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

Good day, and thank you for standing by. Welcome to the Kiwi Property FY '25 Interim Results Webcast. [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 first speaker, Clive Mackenzie, CEO of Kiwi Property.

Thank you, 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 2024. I'm Clive Mackenzie, the CEO of Kiwi Property. And today, I'm joined by Steve Penney, our CFO; and Fraser Gunn, our Head of Investor Relations. I assume you have a copy of our presentation in front of you. If not, you can access one from the Investors section of our website at kp.co.nz. A quick reminder that as usual, we have included detailed financial and property slides in the appendices to the interim results presentation. I'll take the disclaimers read, so please turn to Slide 5. Kiwi Property has a well-rounded strategy aimed at increasing long-term returns for investors through its ownership, development and management of a portfolio of premium real estate. At the core of the strategy is our ambition to be New Zealand's leading creator and curator of retail-led mixed-use communities. We believe our core mixed-use assets located in metropolitan areas with great transport access such as Sylvia Park, Drury, LynnMall and The Base are primed for growth and that by prioritizing them, we will create the greatest value for shareholders in the years ahead. We are committed to leading the market on retail-led mixed-use assets and Sylvia Park is a great example of this. Prime Minister, Christopher Luxon, officially opened Kiwi Property's first build-to-rent development, Resido, on the 11th of June. This premium residential asset provides further diversification at Sylvia Park with retail, office and medical also located on site. At Resido, we have now leased 148 apartments or 50% of the development, which is in line with our lease-up projections and shows there is plenty of demand for this high-quality asset. Our development at Drury continues to progress with Drury Stage 1 earthworks now completed. Kiwi Property Stage 1 and Stage 2 development plan were recently named as a listed project for the central government's new Fast-Track Legislation. This is positive news and affirms our belief that Drury is a project of national significance, enabling growth for Auckland. In a tough economic environment, Kiwi Property is intently focused on building a future-fit business with the results of the last 6 months giving us even greater confidence in our retail-led mixed-use strategy. In particular, the resilience of Kiwi Property's mixed-use assets has been evident through strong leasing spreads, up by 4.6% and asset valuation increases up by 0.9%. We have sought to streamline the business with employment and admin expenses down by 20% due to people-related cost reduction initiatives and lower one-off costs. Kiwi Property has a view that where we enable customers and partners to succeed, we will also succeed. Retail sales at our centers were resilient over the preceding 12 months, declining by 1.8% compared to the national average decline of 3.8%, illustrating the quality retail has held up well. Foot traffic increased by 1 million visits to 37.3 million, reflecting the strength of Kiwi Property Centers as destinations even during difficult economic times. We continue to look for ways to grow with diverse sources of capital. And earlier this month, Kiwi Property invested in New Zealand-owned Mackersy Property by way of a convertible loan. Mackersy Property is an investment management business with more than $2 billion in assets under management with a strong track record and alignment with Kiwi Property's values. The investment in Mackersy Property will connect us with additional sources of capital and the prospect of earnings growth over time. In other capital initiatives, we were pleased with the dividend reinvestment plan participation of 47% in September, up from 38% in the prior year. This retained $10.2 million in the business and the DRP will be in operation again for the December dividend. Turning now to Slide 6. Given the current macro conditions, we're pleased to have continued maximizing the day-to-day operational performance of our assets. As you can see on the slide, we completed 349 leasing transactions over the last 6 months, achieving a 4.2% increase in total leasing spreads. There was significant rental growth coming from new leases, which was up by 5.6%. New leases at our office spaces were particularly strong, delivering an 11.1% uplift. This was driven in particular by new and renewed leases at the Vero Centre. These figures demonstrate the flight to quality that has happened in the office market and the rise of hub-and-spoke office locations such as Sylvia Park. Tenants are demanding premium buildings with great amenities and excellent locations and we're well placed to meet those requirements, putting us in a good position to drive further rental growth over the coming years. Turning now to Slide 7. Retail spending has cooled in New Zealand over recent months with figures released by Statistics New Zealand showing that electronic card transactions for the consumables, apparel and durable sectors were down 3.8% in September 2024, compared to the same time last year. Kiwi property centers were more resilient with sales down by only 1.8% in comparison, indicating that quality retail has a high degree of resilience even during economic downturns. Portfolio sales totaled $2.1 billion for the 12-month period, representing a slight decline from $2.14 billion in the previous period. The attractiveness of our centers as destinations was reflected in the pedestrian count, which grew by 1 million visits over the period to 37.3 million with around 16 million of those at Sylvia Park alone. While customers' wallets are under pressure in the current economic climate and retail sales have moderated, we believe that our leading portfolio of retail-led mixed-use assets is well placed to bounce back strongly now that factors influencing the retail spend had moderated, including a reduction in both inflation and interest rates. On now to Slide 8. Kiwi Property's total portfolio value increased 0.3% or $9.5 million in the 6 months to 30 September. Capitalization rates were resilient with the investment portfolio broadly flat over the 6 months and the values appear to be stabilizing as interest rates passed the cyclical peak. The fair value of the Sylvia Park Precinct rose by 1% or $17.2 million, while the Base increased by 2.7% or $5.5 million, reflecting their standing as leading mixed-use assets. The decline in the office portfolio's valuation was primarily influenced by the Vero Centre with the asset's valuation reflecting the challenges within the sector. Turning now to Slide 9. Increasing efficiency and reducing overheads is a priority as we build a future-fit business. We have sought to optimize the organization following a period of asset sales and the implementation of the new Yardi enterprise IT system. This optimization is now largely complete with the technology rollout and other initiatives enabling a reduction in employee headcount, which is now beginning to be realized during FY '25 with a $1.6 million decrease in people-related costs. Kiwi Property is progressing with reducing management expenses as a percentage of net property income. The 6-month management expense ratio of 13% is a significant improvement from the preceding periods, which were all above 17%. We will continue this focus on cost control and ensure that Kiwi Property is a disciplined and future-fit business. Turning now to Slide 11. Kiwi Property is focused on the optimal allocation of capital to specific investment categories in order to drive superior shareholder returns. Our capital allocation framework categorizes investments into 3 groups; core, value-add and opportunistic, each with a targeted return threshold aligned to its risk profile. This framework guides our review of our existing portfolio and when evaluating new opportunities, providing discipline around the investment process and supporting Kiwi Property strategy. Our goal is to achieve total shareholder returns above 10%, underpinned by sustainable earnings growth over time. Using examples, we have shown how our assets fit within our capital allocation framework on the far right side of the table on the slide. Sylvia Park Shopping Centre is classified as core, around 8% plus returns targeted. Adjoining properties at Sylvia Park are value-add, where we target 9% to 15% returns and our Drury landholding is classified as opportunistic, where we target returns above 15%. A further investment that we have made in the opportunistic category is our recent convertible loan provided to Mackersy Property. Details of this are on Slide 12. Mackersy Property is one of New Zealand's leading full-service investment management firms with over $2 billion in assets under management. It is focused on sourcing, funding and managing high-quality properties on behalf of wholesale investors across New Zealand. Mackersy Property manages assets across the office, retail, large-format retail and industrial sectors. Earlier this year, Kiwi Property invested in Mackersy Property by way of a $6.5 million convertible loan to support Mackersy's continued growth. On conversion of the loan, Kiwi Property's modest investment will result in a 50% shareholding. We anticipate the deal will be marginally accretive to earnings initially with the ability to grow over time as market activity returns. As well as potential earnings growth, we see additional benefits from the investment. It will diversify our capital sources by providing direct access to a deep pool of around 2,800 wholesale investors. The business is set up for future growth with key executive shareholders who have strong investor relationships and origination capability remaining in the business. Mackersy has a strong track record that is scalable and we believe there's real growth potential in this investment as the property cycle turns. I'd now like to hand over to our CFO, Steve, to discuss our interim financial results, beginning on Slide 14.

