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

Good day, and thank you for standing by. Welcome to Kiwi Property's FY '23 Interim Results Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, CEO, Clive Mackenzie; and CFO, Steve Penney. Please go ahead.

Kia ora and good morning, everyone, and thank you for joining us for Kiwi Property's interim results announcement for the 6 months ended 30 September, 2023. I'm Clive Mackenzie, the CEO of Kiwi Property. And today, I'm joined by Steve Penney, our CFO; and Camp Hodgetts, our Head of IR. I assume you all have a copy of our presentation in front of you. If not, you can access one from the results section of our website at kiwiproperty.co.nz. A quick reminder that as usual, we have included detailed financial and property slides and the appendix to the interim results presentation. I'll take the disclaimers read, so please turn to Slide 5. Kiwi Property has a comprehensive strategy designed to deliver superior returns for investors over time through the company's ownership, development and management of our portfolio of high-quality real estate. At the core of the strategy is a focus on creating and curating retail-led mixed-use properties at key transport nodes. We believe these assets such as Sylvia Park, LynnMall and The Base are primed for growth and by prioritizing them, we will create the greatest value for shareholders in the years ahead. Our team is committed to maximizing the performance of our centers and through a combination of active leasing and asset management will drive rental income and unlock ancillary sources of revenue. We're not just thinking about our current portfolio however, but also what our portfolio should look like in the future. To this end, over recent periods, we've been selling a number of noncore assets and recycling the proceeds into newer development that we expect to deliver superior returns in the years ahead. This is a very deliberate strategy that goes beyond the short-term benefit of strengthening our balance sheet. By disposing of assets such as Northlands and 44 The Terrace and reinvesting the proceeds, we will help create a greener, higher quality, more resilient and lower-risk asset portfolio with a greater long-term prospects. Turning now to Slide 6. Kiwi Property's 4 mixed-use assets create a significant competitive advantage for the company due to their strategic locations, large land holdings and favorable zonings. We're proud to own at the heart of 3 of Auckland's 11 Metropolitan town centers, namely Sylvia Park, LynnMall, and Drury, earmarking them for significant future intensification and enabling construction up to 72 meters high. Not only does this enable significant growth to take place in and around centers, it also creates an extensive range of retail, office and residential development possibilities. The other key feature of our mixed-use assets is that they're located at key transport nodes. The benefit of this is two-fold. Firstly, the proximity to public transport helps attract people to our centers by making them easier to reach. The commute time from LynnMall to the CBD, for example, will be just over 20 minutes once a new city rail link opened. Secondly, and just as importantly, is the valuation benefit we're expecting to materialize in the future. In Australia, the landholdings surrounding transport modes has experienced a significant value uplift as large numbers of people have moved into these areas to take advantage of the accessibility they provide. While it's still early days, we anticipate a similar trend will emerge in Auckland, with densification resulting in more people living in and around our centers, leading to increased customer counts, greater sales, improved rents and higher valuations. Turning now to Slide 7. While we have an eye on the future and the significant development potential of our mixed-use centers, we're squarely focused on maximizing the operational performance of our assets today to help drive rental income. It's no secret that New Zealand has faced a challenging economic environment over recent months, fueled by persistently high inflation, elevated interest rates and lagging consumer confidence. Despite these headwinds, our assets continue to perform well in the first half of the financial year, defying concerns about the impact of rising living costs on customer spending. As you can see on this slide, total sales across our portfolio were up an impressive $280 million in the 12 months to 30 September, reaching $2.1 billion. Mixed-use sales were the standout, climbing 16.5%, fueled by the 5.1 million additional customer visits to Sylvia Park, LynnMall and The Base during the period. While this increased visitation is partly due to a post-COVID normalization, it also reflects the flight to quality in the sector and the resilience of our leading centers. The strong sales performance helped us negotiate robust rental growth in the 6 months to 30 September, including a 4.5% uplift for new leases and rent reviews across our mixed-use portfolio. In total, we completed almost 350 leasing deals in the first half, with new office leases that standout, rising well ahead of inflation of 13.9%. Our relationship with tenants remain strong. The Net Promoter Score we used to measure tenant satisfaction has risen 11 basis points since March 2023, demonstrating the adequacy of our customers. Turning now to Slide 8. We're proud to own and manage several of the country's leading shopping destinations. One of the many benefits of holding this excellent portfolio is our ability to work with retailers to expand their store footprint across multiple sites. A great example is JD Sports, which opened its first New Zealand store at Sylvia Park and due to its impressive success has since launched subsequent shops at LynnMall and The Base. Few other landlords in the country can enable retailers to scale in this fashion, giving Kiwi Property an important and lucrative opportunity to attract brands seeking a presence at multiple leading locations. The Base continues to go from strength to strength, not only did the center record more than $500 million in sales in the 12 months through September, but it's also building an increasingly impressive retail mix. JB Hi-Fi has recently relocated from the CBD to The Base. Footlocker has moved into our new flagship store, and we're looking forward to the Waikato's first Mecca opening soon. These are just a few examples that indicate the assets' continued evolution. In parallel, we're working hard to grow additional income sources across our centers through our Activate teams, which specializes in pop-up stores, kiosks and in-center advertising. We've helped a diverse range of brands, including Red Bull, Samsung, Pepsi and Lancome, develop and execute creative brand activations that effectively engage shoppers across our portfolio. Working with out-of-home advertising specialist, oOh! media, we recently converted 36 advertising screens from analog to digital format, helping to unlock digital advertising opportunities. We've also launched New Zealand's largest 3D capable retail digital advertising screen at Sylvia Park, attracting significant demand from brands wanting exposure to the millions of shoppers visiting the center each year. Over the past year, Activate revenue has increased over 22%, and we're seeing significant potential for further growth. Turning to Slide 9. We've made pleasing progress on our sustainability strategy over recent months, achieving some important milestones in the process. Firstly, our Sylvia Park BTR development was awarded an 8 Homestar Design rating, reflecting its strong sustainability credentials and our focus on ensuring energy efficiency at the complex, which will serve us and our retailers well for years to come. Secondly, as part of our focus on increasing the well-being of our people in and around our community, we recently ran a campaign designed to bring people together to connect over a cup of coffee. Over 8,000 people participated in this initiative raising funds for the Mental Health Foundation and driving sales for our food and beverage retailers. And thirdly, in November, Sylvia Park undertook our NABERS pilot energy rating. As NABERS ratings are currently available for shopping centers -- aren't currently available for shopping centers in this country, we've been working with partners in Australia to bring this to fruition and are proud to be a leading -- sorry, and are proud to be leading the charge for retail landlords in New Zealand. I'd now like to hand over to Steve to discuss our interim financial results beginning on Slide 10.

