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

Good morning, ladies and gentlemen. My last meeting, and we're already 2 minutes late. Thanks for joining us today at the Kiwi Property Annual General Meeting for shareholders. either in person here at the Marine Center or online via the Link virtual meeting room. I said there are plenty of familiar faces in the room, so welcome back. My name is Mark Ford. I'm an independent Director and Chair of the Board. I'm pleased to advise that we have a quorum today and declare the annual general meeting open. Before we start the formal proceedings and presentations, just to do housekeeping matters. Firstly, please, if you have a mobile phone with you, put it on silent. That includes people sitting up here. Solar facilities, you will have noticed on the landing at the left out the back of the room. If a fire alarm goes off, which we obviously hope not, please follow staff in orderly fashion down the stairs and congregate in the car park. If you're participating in the meeting today online and encounter any issues, there is a virtual meeting online portal guide or a phone number you can call, the Link help line, which is 0800-200-220. And with that, let's get things underway. I would like to start today's meeting by introducing my colleagues on the Board. Mary-Jane Daily. Mary-Jane was appointed to our Board in September 2014 and is an Auckland-based professional director with a strong background in banking and finance. Mary-Jane is also Chair of our Audit Committee -- Audit and Risk Committee. Carlie Eve, and I think we're going to get a shot of Carlie here. No? Okay. We don't. You'll see Carlie later on screen. Carlie is an Auckland-based Professional Director. She joined our Board in May of this year, following a highly successful career in finance and funds management, and she'll be standing for election today. Carlie will be -- is a member of our Audit and Risk Committee, and she had a long-standing commitment and was unable to join us today and sends her apology. Chris Aiken. Chris is an Auckland-based professional Director, joined our Board in June '21. Chris has significant property experience spanning both public and private sectors. Chris is the new Chair of our ESG, Environmental, Social and Governance Committee, and a member of the Remuneration and Nominations Committee. Jane Freeman. Jane was appointed to our Board in August 2014 and is an independent-based professional director with extensive retail experience in customer-driven technology. Jane is Chair of our Remuneration and Nominations Committee. Peter Alexander. Peter is an Auckland-based Professional Director who's joined our Board in May this year. Peter has extensive property experience and has held executive roles at several large listed New Zealand companies. Peter will be standing for election today and is a member of our ESG Committee. Last but not least, Simon Shakesheff. Simon is an Australian-based professional Director, joined our Board in November 2019. Simon brings a wealth of property and finance experience and expertise to the role and is a member of the Audit and Risk Committee, the ESG Committee and the Remuneration and Nominations Committee. Simon is standing for reelection today. Following the close of this meeting, Simon will be your new Chair, Chairman if he gets reelected. In accordance with the NZX listing rules, the Board has determined that all directors are independent. The notice of meeting also contains further information on director independence. Also joining us today are Clive MacKenzie, our Chief Executive Officer; and Steve Penney, our Chief Financial Officer. And you'll hear a lot from Clive in a little while. I also welcome the team from our registrar, Link Market Services. They'll conduct the voting on the formal business later in the meeting and will act as scrutineer on the voting. And finally, I'd like to welcome Karen Shires from PwC, our group's auditor for the 2023 financial year. Moving to today's agenda, I'll start with a brief address and then invite Clive to provide an update on the company's financial results for the year ended 31 March 2023 or as will be referred to through the presentation FY '23, as well as some of the key initiatives we have underway. At the conclusion of these presentations, we'll take questions from both the floor and from our virtual attendees and conduct the formal business for the meeting. The formal business consists of 3 resolutions: to reelect Simon to the Board to elect Carlie to the Board and to elect Peter to the Board. We'll then have a short message from our incoming Chair, Simon, before formally closing the meeting and having a chat over a cup of tea or coffee. Just still on admin, we'll get to the meat of it soon. Shareholders present today will be able to ask questions as well as participating through the virtual website. If you're online, you can submit a question at any time by clicking on the, "Ask a Question" box at the top or bottom of the online portal. I think that's now shown on the screen there. We will answer general questions following Clive's address and then specific questions relating to each resolution before voting on them. I encourage shareholders who are online to send your questions through early. This will allow us to answer these questions at the appropriate point in the meeting. For those shareholders in the meeting, we will ask for questions at the appropriate time rather than have questions on the way through. This is a shareholders meeting, only shareholders or appointed proxies can ask a question. So you'll be prompted to import your shareholder or proxy number before completing the online process. Moving now to my remarks. Kiwi Property made a significant progress towards our ambition of becoming New Zealand's leading creator and curator of connected communities in FY '23. We delivered a robust operating performance, including increases in key metrics such as sales, rents, operating profit and adjusted funds from operations. And Clive will talk further about that later. Over the past year, we've been guided by a clear strategy for creating value for our shareholders and other stakeholders. This morning, you'll hear multiple examples of the way in which the company has executed on this strategy and our 4 priorities, which are leading the market on mixed-use communities; growing with diverse capital sources; enabling the success of our customers and partners; and building a future-fit business, particularly important as we go through some headwinds in the current economic climate. There's no doubt, the past few years have been challenging, not just for us but for the property sector as a whole, and in fact, for the country and globally as a whole. We've contended with the impact of COVID-19 and the disruption that followed, including high inflation, rising interest and capitalization rates, a cost of living crisis, I think we can call it, and declining property prices. We've not been immune to any of these forces. But rather than reacting, we've tried to act decisively to manage our assets and balance sheet as the economic environment has shifted. And we've all been through cycles before. We know we work in a cyclical industry. and it's our job to manage it through that and come out the other side in a good position. It's all about discipline from our point of