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

Good day, and thank you for standing by. Welcome to Kiwi Property FY '25 Annual Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Chief Executive Officer, Clive Mackenzie; and Steve Penney, CFO from Kiwi Property. Please go ahead.

Kia ora koutou and good morning, everyone, and thank you for joining us for Kiwi Property's annual results announcement for the 12 months ended 31 March 2025. 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 all 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 information in the appendices to the annual results presentation. Turning now to Kiwi Property's business highlights over the last year on Slide 4. Kiwi Property is focused on increasing long-term returns for its investors through the ownership, development and management of a portfolio of premium real estate. At the core of our strategy is an ambition to be New Zealand's leading creator and curator of retail-led mixed-use communities. We believe our strategic mixed-use assets located in metropolitan areas with great transport access such as Sylvia Park, LynnMall, Drury and The Base will continue to grow and that prioritizing them will create the greatest value for our shareholders in the years ahead. We are pleased with our achievements in FY '25, making progress against each of our strategic priorities. The resilience of our mixed-use assets during a recessionary period demonstrates the benefits of our strategy. The mixed-use assets achieved strong new leasing spreads, up 8.3% with property valuations marginally up by 1.1%. Our development at Drury continues to progress, and we are proud to announce the first sale of large-format retail land at the site. Our agreement with Foodstuffs North Island marks the beginning of Drury's first supermarket, a major [ dual cart ] for both existing and future residents. The sale of 1.2 hectares of land to Foodstuffs becomes unconditional in April 2025. This sale has built momentum for large-format retail land demand and 3 other parties are currently in advanced discussions to acquire Drury land. Kiwi Property's mixed-use approach expanded at Sylvia Park when we officially opened our first build-to-rent development, Resido on the 11th of June 2024. This premium residential asset provides further diversification at Sylvia Park with retail, office and medical also located within the precinct. As at 16th of May, we have now leased 85% of Resido apartments. And as of today, it's at 88%, which is in line with our lease-up projections and shows that there is plenty of customer demand for this high-quality asset. With reduced transaction activity and adverse capital market conditions during the year, Kiwi Property sought additional capital sources as future avenues for growth. In November 2024, we invested in Mackersy Property, a New Zealand's funds management business with more than $2 billion in assets under management. Our agreement with Mackersy potentially provides Kiwi Property with an additional capital source either through direct investment or partnership on existing assets as well as potential earnings growth as the property market recovers. Against a tough economic backdrop, we have worked hard throughout the year to reduce costs. In this financial year, employment and administration expenses were down $7.5 million or nearly -- sorry, or nearly 23% from the prior year. This decrease was due to a focus on reducing people-related costs and lower one-off expenses over the period. Although sales figures at our mixed-use assets were marginally lower amidst a broader retail slowdown, the number of customer visits continues to increase at these centers. Nearly 600,000 more visits were made to our mixed-use assets, representing a 2.2% increase compared to the prior year. We have also focused efforts to foster a productive, supportive and enjoyable culture at Kiwi Property, which has resulted in a pleasing uplift in employee engagement scores to a 5-year high of 75%. Turning now to Page 5. Given the recessionary period New Zealand has experienced, we're pleased to have continued to maximize the day-to-day operational performance of our assets. As you can see on this slide, total rental growth from mixed-use office and retail leasing activity was up 4.3% for FY '25. Our leasing teams have achieved significant rental growth, both from new leases, which were up 6.1% and our existing tenants rent reviews, which saw a 3.7% growth. The mixed-use portfolio, in particular, performed well with an 8.3% uplift in leasing spreads for new lease deals. This was led by The Base, up 11.7% and Sylvia Park Precinct up 9.5%, underscoring strong tenant demand at these high-performing centers. At year-end, 75% of our total portfolio of our income was subject to either a fixed or CPI-based review, allowing for future rental growth. Overall, portfolio occupancy declined from 99.3% to 96.9% over the period. This reduction is primarily due to the departure of Bell Gully in the Vero Centre and an industrial tenant from one of Sylvia Park's adjoining properties. We are now also reporting on the occupancy of Resido, which is still in its initial lease-up phase. Resido was 82% leased at year-end, down-weighting our average occupancy. When excluding Resido from the calculation, occupancy