. So we're working through that process at the moment. With regards to The Plaza, we think the seismic works and assessments will take most of this year. So we would suggest probably towards the end of the financial year that we'll be able to bring the property back to the market. But with seismic, it's always a little bit of unknown until you actually get through the process here, but thank you.

Yes. And then just on Northlands. So you're working through the process with several parties? Or is there a preferred party that has an option over and can now come and see it?

We have a number of parties.

Okay, great. Just on the funds management platform. Just a couple of sort of questions. Firstly, the establishment phase, how long are you expecting that to take complete? And also, are you considering a dual track like is IPO demerger an option or not? And then just how you're positioning the platform with regards growth?

Yes. Look, it's too early to get into any specific details around some of those questions though it's probably worth noting that the listed route is probably more problematic right now. So we've got a lot of work looking at all the options available, just that it's probably going to be an unlisted platform.

And then just in terms of the establishment phase and completing that, anything you can sort of -- are you close? Or could that still take a wee while?

That will be in the second -- probably in the sort of third quarter.

Of the fiscal year?

Yes.

I mean, Arie, it's Gavin here. I mean obviously, that will depend on whether any OIO approvals are required, so that could delay things.

Yes, good answer, good answer. Thank you, Gavin.

Okay, cool. Gavin, just on the abatements, I mean I note that there's obviously still a decent amount for which you've accrued and then also doubtful debt provisioning seems quite a bit higher than usual. Can you just sort of talk about when you're hoping to have that sort of finished off and what's causing the delays? And then also, just any color on why the doubtful debt provisioning is higher?

Yes. I mean in terms of timing, I would expect most of those abatements to be wrapped up over the next 3 months. I mean you'll appreciate, we've got sort of circa 600 retail tenants so it's quite a process to get through all of those tenants but we believe the provision we've got is as adequate and it covers sort of both Delta lockdowns and the impact of Omicron. The provision for doubtful debts is slightly higher, but when you net off abatements, it's actually not higher than the prior year. And so we're not seeing any increase in tenants falling over or anything like that. As I mentioned, our GOC ratios are low and our rents are affordable.

That's good. And then just a couple of very quick ones. Just on the dividend guidance. What has been factored in on divestments? Are you assuming that Northlands is divested partly through the year in that dividend guidance? And are you factoring in anything further on COVID relied in that dividend guidance?

Yes, we are factoring in the sale of Northlands throughout the year and we have a very modest provision for Omicron -- for the Omicron costs, which, again, we hope we won't need, but we'll see as the year progresses.

Great. And then last one, I mean it's been brought to my attention that the compendium provides some useful additional NOI breakdown for Sylvia Park precinct but I mean, if isn't provided in the other materials, is there any reason why we can't get an OIO breakdown for Westgate Lifestyle and Northlands?

Well, as you're aware, it is disclosed in that property compendium, but note that we could have replicated that in the main pack, but it is all there in the property compendium, which does always contain a little bit more information, such as IRRs on every single property, and we've also broken out ANZ Raranga this time.

Yes, yes. I know. So as Westgate Lifestyle and Northlands separately disclosed in the compendium as well?

Westgate. Sorry, they're in other properties. So they're not separately disclosed, and I don't believe they were separately disclosed last year.

But Westgate Lifestyle was.

Okay.

Our next question comes from Nick Mar at Macquarie.

Just further on the sort of connected [ offside ] of [ LR ], I guess, asking it in a different way. Is there sort of an amount that you target sort of recycling out of the portfolio either through directly selling assets or through co-investment or selling off maybe possibly some of the Drury land per annum to sort of meet your current commitments? Just trying to get a sense of how much you would like to, I guess, [ hit ] the balance sheet or provide for sort of a rainy day?

Why don't I talk holistically about that and Gavin, you may want to add on. As I've called out, we've got an extensive development pipeline that extends over many, many years. And the great thing is we have a number of sources of potential capital to fund that pipeline. And so we can tap those sources as we move forward and as we want to bring those developments online. So that could be, as we called out, from our -- the use of our CBD office assets, it could be the recycling of some of our retail assets but it also could be bringing in partners on some of our other mixed-use sites. And potentially, you've called out the potential to sell part of the Drury site down the line if we so desire. So we've got a whole range of options in front of us, and we'll sort of tap them as we need to. So the development pipeline stretching out over many years probably runs into the billions of dollars, but we will need to just figure out the right timing for each of those things.

Yes. Now I'll just add, Nick that we've got sufficient capital to fund our existing commitments, which includes Sylvia Park BTR, 3 Te Kehu Way and Drury earthworks. So we don't target a specific amount per annum that needs to be released from asset sales or funds management or joint ventures but we do obviously have a 10-year-plus master plan. And we're conscious of those opportunities we've got in front of us. So we believe this -- the current asset sale that we've got underway plus this funds management platform will release a significant amount of capital that will assist the funding of LynnMall BTR and the Drury development.