view. We take our cues from unfolding market dynamics. We exercise constraint where it makes sense to do so and pursue opportunities where the timing is right. In FY '23, we've taken several steps to effectively enhance the resilience and performance of the business. First, we've made substantial project -- sorry, progress on our previously announced capital recycling program, selling a number of assets, Northland and Northland Shopping Center and 44 The Terrace, in December '22 and Westgate Lifestyle Shopping Center in May. And earlier this month, we also announced that we have entered a conditional sales contract for the Aurora Center in Wellington. The sale of these noncore properties and recycling of proceeds is a central pillar of our funding strategy. Not only does it provide our lowest cost of capital, but it also results in a higher quality and more resilient asset portfolio. Secondly, we're strictly managing the pace of development. We're in a very, very fortunate position of having large mixed-use land holdings of more than 125 hectares across Sylvia Park, LynnMall, The Base and Drury. The scale and zoning of these assets gives us flexibility to manage the pace and timing of our development program, and we can make strategic choices about what and when to build based on demand, market fundamentals, cost of funding and obviously, a lot of other metrics as well. Finally, we're committed to driving operational discipline and ensuring cost control. And again, Clive will talk about that a little later. It's vital that we deliver efficiencies across the business, and we are looking at a range of options to further optimize the company's performance and overheads. Adopting a disciplined approach will put the business in the best position we can to deal with current period of economic uncertainty. Importantly, these measures aren't just about making us more resilient in the short term. But by taking these steps today, we want to ensure that the company is in a stronger position as things change and opportunities emerge. As a result of our property sales asset program, we've recycled around $290 million in capital over the last 12 months. These funds have assisted the strength of our balance sheet and put the business in an even stronger position and navigate future macroeconomic challenges. In March, we overcame a challenging time in the debt markets, I'm sure we ever came in, but we dealt with it, to complete a successful $125 million green bond issue. This was heavily oversubscribed and enjoyed particularly strong support from you, our retail investor base nationwide. This highlights the breadth and depth of support for Kiwi Property and our mixed-use strategy and our strong sustainability credentials, which as you're all aware becomes more and more important as the years go by. Our focus on capital management has helped curb increases in our gearing and despite a decline in the value of our portfolio at March '23. Our gearing sat at 35%, which was in our range. It's further reduced on a pro forma basis following the subsequent sale of Westgate, and it's reduced then to just over 33%. Also on a pro forma basis, our debt was 90% hedged, up from 84%. And the hedging enables us to manage the increases in interest rates and hopefully to avoid further increases for a period of time that our hedges cover us. Our balance sheet flexibility is just one of the factors that will help us navigate the current uncertain times. Another is our property and tenant portfolio, which we believe is one of the best in the country. Over 50% of our tenants provide essential services, everyday essentials or our government departments or financial service providers, ensuring a high degree of income security even under challenging conditions. There's a list of our top 10 tenants there, including a range of blue-chip organizations such as ASB and ANZ. Importantly, none of these tenants provide more than 10% of our gross income. So we have quite a good diversified income base. Our weighted average lease expiry is about 4.5 years. allowing us to reset rents, remix tenants and refresh fit-outs on a regular ongoing basis. We are focused on maintaining a robust and resilient balance sheet, mitigating the risk to our business. But that's just one of our priorities. Another is to grow our earnings so that we can deliver better returns. One of the ways we're doing this is by delivering on our mixed-use strategy and led by our efforts at Sylvia Park. Sylvia Park precinct has evolved significantly in recent years to include an increasing range of uses, helping to attract more people, drive sales, and it's a perfect example of our strategy in action. So it's no longer just New Zealand's favorite shopping center attracting around 15 million customer visits in FY '23. Almost 3x New Zealand population, which is a pretty amazing stat. And despite the economic headwinds, the center's performance continues to go from strength to strength. And while Sylvia Park is historically known for its shopping center, we now have 2 performing office buildings: ANZ Raranga and the recently opened Te Kehu Way. These offices will form the foundation of a commercial hub that we expect to grow over time. We're already receiving significant interest from office tenants who would want to -- may want to relocate to Sylvia Park in the future due to the amenities, the transport connectivity, and the third piece of the puzzle is residential. We're currently underway with the construction of a 295-unit build-to-rent apartments. I'm sure you've all read and heard about build to rent. It's the second largest global asset property class, ahead of retail and only behind office. These apartments, which we are developing, are due for completion in May 2024. The addition of the residential component will elevate Sylvia Park into a world-class mixed-use center. And the presence of the office workers and residents who live there provide a new revenue stream and create a permanent on-site population of people who will eat shop and drink on site, driving sales and boosting earnings and driving the operation of our customers, which obviously drives our own operation. We've never been afraid to take the hard decisions and invest in transformative opportunities, and we pride ourselves in doing that. Sometimes it takes a little bit of time, but we're here for the long term. We manage a long-term asset class. The innovations of mixed use at Sylvia Park, one of the differentiators that we believe set Kiwi Property apart from our competition in the last couple of years. Of course, there is a matter that we don't have a lot of direct control over, and that's our share price. The Board is very disappointed at where the shares are trading, and I can assure you that the Board strive to do what we can to see improvement where we can. It's not just us, it's the industry, it's the global market. And in fact, New Zealand is not doing too bad compared to the United States and European property companies that are trading at 60 or more, in some cases, discount to net assets. And I'm pleased to say that actually, we've done a little better relative to our peers over the last 12 months as people come to understand our mixed-use strategy. I'll now hand over to Clive, who is going to discuss our FY '23 business performance and give some of the highlights for the year just gone.