increases to 97.6%. Our weighted average lease expiry remained relatively stable at 3.8 years from 4 years in the prior period. Turning now to Slide 6. As well as strong rental growth across the portfolio, we have also seen a significant 30% increase in activated income from the prior year. Activate is a division of our leasing team. We seek to maximize the return on our assets through our Activate income, which relates to sources of revenue from the partnering with brands for pop-up activations, media space and digital signage at our centers and the short-term or cash leasing of otherwise unoccupied sites. Signage revenue is generated from 180 advertising screens across the portfolio, including 9 large external billboards added to our properties over the last 12 months. Sylvia Park is also home to the largest 3D digital screen in New Zealand. We have a strong focus on operational excellence and driving income from each asset in the portfolio, which has generated consistent growth in Activate income over time. Activate income now makes up approximately $7 million or 4% of our FY '25 total net operating income. Since FY '20, this has grown at an average rate of 11% per year. Now over to Slide 7. We continue to dedicate focus to future-proofing the Kiwi Property business. Increasing efficiency and reducing overheads has been a major area of focus for the last 12 months, setting us up for success as we move into FY '26. These efforts have led to our employment and administration expenses reducing by $7.5 million, a 23% decrease from the prior year. Workforce planning and people management in FY '25 saw our headcount reduced by a further 9 full-time employees. We saved $4.3 million through people-related cost saving initiatives and since March 2024, have saved a further $3.1 million from the now embedded Yardi enterprise IT system. Pleasingly, we have recorded a 5-year high engagement score of 75% following a conscious effort to emphasize culture, leadership and internal promotions. Over now to Slide 8. Sales across our portfolio were marginally lower over the year amidst a slowdown in the wider New Zealand retail sector. Mixed-use sales were $1.76 billion for the 12 months ended 31 March 2025, representing a small decline of 1.3% compared to the previous year. Total sales were lower by 1.6% across the portfolio. Total occupancy costs were up to 15.6% from 14% across the mixed-use assets. This provides further scope for rent growth as we consider an appropriate occupancy cost range for retail landlords to be between 17% and 18%. Positively, foot traffic continues to increase at Kiwi Property's mixed-use assets, proving the attractiveness of our mixed-use assets as destination even at a time when many New Zealand purse strings are tightened. Nearly 600,000 more visits were made to the mixed-use centers than in the prior year, which is about a 2.2% increase. While spending has been lower due to the current recessionary environment, we believe that our assets are well placed to recover strongly, particularly now that factors influencing retail spend have improved, including a reduction of both inflation and interest rates. Over now to Slide 9. Kiwi Property's asset values were relatively stable over the year with the FY '25 fair value movement for the total portfolio down by just 0.3% or $11.6 million. Values look to have stabilized as interest rates continue to decrease with the investment portfolio capitalization rate broadly flat versus the prior year. The mixed-use portfolio was marginally up by 1.1% over the year with the fair value of the Sylvia Park Shopping Centre increasing 3.4% or $35.6 million and The Base increasing 7.4% or $15.4 million. This valuation growth reflects their position as leading mixed-use assets with strong underlying rental growth. The combined valuation of the Drury landholding has decreased by $11.7 million or 6.9% due to development spend outpacing the underlying land value growth. Given this is a long-term project with some of the costs spread over multiple stages, we expect Drury land values to normalize over time. On now to Slide 10. Progressing the sustainability performance of our assets is a key focus for Kiwi Property with a measurable success of sustainability credentials becoming increasingly important, not just because of our own sustainability commitments, but because our tenants increasingly expect it. Our 9-Homestar Built rating for Resido is a particularly satisfying achievement as we significantly surpassed our initial 7-Star target. Resido's 9-Star Built certification donates best practice, and we understand -- sorry, we understand Resido is the first development of this scale in New Zealand to be awarded this rating. We have also lifted our NABERSNZ energy efficiency ratings at 2 of our office assets following targeted investment in sustainability initiatives. ASB North Wharf has increased from 4.5-Star to 5-Star and the Vero Centre has increased from 4-Star to 4.5-Star. With a focused effort to reduce operational emissions across the portfolio, we are proud to have reduced emissions by 14% since FY '24. Our new sustainability strategy is described in detail in our sustainability report. I'd now like to hand over to our CFO, Steve, to discuss our annual financial results, beginning on Slide 12.