Thanks, Clive, and good morning, everyone. As you've heard over recent months, we've continued to rebalance our portfolio towards assets that we expect will be more resilient and higher performing over time. The sale of Northlands, Westgate Lifestyle and 44 The Terrace resulted in a decrease in Kiwi Property's earnings in the first half of the financial year with net rental income down by 16.2% to $89.1 million. Operating profit before tax was similarly affected declining 26.7% to $52.4 million, while adjusted funds from operations contracted 25.4% to $48.6 million. Rising interest and capitalization rates resulted in an $81.1 million reduction in the fair value of our investment property portfolio in the 6 months to 30 September, leading the business to post a net loss after-tax of $36.5 million. When viewed on a like-for-like basis to account for the impact of the asset sales and COVID-19 adjustments, a more balanced picture emerges that better reflects the business' operational performance in the first half. Using this approach, net rental income was up 2.5%, while AFFO decreased marginally by 0.2% and operating profit before tax declined 1% due to rising interest costs. While our capital recycling program has caused a temporary decline in income, we are confident that by selling our noncore assets and reinvesting the proceeds into new opportunities, such as build-to-rent, we will deliver a higher quality asset base and improve long-term returns for our shareholders. Turning now to Slide 11. As Clive has already mentioned, tenants at our mixed-use and retail assets delivered strong sales growth in the year to 30 September. Total sales reached $2.13 billion, up 15% on a moving annual turnover basis. Sylvia Park precinct sales were up 18% to $915 million, while sales at The Base grew almost 16% to $523 million. Our centers' sales performance is particularly pleasing given the increased pressure on consumer spending over the past year or so and is a testament to the resilience of our assets. While we expect the cost of living pressures to continue by ensuring an outstanding retail experience, delivering the best brand and enhancing our offering, we will help maintain our share of customers' wallet. Turning now to Slide 12. Kiwi Property achieved rental growth of 3.7% compared to the same time last year with new leases up 2.1% and rent reviews 4.1%. We saw a strong uplift in leasing spreads for new lease deals across the mixed-use portfolio at 4.1%, led by Sylvia Park up 8.1%. Occupancy declined slightly from 99.2% at the end of FY '23 to 98.8% at the end of September, following the sale of 44 The Terrace, which was fully occupied and the continued lease-up of 3 Te Kehu Way. Around 80% of the net lettable area in that building is now tenanted with the rest currently subject to negotiation. A concerted effort is underway to conclude the remaining deals and we look forward to having all leasing at 3 Te Kehu Way completed as soon as possible. Turning now to Slide 13. We've undertaken several capital management activities over recent months, including reducing our bank debt facilities from $1 billion to $950 million. Our weighted average cost of debt increased from 5.18% to 5.52% in the first half of the financial year, reflecting the rising interest rate environment while our weighted average term to debt maturity was 3.6 years at the end of the period. Our asset sales program continued over recent months delivering $127 million in capital from the sale of Westgate Lifestyle and the Sylvia Park land to IKEA. The previously mentioned reduction in the fair value of our property portfolio saw our gearing increase marginally from 35% as at 31 March, 2023 to 35.3% as at 30 September, 2023. Net asset backing per share was similarly affected, decreasing to $1.17 per share. In October, we amended our bond gearing covenant from 45% to 50% in a move supported by 99.8% of voting bondholders. The amendment aligns Kiwi Property with other listed property vehicles in the sector, while also ensuring consistency across our bond and banking covenants. Earlier this month, we also conducted a debt refinance and added ICBC as a new banking partner, creating additional optionality for our business. As a result of these activities, our weighted average term of all debt facilities extended to 4.1 years on a pro forma basis. We've also taken several steps to drive operational efficiency across our organization, including reducing the number of people in the business by 7.5% since the start of the financial year. We'll continue to look for opportunities for further workforce optimization following the rollout of our new Yardi IT system from December this year. The proactive management of our gearing position is a central focus for the organization through the current high interest rate period. Recent asset sales, coupled with the 78% hedging of our debt book and the recent covenant amendment put us in a good position to navigate the current volatile climate. Turning now to Slide 14. Kiwi Property will pay a quarterly cash dividend of 1.425 cents per share for the second quarter of financial year '24, taking the half year cash dividend to 2.85 cents per share. The dividend reinvestment plan will not operate for this dividend and will be reassessed on a quarterly basis. We're committed to maintaining and then growing the dividend payout over time and the fact that we've been able to do this in a period of economic volatility, while also selling assets speaks to our intent. In addition, our full year cash dividend guidance of 5.7 cents per share remains unchanged for FY '24 and we expect this to be within our target payout range of 90% to 100% of AFFO. As always, dividend guidance and payments are contingent on the performance of the company and barring material adverse events or unforeseen circumstances. Now back to Clive on Slide 16.