Thanks, Clive, and good morning, everyone. Historically, Kiwi Property has invested in modern assets with strong demand and rental growth prospects. This investment is showing through in our financial results with an increase in reported net rental income up by 7% to $95.3 million and operating profit before tax up by 7.7% to $56.4 million. The increase in net rental income was mainly driven by net rental growth of $4.1 million and tenancy termination fees of $3 million, both at Sylvia Park and the Vero Centre. This was partially offset by higher operating expenditure for Resido Lynton of $900,000. Adjusted funds from operations remained flat at $48.4 million despite higher interest costs and the removal of building tax depreciation. Overall, the business performance has been encouraging in what has been a tough operating environment. Over now to Slide 15. Kiwi Property achieved rental growth of 4.2% over the period with new leases up 5.6% and rent reviews up 3.8%. We saw a strong uplift in leasing spreads for new lease deals across the mixed-use portfolio at 6%, led by The Base and Sylvia Park Precinct up by 12.2% and 5.3%, respectively. More than 80% of our future rent reviews are fixed, enabling rental growth even in softer economic conditions. Occupancy declined slightly from 99.3% at the end of FY '24 to 98.4% at the end of September, which is primarily due to the departure of Bell Gully in the Vero Centre. New and renewed leases have contributed to strong leasing spreads at the Vero Centre, which is up by 10.4%. The occupancy of our mixed-use portfolio remains strong at 99% and again demonstrates the attractiveness of these assets to tenants. The weighted average lease expiry remained relatively stable at 3.8 years compared to 4 years at the end of financial year '24. Turning now to Slide 16. Kiwi Property continues to be well supported by our banking group. Following a refinance undertaken in September this year, we have increased our bank debt facilities by $50 million to $1 billion, leaving $246 million in undrawn headroom. Our weighted average term to debt maturity reduced from 3.6 years to 3.1 years with Kiwi Property taking advantage of lower cost and shorter tenure facilities. As a result of the refinance and declining interest rates, our weighted average cost of debt reduced from 5.61% to 5.25% in the first half of the financial year. Our property assets have increased from $3.2 billion to $3.3 billion as of September. Gearing remains relatively stable at 38%, up from 37% in March 2024, which is still well below our bond and banking covenant of 50%. Net tangible assets per share also remained stable with no change from $1.17 at the end of financial year '24. Kiwi Property is currently considering an offer of 5.5-year fixed-rate senior secured green bonds to institutional and New Zealand retail investors. The net proceeds of the proposed issue are to be applied towards refinancing the KPG030 series of $125 million green bonds that mature on the 19th of December. KPG's weighted average term to maturity will increase to 3.6 years on a pro forma basis, assuming a $125 million issue. The green bonds are expected to be rated as BBB+ by Standard & Poor's and the offer is expected to open in the week commencing the 2nd of December. I'll now hand back to Clive, who will resume on Slide 18.