Thanks, Mark. And good morning, everyone. It's great to be connecting with our shareholders face-to-face once again, and thank you for joining us for those that are viewing this event online as well. Thank you. As Mark mentioned, Kiwi Property delivered a robust operating performance in FY '23 and while also taking significant steps on our journey to becoming New Zealand's leading creator and curator of mixed-use communities. Our aim is to build on that platform through FY '24 and with a focus on sustained delivery and the commitment to driving returns for you, our shareholders. Now let's take a closer look at some of our key financial and operational highlights for the FY '23 year. As you can see here, the company's net rental income rose to NZD 203.7 million, which is up 13.9% on the same time last year. This figure benefited from the release of the COVID-19 rental abatement that were no longer required. However, a key driver was the strong performance of our assets, which was led by Sylvia Park and The Basin Hamilton. The company's ability to grow rental income while also disposing of assets was a positive outcome and highlighted the strength of our core property portfolio. Our operating profit after tax was also up, increasing an impressive 11.3% to NZD 129.6 million. While adjusted funds from operations, the key metric that we use to determine Kiwi Property's dividend, rose 16.1% to NZD 116.5 million. Unfortunately, the company's robust operating result could not offset the impact of rising interest rates and the global softening of capitalization rates. And as a result of these factors, the fair value of Kiwi Property's investment portfolio declined by an unrealized 10% or NZD 352.6 million, leading the business to post a net loss after tax of NZD 227.7 million for the FY '23 financial year. Clearly, while these numbers are disappointing, they are unfortunately not unexpected given the stage of the property cycle and the current economic headwinds that Mike outlined. By continuing to drive sales, though, and grow rents and diversify our income streams, we will help to mitigate any further devaluations we may see in our property portfolio. One of the most pleasing aspects of Kiwi Properties FY '23 annual result was a record sales performance of our mixed-use property portfolio. Shoppers spent more than NZD 1.7 billion at Sylvia Park, LynnMall and The Base, and this was up 28.5% on last year and 34.8% on FY '19, which was the last full year of trading, which was unaffected by COVID-19. The Sylvia Park precinct an incredible NZD 889 million. We're well on our way to NZD 1 billion of sales at that asset. And The Base broke through the NZD 500 million sales threshold as well, reflecting its standing as the leading retail center in the Waikato. These figures highlight the strength and the resilience of our flagship mixed-use assets. Sylvia Park recorded an impressive 15 million customer visits, which Mark has already mentioned, also over the past 12 months. While our mixed-use portfolio recorded 25 million visitors in the total in FY '23. Over recent years, we've seen a divergence in the retail property sector, with the best centers going from strength to strength and the second tier centers in contrast coming under increasing pressure from e-commerce and also retail store consolidation. We have worked hard to ensure our assets are well placed to benefit from this flight to quality, bringing an exciting range of first to New Zealand retailers to market and delivering a new standard of dining, hospitality and entertainment options. Our property portfolio was almost entirely leased at 31 March 2023 with occupancy sitting at 99.3%. This puts us in a really strong position as we face these economic headwinds. Rental growth was similarly robust, with rent reviews and new leasing up 5.3% and 4.4%, respectively, despite the challenging economic environment. Together, these figures reinforce the strength of tenant demand for space and Kiwi Property's core assets and the effectiveness of our active leasing program. We believe that as our sites become increasingly mixed use, we will be in an even stronger position to attract more customers who will stay longer and spend more when they do. In parallel with our specialty gross occupancy cost ratio, which is a key measure of retail tenancy affordability remaining at a conservative 12.9%, there is scope for the company to drive further rental growth in the future. Alongside our strong operational performance, we also moved ahead with several exciting strategic and development initiatives in FY '23. Let me take you through a few of them right now. At Sylvia Park, around half of our 35-hectare land holding has the capacity for further intensification, which provides us a range of options to unlock additional value from the site over time. An example of this is the sale of 3.2 hectares of land on the eastern side of the precinct to IKEA, which is now unconditional. The iconic Swedish retailer has given -- has already begun construction of its store, which will be the first in New Zealand and about the same size as 3 rugby fields, just to put it into context for you. IKEA is due to open in late 2025 and is expected to attract a huge number of additional shoppers from across the country to Sylvia Park as well as driving an increase in the value of the entire precinct for us. We're already underway with the planning for a 6,400 square meter large-format retail center next to the IKEA site to take advantage of its remarkable pulling power. And in late March, we completed the distinctive new 6-level office development at 3 Te Kehu Way, Sylvia Park. The building offers excellent amenities and sustainability performance as well. 3 Te Kehu Way has been designed to cater to the needs of both office and also medical tenants, the latter of which has become an increasing focus for our business due to the sector's forecast income resilience and long-term growth potential as well. The building distinctive design has already made it a prominent feature on the Mount Wellington landscape. But even more importantly, the building marks an important step in Sylvia Park's continued mixed-use evolution. With ANZ Raranga next door, we have established the core of a new commercial hub, providing a platform to attract new tenants and drive growth across the precinct. 3 Te Kehu Way was completed on budget and with projected yields ahead of the 6% initial target, a great outcome given the cost pressure throughout the build period. We're currently finalizing the lease-up of the building, but are pleased to have already welcomed new tenants such as Geneva Finance, Horizon Radiology, Regis Co-Working, and most recently, one of New Zealand's largest agricultural commodity traders, Viterra. 3 Te Kehu Way is just one place where we've made significant progress on our targeted development program in FY '23. Construction of New Zealand's first major build-to-rent development is now also well advanced at Sylvia Park. The 295-apartment complex is now up to level 10 and is on track to open in May next year. New Zealand experienced a net gain of 72,000 people in the year to April 2023. That's equivalent of almost 1.5% boost to our population, which will require tens of thousands of extra homes going forward. At the same time, residential construction has declined rapidly, with a number of new building consents down 18% in the 3 months to February compared to a year earlier. We expect this gap between demand and supply to place upward pressure on rents and increased the number of people wanting to live at Sylvia Park. Our BTR assets will be launched and marketed under the newly created Resido brand. A fresh and dynamic proposition set to become synonymous with Kiwi Properties residential offering. In addition, Drury is one of Kiwi Property's most exciting current opportunities. With a private plan change now secured, which designated our site as the location of the future Town Center, and we're moving ahead to create an exciting new mixed-use asset over time. All 13 of the site residential superlots are now formed and at grade, with titles expected to be issued early in the 2026 calendar year. This is excellent progress, especially when you consider the weather we've had over the last couple of months. Kiwi Property isn't the only party that is firmly committed to Drury. The central government is spending around NZD 500 million a year for the next 5 years to build infrastructure area, including the upgrade of State Highway 1; and the new Drury central train station, which is going to be immediately adjacent to our site. These projects will enhance Drury's accessibility and help supercharge the growth across the region. And after the earth and civil works, the gross development land value of our Stage 1 site is expected to be around NZD 205 million. The Stage 2 site will be retained for future development and provides the opportunity to drive significant additional returns over time. And we are focused on carefully managing the funding requirements of our Drury development and have a range of options available, including the introduction of capital partners as well as the sell-down of one or more of the site's residential superlots or some of its large format retail sites as well. We've also been committed to sustainability for over 20 years and have made substantial ground towards our goal of becoming net carbon negative in our operations by 2030. Over the past couple of years, ESG has taken a step forward in terms of its importance to many of our current and also potential investors. This is a positive development and one we're highly supportive of. Our efforts in this space are guided by our comprehensive sustainability strategy, which is based on the pillars of places, people and partnerships, as shown on the slide, each with their own set of individual KPIs. During the year, we achieved several important ESG milestones, which contributed to our being awarded a score of 81 out of 100 by the Global Real Estate Sustainability Benchmarks or GRESB. In addition, our Sylvia Park build-to-rent development has been awarded an 8 Home Star design rating. And in FY '23, we achieved a 53% reduction in our emissions compared to our 2012 baseline year. And working closely with Naylor Love and Waste Management New Zealand, we managed to divert more than 92% of the construction waste from 3 Te Kehu Way from landfill, highlighting our commitment to sustainable development. That concludes my review of FY '23. As we look ahead to FY '24, the management team and I are squarely focused on maintaining Kiwi Property's strong operational performance, and we have 4 key priorities for the rest of the year. The first one is we'll drive proactive capital management, and we'll mitigate any interest rate cost increases and maintain our balance sheet flexibility. The second priority we have will be to continue driving the operational excellence across our high-quality asset portfolio with a very clear focus on cost control and asset management. Thirdly, we'll prepare for the launch of Sylvia Park's BTR1, including successful launching of the new Resido brand to the market and establishing our BTR platform -- operating platform. And fourth, we'll position Kiwi Property for the future by completing Drury Stage 1 earthworks and identifying opportunities that will enable Kiwi Property to drive revenue and returns for you, our shareholders. By doing these things, will help unlock additional shareholder value, encourage a lift in the Kiwi Property share price and support sustained dividend growth. Kiwi Property's commitment to delivery is as strong as ever, if not stronger. We are focused on growing rents, growing our assets and growing returns for you, our shareholders. Our goal is to perform today while simultaneously transforming heavy property into a faster, more resilient and, ultimately, more profitable business for the years ahead. Before I wrap up, I'd like to say welcome to Carlie and to Peter, who have already added significant value to the Board since joining us around a month ago. I'd also like to offer my sincere thanks to Mark, who is retiring as our Chair today at today's annual meeting. He's been an excellent director guiding our business and championing the interests of Kiwi Property shareholders for more than a decade. It's been an absolute pleasure working closely with you, Mark. I'd like to thank you for your guidance and support over the many years. Thank you. I'd like to now hand back to Mark.