Thanks, Clive, and good morning, everyone. Kiwi Property has delivered a strong overall rental income performance with net rental income up 5% across our portfolio this year. Our mixed-use assets were particularly robust performance, which offset the slower performance in retail leasing markets. Compared to the prior year, net rental income for the Sylvia Park Precinct was up $7.6 million, with the underlying rental income growth of Sylvia Park Retail up 3.5%, higher surrender fees of $1.9 million and a full year of operations for Geneva House, our office and medical building at 3 Te Kehu Way, increasing net rental income by $1.6 million. LynnMall net rental income was up $1.3 million through a $600,000 increase in underlying rental growth and a further $600,000 increase in Activate income. The Base net rental income was up $1.6 million coming through strong rental growth, which was up by 7.1% in part, thanks to the extension of new entertainment and medical tenants in the otherwise unoccupied space on Level 1 of the Base's Te Awa Shopping Centre. Reflecting a softer office market, the office portfolio net rental income was lower by $900,000. Positively, existing office leases occupying around 8,900 square meters were extended during the year. Net rental income for the retail portfolio was $700,000 lower than the prior year, reflecting tougher trading conditions for secondary retail assets. Overall, the income performance for this financial year has been encouraging in what has been a difficult operating environment. Turning now to Slide 13. Although net rental income increased over the year, our adjusted funds from operations was down by $7 million or 7%. This was primarily due to higher finance costs up $8.8 million and higher current tax, which increased by $4.4 million. Net finance expenses were higher versus the prior year due to lower capitalized interest down by $3.9 million and higher drawn debt up by $89 million. The tax increase was due to the removal of tax depreciation on commercial buildings, which began in the FY '25 year. The resulting effective tax rate based on funds from operations of 16.9% was up from 13.6% in FY '24. With a full year dividend of $0.054 per share, the dividend payout ratio for FY '25 is 93% within our target range of paying 90% to 100% of AFFO. The dividend reinvestment plan was applicable for the last 3 quarters of the year with a total of $28.8 million reinvested. For financial year 2026, we are pleased to guide shareholders to a dividend of $0.056 per share, a 3.7% increase on the current year dividend. This increase reflects our strong focus on sustainably increasing dividends over time for shareholders. We expect the FY '26 dividend to also be within our target range of 90% to 100% of AFFO. Now turning over to Slide 14. Our total property assets, including investment properties and Drury land classified under inventories have increased from $3.2 billion to $3.3 billion as at 31 March 2025. The increase of $103.1 million included $118.8 million of capital expenditure, which was offset by reductions due to an $11.6 million fair value impact and accounting adjustments of $4.1 million. Net tangible assets per share were marginally lower at $1.14, down from $1.17 in the prior year. Gearing was up to 38.4% at year-end, up from 37% in March 2024, but still well below our bond and banking covenant of 50%. Our capital spend has reduced and our focus is on completing nonstrategic asset sales before commencing any further significant capital investment. The interest cover ratio was marginally lower at 2.9x compared to 3x in the prior year. Over now to Slide 15. Kiwi Property continues to be well supported by our banking group. Following our refinance undertaken in September last year, we increased our bank debt facilities by $50 million to a total of $1 billion with $217 million remaining undrawn at year-end. Our weighted average term to maturity reduced from 3.6 to 3.1 years as Kiwi Property took advantage of a lower cost and shorter tenure facilities during the refinance while still ensuring a healthy term to maturity was retained. The amount of green bonds outstanding remained at $500 million over the period with the 30 series green bond maturing and being replaced by $125 million green bond issue in December last year. Our 40 series bonds totaling $100 million in value mature in November this year, and we will review the bank and debt capital markets closer to the time to assess refinancing options. On now to Slide 16. As a result of the refinance and declining interest rates, our weighted average cost of debt reduced by 31 basis points to 5.3% over the year. During FY '25, we entered into $440 million of fixed interest rate swaps, providing greater certainty on interest costs, particularly in the near term. We will continue to proactively manage hedging levels and increase or decrease levels in line with progress on transactions and the changing shape of the swap curve. Post year-end, we have added $50 million of fixed interest cover, taking advantage of lower rates driven by market volatility. I'll now hand back to Clive, who will resume on Slide 18.