Thanks, Steve. Kiwi Property's first build-to-rent asset in currently New Zealand's largest Resido was officially opened by the Prime Minister on the 11th of June 2024. Since then, we've been encouraged by the team's efforts to lease the 295 apartments, noting that leasing commenced during a period of softness in the Auckland residential rental market. In particular, rental search activity was down 29% and new listings were up 29% compared to the same month last year. We are focused on achieving let-up targets and responded to market conditions. The rents we're achieving reflect the additional amenities provided, including the on-site Resido team, 24-hour gym, rooftop barbecue, media room, residence lounge, dog park and proximity to Sylvia Park Shopping Centre. As of the 21st of November, 148 apartments were leased or 50% of the development and we are well positioned to meet our 12- to 18-month lease-up target. The total average rent is $700 per week, which is skewed by a high proportion of studio and 1-bedroom apartments currently leased up. Resido's unit mix has aligned with the market demand and is weighted towards 1-bed and 2-bed units, which make up 60% and 34%, respectively, of total Resido apartments. Turning now to Slide 19. The data from our Resido leasing program suggests that we are not only attracting our target demographic on the local area, but also introducing new customers to the wider Sylvia Park Precinct. Of note, 68% of our Resido residents previously lived outside of Sylvia Park's primary and secondary catchments. We've talked a lot about the halo of Sylvia Park and the fact that Resido is drawing people in from other areas of Auckland is a clear demonstration of that halo. The average income of Resido tenants is 48% above the Auckland average with 66% of Resido residents currently in professional or managerial roles. The average age of Resido residents is 34 years old and 31% of our residents are pet owners. Welcoming pets is a key attraction for Resido and will help us to retain tenants for longer periods. 69% of our current Resido leases have been signed for terms of 12 months or longer. Overall, the Resido lease-up is well on track, which is very pleasing results in a soft rental market. On now to Slide 20. Now 5 months since opening day, we have taken the opportunity to provide updated metrics for the development of Resido. With the asset now operational, management has assessed operating requirements and finalized expenses with the significant OpEx items, including rates and insurances. Resido's forecast OpEx rate has reduced to 20% to 23%, which is 2% lower than prior forecasts. With a total project cost of $240 million, stabilized net operating income of $11.2 million and ancillary income of $1.1 million, the project yield on cost is approximately 4.6% and the project 10-year property internal rate of return is around 7.4%. We note that these metrics are presented excluding halo income or the benefits that flow from having Resido located immediately adjacent to Sylvia Park Shopping Centre. On now to Slide 21. The Resido development was impacted by the downstream effects of COVID-19, including construction, labor and material shortages, which resulted in cost escalation. The development cost was approximately $19 million or around 9% above the initial project budget. Investment market conditions also deteriorated due to sharply rising interest rates, which impacted the project. Since construction commenced in February 2022, the fair value of our total investment portfolio has declined by circa 12%. This compares with a total unrealized development shortfall of $32 million or 13% for Resido. We expect to achieve full value from a faster lease-up period with residential market rental growth and capitalization rate compression as the investment market improves. Given the capitalization rate and inflation factors mentioned, the current Resido valuation is below its cost, but we see a clear path to higher value in time. Turning now to Slide 22. Drury is expected to become a key retail-led mixed-use development for Kiwi Property over time with advanced discussions underway on large-format retail sale opportunities. Further details on these opportunities will be provided when transactions are finalized. Transport connections are also underway with the new Drury Central Train station due for completion in 2025, helping to catalyze the growth of the community as part of Stage 1. Progress on Stage 1 continues with the major earthworks being completed in June 2024. The strategy is to maximize the returns from Stage 1 super lot sales, which will be used to fund subsequent development stages. Ownership and development of the town center is the focus in Stage 2, which is where we expect to create significant long-term value. It was also encouraging to see our Drury Metropolitan Town Center plans included as a listed project on Schedule 2 of the government's Fast-Track Approvals Bill, which was announced in October. This is positive news and aligns with our belief that Drury is a significant development for employment, housing and community building, enabling growth for Auckland. On now to Slide 24, where Steve will discuss our dividend payout.

