Property For Industry Limited (PFI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Property For Industry's 2022 Annual Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Simon Woodhams, Chief Executive Officer. Please go ahead.

Good morning. Thank you, and welcome to Property For Industry's 2022 annual results briefing. It's Simon, the CEO of PFI speaking. And today with me is Craig Peirce, our Chief Finance and Operating Officer. Just before we get started, we both wanted to acknowledge those impacted by the recent flooding in Auckland and the widespread devastation caused by Cyclone Gabrielle. Obviously, our thoughts with everyone who's been affected by these events. A small number of PFI properties have suffered some damage and it's our expectation that any losses will be covered by insurance. But pleasingly, everyone at PFI here is safe and well. So thank you for thinking of us. Just turning to Slide 2. Today, Craig and I are going to speak to the topics outlined on this slide. I'll begin by reviewing the highlights for the period and give an overview of the portfolio and its performance along with a summary of the key leasing transactions throughout the period. Craig then going to take us through the annual results and the section on capital management before giving an update on sustainability. I will then give a brief update on the market and reviewing our priorities. I will then close the presentation, after which there's going to be an opportunity for you, the participants for this call to ask any questions you may have. So if we can start on the Slide 4 headed highlights. We're pleased to report what has been a very busy year for us here at PFI. Highlights that Craig and I will expand on throughout the presentation included a steady underlying result with both our funds from operations and adjusted funds from operations marginally down on 2021's record result. Brownfield opportunities progressed at 78 Springs Road and 30-32 Bowden Road with construction work set to commence at both sites in Q3 of this year -- Q2, sorry, of this year. We've refreshed our sustainability strategy and continue to make meaningful progress on our ESG commitments. Our portfolio has delivered strong rental growth with 15% of contract rent leased during 2022 at an average of 11.8% above previous contract rents. Our balance sheet also remains in great shape with NTA confirmed at $2.98 per share and gearing at 28.5%. After concluding the share buyback program in December, we ended the year with over $120 million of available liquidity. And finally, today, we've announced a fourth quarter dividend of $0.0265 per share, resulting in cash dividends for the year of $0.081 per share, which is an increase of 2.5% on our 2021 dividends. Turning to Slide 6 headed portfolio snapshot. We've got a summary of the portfolio statistics as at 31 December. You can see that the company continues to own a diversified portfolio of 94 properties leased to 132 tenants. Pleasingly, the portfolio remains 100% occupied with a weighted average lease term of over 5 years. The contract rent grew $2.6 million to $98.2 million, and our unwavering focus on industrial property with the majority being held here in Auckland continues. On the next slide, Slide 7. During the year, we recorded a decrease in value from independent valuations of $56.7 million or 2.6% to $2.12 billion. This was largely driven by the higher interest rate environment, which has eased cap rates. Encouragingly, realized rental growth contributed to an estimated 1.3% of value growth to the portfolio and independent value of assessed portfolio has been approximately 11% under-rented. As a result of these revaluations and portfolio activity, our passing yield increased to 4.62%, and NTA has been confirmed at $2.99 per share. Moving through to Slide 8. During the period, the team completed 33 leases over 104,000 square meters of area for an average lease term of 5 years. Of these 33 leases, 7 were new leases and 26 were renewals. On average, just 0.1 months of incentive per year of term was required to secure these transactions, reflecting the continued strength of the industrial market. The positive re-leasing spread of approximately 12% on annual passing rents was also achieved, demonstrating the strong growth in market rents we've seen over the last 12 months to 18 months. Moving on to 9 -- Slide 9. As I mentioned earlier, the portfolio remains 100% occupied. And as the graph on the right -- sorry, the left-hand side illustrates, we have just 7.8% of contract rent due to expire during 2023. Excluding brownfield opportunities, which we'll touch on later, just 4.4% of contract rent is due to expire during the year. This is well below recent years, where historically, we have had around 10% due to expire at the start of the year. You can turn to Page 10. 102 rent reviews were completed during the year, resulting in an average annualized uplift of 4% on $62.8 million of contract rent. Around 83% of our portfolio is subject to some form of lease event during 2023, allowing PFI to capture further rental growth with CBRE are forecasting to increase by 5.5% per annum over the next 5 years for prime properties and 3.5% per annum over the next 5 years for secondary properties. Moving to Slide 11. We've also made some great progress on our plans to bring facilities management services in-house. We currently use an outsourced provider for our FM. And while that model has worked well for many years, we can see that bringing this function in-house is pivotal to delivering on our sustainability and business objectives. This change also gives us the opportunity to provide a more integrated experience for our tenants with both the leasing and facilities management teams working closely together, which we believe will drive further value for our business. During 2022, we hired our lead facilities manager and picked off a program of work to update our systems and processes. Everything has been designed in a way to ensure we can provide a seamless experience for tenants, contractors and our team. And we are building this internal function with our future ambitions in mind. We're aiming to complete this project during the year. Now I'm going to hand over to Craig, who will run you through the annual results. Craig?

