Precinct Properties NZ Ltd & Precinct Properties Investments Ltd (PCT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Precinct Properties' 2020 Full-Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Pritchard, CEO. Please go ahead.

Thanks, Kelly, and good morning, everyone, and welcome to the 2020 annual result briefing for Precinct Properties. I'm joined today by George Crawford, Precinct's Chief Operating Officer; and Richard Hilder, Precinct's Chief Financial Officer. As we are all aware, the 2020 financial year has been incredibly challenging, with the impact of COVID-19 on our country, our industry and on our business. Despite these challenges, our business has continued to move forward, and in particular, has completed the largest development in our history, which has placed our business now in a very strong position. The program for today's call is outlined on Page 2 of the presentation. I will shortly provide an overview of the highlights of the result before touching on some major things and reviewing Precinct's progress relative to our stellar strategy. I will then hand over to Richard, who will cover off the financial result before George provides an overview of our markets and our operational performance. Following that, I will provide an update on our development activity, and as usual, we will be delighted to answer any questions at conclusion of the call. Moving to the highlights page. This year, as outlined on this page, there are a number of highlights for the business. Most notably is the further growth in our AFFO, which has led to a 5% increase in our dividend for the FY '20 year. Also pleasing is our operating performance, particularly now that we have completed Commercial Bay and have a portfolio that is 98% occupied with an 8-year weighted average lease term. Further leasing on the new PwC Tower, taking it to 97% leased and the commencement of works at Bowen Stage 2 following further leasing are also key highlights in the period. Turning to Page 4 and our strategy. Our strategy has been well published over the past 8 years as we have reviewed, refined and adjusted our strategy as we have progressed. We've set out the key moves, and in particular, highlighted the establishment and now the conclusion of our 2020 vision. Looking forward, we're excited to continue to develop our pipeline of development opportunities, growing our market position in the flex space and coworking market and looking to secure future opportunities to grow value for shareholders. Over the page, we focus in on the transformation that has occurred from the 2020 vision and the benefits, which have accrued to shareholders. Most obviously, we have established some time ago a sustainable dividend policy, which is backed by AFFO and is now demonstrating the benefits of our strategy. As outlined in today's announcement, we are guiding to a lift in the FY '21 dividend to $0.065 per share. And driving this transformational change, we have significantly improved the quality and the resilience of our portfolio. Through divesting B grade assets and investing into new premium grade assets, we have attracted long-term leases with high-quality occupiers, and the portfolio is well leased, providing for a high degree of certainty that the rents will be paid. Over the page, we focus on the additional aspects of our strategy, which supports the outperformance that we strive for. Our key sustainability elements comprising our people, operational excellence, and our development activities underpin the functions of our business. In addition, we have identified then in order to drive outperformance. We believe we can achieve this through our portfolio by way of stock selection, through our development activities, and finally, through our operating activities, in particular, at Commercial Bay retail and through Generator. Page 7 sets out a summary of the key things, which we are observing in our markets, some of which are even more topical, given that we have moved into Alert Level 3 here in Auckland yesterday. The key things are working from home, our occupier markets, our views on the construction market and the activity levels in the city center. I will comment briefly on each of these things, but take a closer look at both working from home and city center activity levels. There has been much debate about the merits and effectiveness of working from home. Our sense is that there has been some impact to the office market, but we don't see those impacts as being materially detrimental to the market. I'll spend a bit more time on work-from-home shortly. Our occupier markets remain relatively resilient. In Auckland, there is expected to be more volatility in demand from occupiers. However, we are heading into this challenging period with the majority of our -- of new supply already leased and with the supply-demand balance at equilibrium. In Wellington, we see this market as continuing to remain quite strong. This is underpinned by demand from central government and a market, which is also facing a significant amount of obsolescence. In our view, the construction market, particularly vertical construction, will undoubtedly soften over the next 12 months, with some in the market suggesting that construction costs could reduce by up to 10%. And finally, city center activity levels, which I'll touch on in just a moment. Turning to Page 8 and taking a deeper dive in the work-from-home trend. Office space utilization, and office workplace strategies have evolved significantly over the past 2 to 3 decades. It wasn't that long ago that office workers had individual offices, had 20 to 25 square meters of space per person and had no ability to work from anywhere other than the office. Today's more agile office workforce is far more mobile, and we've seen density ratios increase significantly to enable more people in less space in an effort to enhance collaboration, but also to contain costs. Technology has enabled a more mobile workforce. Despite these changes, and pre-COVID, the workplace was evolving into a place where collaboration occurred, where work is met and consulted with one another, but they were not often the sole place that workers would work. With the advent of COVID, these practices have endured and have been extended. However, our view is that the role of the office remains as important as ever. And we do not see a material change in the premises areas for office occupiers in New Zealand. Supporting this theory, the following page outlines that of the 161 office occupiers, which Precinct heads within its portfolio, to date, just 4 businesses have indicated that they will look to sublease some of the space, for a total area of around 6,000 square meters. The vast majority of our occupiers have recognized that the office space remains critical to the success of their business and is a key driver in attracting talent and also a key driver in fostering talent. Over the page, we set out the public transport and pedestrian counts for the Auckland and Wellington city centers. As outlined on this slide, without tertiary students and without international tourists, pedestrian counts have increased in Auckland to be 83% of what they were this time last year. To us, this signals that the vast majority of office workers were back in the office up until the reintroduction of lockdown yesterday. Similarly, in Wellington, the public transport utilization was higher than Auckland, with bus patronage in excess of 90% of the same time last year. These trends give us confidence that the city center office is here to stay and that following COVID, our expectation is that prime grade office in central cities will remain a core aspect of any successful business. I'd now like to hand over to Richard to take you through the financial results.