Thanks, Steve. Kiwi Property's first build-to-rent asset and currently New Zealand's largest, Resido, was officially opened in mid-2024. As at 16 May, 252 apartments were leased, representing 85% of the total development. The lease-up performance is at the faster end of our 12- to 18-month lease-up target, demonstrating that the asset has been well received by prospective tenants. The strong lease-up performance has occurred in a subdued residential rental market where weaker net migration inflows and increased rental supply have impacted demand. The average rent of $700 per week reflects the additional amenities provided and rents are around 26% higher than the median Auckland apartment rent. In late 2024, a survey of residents showed that our tenants rate the overall experience of living at Resido highly, averaging 4.6 out of 5. Key drivers for a positive experience at Resido included the sense of community, easy access to Sylvia Park, gym facilities and other added value amenities. On now to Slide 19. We have collected data from our Resido leasing program and external research, which provides rich insights into the way a typical Resido resident interacts with the wider Sylvia Park Precinct. The typical Resido resident is 36 years of age, a working professional and has an average weekly income 56% higher than the Auckland average. Over 1/3 of Resido residents are also pet owners. We found that the typical Resido resident saves money on transport costs, shops at Sylvia Park more frequently and visits a broader range of retailers since they've moved in. Tenants have increased their spend at Sylvia Park food outlets by 43% and at supermarkets by 40%. Approximately 13% of their overall card spend is now at Sylvia Park each month, up from 4% before moving in, a more than threefold increase. On now to Slide 20. At Drury, we're pleased to be able to announce the first sale of large-format retail land to New Zealand-owned supermarket operator, Foodstuffs, which became unconditional in April 2025. Today, Foodstuffs North Island announced its plans to build a new world supermarket at Drury, which will bring an essential amenity to the heart of this new metropolitan town center. The sale of this land represents around 5% of the total land intended for sale at Drury, with a further 44% in advanced sale discussions with 3 separate parties. Residential land makes up around 37% of the total land intended for sale, and we will commence sales as residential market conditions improve. Stage 1 earthworks at Drury were completed in June '24 and further capital spend at Drury, including civil works can be broadly matched to the sales of large-format retail land, allowing us to progress further land development as sales are achieved. Kiwi Property's Drury project was also included in Schedule 2 of the Fast Track Approvals Act 2024. We submitted our application in March and pleasingly received notice that our application was accepted for processing earlier this month and will shortly be considered. This will further increase our consented developable area at Drury, allowing for a commercial retail center, including approximately 33,000 square meters of commercial, 96,000 square meters of retail and 10,000 square meters of community activity and future residential activity. And finally, over to Slide 22 for our priorities and guidance for the coming year. Kiwi Property delivered a robust operating result in FY '25 and took important steps forward in the delivery of our strategy. Heading into FY '26, we have 4 key priorities that we know will make an impact. Firstly, we will efficiently manage the balance sheet and seek to free up additional investment capacity, including looking to divest nonstrategic assets. This will allow us to enhance our existing high-quality assets and progress other investment opportunities as market conditions allow, in line with our capital allocation framework. Secondly, we'll continue to drive rental growth with a focus on maximizing the operational performance of our high-quality assets. Thirdly, we look to maintain strong discipline on costs following great progress made to date in this area. And finally, we'll look to sell further large-format retail sites at Drury following the first land sale made last month. The economic environment, both locally and globally, has meant transactions of this nature have taken longer than expected, but it's pleasing to see activity starting to return to the New Zealand property market. We expect to achieve further land sales over the coming year, and this will be a continued focus for FY '26. As a business, our goal is to deliver sustainable earnings and dividend growth for our shareholders. I'm pleased to reiterate the FY '26 dividend guidance of $0.056 per share, as Steve mentioned earlier in the presentation. This represents a 3.7% increase on the prior year, underscoring our intention to continue to deliver dividend growth over time. We're very conscious of the current period of global economic volatility and will adopt a highly disciplined approach to the operation of our business in FY '26, delivering our strategy, driving asset performance and strictly managing our balance sheet. By focusing on these things, we'll put ourselves in the best position to deliver sustainable earnings and dividend growth for shareholders as economic conditions improve. Thank you for joining us today. That concludes our overview of Kiwi Property's FY '25 annual financial results. Today's presentation, along with our FY '25 annual report, property compendium, sustainability report and climate-related disclosures is available on the Kiwi Property website. I'll now pass over to the moderator who will open up the phone lines for questions. Thank you.