Thanks, Steve. I'd like to spend a few minutes discussing 2 of our most significant opportunities, namely Drury and build-to-rent. We've been talking about these projects for some time, but with build-to-rent scheduled to open from the middle of next year, we thought now was an appropriate opportunity to provide more detail about the context for the development and the expected returns. Starting with build-to-rent. As you can see from this slide, the asset class has experienced pronounced growth offshore over recent years and is expected to grow even more quickly. In the U.K., for example, the number of BTR dwellings that are either completed, under construction or in planning increased by over 500% between 2016 and 2022. In Australia, the expansion of the BTR sector is forecast to be equally impressive with a cumulative number of build-to-rent units expected to grow from just over 4,000 last year to more than 23,000 within the next 5 years. The sharp increase in build-to-rent in these markets highlights the demand for the product, which we believe will also be replicated in New Zealand. Just as importantly though, it also points to the amount of capital active in the sector. Based on the conversations we've had with a range of parties over a recent period, we expect this capital to flow into New Zealand's build-to-rent market, helping to accelerate this growth and unlock opportunities for early adapters such as Kiwi Property. Turning to Slide 17. The growth in demand for build-to-rent has been rapid offshore and we believe the conditions are right for it to follow a similar trajectory in New Zealand with a range of macroeconomic and social factors aligning to help stimulate demand. Firstly, as you'll be aware, New Zealand has seen a spike in net migration that began in earnest late last year. According to Stats New Zealand, net migration was over 110,000 people in the year to August 2023. At the same time, the number of people entering the country and looking for homes is booming, while the rate of residential construction has declined significantly, dropping over 14% from August last year. This supply and demand imbalance is contributing to a decrease in housing affordability with Aucklanders taking around 11 years to safer deposit and those who own their own homes, spending more than 55% of their income to fund their mortgage repayments. There is little wonder the number of renters is so high with more than 50% of Aucklanders over 15 already living in rental accommodation and forecast to climb to 60% by 2043. As the need for rental accommodation grows, we see significant potential for build-to-rent to play a role in addressing the shortfall. Importantly, though, while there will be some people who rent due to challenges with housing affordability, build-to-rent isn't above low-cost accommodation. We believe that for many people, build-to-rent will be the first choice, providing flexibility, stability and amenity while enabling them to free up capital or save for a house deposit. It's these tenants that we expect to provide the foundation of our tenant population. On now to Slide 18. The significant imbalance between demand and supply in Auckland's rental market has the potential to drive strong long-term rental growth. Residential rents have increased more than any other commercial property sector over the past 20 years with a CAGR of over -- sorry, of 4%. As we can see in this graph on the bottom right, the growth was even more pronounced in Auckland's apartment market in 2023, where rents rose 21.4% ahead of Brisbane and only marginally behind Melbourne and Sydney. Given the current low level of vacant apartments, competition for quality accommodation is intensifying, enabling landlords to increase prices and be more selective of our tenants. In this environment, rents look set to continue rising, creating significant opportunities for build-to-rent. Turning now to Slide 19. Construction of our first build-to-rent development called Resido continues at pace. The 3 towers were topped out in August and internal fit-outs are now underway with the project on track to open in May 2024. The total cost of the project is expected to be $245 million, up around 10% from launch due to cost inflation. We forecast Resido will generate around $11.7 million in net operating income upon stabilization, including ancillary income of $1.7 million from services such as parking licenses, storage rental, furniture rental and utility recoveries. We're currently exploring the monetization of these and other opportunities and we'll provide more information in due course. As you can see here, Resido is expected to deliver a yield on cost of between 4.5% and 5%, up slightly on the figure we outlined at the launch of the project. The forecast property IRR is 7.75% to 8.25%, broadly in line with the figure previously disclosed, albeit with a slightly wider range reflecting the current volatility in the market. The opening of Resido is an important strategic milestone on that transformation journey. Not only will the asset class unlock a significant revenue stream, but will also deliver a vital component of our mixed-use strategy. We intend to be at the forefront of growth in the build-to-rent sector with Resido providing the opportunity to prove up the concept to the market, build investor confidence and stimulate interest from the range of capital partners seeking a foothold in the sector. On now to Slide 20. As we've discussed before, the Drury region is set to transform over the next 20 to 30 years, underpinned by growing Auckland population and central government's financial support towards critical infrastructure. We believe our development at Drury has the potential to become an outstanding mixed-use community