Thanks, Clive. Kiwi Property's adjusted funds from operations or AFFO for the half year came to $0.0305 per share, remaining relatively flat when compared with the prior period despite higher interest costs and the removal of building tax depreciation. We will pay a quarterly cash dividend of $0.0135 per share for the second quarter dividend in financial year '25, taking the half year cash dividend to $0.027 per share and reflecting an AFFO payout ratio of 89%. The dividend reinvestment plan will be in operation for the December dividend. Our full year cash dividend guidance of $0.054 per share remains unchanged for FY '25. While we are encouraged by the performance of the business to date, given the current economic backdrop and with elevated gearing, we have not revised the dividend guidance upwards. As always, dividend guidance and payments are contingent on the company's performance and barring material adverse events or unforeseen circumstances. Now back to Clive, who will finish with our key priorities on Slide 25.

Thanks, Steve. As you have seen, Kiwi Property has delivered a resilient operating result in the first half of the financial year and taken important steps forward in the delivery of our strategy. Heading into the second half of the financial year, our 4 key priorities are as follows. First, we aim to have Resido fully tenanted within our 12- to 18-month target window and deliver returns in line with those I outlined earlier, thereby proving up our BTR thesis and attracting capital partners for future development. Secondly, we will look to finalize terms for the sale of large-format retail sites at Drury, unlocking the proceeds to accelerate the development of Stage 2 and the returns that go with it. Our third priority is maintaining a strong focus on costs to ensure that Kiwi Property is a disciplined and future-fit business. And finally, we continue to drive operational excellence across our high-quality asset portfolio, focusing on efficiencies, growing rents and driving sales. We're extremely conscious of the current economic slowdown, and we will continue to adopt a highly disciplined approach to the operation of our business in FY '25, delivering on strategy, driving asset performance and strictly managing our balance sheet. By focusing on these things, we will put ourselves in the best position to navigate the current economic climate and deliver returns for shareholders as conditions improve. Thank you for joining today. That concludes our overview of Kiwi Property's interim financial results. I'll now pass over to the moderator who will open the phone lines for questions. Thank you.