Good morning, everyone, and thanks for tuning in. As Simon mentioned earlier, we're pleased to share with you a steady underlying result for the company. Fair value losses on properties of $56.7 million contributed to a loss after tax of $13.9 million. Funds from operations earnings were down 7.8% from the prior year to $0.1021 per share. Adjusted funds from operations earnings were down 5% from the prior year to $0.0883 per share. And 2022 cash dividends of $0.081 per share were up 2.5% on 2021 dividends. So digging into the numbers a little bit, let's turn to Slide 13. On this slide, we take a look at net rental income, which at $95.6 million was up $1.4 million or 1.4% on the prior year. Growth on the stabilized portion of the portfolio equated to 2.4% for the year. As Simon explained earlier, 2022 saw PFI's portfolio deliver strong levels of rental growth, which has translated into positive contribution to net rental income of $3.7 million. Net impact of other activities such as current and prior year acquisitions, developments and divestments resulted in a decrease of $2.4 million, but the largest negative item to call out here in the loss of income from the divestment of Carlaw Park late from the prior year. Moving to Slide 14. On Slide 14, we see how the first half of the year's activity has translated into adjusted funds from operations or AFFO. At a headline level, AFFO earnings of $0.0883 per share were down $0.0046 per share or 5% when compared to 2021. Under the hood, there are a few moving parts. Net rental income, including AFFO adjustments, was up $3.3 million or $0.0066 per share. A reduction in nonrecoverable property costs, tax and maintenance CapEx also provided a positive contribution. The main offsetting factor was an increase in interest of $4.5 million. This increase was a combination of a couple of factors. We've seen an increase in the company's weighted average cost of debt to 4.77% as of the end of 2022 from 3.81% as of the end of the prior year, combined with a $57 million or 10% increase in average borrowings from net acquisition and divestment activity. If you now turn to Slide 15, and turning our attention to dividends, the PFI Board has today resolved a fourth quarter dividend of $0.0265 per share with a dividend reinvestment scheme not operating for the dividend. The fourth quarter dividend will take cash dividends for the year to $0.081 per share, up 2.5% on 2021 dividends, resulting in an FFO dividend payout ratio of 79% and an AFFO dividend payout ratio of 92%. The dividend payout ratio based on PFI's dividend policy is 91% of AFFO on a rolling 3-year historic basis. Looking to the year ahead, we expect to clear 2023 cash dividends of between $0.081 per share and $0.083 per share, an increase of up to 2.5% on 2022 dividends. Higher forecast interest rates, including uncertainty around the pace and size of changes in the official cash rate have the potential to impact forecast earnings, and PFI's guidance assumes an average BKBM throughout 2023 of 5.25%. This guidance is also subject to upside risks from capturing sector rental growth and portfolio under-renting with additional downside risk predominantly from tenant failure. PFI's dividend policy, again, being to distribute between 90% and 100% of AFFO on a rolling 3-year historic basis, and cash dividends of $0.081 per share to $0.083 per share are anticipated to result in the dividend payout ratio at the bottom end of the policy range for the 2023 period. Looking now at the balance sheet. Here, we provide more detail on the change in value of PFI's investment properties, which including assets held for sale availed are valued at over $2.1 billion. The decrease from $2.17 billion at the end of 2021 was primarily driven by the $56.7 million valuation loss Simon talked about earlier as well as $20.8 million of disposals. $17.8 million was deployed on CapEx during the year, including a sustainable refurbishment at 3-5 Niall Burgess Road, seismic strengthening at Shed 22, pre-project works at our development at Bowden Road and seismic strengthening works at Rosebank Road. One small property at Neilson Street in Penrose was also purchased during the year. Turning now to Slide 17, where we look at NTA. Net tangible assets or NTA per share decreased by $0.046 per share or 1.5% from $3.034 per share as at the end of 2021 to $2.988 per share as at the end of 2022, with valuation losses mentioned on the previous slide driving the decrease, partly offset by movements in swaps and retained earnings. Moving now to Slide 19. 