and a hub for progress in the area, creating significant opportunities for the company and our investors. There are a range of factors that are expected to support our success shown here. Firstly, scale. The wider Drury area is expected to become home to 60,000 people over the next 30 years, creating a vast pool of potential residents, tenants and customers. Secondly, funding, $2.7 billion of government-funded transport enhancements are proposed for the Drury region, and works are already underway. This investment is set to supercharge progress in the area. Thirdly, connectivity. Kiwi Property site is adjacent to State Highway 1 with a new train station under construction next to our landholding, making access, fast and easy. Fourthly, zoning, Kiwi Property's landholding has been zoned as a mixed-use metropolitan center allowing construction up to 72 meters across much of the site, creating an exciting range of development options. Fifthly, sustainability. Our ambition is for Drury to be a 5 Green Star Community. We believe sustainability will become increasingly important to customers and tenants, so Drury's credentials in this space will help drive competitive advantage. And finally, master planning. As the owner of the master plan across 53 hectares site, we can control development and outcomes, including the range and parts of housing, ensuring the creation of consistently high quality and desirable community. On now to Slide 21. Our development at Drury is moving ahead well with the 2023/'24 earthworks season underway and good progress being made on creating the Stage 1 residential super-lots shown on this page in yellow and Stage 1 large format retail precinct shown in red -- sorry, shown in black. We believe the scale -- sorry, we believe the sale of the residential super-lots and large format retail sites have the potential to pay for the development of Stage 2. As such, this funding mechanism is our primary focus. Our objective is to maximize the development returns from Stage 1, enabling us to hold and develop the new Drury Town Center over time. This approach will help us create significant value throughout the life of the project and allow us to leverage our expertise in mixed-use community creation. While we cannot share specifics today, we are currently in productive discussions with several major LFR retailers and group homebuilders regarding opportunities at Drury, and will share these details in due course. Turning now to Slide 22. Drury has the potential to deliver attractive returns over the long term. Today, I want to unpack what we expect that to look like in more depth. Our site at Drury is 53.5 hectares and was purchased for $55 million. $25 million has been spent developing the land post acquisition, which has a current valuation of $135 million. Post 30 September, we expect an additional $85 million of CapEx to be incurred in Stage 1 as we prepare the residential and LFR land for sale. It's worth noting that some of this expenditure will also benefit Stage 2, such as water and power, although an additional $65 million of CapEx will be required to unlock the Town Center with the cost being spread between now and FY '27. While the CapEx involved in the project is significant, so are the returns with our forecast suggesting Drury will deliver impressive total and receipts of around $360 million. We are targeting an IRR on Stage 1 land development activities of 15% to 20% and aiming for an IRR of 8% to 12% as we create the Town Center at Stage 2, with the differential reflecting the comparative levels of risk associated with each phase of activity. Importantly, for shareholders, we expect Stage 1 land sales, which will likely take place between FY '26 and FY '29 to have an average annual AFFO impact of $0.05 and $0.06 per share. Turning now to Slide 24. As you have seen on a like-for-like basis, Kiwi Property delivered a robust operating result in the first half of the financial year and took important steps forward in the delivery of our strategy. Heading into the second half of the financial year, our 4 key priorities remain unchanged. First, we'll drive proactive capital management, mitigate interest cost increases and maintain balance sheet flexibility. Second, we will continue driving operational excellence across our high-quality asset portfolio, focusing on cost control, growing rents and driving sales. Third, we will make final preparations for the launch of Resido including pre-leasing and establishing our BTR operating platform. And fourth, we will position Kiwi Property for the future by progressing Drury Stage 1 earthworks, concluding our Yardi IT implementation and identifying opportunities that will enable Kiwi Property to drive revenue and returns by our shareholders. We're extremely conscious of the current period of economic volatility and we will adopt a highly disciplined approach to the operation of our business in the second half of the year, delivering on strategy, driving asset performance, strictly managing our balance sheet and being pragmatic in the timing of our development program. Current high interest rates and bond yields are putting pressure on share prices across the property sector. We're unfortunately unable to control those macro factors, but what we can control is the operational delivery of our business, the execution of our strategy and the progress on our development. By focusing on these things, we will put ourselves in the best position to deliver returns for shareholders, navigate the current downturn and emerge strongly when conditions normalize. Thank you for joining us today. That concludes my overview of our interim financial results. I'll now pass back to the moderator who'll open the phone lines for questions. Thank you.