Thanks, Scott, and good morning, everyone. Total comprehensive income after tax for the year was $35.1 million. This compares to $190 million last year, with the difference relating to last year's revaluation gain and this year's devaluation. Despite this, our operating performance was strong, with our preferred measures, funds from operations and adjusted funds from operations, both higher in the period. As noted at the time of the interim results, tax expense was expected to be low given the amount of activity occurring within the portfolio. The lower expense was due to the disposal of depreciable assets, leasing costs and deductible CapEx. The reintroduction of depreciation of structure for commercial buildings will provide additional tax deductions from July 1, 2020. As at June 30, the total value of undepreciated structure was $817 million. This will see Precinct's tax expense remain low over the coming years. Slide 13 provides a breakdown of operating income. Net property income for the period increased 2.1% to $97.2 million. During lockdown levels 3 and 4, Precinct provided support to clients impacted by COVID-19. This was achieved through a range of measures, including rental abatements totaling $1.7 million. Notably, these were fully expensed in the period. The completion of developments continues to increase net property income. However, these additions have been partly offset through asset disposals and foregone income associated with Wellington government assets and 1 Queen Street. Adjusting for the COVID-19 abatements, developments and transactions, like-for-like income growth was 3.1% higher with the Auckland portfolio seeing an increase of 2.5% and Wellington, achieving a 4.8% uplift. Generator recorded gross operating revenue of $18.6 million and contributed $8.6 million to operating income. Including Generator's rent expense of $6.8 million, which is excluded due to IFRS 16, the net contribution to funds from operations reduces to $1.8 million. Turning to the next slide. With the decision last year to move to an AFFO-based dividend policy, it is pleasing then to see both FFO and AFFO grow in the period. Of these 2 measures, we continue to believe that AFFO provides a better measure of funds available for distribution and this grew by 11% or 5.9% per weighted security. The 2020 dividend of $0.063 per share was 5% higher than the previous year and reflected an AFFO payout ratio of around 100%. Had it not been for COVID-19 rent abatements, which were fully expensed in the period, AFFO would have been around $0.064 per share. Over the coming years, we expect maintenance CapEx and leasing expenses to reduce, reflecting the age and quality of the portfolio and its long-term weighted average lease term. This, combined with ongoing developments should support earnings stability and growth. Turning to Slide 15. The devaluation movement of $66 million reflects a 2% decrease on year-end book values. Excluding developments, the investment portfolio saw a 2% increase with the Wellington assets recording an uplift of 5.8%, while Auckland was largely flat. Across Wellington, the valuation gains were mainly attributable a firming in cap rates, particularly those of long-term leases to government entities. In Auckland, while there was a firming in cap rates and continued market rent growth, the impacts of COVID-19 on both the 1 Queen Street project and Commercial Bay led to an overall devaluation decline. Commercial Bay recorded a revaluation decline of $81 million due to costs associated with COVID-19, the accounting treatment of liquidated damages and the lower Commercial Bay retail valuation. Adjusting for the $26.7 million of liquidated damages revenue recognized in the period, the net year-on-year movement attributable to Commercial Bay was $54 million. Valuers have also noted that retail assets have been impacted more than office assets due to the economic conditions and the office portfolio's long WALT and covenant strength. As at June 30, the portfolio value totals $3 billion, with Precinct's NAV per share at balance date reducing to $1.45. Turning to the next slide. Our approach to capital management remains proactive, and we are focused on initiatives that support our strategy. During the year, we settled the $163 million USPP and refinanced the $150 million bank debt facility, which was due to expire in November 2020. Total committed funding remains around $1.2 billion with a weighted average term to expiry of around 4 years. We have an expectation that the convertible notes will be converted to equity. The next liquidity event is the maturity of the $70 million bonds in December 2021. The balance sheet remains in a strong position with gearing, which excludes the convertible note of around 29% against a covenant of 50%. The sale of Pastoral House at the end of April reduced gearing and will help to fund future opportunities. In addition to the sale, another capital recycling initiative is being explored through the potential sale of the remaining 50% interest in the ANZ Centre. Our weighted average interest rate has reduced to 3.9% in the period, with hedging levels falling to around 56%. Both reductions reflect an increase in borrowings and several swap restructures undertaken in the period. Interest coverage remains good at 2.4x against a covenant of 1.75x. This ratio is expected to improve as developments become income-producing and on maturity of the convertible note. Turning to Slide 17. We continue to make good progress on sustainability. In the year, we improved our growth rating to above the global average, and most pleasingly, verified our carbon footprint, obtaining a carbon-zero certification in the process. We are also reducing the portfolio's carbon intensity and have a goal of ensuring all our office buildings have a minimum NABERS Energy rating greater than 3. While we have made progress in this space, we will look at ways to improve our reporting and reduce emissions further. Over the coming 12 months, we intend on submitting to CDP and report under the TCFD framework. Finally, despite the current uncertainty, we expect adjusted funds from operations for the next financial year to increase 3% to $0.065 per share. We continue to have confidence in our earnings outlook due to the portfolio's quality, its client base and strong WALT. The portfolio also benefits from a high proportion of structured reviews were around 15% of the portfolio subject to a market event over the next 12 months. The reintroduction of building depreciation and lower interest rates will support further earnings growth over the next few years. And in addition, Generator and developments, such as 40 Bowen Street will continue to provide further earnings accretion. Consistent with our policy, we anticipate growing the dividend for FY '21 by 3.2% to $0.065 per share. Thank you. I will now hand over to George.