2022 was a busy period for capital management. With the company's shares trading at a 21% discount to NTA at the time, we announced that we would undertake an on-market share buyback program on 25 May 2022. By the end of the year, more than 3.5 million shares or approximately 14% of the shares able to be purchased under the program have been purchased at an average price of $2.4271 per share. That's approximately $8.6 million of proceeds. By the end of the year, we had around $140 million committed to brownfield developments across Springs and Bowden Roads. So in December, the decision was made to pause the buyback program indefinitely as the company has assessed the investment in these developments as being a superior use of its capital. Moving over to Slide 20. This slide provides more detail on PFI's proactive and conservative capital management. We refinanced our $100 million facility from the Banking in New Zealand during the year, extending the facility date by 1 year to 2 July '24. In addition, a USPP facility was established with Pricoa Capital Group, providing PFI with access to long-term funding, albeit the USPP facility remains undrawn at this point in time. And looking ahead, with $140 million of planned Green Star development spend, we are now investigating Green Finance to match that Green investment. Moving to Slide 21. On this slide, the top graph shows our bank facilities and bonds and the bottom graph illustrates our hedging profile. As can be seen by the bottom graph, interest rate hedging provides for an average of 61% of the company's debt to be hedged at an average fixed rate of 2.38% during the year, offering some protection from rising interest rates. Turning now to Slide 23 for an update on sustainability. During 2022, we continue to make tangible progress on our sustainability and wider ESG commitments. Highlights for the year included the completion of our R22 HVAC replacement program ahead of schedule, starting to apply our sustainable refurbishment program and continued focus on our team, our community and transparent disclosures. And when it comes to disclosures, you can find our third voluntary TCFD report in our annual report. Moving to Slide 24. Our ESG framework was developed in 2019, and we've made big strides since it was implemented, but it was time for a refresh to set us up for the next phase. So during 2022, we consulted with a range of stakeholders, and we've set up a new sustainability strategy through to 2030. The strategy sees us focus on 5 areas: greenhouse gas emissions, resources and waste, disaster and climate resilience, people and well-being and, importantly, economic value. We've seen aspirations for each of these focus areas and committed to a number of projects and targets that will help us to work towards these aspirations. Turning to Slide 25. Some of the immediate targets are set out on this slide. Firstly, we're committing to Green Star certification for significant new buildings, which will help us future-proof of portfolio. Second, we set an ambitious target to implement power metering across 50% of our portfolio by 2024, which will enable us to understand the energy use in our buildings. We're also targeting installations of solar at 5 of our properties to provide renewable power for our tenants. And finally, we'll continue to minimize and offset our Scope 1 and 2 emissions. I encourage you to take a look at the sustainability section of our annual report, which has a lot of information on the refreshed strategy and our thinking behind it. That's all for me for now. I'll hand you back to Simon, and I'll be around for questions at the end. Simon?