Thanks, Clive, and thanks for those kind words. Kiwi Property paid a quarterly cash dividend of $0.01425 per share for the fourth quarter of FY '23, taking the full year cash dividend to $0.057 per share. We're committed to maintaining and then growing the dividend payout over time. And the fact that we've been able to do so in this period of economic volatility while also selling assets speaks to our intent. We also reinstated the dividend reinvestment plan for the fourth quarter at a 2% discount. The DRP contributes to our multifaceted capital management program and will support shareholders to grow the Kiwi Property Holdings while averting transaction costs. I'm also pleased to confirm that our full year cash dividend guidance of $0.057 per share for FY '24 delivered an attractive -- sorry, delivering an attractive gross yield on -- based on the current share price. As always, dividend guidance and payments are contingent on the company's performance and barring material adverse effects or unforeseen circumstances. That concludes our overview of the company's activities for FY '23. Before we move on to questions and formal business, I'd just like to make some final remarks. As Clive mentioned, today is my final AGM as Chair of Kiwi Property after 12 years. My time at Kiwi feels like it's gone really quickly, and I look back on those 12 years. And I'm proud of the many things that we've achieved together, but also conscious of some of the headwinds that we faced during that time. Since joining the Board in 2011, change has been pretty much the only constant. Within my first 3 years as Chair, we proceeded with internalization by buying the business back from [indiscernible] Bank and then the corporatization moving from being a trust to a company, therein initiatives that have enabled us to master of our own destiny. In a period of rapid growth in the following years, we completed ASB North Wharf, purchased Sylvia Park Lifestyle and entered into a 50% joint venture with Tainui Group Holdings at The Base and Center Place North. Many of Kiwi Property's greater successes have required foresight courage and the long-term outlook, as I said before. And whilst nobody sitting at this table was involved, this goes right back to the example of buying a block of rundown storage sheds at Sylvia Park some 20 years ago. And look at what Sylvia Park has become today and is continuing to become something different all the time and something bigger, better and a world-class asset. So we've embarked on our strategic transformation a few years ago. We knew that the shift from being a retail landlord effectively to a creator of mixed-use communities would take time. And that's proven to be the case. No surprises there. But I do firmly believe that we're on the cusp of delivering on that ambition, and the likes of 3 Te Kehu Way and the build-to-rent project are set to bring that story to life. The opportunities, as we've -- both Clive and I have said, at Drury, The Base and LynnMall provide for ongoing growth over the next to 20 years. And it's a portfolio that, as I said before, we control and we can manage the timing of. I'd like to thank you for your continued to support as we've been going through this evolution. We never take the trust that you've placed in us or in me personally as the Chair for granted, and I know that my fellow directors and management feel the same way. On that note, I'd like to thank the members of the Board, past and present, and Clive and the Kiwi Property staff for supporting me during my tenure as Chair and wish everybody the best for the future. And I look forward to continuing to watch the growth of Kiwi and coming back for the opening of the build to rent at my own expense. You've got to be in excellent hands with the new and refreshed Board. We put a lot of work into diversification not just of gender, but of thought process and experience. And under Simon's guidance, like I said before, assuming he gets reelected, which I think he might, then you're going to be just in great hands. Quickly before moving to the formal business for the day. We are very happy to take questions. Make them easy, my last meeting. And we ask that you limit your questions to the company's activities because you'll be able to ask questions around the resolutions a little later. This is a shareholders' meeting, so only shareholders and appointed proxies can ask a question. We'll start with questions from the floor. If you can please present -- sorry, wait until a microphone is provided to you. There's a couple of microphones circulating, and then clearly state your name before asking the question. I'll take the questions, and then I will pass those on to whoever is most appropriate to answer them.