Thank you, Richard. Good morning, everyone. Turning to our markets on pages 20 and 21. Overall, we have seen a good level of resilience within our city center markets. And this has also been reflected in our portfolio activity, which I will cover shortly. Wellington has shown the highest level of resilience, underpinned by continued public sector expansion and a shortage of quality office stock. This is resulting in low vacancy and a supporting rental growth. The prime market in Auckland continues to have low vacancy levels despite the increase in stock following the completion of Commercial Bay. The impacts of COVID-19 means some businesses are looking to sublease space. However, these are mainly in the city fringe markets. And as Scott mentioned, the impact on our own portfolio appears to be limited. We expect the prime rentals will remain fairly flat in the near term, however, as there are more options available. Demand for flexible space in Auckland and Wellington has been strong over the last year. However, this is impacted in the short-term as some businesses contract or consider sublease alternatives. Over the medium term, we expect continued growth in demand as occupiers increasingly recognize the benefit of flexibility. City center retail market conditions remained challenging, with continued impacts from the growth in e-commerce as well as the loss of international tourists. Consumer spending post the April-May lockdown has been strong, however, across the market. And I will shortly provide further detail on the first 3 months of trading at Commercial Bay. Moving to Page 22. The investment market has rebinded, and we have seen a number of market transactions complete at strong metrics post lockdown. The inability of international buyers to physically view assets has been a challenge, but it hasn't prevented international buyers transacting. Very low interest rates seen here to stay. And combined with the tax changes, we believe, we'll continue to underpin demand for quality assets. Turning now to our operations. Page 24 provides a reminder of our value drivers. For our investment portfolio, we benefit from highly secured cash flows with strong defensive characteristics, underpinned by 98% occupancy, a weighted average lease term of 8 years and a very high-quality occupier base. Government pays around 1/4 of the rent and over half of our rent is paid by investment-grade entities. Supplementing our investment portfolio are our operating exposures and development activities, which both drive further value creation. Our development activities support maintaining the quality of our portfolio through creating both high-quality assets and attracting and retaining high-quality occupiers in our portfolio. Our operating activities include Commercial Bay retail and our flex space provider Generator as well as driving a premium to market rentals, these activities add value to our real estate by underpinning demand and improving the amenity and community around our assets. I will provide some insights on our investment portfolio performance and operating activities, and Scott will then cover off our development activity. As outlined further on Page 25, we now participate fully across the office spectrum from traditional long-term leases through the co-working space. This means that we can deliver to the evolving market requirements. Turning to our portfolio activity on Page 26. We're pleased to say that solid leasing activity continued during lockdown, with a number of key leasing deals concluded in June and July. This has included the 2,000 square meter lease to a confidential party, which has taken the Commercial Bay tower to 97% leased. For us, this activity is a key indicator of the underlying strength of the office markets and the confidence, which many occupiers have in the future of the office as well as the value of being located in Auckland and Wellington city centers. The strength of the market through