Thank you very much. We will now conduct the question-and-answer session. [Operator Instructions] First question, we have Nicholas Hill from [Technical Difficulty].

Can you hear me? Okay. What's the rationale for suspending the DRP in Q3?

We basically -- we had a look at our valuations, which appear to be starting to stabilize. You'll see that in our mixed-use assets. And also looking at the economic outlook in terms of interest rates, all the commentaries around that, they appear to be now peaking. And so at this point, we decided we didn't need the additional capital from the DRP. It's a relatively small amount of money. So, we turned it off. But we will be reassessing on a quarterly basis our DRP.

And then just on the Resido project metrics, does the projected yield on cost figure include the value of land?

No, it doesn't. It's a relatively minor amount of money, the value of the land. But we've been clear that the land holdings for Sylvia Park are incorporated in the overall site. And as such, we don't show the -- or don't include the land component in any of our developments at Sylvia Park.

And then would it be possible to expand on what you mean by balance sheet flexibility and how you intend to deliver that?

As we've indicated, we've got a number of noncore assets and we've already called out Aurora as one of those. So, we'll be looking to, over time, looking to dispose of that, but also managing the capital that we spend very tightly and I've been very conscious of making sure that we keep our gearing in check as we move forward. Is anything else you wanted to add to that, Steve?

Yes, we also continue to work on joint venture opportunities at Drury as well as land sales there, as Clive mentioned earlier. So, those things give us good balance sheet flexibility.

Actually, sorry, back to Resido, that net operating income figure, what is that net op? Would that be sort of maybe an assumption around the portfolio churn and assumption of the unit being vacant for, say, 2 months on average while a new tenant is signed?

That's correct. So, we've called out there that, that net operating income reflects a sort of lease-up of 12 to 18 months in duration, a stabilized occupancy of 97.5% with an 65% annual tenant retention. And that is also obviously net of costs and we called out our targeted operating expense ratio sort of 22% to 25%. And that includes things like Auckland City rates, insurance and all the other running costs for the site, yes.

Sorry, Nick, did you say...

Yes. In terms of like leasing the site -- the units.

I don't think...

I was just sort of...

But it would have those factors, yes. We've built those, but we haven't called out specifically what that is, yes.

And then on the target operating expense ratio, what kind of maintenance CapEx assumptions does that include?

Which slide are you referring to this, sorry?

You've got -- still on the Resido one, target operating expense ratio of 22% to 25% on Slide 19.