So do we have any questions from the floor?

Thank you, Mark, for that detailed update and for your time as the Chair of the -- 12 years as the Chair of Kiwi Property, and we really appreciate it. I've got 2 questions. One of -- relating to the Kiwi's activity in Drury. Recently, counsel has proposed future development strategy, which will rezone large parts of Drury back to Raranga, which will hold significant developments in the area. And I guess my question is what would -- how would that impact, I guess, Kiwi's investments there? And will Kiwi Property be making a submission on that?

Okay. Well, I might go that one to Clive.

Can you hear me okay? Excellent. We're fortunate our land has already gone through the zoning process. So any of those changes that are being proposed by Auckland Council won't affect our land or any of the surrounding land immediately around our site. In terms of making submission, that's something that we're looking closely at, at the moment in terms of those planned changes. Thanks.

And my second question is on the slide to fund the Drury project, you mentioned land sales and also partnerships. Is that sufficient to cover, I guess, funding for that? Or will you be looking at other alternatives maybe even possibly another share issue? Or yes, just...

I mean Drury is a long-term project. It will be staged according to how we can fund it and demand and a whole lot of other aspects. And we will be open to all forms of -- we always look at alternatives. We don't -- we can't set a plan in this industry for how you're going to go about things because things constantly change and the opportunities for funding change. But I think it's fair to say that we will need external capital. It's a large long-term project, and it would a put strain on the balance sheet if we felt we could pull ourselves. So some of those potential superlot sales and bringing in partners, either for individual parts or across the project, will be our main source of target.

We have a question down here, Seth. They're fighting over who's going to get the microphone.

Thank you. It's [ Colin Upche ], shareholder. Firstly, I'm very comfortable with the strategy the Board has taken and is taking, so you have my support with that. And we can only hold on for the ride because I think it's going to be worthwhile doing. But we can't control the share price, as you rightly said. I just have 2 questions to help me understand basically the accounts. One relates to direct property expenses. There's obviously something happened there. We saved $23 million compared with the year prior. There's obviously something there that I just need to understand what's driving that. So maybe we'll do on that one first, and I'll just move on.

Okay. Yes, probably, Steve. Let the experts answer.

Can you hear me again? That's largely to do with an accounting adjustment. So we gave tenants rebates during COVID on rent. And then there was a change in the accounting rules. And so the numbers presented to do with a reclassification of numbers.

So we haven't saved $23 million.

No. It's -- there's a cost. So expense in the prior year and recognized in the prior year. So that's what it looks like there's been a saving. The previous accounting treatment required us to amortize that over a long period of time, they changed the accounting rules. And so we experienced in prior year and that's pushed the cost up in the comparative period.

Okay. Trigger the light. I'll move on. Just if I could just get an understanding of the policies going forward with regards to the borrowing ratio on the gearing, and I see it's the highest it's been for 5 or so years. And clearly, there's some pressure on that, and I understand that. What's the policy regarding our targets for that? And how are we going to achieve the aims there? Because I wouldn't like to see it carry on, on an increasing trajectory.

No. I mean, look, interestingly, the gearing has gone up largely due to asset devaluations, the 10% that Clive talked about. We do like to maintain our gearing within that 25% to 35%, maybe a little bit higher in times band. And there are a number of ways we're doing that. And asset sales have been -- to date have been a significant contributor to that, reducing our debt by about $300 million. It's something that we're obviously very conscious of, and it is clearly always 1 of the top 2 or 3 things that we talk about in every meeting and continue to evolve strategies around that. And again, things are moving fees at the moment, but it is clearly on our radar to manage within the band. We have always managed it. We have a question at the back here.

Robert Weeden, shareholder. A question about finance. With the hedging, what sort of instruments do you use? What are you hedging against?

Okay. Steve?

We obviously have backed debt and in bonds. The bonds have a fixed -- typically have a fixed interest rate for the entire period. And then on top of that, we use the no interest rate swaps, which hedged for a period of time, and that's offset against any floating debt. So it's a very falsie. We have a treasury hedging bands, which we manage our hedging levels to ensure that we sufficiently manage that risk.

And are the borrowings denominated in New Zealand dollars purely?

All in New Zealand dollars, yes.

There was a question at the back here, I think.

Mr. Chairman, my name [ Richard F. ], I'm a shareholder. Two questions. There was a very nicely headline in the NBR yesterday that said S&P downgrades Kiwi. I'd like your comments on that. And also, I understand that the deal to sell the Aurora center is considerably below the current value in the balance sheet. Does this have any other effect on the other assets?

Certainly. First of all, on the S&P, S&P have not downgraded. They've put our rating on watch, which is not suspected, unexpected rather. We sort of -- we've been talking to S&P. We knew this was going to come. We believe it's a temporary issue. They -- based on the numbers that they've done, they believe and they're right that for the next year or two, we will be under the -- one of the particular measurements that they use to determine the rating. They don't automatically change the rating because of that. They put us on watch. But both on their calculations and ours, by 2025, we'll be off watch and maintain our current rating. So that is the expectation. So the headline was a little bit misleading. And the second question around that sale. That asset is a noncore asset. We're meeting the market and then in terms of that sales price. As you know, valuations are under a little stress at the moment, and we've already seen that with the write-downs at year-end. We -- I'd love to say that we've got a nice, little crystal ball up here, and we can predict where that's going. But we don't. And as I said earlier, we do live in or work in an environment of cyclical nature, our asset class, and we will see ups and downs. Those profits, and most of them booked, are unrealized. And yes, we're realizing this because of a whole range of reasons. But primarily, it's a noncore asset, and we're looking to maintain or reduce the gearing rate and manage our balance sheet. So we took that with our eyes wide open, and there are others in the market doing the same thing. Question down here. Does that -- sorry, does that answer your question?