[Operator Instructions] Our first question comes from Nicholas Hill from Craigs Investment Partners.

Congratulations on the stable results. Just on Resido, well done on the increase in the occupancy given the soft market. But I think I noticed a slight change in language when talking about the rents. Previously, you reported rents achieved as a premium to comparable apartments, whereas now you're comparing against median apartments. Does this reflect the change in benchmark you're using? And if so, would it be possible to comment what drove this change?

Nick, thank you. No, there's no change in benchmarks -- sorry for the confusion if one was created.

Okay. And then regarding Mackersy property, I appreciate it's quite early in the piece, but would it be possible to provide any commentary if you've noticed any, say, difference in behavior from wholesale investors between now and a year ago given that interest rates have been cut as well as, I guess, how it's going generally?

Yes. We really are positively encouraged by the quality of the management team and also the quality of the investment portfolio that they manage. We are starting to see some initial signs of activity coming through in that market. And hopefully, with interest rates potentially coming down in the next couple of days, we'll see some activity actually starting to take place. So yes, using that old phrase, we're starting to see some green shoots coming through in that sector.

Okay. And on the FY '26 dividend guidance, whereabouts in your payout policy range do you see that? And does this include any assumptions around land sales?

So our payout range remains within that 90% to 100% level. And land sales, Steve, I don't think...

No land sales included.

No land sales included.

Would you say this is more towards the lower end or higher end given the current outlook?

The middle.

Okay. Great. I guess last one from me before I let someone else have a go. On the commentary around employment and admin cost reductions, you say a focus on internal growth and development is supporting people-related cost savings. Would it be possible to provide some examples of how you see this happening? I mean, at first glass, this is something you can see with firms happening over the long term, but I was wondering how you see this applying to your business model.

Yes. So it actually has been a focus for some time. So we're spending a lot of time with our senior leadership group across the organization, looking at developing them and giving them the tools to be able to grow and prosper within the organization. But also, we basically focused on making sure that everybody enjoys working at Kiwi Property and looking at amending the culture to sort of a results-driven culture that leads to best-in-class performance. And that's really where our focus has been and surely see results from our engagement score.

So I guess it would also be sort of a case of like lowering turnover and having to keep on hiring expensive externals and stuff like that would be a piece.

Yes. Yes. But also we're looking to encourage promotions within the organization as well. So that's been a real focus for us. And we've seen some great examples of that where some of our really talented staff are being able to step up into new roles and really grow and expand within the organization, which was a big win for us.

[Operator Instructions] Next, we have [ Bianca Murphy ] from UBS.

Firstly, in terms of the lower employee and admin expenses for this year, for FY '26, are you expecting those costs to be at a similar percentage to NPI compared to this year?

Yes, we're looking to carry on that trend, yes.

Okay. And then moving on to Drury. So the 44% where you're in advanced field discussions, could you provide any color on when we could expect those to convert to sales?

We'll be doing those through this financial year. But we're reasonably well advanced in all of those discussions here -- sorry, well advanced, not reasonably, well advanced.

Okay. And so would it be more sort of second half weighted you expect?

I would think so, yes.

Okay. And that first land sales to Foodstuffs, at what price per square meter was that, sort if you can share that?

Yes. Unfortunately, I can't give any additional information around that because it's market sensitive.

Okay. All right. And then last question, just on Vero. So occupancy there has dropped quite significantly, obviously. Could you give any update on how re-leasing for that asset is going at the moment?

Yes. So we're about 2,700 square meters of vacancy at Vero following Bell Gully leaving the center. We're in advanced discussions with a number of parties. In fact, one we're hoping to be able to close out in the next couple of weeks for around 700 square meters, which will take us down to around 2,000 square meters, and we have interest in that remaining space as well.

Our next question comes from Nick Mar from Macquarie.

Just following on from some of those questions on the Drury piece. Obviously, you can't disclose what the pricing is, but did that pricing and where the discussions are on the balance of it affect the valuation during that period?

Yes, obviously, for Stage 1 was supportive.

Yes, but the valuation...