So, there's no normal maintenance that we put through there. We haven't detailed exactly what that is. But what I can say is we've worked up in detail what our budgets are. So, we have all those covered there. So, we've done a lot of analysis, done a lot of comparison to build-to-rent product in Australia to make sure that we are in sync with the cost of basing and the time lines for things like maintenance capital, et cetera.

And then looking at the 10-year IRRs or the capital growth assumptions, is this sort of the case of sort of like capital or like house prices staying level for the next couple of years for growing? Or is that constant growth year-on-year for the next 10-year period?

There is constant growth, but it has been moderated given the current housing market at the moment.

Could it be possible to sort of give an indication of what that year-on-year changes?

We'll have to come back to you on that one.

And then I guess a final one for me. Your total rental growth was 3.7% versus 4.8% previously. Will it be possible to provide a bit more commentary as to why is the difference? Was it just mainly due to a relatively high degree of fixed reviews?

You're talking about...

Slide 12.

Okay.

Yes, Slide 12. So, it's total rental growth of 3.7% versus 4.8% for FY '23.

Yes. I think a little bit of that will be the impact of [ CPI ] coming off. And just the lease deals that we've achieved over that time.

It's still -- we're still getting good growth, specifically in our mixed-use and office portfolios. What we've also done is we've shown our retail assets as well and what the rental growth looks like now and you can see that's somewhat softer than our normal mixed-use and office portfolio, so.

Next we have Nick Mar from Macquarie.

Just on Drury and sort of how you're thinking about the AFFO and the dividend. Could you just cover for a few things, based on the way you're treating the sort of sales and the income, will those profits be taxable?

Yes, we've assumed that they're all taxed at 28%.

Yes. And then when you're sort of looking through the kind of dividend over the next few years, are you looking at that sort of $0.05 to $0.06 as being sort of supportive of distributions from FY '26? Obviously, in FY '25, the sector has got get [ wind ] from the tax changes that are expected to come through. Would you look through that given the uplift you're going to see hopefully from FY '26?

Yes. We haven't changed the dividend policy or anything like that. We're just showing you an example of what it's worth. And as long as those properties are in inventory from an accounting perspective, then the value of the sales will sit in AFFO.

I guess what I'm asking is if for example, the current dividend level would be north of 100% for FY '25 given the tax changes, but then you've got possibly up to a sort of 10% uplift in earnings or AFFO from '26 with Drury. Do you think that's the reason for the Board and the company to look through the potential headwind in '25 in terms of what level set the dividend at?

We're not giving guidance for the next financial year. I think what we're trying to indicate is that, that AFFO impact is a direct result of being able to sell some of those landlords. So, we're saying that between FY '26 and '29, the AFFO impact will be $0.05 to $0.06 per share. We're not making a commentary around depreciation or the total earnings.

No, that's fine. And then just on [ Zara ], sort of fully leased as at 30 September, how are you going with the [ BULGARI ] space that will come up?

Yes. So, BULGARI's lease comes up at the end of next year. And we're making good progress on the re-lease of that. We have 2 level -- 2 of the 5 levels already secured and 1/3 very close to finalization. So, we're making good progress in that space.

And then just lastly, on those sort of retail spreads. I know, again, it's a diminishing part of your portfolio. But is that sort of the ongoing run rate of what -- how those retail assets are performing? Or is there anything to call out there?

No. We've had a discussion about this over the years. Very clearly, you're seeing the playout of bifurcation of retail with the stronger assets, which in this case our mixed-use assets continue to perform strongly where those more secondary retail locations are battling to get rental growth just as retailers look to consolidate their store networks. So, you can see that's starting to play out in some of those locations, yes.

Next we have Arie Dekker from Jarden.

Thanks for the additional color on BTR and Drury. Just starting with BTR. I mean, I appreciate there's not a lot of comparable product in the area, but what sort of premium to median or up quartile rents are you factoring in that 4.5% to 5%?

So, what we've done is we've looked across the whole of the Auckland market to build up a database of comparable product for us. And we've been mapping that probably for the last sort of 12 months and we will continue to map it on a month-to-month basis. And so that gives us a database of comparison. So, the rents that we are looking to charge are comparable to that database.

And that's -- so that incorporates product in Central Auckland as well? Is that what you sort of saying?

Well, it's more comparable in terms of location and type of development. So, it might be something outside of specifically -- not necessarily in the Sylvia Park catchment, but it may be in the [ New Zealand ] catchment or in all shore, et cetera. So, similar demographics and similar amenities as well. So, we look to have comparable product and set our rents according to that.

And then just in terms of the testing of the rents with the market, whether that's agents or other forms of sort of market testing? Have you done much sort of on that to help them perform that as well?