15%?

Sorry, 13.5%.

Good morning, Mr. Chairman, and everybody. My name is [ Peter Musburger ], a shareholder. Can you give us an idea of what the rental weekly would be for the build to rents coming up?

Yes. Again, I'll hand to Clive.

Thank you, Peter. Obviously, we've got a year out before we actually bring those apartments to market. So we're not in a position yet to actually set a rent, but what we'll be targeting is the surrounding market rent. And so we're looking very closely at what the market rents are looking like, and they're projecting them forward. They are moving quite strongly at the moment, which is something we called out earlier in my speech as well. But as we get closer in probably a month or so out, we'll be looking at what we said those rents are. But effectively, we want to meet the market and also see if we can get the true value of the quality of the product that we put into market as well.

And I might just add, too. Globally, the experience is that a good build-to-rent product receives a premium for the local market because of the facilities that are offered. So there are bidding rooms. There are barbecue facilities, dog walking facilities, a whole range of community-based activities and facilities that people are prepared to pay for. So that will be part of our aim, is to achieve.

Paul Forte, a shareholder. What additional expenses were incurred by moving from a half yearly distribution to a quarterly distribution?

Steve?

Yes, very material. I think it's slightly more interest costs, but largely immaterial.

A subsequent question. What consideration has been given to a share consolidation?

At this stage, I mean we look at all alternatives, but it's not in our immediate plans. Anything is possible long term. I think there's a gentleman at the back first, and then we'll come to you.

Simon Angel, shareholder, also analyst at Wealth Morning. Just a follow-up question on plans for build to rent. Do you have a target yield there? And what proportion of the portfolio do you expect build to rent to become? And how would that affect your overall yield?

Well, I'll answer the first. Yes. So we made an announcement to the market or it was probably over a year ago in terms of what the yields were for our build-to-rent project. At that stage, it was a 4.5% initial yield, but an IRR of over 8%. Obviously, the market's moved both in terms of rent spot in terms of interest rates. So we continue to track that. But we're ahead of those metrics.

And in terms of the percentage of -- we'll -- this first build to rent, we'll need to bed down. It will take 12 months to bed down after completion. We have no set target, but we'll look at market. As I said earlier, we -- for all our investments, we look at what's happening in the market, the demand, the returns, et cetera. So we do think it's an asset class that will take off in New Zealand, as it has around the world. In Australia, at the moment, it's gone from nothing to think about from 15,000, yes, around 15,000 units under development or in planning at this stage. Obviously, Auckland is a smaller market. New Zealand is a small market. But it's something that we think will -- particularly in a climate where there's significant undersupply of housing, we think it's one of the solutions. And as time goes by, we hope that government recognize that and support that as well. I think we can go to the gentleman here.

Yes. My name is Scott Patterson, proxy for George Patterson. If you look at your share price over the last 5 years, it's been a low of $0.75 and a higher $1.69, and today at 77.5%. You talk repeatedly is with Clive, too, about headwinds, headwinds, headwinds. Pre-COVID, the share price was nothing fantastic either.

No.

So you keep talking about these headwinds. Just strategy, you're talking about the strategy going forward. How is this going to look at the share price?

Well, I think there's a couple of things to say. Firstly, and this is not an excuse, it's simply a fact. But post the Christchurch and Wellington earthquakes, we're in a situation where we spent NZD 250 million to bring buildings that were built to code either by us or by the people that we bought at the time. But codes change, and we had to satisfy our tenants and to satisfy a moral obligation to society. We had to spend money upgrading those buildings. That NZD 250 million gave 0 return. It was there to strengthen, not to create additional value. If you applied an average return of 6% to that NZD 250 million, the numbers would be significantly different. And I expect our share price would have been significant. Well, -- we also -- as I said, I'm not trying to make excuses but just telling you how it is. We also were in largely thought to be a holder and manager of retail assets. Retail assets were on the nose. It's starting to turn around and to change. And at the moment, that on the nose stuff move from retail to office due to COVID and work from home and those other things. It's been a tough market, but we continue to deliver operationally. And these other things largely have been outside of control, and we do believe that what we're creating. But the other thing I'll say is in tough times like we have now, there is always -- and it's through every cycle, there was always a flight to quality. And we believe that we have the best quality portfolios in the country, and what we're doing will diversify income source and add to that quality and that we will become more resistant to changes going by. I can put my hand on my heart and say I would love not to be in this position with the share price, but I can also put the hand and my heart to say we're doing what we can to fix it, but it's been out of mine. Sorry, it's not an answer but -- okay. Any other questions from the floor?

Jim Taylor, shareholder. Just building on that. We heard much the same story last year about the share price. The AFFO, which has improved considerably, there's no problem with the -- what you've done with the operations. But as an investment, it hasn't really performed. The payout this year was, what, 80% of the AFFO. I thought we had a policy of 90%. But the reinvestment of those withheld dividends are not being reflected in shareholder value at this stage, and it hasn't been 3 years or 2. When will those reinvestments materialize? And if not, why not pay out more of the AFFO as a dividend? I'm sure that will improve the share price.

As long as it's sustainable, and we're in an environment where our goal is to maintain and then increase the dividend payout. But we need to do that in a sustained and controlled manner. In terms of when you'll see the realization from that, I come back to the fact that we're in a transition from being a retail entity to being a mixed-use entity of extremely high-quality and world-class assets. So we do expect that to change, but they're not going to change overnight.

But my point is the dividends that are being withheld, if you like, or the AFFO is being withheld and reinvested in the business is not materializing in shareholder value.

No. But -- well, it is materializing in our increased operating results. and it will come through as these assets come online. That is our expectation.