Marvelous. Thanks, Craig. I'm on Slide 27 now. I'm just going to touch briefly on current market conditions. As can be seen by this slide, Auckland industrial vacancy remains at historical lows well below 1% for both prime and secondary stock. These favorable supply-demand conditions provide the platform for continued forecast rental growth, and with 11% under-renting, our portfolio is well positioned to capture this. Looking forward to our defensive well diversified property portfolio allows us to look through the short-term challenges to execute on upcoming opportunities within our portfolio with a high level of confidence, which is pleasing. If you turn to Slide 29, as many of you on the call today will know when we look at our portfolio, we split it into 4 categories or buckets. We do this as it gives us focus and enables us to act with confidence as the portfolio continues to grow. As you can see, currently, all 4 categories or buckets that are comfortably within their target ranges. An increasing area of focus for the team is the redevelopment of existing holdings, the brownfields bucket, so to speak. I'm going to cover that shortly. But first, I just want to speak to our assets held for sale, which is on the next slide, Slide 30. Last year, we divested 3 smaller noncore assets during the year, and 8A & 8B Canada Crescent, which is down in Christchurch is contracted to be sold and settled in April of this year. After these sales are all complete, we expect our pro forma going to sit at 27.8%. These sales are part of an ongoing asset management program where we're prepared to move noncore assets on maximizing value, obviously, and then using the capital recycle back into better opportunities. A really good example of the strategy and action is how we dealt with the MOVe Logistics portfolio. And we just got a little slide on that, Slide 31. Some of you remember, we acquired 9 properties in our sale and leaseback transaction for what was then TIL Logistics back in November 2017. The waterfall chart here demonstrates the incremental value increase to our shareholders from November '17 through until 31 December last year, 2022. The first column shows that we originally purchased portfolio for just under $70 million. And while the last column shows that the total return or the valuation for the properties now sits at $123.2 million. The movement from $69.8 million to $123.2 million is comprised of nearly $22 million of valuation gains on the retained assets, gains on sale of $4.6 million on the 3 assets disposed during 2022, and as detailed on the previous slide -- sorry, that was detailed on the previous slide, and finally, the receipt of $27 million in net rent over that period. These activities combined gave us a total gain of approximately $53 million or a property level internal rate of return of around 13% per annum, which is clearly demonstrating that the recycling of capital is an important driver of value for us here at PFI and market conditions and alternative investment opportunities align. When we do recycle this capital, we want to target further accretive projects. If you turn to Slide 32. When you look at our brownfield opportunities, you can see that approximately $216 million or 10% of our portfolio is held in such opportunities. These are the redevelopments that allow us to invest our capital back into projects in key precincts. We regenerate older assets into best-in-class buildings that will underpin our performance for the next 50 years and beyond. If you jump through to Slide 34. We speak about 30-32 Bowden Road, which is located here in Auckland, in the middle of Mount Wellington, one of Auckland's key industrial precincts. This property has a final lease expiry 31 March this year, and our redevelopment plans for this 3.9 hectare site have been very well advanced during the last 6 months. Pleasingly, we have secured a precommitment for approximately 40% of the site, entering into a 12-year lease with Tokyo Food, who currently occupy a smaller warehouse close by in Carbine Road. Their relocation to our site allows them to consolidate several operations into a best-in-class property. We're targeting a June 2024 completion date for this new warehouse. Stage 1 of Tokyo Food, the stage is expected to cost around $31 million, and we're targeting a yield on cost, including land in excess of 5%. As previously announced, the Tokyo Food building will target a 5 Green Star rating. Jump through the next slide, next. For the balance of the site, we're developing an approximate 11,000 square meter facility on a speculative basis. Do note that we continue to receive really good levels of inquiry from prospective tenants. Combined, the total project at Bowden Road is an estimated spend of approximately $75 million with a targeted yield on cost including land in excess of 5%. The speculative development will also target 5 Green Star rating and will create PFI's first fully Green Star rated industrial estate once we complete. Moving through to Slide 37, we have some details on Springs Road. As announced late last year just before Christmas, our existing tenant, Fisher & Paykel Appliances, has committed to the first stage of a significant redevelopment at Springs Road and East Tamaki. The initial phase of this project has an estimated total incremental cost of around $76 million with a targeted yield on cost, including land of greater than 5.3%. The project is expected to be accretive to both earnings and NTA on a per share basis. Again, and consistent with our climate commitments, this facility will target a 5 Green Star Built rating. Move forward to 38. Here, we have the potential master plan for this significant 10.4 hectare in East Tamaki. It currently benefits from a very low site coverage of less than 40%. It's zoned heavy industrial and the site can accommodate around 67,500 square meters of facilities. Once complete, we're targeting to lift the site coverage here to around 65%. All new facilities within this estate will target 5 Green Star Built ratings. We move through to Slide 40. Just before I take you through the summary and take questions and very recent news as announced just late last week, we're pleased to announce the appointment of Angela Bull to the PFI Board. Angela will be known to many of you already, and she has a background on property investment and commercial development. This addition, along with the appointment of Carolyn Steele late last year has further strengthened and diversified our Board. Move through to the final slide of the presentation, Slide 41. To summarize, we're very pleased to deliver what has been a steady set of underlying results. Industrial property as an asset class that has continued to perform well. Demand from occupiers remains robust, supported by record low levels of vacancy and strong rental growth. Pleasingly, our portfolio and strategy are benefiting from these dynamics. Looking forward, as always, there may be some challenges, but we believe we are very well placed to respond to these. And just as important, we are ready to take advantage of the opportunities that we'll know about present themselves as well. Thank you. That concludes the presentation. Craig and I would welcome any questions you may have.