[Operator Instructions] And I show our first question comes from the line of Nicholas Hill from Craigs Investment Partners.

Regarding the Mackersy Property investment, what actually are you buying with the $6.5 million convertible note? Is this an 50% interest in what is essentially a management contract for $2 billion in AUM? Or is it a bit more nuanced than that?

Yes. So, the investment in Mackersy Property is really about providing us an additional capital source and also the prospect for earnings growth over time. Obviously, as we called out, Mackersy is a well-established business with a great track record and it's got access to a deep pool of wholesale investors. And it also, we believe, has the opportunity to grow as the economy bounces back. And we think that there's an opportunity for enhanced earnings for Kiwi Property out of that relationship as well.

So just to be clear, you did -- you are buying half of the equity interest in the management contract or platform for the $2 billion in AUM?

Well, we're buying it in Mackersy itself, which obviously has those management contracts with all its individual syndicates, yes.

Got you. So effectively, yes. So, in terms of how the growth potential of Mackersy is achieved, do you see this largely being done by, I guess, raising more capital for more funds and things like that from its wholesale network after the RBNZ has finished cutting the OCR?

Correct.

Could you provide some more commentary as to why you outlined the investment will help the retention of key executive shareholders?

Obviously, some of the details of the transaction are confidential. But effectively, the key drivers of the business in the relationships and origination capability are remaining with the business for the future. So, this is more of a partnership than a buyout or anything like that. We don't want it to be seen as that. This is really just a partnership with us where we have aligned interests. We have a similar culture. We've worked closely with them on Northland as a manager and we see a lot of synergies in the way we run our businesses.

Okay. Just wondering, I'm not completely familiar with Mackersy Property. Have they cut distributions to investors in any of their funds over the last 24 months?

That is a question that you would need to ask directly of Mackersy.

Okay. And then I guess last one from me. I know that's one else have a go. So, the Vero Centre is staying on the balance sheet. Would you be able to provide any guidance or commentary in terms of what you're thinking regarding leasing the vacated space or repositioning the asset? Will there be some spend to position the vacated areas or replace some of the lifts?

Yes. So, we're obviously still leasing some of the Bell Gully space. We've effectively leased 3 of our floors and we have 2 left to lease. We are undertaking an upgrade of the building. So, we're doing a lift replacement upgrade, which has kicked off. And we'll be investing more in the sort of end of trip and those areas where customers and office workers actually touch the building. So, in those high-profile locations like lobbies, et cetera, yes.

And I show our next question comes from the line of Arie Dekker from Jarden.

Just a couple more questions on Mackersy. Could you just give a bit of color into what they're specifically looking to use for growth funds you're providing for?

So, the funds that we're providing are to assist them, they have some debt that they needed to or wanted to repay. And so we're helping them through that process and also setting them up on a platform to be able to grow in the future. So that's basically what we're helping them with.

Is that IT and systems, is it or...

It's more about providing working capital and helping them get into a position where as the economy improves, they're in a position to grow again.

Yes. And then just in terms of the convert, what sort of term is it for? And when do you anticipate it converting into the 50% equity?

Yes. At this stage, we sort of envisage the potential conversion to equity in the next sort of 12 to 18 months.

And then I guess just if you could give a couple of examples, albeit clearly hypothetical of just how you might be looking to leverage the partnership with Mackersy and your own assets?

Yes. Look, that's detail that we're going to be working through with Mackersy. But clearly, they potentially could be a source of capital for us as we look to move out of some of the non-core assets that we have. But that will have to be done on an asset-by-asset basis with Mackersy and whether their investors are interested in those assets. But it does give a different source of capital to what we're currently tapping into while allowing us to continue the management of those assets in conjunction with Mackersy.

Just turning to build-to-rent and the capital allocation framework outlined. I mean you've been clear that any further build-to-rent would need to come with partner funding. If I look at the way that the framework sort of put together, is it fair to say that from Kiwi's perspective, those partners would essentially need to be sort of funding 80% plus of any future build-to-rent because it doesn't look like it easily fits within sort of the framework and isn't specifically mentioned?