Yes. No, that makes sense. And then on the office platform, I guess, what's major to it now versus -- we've talked about this for a number of years. What's, I guess, changed to drive the decision to push ahead with this? There was various reasons to push back against it previously. Could you just talk through that something?

Yes. Look, it's just we believe now is the right time for us. We're getting ready for that next tranche of capital expenditure. It's always been a potential opportunity for us and we've always had it as part of our options that we've looked at. But we believe as we're getting ready for the next round of development expenditure, kind of now is the time to progress that, yes.

Yes. And I'll just add to that, Nick, we have extracted a lot more value out of these office assets during that time. And it's always a balancing act between selling assets and incurring the dilution and redeploying those proceeds. So now that Sylvia Park BTR and 3 Te Kehu Way and these other opportunities are coming to fruition. It's an opportune time to release funds from these assets, which have very tight cap rates.

All right. And then just in terms of the valuations, can you just talk through what's going on at LynnMall in particular? And then a couple of the office assets actually have de-valued as well just would like some color on that.

I believe the movement at LynnMall relates to additional seismic CapEx.

That's correct.

And in ASP and the [indiscernible] sort of took a bit of a hit during the period?

Yes. I think ASP is probably around ancillary income and the cap rate hasn't moved. So there's nothing really specific on account of those assets.

No, I can't think of any that...

I think it might clear around that other income there's a fair amount of retail at the [ foot ] of the ASP building year.

Yes, okay. And then lastly, are you seeing any changes to what sort of rent review mechanisms or quantums you're putting into new leasing or renewals particularly in the mixed-use assets?

Yes. Look, it's a really good question and the sort of unknown is how long does inflation carry on at this level. At the moment, about 2/3 of our rent reviews are fixed, and we're running at sort of 3.5% to 4.5% fixed increases on our portfolio. And the good thing is we have a relatively short lease cycle. So it does allow us to amend that setting going forward and we may well bring the balance more towards 50-50 CPI plus reviews and fixed reviews as we go forward to give us that flexibility. But in effect also to hedge us whichever way it goes as well, yes.

Our next question comes from Jeremy Kincaid at UBS.

Just a couple for me. I'll first start on the seismic issues. With regards to The Plaza, are you just commissioning a seismic report? Or do you think you'll have to deploy some capital in there before you sell it as well?

Yes. As you recall, last year, we are following the [ climatic ] quake. So we did call out that we had received some damage -- not substantial, but some damage to The Plaza to the car park building. And a lot of our work is around how we remediate that damage before we bring the asset back to market, yes. So it's really just putting it back into a position that we can put it back to market yes.

And Jeremy, the -- sorry, Jeremy, the valuation takes account of seismic costs. And so the question then is do you fix it? Or do you sell it? But if you sell it at least you know what the expected costs are going to be.

Yes. So they're working through the design solutions at the moment, yes, and then they'll price them, yes. Yes.

Okay, sure. And also, I didn't appreciate LynnMall also had some seismic issues. Is there anything else in your portfolio that we should be aware of that may have seismic problems?

Look, it's -- I wouldn't say seismic problems is the right term. Every building in New Zealand, probably needs to be reviewed from a seismic perspective over time. And we're systematically going through our whole portfolio and making sure that they all meet the relevant codes and we're keeping them as current as we can in terms of that. So it's just a process we're going through. LynnMall is an older asset and inevitably in older assets, there's some work that needs to be done here.

Okay, sure. And then the update you gave on cost inflation was helpful, but you didn't provide any update on return metrics or anything like that on some of your developments. Is it fair to assume since there wasn't an update that those haven't changed? Or do you think they might change a little bit?

There's no change for those metrics at the moment. The fortunate thing is even though we've seen sort of cost increases coming through, especially more recently, we're also seeing on the other side, in the BTR space that some of the income metrics also is improving quite significantly as well. So the overall metrics are looking fine at the moment for those projects, yes. But we'll update those as we go forward to the market, yes, should there be any changes.

Great. And then one final one for me just on the office fund as well. Do you think you will look to sell all the assets outright? Or do you think you'll sell portions of the fund as your capital requirements at Drury increase?

And I'm not sure I'm answering the question, but we have no desire to sell our office assets. We will remain -- keep -- retain a strategic stake in those assets going forward. And obviously, the management of those assets. So I'm not sure if that answers your question, yes.

Okay, no actually it does help. Right.

Our next question comes from Shane Solly at Harbour Asset.

Just going back to [ 101 ] stuff, the impact of higher inflation, interest rates and just the risk around cap rates, how are you thinking about that the risk around cap rate movement from here?