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

Congratulations on the results. Just looking at your re-leasing spreads of 12%, do the rental agreements being released have the same terms and rent review mechanisms as before or are we sort of to see some change like our tenants starting to worry about future industrial rental growth? So looking at like fixing a greater proportion of their rental terms and then willing to pay a premium for that?

Nick, it's Simon here. Good question. It's pretty much on a case-by-case basis. Any new agreements or variations we've pending to be able to achieve higher fixed rentals on the way through. So if you look typically, we probably had fixed rents of 2% to 2.5%. We're now seeing tenants agree to that sort of 3%, 3.25%, 3.5% as a fixed rental increase. And then on top of that, if we're signing a longer lease, we're putting in a mid-market rent review, sometimes there's a cap and core of 10%. But generally, we've seen higher fixed incrementals been agreed to, but it is case-by-case.

And then just looking at your sort of $140 million in committed projects underway, could you give any indication of how much of the construction costs are currently locked on?

At the moment, at Bowden Road, we've got about 35% to 40% yearly trades agreed, but we won't be locking the construction costs -- contracts down for Bowden Road until the end of March and Springs Road until mid- to late July. So we're working with our construction partner at the moment on those. What I would say though is the rate of escalation that we were seeing 12 months to 18 months ago or in the last 12 months to 18 months has abated. So we're feeling pretty good about the timing of locking those down.

Our next question comes from the line of [indiscernible].

Congrats on a great result. Just a couple of quick ones from me. Just your under-renting what's at 11%, I see you no longer disclose the Auckland number. So would you be able to give an indication for that?

Remain on the line. The conference will resume shortly. One moment please. Please remain on the line. The conference will resume shortly.

Hi, there. We're back. I don't know what happened to our phone, sorry.

[indiscernible] if you could please proceed with your question.

Yes. Hey, guys, sorry, not so sure what's happened there. Just congrats on a great result. It's pretty awesome to see the renting stuff coming through. Just in terms of the Auckland under-renting, I see you no longer disclose it or maybe unlisted, would you be able to provide a rough estimate for that?

Vishal, Craig speaking. Yes, look, we haven't broken out Auckland and out of Auckland, but I guess, as you might expect, the Auckland under-renting is higher than the sort of out of Auckland under-renting is what we could say. So -- and the portfolio is more than 80% Auckland based. So you could expect that number to be higher for the Auckland portion of the portfolio. But sorry, we haven't disclosed that at this time, you're right.

No, that's okay, that makes sense. And then just following on from the comments you gave to Nick earlier, I mean you're putting in mid-market rental reviews for your longer leasing agreements going forward. Are there any kind of other mechanisms or anything you've put in place to kind of close this under-renting gap?

Those are pretty much the key ones. When you get an opportunity to reset the market, you've got to make sure that you push or work with your tenants as hard as possible rather than push them as possible. So yes, we're very conscious of it, but you need to have the ability at market. So on renewal is a really good one. And obviously, these market reviews, they are uncapped. So, yes.

Yes, probably the other 2 call-outs, Vishal, I'll give there. Obviously, very low level of incentive. So that's sort of a very positive dynamic for us there. And then the other thing being the level of renewals versus the level of new leases. Again, I think the number is 25, 26 leases agreed during the year, which I think is 19 or so were renewals. And that really speaks to the position that [indiscernible] as well, they're keen to secure and secure early when it comes to staying on, which obviously works really well from a cash flow point of view and a rental growth point of view.

No downtime.