Yes. And look, I think we've spoken about this on a couple of occasions in the past. Resido is an opportunity for us to prove up build-to-rent case in the New Zealand market. We've always been very clear that for the growth of this asset class, we will need third-party capital to be able to come alongside us. And clearly, in terms of that investment framework, we will be looking for the majority of that capital to be from third parties and that's always been our intention, yes.

That makes sense and sort of consistent. Just on the costs and you've done a really good job, obviously, in the last 12, 18 months as you've sort of outlined. Could you just give a little bit of color as to the potential for more? Obviously, some of it's in [ train ], maybe there's still a little bit more to go. Just yes, where you sort of see those costs settling and some context on how much more to go?

Is this on the operating cost for Kiwi Property you're referring to?

Yes. Correct.

So obviously, we -- yes, thank you. We've obviously done a lot of work in that space. I think you'll see it sort of stabilizing around the numbers we have. Clearly, we will remain focused on costs going forward and where we can see an opportunity to reduce cost we can. But I think we've done the majority of the heavy lifting, but there may be a little bit more to come, but you probably can see this as sort of the base that we're looking at, at the moment, yes.

Sure. And then just last question. And obviously, we've talked briefly about Mackersy. But just in terms of the non-core assets, bringing gearing back into your target range, those sorts of things, just some sort of color in terms of what you're thinking is and also any specific initiatives currently underway?

Yes. With regards to recycling capital out of non-core assets, the market is not particularly conducive to transactions at the moment. We want to make sure when and where we do transactions that they benefit our shareholders. So, we'll be watching the market closely in terms of any improvements and see some opportunities to recycle capital down the line. But as I've called out, Mackersy is another option for us as we look to go through that recycling process.

And I show our next question comes from the line of Rohan Koreman-Smit from Forsyth Barr.

Just sorry to [ belabor ] the point. But Mackersy, it looks like you're paying 0.6% of AUM. It's quite a bit lower than other transactions in the space. Can you maybe give us an EBIT multiple or something like that around the transaction? I think the median over the last number of years has been about 11x. Are you kind of in that ballpark? And then why is the price so low? I guess the EBIT multiple is at the same level, then it's not low. But what are some of the issues that kind of the vehicle is facing at the moment?

I'll hand that one over to Steve.

Yes. The price as a percentage of fund is at the very bottom end of the scale. So you're correct on that one. The EBIT multiple was -- it's sensitive. Obviously, when we convert, we'll give you more information at that time. And the business is focused on fund consolidation and reviewing its fee structure. So that's what's working on at the moment. That's what we're hoping to do.

And then the other 50%, do you have a put call or any sort of option over it?

First rights, yes.

First rights. Okay. And they have the same over your stake or convertible note?

Yes.

Just looking at the capital allocation framework, you talked about sale of non-core assets and hopefully, Mackersy helps you there. But you're lifting value-add and opportunistic buckets at the same time as talking to sell down non-core, which I'm guessing the non-core assets don't sit in the core bucket currently. So how are we to interpret you achieving these bands? Are we thinking about partial sales of core assets?

Firstly, it's going to be done over a period of time. So, there will be a transition over a period of time. So, we'll be able to weigh those things as we go through that transition. I think we've already called out the opportunity around Drury and that's on that opportunistic band. And so some of that will help to weigh some of the assets that we may sell out of the value-add that may not be core for us as we go forward, yes. I don't know, Steve, do you have anything to add to that?

I was going to say once an asset that we've developed has stabilized and we've realized the developed the core returns for that, then we could partially sell down or fully sell down and recycle that capital into another development opportunity to push the returns higher.

Okay. And then Drury, I noticed you don't talk about AFFO, but I'm assuming you're still talking about land sales being part of earnings for the next couple of years?

That's correct, yes.

Okay. And let's see. That was -- one last one. Resido rents are below the end of -- bottom end of feasibility, but your net property income after you include your other revenue or ancillary income, still around $10 million. I'm guessing that reduction in core operating costs has been quite larger than 2 percentage points on a kind of like-for-like dollar basis. Can you just talk us through what the reduction actually involves?

The reduction in operating expenses, I think we were probably a little bit conservative on the setting up of those budgets. And in particular, we've managed to achieve better rates from our insurance across our portfolio. And also, I think we budgeted for higher counsel costs than actually have incurred as well. But we just -- we went into this as our first one as a test case. We were maybe a little bit conservative on some of those costs and we've been able to pull those back and reap some savings, which is obviously helping flow through into the NOI line.