the year and the benefit of that for our rental growth is further evidenced by the 8% lift on previous rentals on new leasing as well as our market rent reviews being settled on average, 11% higher than previously contracted levels. Acknowledging that we are once again in a lockdown position in Auckland, Page 27 summarizes the impacts from the April, May lockdown period. That was a very difficult and uncertain period for our occupiers. And our approach was to maintain very high levels of communication and to provide support for those businesses, which were most affected. We provided a total of $1.7 million of abatement across April, May and June. Just under half of this was contractual support to office occupiers for the lockdown period, with the balance mainly discretionary support for our retailers. Importantly, across all of our office leases, no abatement was provided other than to 3 parties with contractual abatement rights. Turning to Page 28 and 29. These slides reinforce the extremely high-quality and resilience of our investment portfolio, underpinned by long-term leases to New Zealand's government and highest-quality businesses. Looking at the chart on the top right-hand side of Page 29. Importantly, the significant amount of long-term leasing completed over the last few years through our development activities, has resulted in a very strong level of secured cash flow. And as shown in the chart below, very low levels of annual lease expiries in the forthcoming years. Moving now to Commercial Bay on Page 30. It's pleasing to announce today that the PwC Tower at Commercial Bay has reached 97% leased, well ahead of our target of 90%, when we committed to the project. The first occupiers have moved in and the post completion fed outs are well underway. With both the retail and office open, the focus is on completing the remaining works, and working with Fletcher Construction to agree the COVID-related costs on the final account. Commercial Bay retail opened on 11th of June, and as outlined on Page 32, we have had a very strong initial 2 months of trade. Sales performance has been ahead of valuation assumptions, with food and beverage being a key outperformer. We're well advanced on the next round of openings, which will include 2 signature restaurants as well as international retailers who were delayed due to COVID-19. The chart on Page 33 provides further evidence that Commercial Bay retail is delivering to its promise with the weekends being our busiest days and reversing the historic position of the city center emptying out on weekends. Regrettably, we are once again closed. However, we remain confident that Commercial Bay will continue to be well supported by Aucklanders as soon as we can reopen. Turning to Generator on Page 34. Our strategy of investing in this space is now proving its benefits across the portfolio. Of our total leasing in the period, around 7,000 square meters has some Generator element to it. This includes the new lease to Ernst & Young at Bowen Campus as well as around 4,500 square meters of leasing to clients who are growing out of Generator sites into the Precinct portfolio. Pleasingly, we have also concluded to manage leases to global corporates, who essentially have dedicated premises in a Precinct building, but with all of their office needs being outsourced to and managed by Generator. Generator has returned a solid and profitable performance for the year, driven by a 13% lift in revenue. And despite the impact of COVID-19, essentially closing the events business for the fourth quarter of the year. We remain confident in the medium-term demand outlook with businesses increasingly valuing flexibility. This view, along with a positive outlook for the Wellington office market, supports our ongoing growth plans with our new Wellington sites at 30 Waring Taylor Street and Bowen Campus plan to open in late 2021 and 2022, respectively. Thank you. And I'll now hand back to Scott.