Yes. So the inventory value [ didn't ] decline at Stage 1, so that's the piece that we're selling and then Stage 2 is just a timing issue.

Okay. No, that's good. And then when would you expect if these transactions do convert into unconditional contracts, when would you expect to sort of receive proceeds from those?

So there's a couple of things that need to happen. We obviously need to put in the infrastructure into the land and then be able to title the land to affect the transaction. So we see the timing around that around FY '27-'28 for that happening.

No, that's helpful. And then is the dividend outlook incorporating the potential divestment of some of those nonstrategic assets. So you're factoring in legal room for any dilution that might come through?

It's not put into the forecast at the moment, but we can -- we've got an allowance in there for those sales if they do happen. So comfortable.

Yes. No, that's good. And then on leasing, could you just talk more about the Vero lease-up in terms of where you're having to sort of pay incentives? And if you're getting what kind of net effective uplift you're seeing on that space? And then secondly, just on ASB, I know it's still got a long vault, but have you had any further discussions with them? There's some discussions about whether they might be looking to pre-commit some new space around Auckland.

So just starting with ASB, we have a great relationship with ASB as a bank, and we're always looking to work with them. And our aim would be to retain them as a tenant. And so we'll continue to have discussions with them around that opportunity. So there's still a number of years to go before they come close to the expiry. So we've got time to work through those processes here. With regard to Vero, yes, there's demand at the quality end of the office market. And yes, we're just tapping into that. It is a slower market at the moment. I'm sure you're hearing that from other players. But we -- Vero is a high-quality asset. We're investing capital into it and upgrading the lifts and we're about to do some work around the lobbies and end of trip and just making sure that we keep it as at the right positioning in the market as a high-quality office environment.

No, that's helpful. And then just lastly, a bit left field, but have you guys factored anything into your thinking around outlook from the innovation boost tax reductions that you might be able to do against some of that Drury stuff and any other kind of major CapEx projects that come up in '26?

It's a great announcement for the sector. We think it's really good. We haven't factored anything into the '26 guidance or forecast yet. We're just working through that. But I can give you an indication from a pro forma basis on what it would have done to '25 if we have applied it to '25. So it would have applied to about 35% to 40% of our CapEx spend, and it would have had an impact of $2 million to $2.5 million of additional income. So meaningful, but not material, and that's $0.12 to $0.15 per share. So it wouldn't have pushed us outside our guidance of 90% to 100% of AFFO, but would have had a good uplift. And we think it will probably be similar in '26. Obviously, the CapEx spend profile is different across the year. So it will move up or down based on that.

[Operator Instructions] We have Rohan Smit from Forsyth Barr.

Just following up on the question around the AFFO timing from the Drury land sales. So will it be recognized in '27-'28, the kind of 49% of the land that you expect to sell as earnings?

That's correct.

Yes. Okay. So recognizing...

[ We're not going to settle this year ].

Yes.

Yes.

And you're not expecting any to settle this year. Yes. Okay. Just on the comment around strategic asset sales, you've previously talked to, say, the Plaza and some of the office stuff being noncore. Is it still similar thinking, the retail assets, I guess there's also Centre Place in there plus office as things that can be used to fund CapEx going forward?

Yes. That's correct, Rohan.

And Vero, I just noticed in the commitments, there was no capital for the lift in HVAC refurb. Is that still taking place? And is it just yet to be contracted? And I guess, can you give us an idea of what CapEx you expect to spend this year, both, I guess, maintenance and total?

Maintenance across the portfolio?

Yes.

You're talking about or in just specifically in Vero?

Vero maintenance across the portfolio and then total CapEx.

Yes. So total maintenance improvements CapEx is on average is about $8 million a year, somewhere between 15 and 20 points. We expect that to be pretty similar. Part of that will include the Vero lift works. So it's -- has got a maintenance fund. So it's incorporated into that. It's not a significant amount. And there will be some -- over the next couple of years, we'll spend approximately $10 million on the lobby upgrade as well for Vero. So yes, that's not in the committed funding there because it doesn't fall under that definition.

Excellent. And just looking at balance sheet, do you expect to get down to that kind of 25% to 35% target range? Is that kind of still the medium-term target? Or have you kind of brought that up to be more in line with the rest of the sector?

We don't have a specific target, but what we want to do is reduce gearing from where it is at the moment to enable growth. So we'd be more comfortable at sort of 35% going forward. We haven't set a specific target.