Gav, do you want to have a go on that one first?

Yes, sure. I mean, yes, there could be some softening of cap rates, Shane. I think fortunately, we still do have a pretty healthy spread between our cap rates and the 10-year government bond rate. We very much do factor in potential downward movements in our gearing forecast and hence, keep gearing at a reasonably conservative level to take that into account. And then obviously, we've got our hedging in terms of interest costs, and we're currently just under 70% hedged with a 2.9-year weighted average term. We have been adding some forward cover and the issue of our green bonds last year, it was a 7-year bond, 2.85% also helps with the fixed component of our overall debt position.

Great. Just 2 more questions, if I may. Firstly, on WIP. You talked about production levels picking up in your development so can you talk about a WIP number then perhaps at all or not?

As in what's left to spend?

Well, understood you've outlined quite an extensive pipeline of potential development. So I'm just looking at work in progress on an annualized basis, then what should we be thinking about for that?

Well, as I said, we're only committed to 3 Te Kehu Way and Sylvia Park BTR so nothing is committed beyond that. And we won't proceed until there's a clear funding strategy for those opportunities. But the next opportunity would likely be the LynnMall BTR development, which is a similar sort of scale to the Sylvia Park BTR development. I mentioned we're doing earthworks at Drury, and we've previously signaled that could be sort of circa $50 million over the next couple of years. And then the next likely development would be large-format retail at Drury.

And just to jump in there Shane yes, sorry, I'll just add there a lot of the work in the development cycle is in the upfront design, getting consents going through those process is time consuming and that's where we're spending a lot of our efforts at the moment working and basically getting ourselves ready when we believe is the right opportunity and the right time to move forward with some of those developments. And we're making great progress in that space here.

Okay. I appreciate that color. Just the last one for me for now is just in terms of the proportion of -- as you move with third-party earnings, what does that mean for your earnings mix for Kiwi if you look forward? Or is it just too early to have that conversation?

I think it's probably too early to have that conversation. But obviously, we believe third-party capital will be an important source of capital for us going forward with either something similar to our office platform or joint ventures, et cetera, as we go forward here.

[Operator Instructions] Our next question comes from Rohan Koreman-Smit at Forsyth Barr.

Congratulations on the result and just a couple of quick questions for me. First one, just on the ERP costs and tech costs, are you gone to give us an idea of, I guess, where corporate costs kind of go next year? And also, I guess are you investing ahead of the curve for this office opportunity?

Yes. Too early to say, Rohan, but you're right. There was a -- this year, there was sort of about $0.8 million uplift relating to digital costs. There will be an increase next year as we sort of land our preferred solution, in fact, over the next probably 2 years as we land and roll out that solution.

And then on tax, I just noticed it was a pretty big jump up. Are you able to give us a bit of a guidance for next year, are we kind of at more normal levels now? Or was this just kind of a one-off?

Yes. Look, there is a one-off this year. This relates to the depreciation recovered on the PwC building in Christchurch. So you'll recall when the Christchurch where kind of the earthquakes first occurred, the PwC building that we owned there was damaged and subsequently demolished. We received an insurance payout, which triggered depreciation recovery. We qualified for rollover relief but we no longer qualify for that rollover relief. So it is now being released. So that's the one-off cost in the current year. We had always provided for that tax through deferred tax, but now the tax actually has to be paid over. So yes, going forward, effective tax rates are more normalized and I'd probably estimate or project approximately 15%.

And then last one when we looked...

Sorry, Rohan. Just the other thing on tax, the other lumpy thing is abatements because we don't get a tax deduction for abatements until they are actually agreed. So as Arie pointed out before, we've got an accrual for abatements. They're not currently tax deductible, but certainly under the deferred tax asset sitting there. But as those abatements agree, we will get a current tax deduction for those.

Perfect. Last one, just on the office portfolio. I think this is following on from Jeremy. Are you looking to sell down your key or desired kind of co-investment in one go? Or is this going to be a staged kind of co-investment like, say, a quarter sell down first half and then in a year or 2's time another quarter? Or are we kind of thinking of this as you'll go down to your preferred kind of co-investment level this year?

A good question, and it's probably too early in the process to give you a definitive answer on that at the moment.

Yes. The only thing I would add to that, Clive, is to attract the most interest in the portfolio, it needs to be a reasonable stake. So I'm not sure quarter would necessarily drive the best outcome.

Yes, I'd agree with that statement.

Thank you, everyone. That was our final question, so I'll now hand back to Clive for any closing comments.

Thank you, Tara. And I'd just like to thank everybody for joining us today, and enjoy the rest of the day. Thank you very much.

Thank you so much. This does conclude our call today. Thank you all for joining. You may now disconnect.