And you always talk about year 3 stabilized in terms of this asset. Have you considered in your rental growth the impact of Simplicity Mount Wellington?

Yes, we have.

And what's the assumption there?

It's factored into that -- into those yields on costs and projected IRRs, yes.

And I show our next question comes from the line of Bianca Fledderus from UBS.

So firstly, just another question on Resido and capital partners. So, I guess looking at that asset on one hand, 50% is now leased. So that's obviously pleasing and points to potentially being fully leased closer to the lower end of your lease-up target. At the same time, we've seen the average rent and projected yields on costs come down. So, I was just wondering if you could comment on what that sort of means for your discussions with any potential capital partners for future BTR projects?

Yes. We're making good progress in proving up the model, as you can see with the lease up that we have, as I've called out, a difficult rental market at the moment. We have had some initial engagement with potential investors and we'll carry on that engagement and keep them informed of our progress as we go through the lease-up. And obviously, if anything happens in the future, we'll obviously update the market if and when we're able to engage with partners, yes.

Okay. And then just another question on the Mackersy investment. Is there any color you could provide on what you expect the earnings growth profile to look like? So, the EPS accretion for you, I mean?

I think that will be a sensitive market information at the moment, yes.

[Operator Instructions] And I show our next question comes from the line of Nick Mar from Macquarie.

Just following up on BTR. If you did have interest from capital partners, would you be willing to sell at the sort of current valuation and sort of below your total cost?

That's not our intent, no.

Okay. No, that's fine. And just on the valuation, is that being done on a strata title basis? Or has it been on a cap rate basis? And what's the sort of reasoning for that approach, which seems to be sort of 5.25% cap rate?

It's done on a discounted cash flow basis. So that's the rental cash flows on the way through and then the sell down of individual units with the bulk sale discount and agency fees and all that sort of stuff in there. It's quite hard to pinpoint a cap rate that we can sort of rely on. So, it's easier to utilize that methodology at the moment. More reliable, that's fine. That's fine.

And given that the rents have sort of come in below your original sort of target and obviously, notwithstanding what will be competition from Simplicity, do you expect, I guess, that if you want to call it discounting upfront that you've done to fill it up to alleviate as sort of the years go by? Or do you think you've just sort of permanently reset the rents and therefore, the 3%, 3.5% growth from here is sort of what you'd expect on the current levels?

Just to give some context around that. One of the measures we're looking at is because of the great amenities that we have with Resido, we're looking at what the sort of differential is to the Auckland apartment market, just like our peers in Australia would compare to the Melbourne or Sydney apartment markets. And we're running at a differential of about a positive 24% at the moment. So what -- the reason I mentioned that is that the rental market will move according to where the economy is going and where it is in the cycle. And we believe that we will track that cycle. So, we can't alter the cycle, but we will track that cycle. So, we're getting the differential that we thought we would get for the quality of our product. And at the moment, it's a soft market and that's reflected in the rents we're getting as well, yes.

Okay. No, that's good. And any sort of observations that you've had around the sort of apartment mix or things like car parking? Has everyone in the first 50% taken up the car parking and you've got no parks left for the remainder? What are you seeing on it?

Yes. Good question. And obviously, we've got a lot of learnings as we come through this development. The first thing I'd say is the residents love the product. So that's the most important thing. There's a lot of really positive feedback on the product, which gives us a lot of faith in moving forward. In terms of apartment mix, I think you can see that in the lease-up, there's a skew towards 1 beds and studios. And perhaps if we were doing it slightly differently, we would probably upweight those a bit more to reflect that in the market. But I think as the economy improves, we'll also see an uptick in the 2-bed lease-up as well. In terms of car parking, we probably were a little light on car parking, but we always knew that we had the car park facilities of the shopping center available. And so we're tapping into those at the moment. So, we always knew there was a that was a risk factor and we had a mitigant for it and we're using that mitigant at the moment, yes.

Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call back over to Clive Mackenzie, CEO, for closing remarks.

Thanks very much. And I'd just like to thank everybody for joining us on the call this morning and look forward to catching up with you all in the near future. Thank you very much. Bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.