Okay. And just finally, just given the AFFO timing on the Drury land sales, you're still considering that AFFO, right, like that can offset any dilution from asset sales that may come through?

That's correct.

[Operator Instructions] Next, we have Arie Dekker from Jarden.

Just firstly, on direct property expenses, they increased $10 million versus $4 million increase in the recoveries. Clearly, you had Resido coming on in the office at Sylvia Park. But can you just give a little bit of color of what other factors because it's quite a step-wise increase contributed to such a large increase, including in the under-recovery.

A great question. Yes, it's Resido is the main -- so it's about $5.7 million is the delta. There's some expenses in there increases from Aurora, which is on a gross lease. There's also some unrecovered expenses due to vacancies. So that -- and then we've increased our doubtful debts. So that's specific in the general provision by about $900,000. So across those categories, basically add up to that $5.7 million. Obviously, and those are unrecoverable expenses.

Sure. Just on the doubtful debts, any particular assets where that's directed at?

No, the specific provision has been increased by about $160,000, $200,000, and it's across the board. And then the material increase here is just a general provision given the sort of economic uncertainty that we're [ running ].

I understand that. Just on Mackersy, just the one question I had on that at this point was how much of the funding -- what's sort of been the rate? I know it's only 6 months, so of the $6.5 million drawdown on that, how much of that's been used in the first 6 months? And what's your view on how long that will last in the business?

Yes. So we don't expect to have to provide any more funding, and we expect that to convert to equity later this year.

Okay. So the business is within the year through the conversion, your expectation is the business will be positive cash flow?

Yes. Based on the current forecast, yes.

Yes. And then just in terms of restructuring of syndicates and that sort of stuff within the business, has there been any sort of start made to that?

It's -- I won't give any further detail on that, but they are progressing well with -- we set them a number of revenue targets, and they're progressing well with the initiatives associated with those, and that will trigger the conversion.

Okay. Yes, just back to the commitments, you gave a little bit of color there to Rohan. Just in terms of total CapEx for this year, though, do you expect -- because I know at Drury, for example, which would be one of the bigger projects, I guess, when you get underway, sort of sitting at $1.5 million at balance date. What is your expectation for total CapEx in '26 and within that spend at Drury?

We won't kick off any further spend at Drury until we've confirmed land sales. So it's relatively sort of immaterial there until we kick off and then it's probably $10 million to $15 million, but it's covered by the land sales, obviously. Our sort of historic BAU CapEx is about $41 million across leasing, maintenance and seismic. And then there's the IKEA shared works, about $12.5 million and then the Drury lobby upgrade that I mentioned before. So all in at the moment, we're looking at about $60 million, $65 million, which is down by about 47% from last year.

Yes, $60 million to $65 million this year. Okay. No, that's helpful. A big step down over these 2 years. And then I guess the -- you gave a little bit of color on the tax impact changes, which is useful. I mean, I guess the question I sort of got, you're not specific on timing around nonstrategic sales and that sort of thing. But just going back up to the strategy, and let's assume you had -- you progress a nonstrategic sale or 2 in the next 12, 18 months. As things currently sit, what would sit as the priority for meaningful investment when that headroom opens up in the gearing again?

Well, the first priority we would have if we did proceed with the asset sale is obviously looking at pay down our debt. But we would also look at our development pipeline and see what opportunities sit there, and there may also be opportunities for purchases of new assets and new income streams as well. So those are the sort of 3 buckets we would look at, at that time, yes.

Yes. And within that -- and I guess I didn't ask it that clearly. But within that bucket, which is sort of development pipeline across your existing assets, is there anything that sort of stands out at the moment as being a priority in that bucket post paydown of debt?

Yes, there's potentially further development at our mixed-use assets. We've got the Level 1 at The Base that we want to continue to develop. That's worked really well for us, and there's an opportunity there. There's further opportunities around mixed-use at Sylvia Park that we'll look to expand on in large-format retail as well at Sylvia Park. Yes, there's quite a few opportunities, but the great thing is we own the land and we control the land, and so we can choose the right timing for us to deploy capital.

Thank you for all the questions. This concludes today's Q&A session and conference call. Thank you for participating. You may now disconnect. Have a great day.