Yes. And it gives us confidence in the rents that we're forecasting, yes.

And then just you've given us an indication of year 3 stabilized. Just in terms of year 1 and 2, where obviously there will be a reasonable drag as you lease it up and obviously, you won't have the benefit of capitalized interest. When it comes to setting the dividend in year 1 and 2, will you look through any drag associated with getting to the stabilized position on BTR?

We haven't made that decision yet.

Just in terms of Drury, I mean as I understand it, you're still looking for partners in that. Is that process still active? And then just second part of the question, I guess, looking at the commitment note, I mean you've talked about $85 million of expenditure to get through to the end of Stage 1, but the commitments at the moment are relatively low as at September, I think it's $5 million or $10 million in that order of magnitude. Are you holding off committing to going full steam on that $85 million of expenditure until you've got at least a couple of commitments for either LFR or resi blocks?

That's correct. We're managing our capital. So, as we are able to transact on some of the land, we will install to reach the capital. So at the moment, all we're committing to is the earthworks that are currently underway. We haven't made any further commitments beyond this point. But what we're calling out to the market is what that capital will look like, but we just -- the timing of that will be dependent on how we unlock the value of the land, yes.

And how many seasons would it take to complete the works? Because like I said, as at September, it looked like the commitments was $5 million or $6 million. If you don't get the commitments you're looking for on resi or LFR through to sort of in the first quarter and start of second quarter next year, how long will it take you to do the enabling works to complete Stage 1?

So, the actual moving of the dirt is will be completed this earth moving season. So for Stage 1, we will -- as you can see from the photo, we're well advanced on that. In terms of putting in services, that's about another sort of 12-month period. And so we'll only commence that work once we started to transact on land. So, we can move that around. But I can say we are making -- we have had really fruitful and good discussions around some of those transactions, but it's just too early for me to update the market.

Steve, just on the tax changes that are coming up. Can you just give us an update on what your building depreciation is sort of running at the moment? And then also your expectations around the allowance of -- for BTR?

So, the impact in the next year on AFFO is about $4.5 million to $5 million at the bottom line of the change -- and at this stage, we're still waiting for a confirmation that we expect that structures will be included in build-to-rent, but that's obviously counter to what we're doing for the rest of the commercial portfolio sector. So, just waiting to further confirmation of that.

And then just final question and I might have missed it. But just on the office assets and capital partners there, is that something that is on hold at the moment, that's something that you may look to sort of re-litigate in the next 12 months?

That's correct.

Next we have Bianca Fledderus from UBS.

The first question for me is just on your commentary around being disciplined about non-essential CapEx spend. What's sort of an example of this? And does that mean that delaying that CapEx spend -- maintenance CapEx spend now we should see an uptick in the future?

Sorry, are you talking about -- I didn't quite catch the first part of the question. Are you talking about the maintenance CapEx for AFFO?

Yes, that's right. So, just that $1 million maintenance CapEx expense in the first half? And yes, sort of what you sort of could expect there in the second half?

Yes, it will be similar to the prior year. But obviously, there's a recategorization that we've made. And so that will have about a $0.10 per share impact approximately this year on AFFO.

And then secondly, just on Sylvia Park build-to-rent. So, I guess the pre-leasing of build-to-rent is different to a traditional asset. But with the opening scheduled for May next year, could you just comment a bit on when you expect to start sort of pre-leasing or renting for this?

You're quite right. Most residential renters make up their mind to start renting sort of 1 to 2 months out from the time that their existing home or rental accommodation expires. So, we would expect that to sort of kick off in March next year. So, we have all our systems in place for that. We are seeing some interest though in short-term accommodation providers talking to us as well around possibilities of taking some space as well. So, there may be some earlier deals that we do ahead of time on that.

And so say, by June or July next year, what sort of number would you be targeting to have rented by then?

So, we've put out to the market that we're expecting the lease-up period to take between 12 and 18 months. Given the current market conditions, I'm hoping that we can meet that time frame. But yes, that's the time frame that's quite normal for build-to-rent in international settings. So, it is the first one in the market. So, we're just being a little bit cautious in our lease-up assumptions, yes.

And then just on the projected IRR on Sylvia Park built-to-rent. First of all, could you share what annual rental growth you are assuming to get to that 7.75% to 8.25% IRR number?

I think that question was similar to -- I think it was Nick's and so we'll give you some detail on our one-on-ones. We'll get that number for you. But if you recall the CAGR for residential interest around 4% over the last 20 years. So that gives us an indication of what rents have done previously, but we'll be a little bit more specific.