Some of us are getting older.

All of us are getting older. We'll try and fix it for your kids. Sorry, that wasn't meant to be flippant. I think I saw another down here.

Thank you. Managing residential rentals is a significantly different sort of scenario than what you're involved in now. And the value of those rentals is very much dependent, I think, on the management of them as tenants can move quite quickly satisfactory. How do you plan to manage that process?

Your point is absolutely 100% value and it's -- valid, rather. And it's something that we are working very hard on. We're putting in place computer systems that will assist in management. We're bringing on people with experience in managing residential from overseas. We're going to get that. We're going to nail that. Famous last words. I won't be here if it doesn't. But no, I mean we are well aware, and that is a massive contributor to the success or otherwise of the build-to-rent project which, in most places in the world is called multifamily homes. So we've adopted a more local AustralIasian name for it. But yes, we're all over that. We're very aware of.

And if you target for those rentals, is it sort of single office work or type people or are family rentals?

There's a range of products. So ranging from small bed sits to 3-bedroom units. And so we expect a cross section, including families. We will be providing facilities for families as well as young singles. So we -- what we want to see created there is a community that represents the population. Any other questions from the floor? Or can we move to -- okay. No hands shooting up. So Trevor, do we have online questions?

Yes, Mark, we've got 4 questions online. The first question is from Barry, who is the New Zealand Shareholders' Association, proxy holder. The question reads, the New Zealand Shareholders' Association supports directors owning shares and the companies on whose boards they sit. It says that as better aligning directors' interests with those of shareholders. We know director shareholder exists the NZSA believes that the question should be asked as to why not. Jane Freeman has been a director of Kiwi Property since 2014. But according to the 2023 annual report, she owns no shares in Kiwi Property. Could you please explain why she has chosen not to own any shares?

Who do you think I'm going to hand that one to?

I think I said -- can you hear me? A couple of years ago that, I mean, my personal -- always how I've operated at independent directors should be independent. But it's not something that I'm an activist about, and I think that what we should do as a Board is think about whether we have a policy on us or not moving forward. If there is a policy because I think the shareholders association view, but I always like to have a diverse view. And I always have had a diverse view. I don't always go with a view that everybody else has got. And I just think that my love for Kiwi Property and the people, the vision that we have doesn't change, to be honest, whether I own any shares or not. And in fact, as I said, I've always been the person that likes to be completely independent. But I think we should consider whether we have a stance on this, which we've never done.

And a lot of corporates do have a policy, something we'll take in mind. The microphones has disappeared. Do you want to chat?

[indiscernible]

No, that's not correct. Dave renewed their lease.

Yes. Sorry, any other questions online?

Yes. The next question is from Richard. The question is, after the Sylvia Park residential project is fully leased, how much on a per share basis will free cash flow increase?

Sure. That's a very detailed question. We've got to be -- as I'm sure you all appreciate, we've got to be very careful to provide when providing forecast information to the market. What I can say is that our rental growth typically tracks at a 2% premium to CPI over a very, very long period of time. So obviously, the investment into residential back is a play on a significant future rental growth opportunity, which we believe after the 18-month lease-up will be accretive to earnings.

Thank you. Any further questions?

The next question is from Barry. With Kiwi Property shares trading at well below NTA of $1.23 per share and gearing of around 33%, has the Board given any thought to a share buyback program?

Yes. Look, we look at opportunities all the time. That is one of the things that the Board will consider on an ongoing basis, but no decision taken at this point.

The next question is from Richard. The question is, as the landlord, do you benefit from increased retail sales at your centers, such as Sylvia Park? That is do you get a percentage of sales? Or do you simply collect rent? If you do not get an incentive, does this mean that there is not a real effect for you if sales go up or down other than the long-term health of each retailer?

Yes, I can pick that one up, Trevor. So the rent that we receive from our retailers is over a number of different ways. So we get is what is called a base rent, which is set on the start of the lease and then it increases on an annual basis. And then we also have an overriding percentage rent provision and the majority of our retail leases as well, yes.

So the answer is yes, we benefit.

Thanks, Mark. There are no other questions online.

Okay. So if we're done with questions, we'll move on to the formal resolutions. So voting on each resolution will be by poll. Each person voting at the annual general meeting and each shareholder who has cast a vote by proxy has one vote for each share held. I'll put each resolution to the meeting and provide an opportunity for you to ask questions. concerning that resolution. I ask that you keep the questions strictly to the resolution. In respect of proxies received, if as the Chair of the meeting, I've been appointed to act as a proxy without direction, then I will vote in respect -- sorry, I will vote for the resolution. For shareholders joining us here today, you should have been given a voting card on the way in when you registered. If you don't have one, please drop your hand, and we'll organize one for you. Please mark your voting intention for each resolution, and the voting cards will be collected at the conclusion of the meeting. Shareholders online will be able to cast their votes using the electronic voting card received once online registration is validated. To vote, you will need to click the Get Voting Card, sounds pretty logical, within the online meeting platform. You'll then be asked to enter your shareholder or proxy number to validate that. Please then mark your voting card as you wish to vote for, against or abstain. Once you've made your selection, please click the Submit Vote button at the bottom of the card to lodge your vote. And please refer to the virtual meeting online guide or use the helpline previously outlined if you require any specific assistance. Note that voting will remain open until 5 minutes after the conclusion of the meeting. The results of the vote will be declared and announced later today via the NZX. So I move to Resolutions 1, 2 and 3, which are all ordinary resolutions, I can't say it, requiring a 50% vote in favor to be passed. In accordance with the company's constitution and the NZX listing rules, Simon Shakesheff, Carlie Eve and Peter Alexander will retire at this meeting. Simon offers himself for reelection, and Carlie and Peter offer themselves for election. The Board has determined that each of these directors will be an independent director for the purposes of the NZX listing rules. I'll now ask Simon to provide a brief comment supporting his reelection.