Thanks, George, and turning to our development section. Page 40 sets out a summary of our current development commitments. We expect to secure a blended return on cost of 18% and a blended yield on cost of around 6.7%. It is worth noting that with the completion of Commercial Bay, the current development activity that we have committed to includes Wynyard Quarter Stage 2 and the first building at Bowen Campus Stage 2. In the last 12 months, we have committed to Bowen Campus Stage 2, while deferring 1 Queen Street and continuing towards completion of Wynyard Quarter Stage 2. Turning to Page 41 and focusing on Wynyard Quarter. The second stage of Wynyard Quarter has progressed well during the year. We're committed to the project with no leasing in late 2018, and we're delighted with the construction and leasing progress to date. Construction has progressed very well. We are currently fully enclosed with fit-out works underway internally. Despite the impacts of COVID and the initial lockdown period, we remain on program, which is a real credit to the main contractor, Hawkins. The office space within the building is 100% leased to media design school and also to a global tech company, who has leased the top 2 floors. The next area of focus is on the 3 retail tenancies with leasing now underway. Now turning to the following page and focusing on Bowen Campus. Over the lockdown period of March through to May, we were very pleased with the level of ongoing inquiry from occupiers for the second stage of Bowen Campus. Pleasingly, we were able to agree terms and negotiate development agreements with EY in Fujitsu, which together with Generator, means the building is 72% pre-leased. Construction has now commenced, and we are currently on-site completing piling for the build. Our expectation is that the building will be complete in late 2022. It is our hope that we will also commence works for 44 Bowen Street during the 2020 calendar year. Based on the inquiry levels and negotiations, which are currently underway, we remain confident that this will occur. The future pipeline of developments is set out on the following page and includes 44 Bowen Street, Wynyard Quarter Stages 3 and 4 as well as 1 Queen Street. We continue to assess our options regarding the 1 Queen Street site in order to determine the highest and best use for the development. In terms of the outlook, there is no doubt that we are in very uncertain times, and the move to Alert Level 3 for Auckland and Alert Level 2 for the rest of New Zealand yesterday confirms this. Despite this, we feel very fortunate that Precinct is in an incredibly strong position with a long weighted average lease term, very little expiry risk and a high degree of structured growth, and most importantly, some of the highest quality occupiers in New Zealand. We remain confident, and our confidence is reflected in our guidance being a lift in the dividend for the FY '21 period. This is the result of years of planning and execution in order to have the highest quality portfolio possible. I'd like to thank you all for joining us for today. That brings us to the conclusion of our presentation. And we're happy to take any questions that you might have.