Yes. On average, it's about that across the 10-year period. It might be -- I think it's slightly higher in the first couple of years and then it dropped back to 3.5%. So, it might be 5.5% in first couple of years.

And then just looking -- yes, as you mentioned there's obviously not a lot of New Zealand's [ casing ] built-to-rent. But if you look at some of your Australian peers, the average IRR is a bit higher at 8% to 10%. As you sort of, add potentially more build-to-rent in the future, do you see potential upside to this IRR number that you shared today? Yes, just to sort of be closer to Australian peers as to get more scale? Have you done any work on that?

Yes. So obviously, that is something we'll be working on. I think this product, we put a lot of effort into making sure we pick up as many learnings as we can out of the U.K. and Australia. Undoubtedly, there will be cost efficiencies that we'll be able to drive in the next product. And we're already conscious of some of those. So, we think we'll be able to sharpen up that IRR over time. It's also worth remembering that this is a 10-year IRR from inception and to actually come to -- come to, actually getting the development completed is sort of like a 2.5-year journey. So, there's quite a lot of upfront drag on the IRR. And also, there's some initial costs that we are covering in the first one, which is just really setting up the build-to-rent operating platform as well, which will obviously be able to spread over a greater number of units as we move forward as well.

[Technical Difficulty]

A really quick question from me. In terms of your guidance you provided, what interest costs you're assuming? Is it a 5.52% or something else?

Yes, we're assuming that Shane, it's correct.

So that's where you're comfortable we're going to see rates settle at?

Yes.

Next we have Rohan Koreman-Smit from Forsyth Barr.

My line dropped out, so I got bumped at the back of the queue. So, thank you for taking my follow-up question after all these other questions. I'm sure you've almost sick of answering questions now. Anyway, first question, I noticed you changed your maintenance CapEx policy. What does this mean in terms of where you think maintenance CapEx will be going forward in terms of a basis point of total asset value type metric?

Yes. I don't have that metric on me, but the impact to AFFO is roughly $0.10 this year.

And then kind of circling back to next questions around Drury land sales AFFO. These sort of projects are typically pretty lumpy. Settlement around super-lots generally happens in one period and I noticed you've given us a kind of smoothed over 3-year number. Given it's all probably going to land in 1 year or maybe if you time it right in 2, how are you thinking about your dividend on that basis? And do you have enough flex in your policy to look through it?

Yes. So, you're correct that it's lumpy. We're just giving an indication of the profitability of the project and the impact to AFFO at this stage and not talking about guidance or changing our dividend policy.

At this stage?

Yes.

On the dividend policy? Yes, cool. And then just also sticking with that, you talked about getting commitments from purchases of super-lots before you kind of start with the next phase of the work. Do you have a kind of target cost coverage in mind? Do you want cost to be covered? Or are you prepared to have some kind of uncommitted expenditure in terms of sales at the back end before you start work?

No, we don't have a direct percentage per se. We've given some indication as to the average land value that we're looking at for Stage 1. So that gives us an indication of when we think we're getting the right value out of the sites. But the transactions we're looking at will be reasonably substantial in terms of the total land value. So that will give us confidence that the market is excited by Drury and ready to move forward. All the indications we're hearing from potential house builders and LFR tenants is that they are very -- I think that Drury is a fantastic opportunity moving forward. And so, we're obviously looking to capitalize on that.

And then just to build-to-rent, this net operating income that you've given us, the $1.7 billion to get gross, we basically, gross it up, I'm just making sure my calculations are correct. We basically gross it up by this target operating expense ratio range. Is that correct?

That's correct.

So, if you look at the net rental income, you're talking about $10 million net. So, what that be, be about $12.5 million gross is kind of what you're expecting?

I haven't done the math.

Rent of the apartment.

You got net operating income of $11.7 million. I suppose you're taking out the ancillary income, so that gives you the $10 million and then you have to gross it up. Yes. That will be about right, yes, that's about right, yes.

So if I go $12.5 million divided by $295 million and I look at that on a per week basis, do you think you'll be able to achieve gross rents of $800 a week for 1 and 2 bedroom apartments at Sylvia Park?

Well, there's a whole range of different apartment sizes and we have tested that in markets...

But most of them are 1 and 2, right? You've given us the range there. You are [Technical Difficulty].

Yes, Studio, 1 bed, 2 bed, and 3 bed, yes, and sizes, yes.

I see no further questions at this time. I'll now hand back the conference to Clive and Steve. Thank you.

Thanks very much, Maggie. Thank you, everybody, for joining today's call and we look forward to talking further with you in the near future. Thank you very much. Have a good day. Bye.

Thank you very much. This concludes today's conference call. You may now disconnect.