Thank you, Mark. And good morning, everyone. My name is Simon Shakesheff. I joined the Kiwi Board a little over 3 years ago. Since then, I've been a member of the Audit and Risk and the ESG subcommittees. I have 35 years of experience analyzing, advising and working for listed real estate companies, and I'm passionate about bringing that experience and a shareholder lens to my role at Kiwi Property. If reelected today, I will have the honor of becoming Kiwi's next Chair, and I would greatly appreciate your support. Thank you. I'll hand over to short video on Carlie.

My name is Carlie Eve. I'm very sorry, I can't be here with you today due to a prior commitment that I had before I became a Director of Kiwi Property Group. I have nearly 30 years' experience in the financial markets with roles at Mint Asset Management and Goldman Sachs, J.B. Wear, across research, investment banking, corporate strategy and funds management. The majority of my career has had some sort of a link with Kiwi Property Group as an analyst and institutional investor and also as part of the executive team. I'm now a professional director based in Auckland. I'm a Director of the Fonterra Shareholders Fund and also Chair of the Dassenchool Heritage Foundation. I also have a prior directorship at Hobsonville Land Company. I have a deep understanding of the property sector and what investors across the spectrum are looking for from their investments value-creation perspective. I am strategic and analytical with strong financial skills. I believe my skill set will be a great addition to the Kiwi Property Group Board, and I really look forward to your support. Thank you. I'll now hand over to Peter.

Good morning, everybody. My name is Peter Alexander. I'm a property investment and development adviser in private practice in Auckland. I have over 35 years' experience in property investment, property development and investment management. I'm the former CEO of Stride Property Group and have worked in senior executive roles at companies such as property for Industry, Goodman Group, AMP Capital and Auckland Airport. I have a deep property investment and development experience, including portfolio strategy and place-based development. I'm currently a trustee of the deal worth Trust board and a Director of Smith & Cove. I was previously the Chair of community housing provider homes of choice and a director. I lead a better of property from the University of Auckland, and I'm a fellow of the Royal Institution of Charlotte. I believe I can contribute my skills and experience to assist Kiwi Property Group executed strategy effectively and deliver growth and shareholder returns. Thank you.

As I mentioned before, our Board is committed to ensuring that we possess the appropriate mix of skills, knowledge, experience and diversity to discharge our roles and responsibilities. The Board fully supports the reelection of Simon and the election of Carlie and Peter as it considers that they have the expertise to contribute to the overall skill set required by the Board. Board, other than Simon, Carlie and Peter, each in respect to their own positions, recommends that you vote in favor of the resolutions. I will now read Resolution 1, that Simon Shakesheff be reelected as a Director of the company. Do we have any questions? Any questions online? So if there are no further questions on that, I've already said that we need a simple majority. So please mark your cards and get us on second resolution, and that is that Carlie Eve be elected as the director of the company. Do we have any questions on that question -- that resolution, rather? Any online, Trevor. No further questions? Again, this resolution requires a 50% vote. So please mark your cards appropriately. Moving to Resolution 3 and our last resolution, that Peter Alexander be elected as a director of the company. Do we have any questions? Any questions from online? Okay. Again, this resolution requires a simple majority of votes. And please mark your cards as appropriate. That completes the voting on the resolutions. At this time, we will put up -- I'm not going to read them out, but we'll put up on the screen the proxy votes that have been lodged in respect of each of the resolutions. And as you will see from the screen is that each resolution will be passed to a significant majority. Our registrar, Link Market Services, will now move through the room to collect your voting cards. For those shareholders online, please submit your vote. And as I said, you have 5 minutes after the close of the meeting to do so, but sooner the better. Link will then complete the counting of all votes and complete their duties as a scrutineer for the purposes of the poll. We'll then announce the voting results to the NZX once this process has been completed later this afternoon. I'd like to now hand back to Simon, who will be, as we've said a number of times, succeeding me as Chair following today's meeting. And I'd just like to say personally that Simon has all the experience, knowledge, intellect, et cetera. that you could wish for. I've known Simon personally for over 30 years on and off, and I think you're going to be in a really great hands. So Simon, over to you.

Thanks. Thank you, Mark. And just a couple of brief comments from me bearing in mind we're all waiting for our tea. Firstly, I would just like to thank Mark. He's ably led Kiwi as a Chair for over a decade, I think 12 years now. He's been an excellent director, a huge advocate for shareholder interest and committed to the highest governance standards. On a personal level, Mark has been very supportive and a mentor, not just to myself and other Board members, but really across the entire business. So I hope everyone wouldn't mind joining me in a brief round of applause for Mark and his contribution.

Thank you. Thank you.

And I can assure you Mark's presence will be missed. Kiwi Property is an impressive business with a robust strategy and some of the country's leading real estate assets. I have an ambitious vision for the company, focusing on driving improved returns for shareholders and positively impacting the communities where we operate. I do want to bring a mix of continuity and commitment to this role. We're at a pivotal moment in our transformation from a retail and office landlord into a creator of connected mixed-use communities. We must push on to realize the benefits of this evolution while keeping sight of the need forefront to deliver for our investors as we do so. As you've heard today, we've delivered a good operational performance in the current year. In the current market, effectively managing our capital, gearing and funding pipeline is just as important, if not more so, if we're to be successful over the longer term. We are good at owning, developing and intensifying mixed-use assets. My priority is to ensure we translate these proven capabilities into better returns for our shareholders. Thank you. Back to you.

I have a little bit of a jack in the box here up and down. I'm about to draw this meeting to a close. I'm not sure whether I'm going to disappear in a puff of smoke or what happens, but I will be gone. And as I said, you're going to be in great hands. So thanks, everybody, for your attendance and participation today, both in the room here and online. A copy of all the presentations and the speech notes will be available on our website and being lodged with the NZX. So thank you, and I close the meeting. Bye to everybody online. For those in the room, we'll now be serving morning tea. Board and management will be available if anything you'd like to follow up on or anything different that you'd like to talk to them about. So we'll have some tea and coffee, and we've specifically asked for extra sausage rolls that went too early last year. So please enjoy, and thank you for your support.