[Operator Instructions] Your first question comes from Arie Dekker with Jarden.

Just -- first question just in relation to the additions to Commercial Bay through 2020. Can you just give a bit of a breakdown of that $200 million? And also, just some commentary on what might still need to be accrued in 2021, if anything? And then just also of those 2020 additions, sort of the cash split for 2020 versus 2021?

Yes, Arie, So we've accrued everything into the end of year accounts for what we need to spend. That is in -- that's in the financial statements that you can see there. In terms of spend in the period, it would be in around $100 million or so, slightly more than that. And then the accrual for Commercial Bay at the end of June 30 is in the mid-40s.

Mid 40s? Okay. Great. Just in terms of, I guess, the relief you've provided given an outline of sort of the deferrals and abatements for the FY '20 year. Obviously, cognizant that we're sort of moving into sort of a new lockdown period of uncertain duration. But just in terms of, I guess, the retail at Commercial Bay, in particular, is there anything in the way of release that you sort of expect to come through the FY '21 accounts associated with this lockdown? Or just generally slower activity because of the impact of COVID on international tourism and the [indiscernible] in the Central City?

Yes, Arie, Scott here. So at the moment, we've had a period of time where for all of those retailers at Commercial Bay, the leases effectively started for those who opened on 11th of June. And a large majority of those actually had a period of rent-free, which was not sort of related to COVID, but was very much a function of kind of incentives for those new leases commencing. They've had a really strong period of trade, as we've reported. There's no -- generally speaking, there's no abatement rights that exist for those retailers now that we're back into Alert Level 3 in the center, I suppose. So we still need to work through kind of what that means. We have stated and I'll restate it again that we're a long-term owner. And so we're pretty keen to support all of our occupiers to the extent that it's necessary throughout the business. The dividend guidance and AFFO guidance for the year has taken into consideration some assumptions around the likelihood that we could be in lockdown again during the year. As you'll see, it's quite uncertain at this stage. So we don't know whether we're going to be in this particularly sort of Alert Level 3 or whether we go to 4 or whether it goes to 2 and what that means. But our assumptions for AFFO and our [indiscernible] guidance has taken into consideration a form of conservatism around and expectation that we may be in lockdown.

Sure. Okay. Just on the ANZ, the potential divestment of the remaining 50%. Can you sort of just comment on timing for adding to the co-investor on that?

Yes, that's passed. And so that asset can now be taken to the [Audio Gap] and we've appointed an agency to help us with that program. That will be effectively launched in the next couple of weeks, although there are a bunch of participants in that market who are already aware that is available.

Our next question comes from Nick Mar with Macquarie.

Just a couple of random questions. The kind of outlook for maintenance CapEx from here, 20 basis points, when you were kind of coming into all of this, I think the guidance was circa 40 basis points back in, I think, 2017 for post completion. What's kind of changed in your view around how much maintenance the portfolio requires?

Yes. I think just continuing to sell-out of those older assets, Nick. We've -- one of the biggest lessons that we've learned been involved in this business for quite a while is that -- as the buildings age, they differently attract quite a lot more maintenance CapEx. And back in '17, we probably didn't assume that we'd sell as much as we have. And our expectation is that we will accept the remaining 50% of ANZ. And when you think about sort of what we've built, and there's a couple of billion dollars really that we would have built once we finish what's on our box at the moment. Then, yes, our expectation is that 20 basis points of maintenance CapEx is one of the benefits of that. Now that doesn't mean that 20 basis points will exist for 10 years or so, but that's what we expect in the short term, having just finished completion of all of those developments.

Yes. No, that's great. And then just on the Bowen Campus and the 44 Bowen. Sorry, did you say you'd expect to start in the calendar year '21 on the second site?

No, we're hoping to try and pre commit 44 before Christmas. And we've got a bunch of discussions, negotiations, which are underway at the moment.

Yes. How much kind of cost save is there for getting both up and running at once versus doing them separately?

Yes, there is -- look, there's a couple of million dollars in that. If we can get the second stage or 44 Bowen up and running before Christmas, we think there's some savings that we can bank there.

Cool. And then lastly, just on the kind of sublet market. Within your leases, what kind of control affinity you have over the tenant's ability to sublet it or whether or not you guys could say and how it is sublet if they do go down the revenue?

Nick, George here. Yes, typically, it's on a sort of not to be unreasonably withheld basis. And -- but we'll generally take an approach of working cooperatively with one of our occupiers, who has an excess of space to make sure that we get a good long-term outcome for the buildings. And so whether that's through them subleasing it or surrendering space, that's what we work through that on a case-by-case basis.

Just a couple of extra points. There's also use provisions, which protect us and there's also -- in the instance where someone might want to assign the lease, then there's sort of greater protections for us around approving who the party might be. So when someone subleases, obviously, we continue to retain the head lease on the hook for any guarantees and so on.

Our next question comes from Adam Lilley with Craigs Investment Partners.

Just thinking more about portfolio. So do you have a view at the moment as to what the kind of your portfolio value is relative to, say, replacement costs, maybe on -- just like the Auckland market and the Wellington market?

Richard here. Auckland is closer to the replacement value, but Wellington is quite divergent. So the replacement value in Wellington is close to double the valuation down there. So values are probably, what, 60% or so of replacement and Auckland that's -- it is closer.

Okay. And just one other from me. You just mentioned there's been a number of swap restructures in the period. Is that kind of by way of like blending and extending? Or kind of how have you approached that?

Yes. Blend and extends and also just pushing some out a bit. That was largely done in lockdown. And the reason for that was around negative interest rates, primarily and that mismatch between -- for swaps.

So do you have 0 rate floors in your policy agreements?

Yes, we do. On the bank documentation.

Our next question comes from Jeremy Kincaid with UBS.

First one from me, just around valuations. What have the valuers done with regards to the change in depreciation laws? Have they made any assumptions there?

Obviously, they're aware of it come the valuations. It was obviously, clearly, public information. I don't think they were fully factored into the valuations. They all -- you'd have seen research notes and some publications from all the houses indicating that valuation uplift kind of in theory. But they all -- as you be aware, they point to transactional evidence. So I don't think that was fully priced in to the values at June 30.

Okay. Sure. And then the second one for me, back to the ANZ Centre. I suppose I had your gearing ratio at a pretty manageable levels, especially with the convertible notes maturing. Is the thinking behind that divestment is more around optimizing the portfolio? And as you talk about getting maintenance CapEx down even lower? Or is there something bigger on the horizon?

That's really -- for us, it's about sort of funding for 1 Queen. So we are working through our options on that development, and we're making quite good progress on it. It's probably a little early to say we were lending in terms of timing and use. But we feel like we could be -- and it would be nice to think that we could get underway with that next year, early next year, potentially. And in order to do that, we'd like to sort of take some capital off the capital out of ANZ and be able to fund 1 Queen.

And on HSBC, can you -- sorry, 1 Queen, can you be capitalizing interest over the next 12 months, even if you're not doing anything substantial to it now?

Yes. The short answer is, yes, I can talk to you about that.

[Operator Instructions] Your next question comes from Shane Solly with Harbour Asset Management.

Thank you for the rundown. Well done on a sort of result, given a very challenging period of time. And a couple of questions. First one, Scott, just when you talked about work from home, how do you think about allowing for that in your portfolio going forward? What's the practical impact for you on work from home?

I think for us, one of the things that we're learning and a good process that we just worked through was the completion of the new PwC Tower. Obviously, our users are really focused on how best they use the real estate that they've leased. And we're fortunate in that the buildings that we have allow either very dense occupation or also occupation that kind of can evolve. Technology is a big part of work from home, and we're definitely seeing demand from our occupiers for tech-enabled options to be throughout the building. And that's definitely being put in place in the new PwC Tower. And there's been a really strong response to that. Our occupiers across the board, bar the 4 that we've identified today that are looking to sublease, have all -- and we've talked to all of them, and they will remain very comfortable around the premises that they have and the area that they have. What they are thinking about is how best to use their space. Whether or not they need to spread out some of their disking systems, so that the space is not so dense. But also in doing that potentially reduce the number of disking stations that they have and recognize that the workspace might be more for collaboration, training, development, meeting value-add functions rather than just kind of processing functions.

I'll just add to that, Shane. We are seeing quite a lot of interest in Generator space from businesses who have a sort of higher number of people working from home, but still want to retain a hub, so they may have a 20 staff about a 10 person office and have a sort of rotating aspect. But also keen to use Generator spaces for meetings, particularly where the sort of tech-enabled facilities within those meeting rooms are at a good level.

Okay. George, just a second point, just to expand on the deferral component in the period. Can you just expand a little bit on your expectations on deferrals, either for the period or the coming period?

Yes. So in terms of the deferrals, we expect those deferrals to be fully paid back. The businesses which we provided those 2 are solid businesses. And we made a general offer to -- across our portfolio to businesses who felt that they would like to defer a portion of rent for a period that we would enable them to do so. And that was well received, but we actually had very low levels of take up. And as I say, they were from solid businesses. So we expect that to come back to us.

Okay. So within the next 6 to -- 6 months, you'd expect the deferrals to be repaid?

Those deferrals were offered on a repayment for sort of monthly rent over 2 years.

Okay. Okay. All right. Just to pick up on this maintenance CapEx point to. You've called out, does that include tenant incentives or not?

No, it doesn't include incentives. No.

Okay. All right. Can you just talk about -- so in terms of the valuations, how did the valuers assess retail or the ground floor retail that amenity component was there?

Commercial base specific change or across the...

Across. Was it...

It's probably -- I don't actually know that level of detail in terms of the retail, the base of the towers. But what I would say about the retail generally is that we've seen a pretty wide spread of the impact on retail. So for high quality retail, you've seen kind of a reduction in value of around 10% for more suburban-based lower quality. You've seen devaluations up to 20%. Our like-for-like valuation impact at Commercial Bay was around 6%. So that sort of reflects the quality, I think. The thing that's exacerbated the valuation impact for Commercial Bay retail is the covered costs, which we're still just finalizing at the moment.

[Operator Instructions] Your next question comes from Angus Simpson with ANZ.

Just further following on from Shane's question with regard to Commercial Bay. So if we think about the split between office and retail, what was the, I guess, the changes in cap rates between the 2? And then value on completion broadly unchanged year-on-year. So what sort of other, I guess, assumptions that valuers make compare an office versus retail?

Between the office and retail, I mean the office was largely unchanged. It's got a long-term WALT, really quality client base there. So that was broadly flat year-on-year for the valuation. The cap for the retail that did move out somewhat. So that was a 25 basis point shift. So we're -- that's at about 5.25% for the retail, which is a large driver for the valuation movement. But yes, the office is largely unchanged. And look, across the board, the valuers certainly valuing the long-term kind of secure nature of our cash flows. So other valuations, they were certainly increasing the level of rent-free and vacancy assumptions and other assets that I've heard have been valued, but that doesn't impact our portfolio so much just because of the, again, the quality and the long-term light nature of the WALT.

Okay. That makes sense. So was any of the devaluation related to cost increases that weren't COVID related?

That weren't COVID related? No, not really.

Perfect. [indiscernible]. And then just last question for me. Just in relation to the under and over rent in the portfolio. So I think last time you reported that the portfolio is sort of above 5% under rented. How does that looking, I guess, in the next 12 months with the view of kind of maybe flat market rents in Auckland, do you still expect to see, I guess, positive re-leasing spreads? Or I guess, how would it compare to that 8% or 9% deliver this year?

Yes. I'll kick it off and then hand over to George. In terms of the under-renting, Wellington is significantly under rented, 9% under-rented. In terms of Auckland, it's largely flat in terms of that under-renting but that's largely driven because of Commercial Bay tower. So the Commercial Bay tower is based on, obviously, the new transactions on higher face rents. So that's an over-rented position. The rest of the Auckland portfolio would still be under-rented by kind of a couple of percent.

Yes. Look, in terms of leasing that we have underway at the moment, we are generally putting our terms and negotiating on terms which are a premium to passing rentals. And that continues to be sort of the case, particularly around the assets in the -- other than the tower and the -- other than the PwC Tower and the Commercial Bay Precinct and also seeing that continue in leasing in Wellington.

There are no further questions at this time. I'll now hand back to Mr. Pritchard for closing remarks.

Great. Thank you. Look, once again, thanks, everyone, for dialing into the call today. We -- despite the challenging environment that we do have, we're really pleased with the result. We're really, really pleased with how the business and the portfolio has shaped up and the fact that we've sort of completed Bowen, and we've completed Commercial Bay, and we've got a full portfolio. So somewhat fortuitous with the timing, but very, very thankful to be here and obviously, thankful for your support. So have a good day, everyone. I appreciate it.

That does conclude our conference for today. Thank you for participating. You may now disconnect.