Cool, that's really awesome. I guess just one last question for me, which I think you guys have mostly answered, but I mean your rental reviews and momentum in the current year were pretty good. I mean really good outcomes for you guys. Do you have anything a bit more to add just to the confidence you have in the re-leasing going forward?

I think if you look at the lease expiries coming up, not just here but next year, when you take out the brownfields portion, we're down under 5% of renewals this year. And that's as a result, we do a lot of work with our tenants 12 months, 24 months out to understand what they're requiring and how do we retain them or improve the buildings. So we've got a management team sitting in the property team who are very -- what's the word I'm looking for, Craig, very focused, very -- get on the front foot...

Proactive.

Proactive, that's the word I'm looking for. So there's no expiry sitting there in the lease expiries of this year that we don't fully understand where we're standing. We're very confident with what's coming up over the next 12 months to 24 months. So we do a lot of work ahead of schedule is what I would say. And again, as Craig pointed out, a renewal not only says the tenant has very few options to go, some of it also says your existing building is fit for purpose, and I think that's quite important as well. So it's a slightly more positive way of looking at it.

Yes.

Yes. So yes, the leasing market is still strong. We've got properties that are potentially becoming vacant 12 months, 18 months out, and we're dealing with multiple parties on them. So yes, I mean, the leasing inquiry at Bowden Road has been strong. We've got over 18 months before that thing is even finished. And we haven't even started on site yet, and we're dealing with 3 pretty good inquiries on it. So yes, we're pretty confident in the leasing market at the moment.

Our next question comes from the line of Shane Solly of Harbour Asset.

Just a couple of questions from me. Firstly, well done on a solid result. In terms of lifting sustainability, you're really leading the charge here. Can you just talk about the overall Green Star target you've got for your portfolio?

Yes. Sure. Shane, thanks for that. It's certainly been a lot of work that Sarah and the team have been putting into that. And now obviously, the wider property team as well. So with the new projects that we're doing, we've come out and say that any new significant building will be, which are going to be 5 Star Green or better. I suppose the reason why significant [indiscernible], as you -- I'm not sure how much you know about the system, but it's a points-based system, and I guess with some of the smaller properties, the slight caveat there that can be quite difficult to get the number of points that you need given the way the rating system works. So yes, look, everything that we build from the ground up from now on will be 5 Star Green. The other part that I would come back to you though is obviously, we have a big portfolio of existing properties. And really the key thing we need to be getting on with here is trying to understand the performance of those buildings and getting some sort of performance rating for those buildings and then trying to lift the performance rating of those buildings. And so a big driver behind bringing facilities management in-house is being able to get on top of how those buildings are performing. You'll see some targets in there around energy monitoring and those sorts of things. So we're rolling out energy monitoring over -- trying to roll it out over half of the portfolio, and there will be other aspects of that as well. And then we'll be looking to put in place some form of Green Star performance measure or neighbors or something along those lines. We haven't quite yet decided to try and measure and then lift the performance of those buildings as well.

Thanks, Craig. Just building on that, the cost increase running ahead of rental growth. Obviously, you're wearing the interest costs upfront to increase the year. Is it fair to say? And then secondly, of that nonrecoverables, what's happening there?

Yes. Look, so the -- obviously, some of the costs associated with these sorts of things are new or additional -- the -- coming back to the facilities management side of things in the -- once the team is up and running and performing as expected, we expect that the funds that we use to pay to an external provider will be broadly the same as the cost of our internal team. As regards to nonrecoverable property costs, I think off the top of my head this year, they were largely flat, Shane. So I wasn't quite sure what you mean by that.

No, that's what I'm sort of trying to gauge whether there's anything we should be thinking about in terms of nonrecoverable -- but sorry, so the cost...

No, no, yes.

Sorry, you keep going.

Yes, sorry, you say...

And so there's [indiscernible] and interest costs, just coming through, is there any lifting in those cost structures here?

Yes. Yes, yes. I mean, obviously, as we pointed out, weighted average cost of debt is sort of up to 4.77% from 3.81%, and that's sort of 10% less than average borrowings as well. So, yes.

Okay. Just the last one for me. The intuitive hedging going forward then, Craig, can you just discuss what the strategy is, what your thoughts are there?

Yes. So we've got a policy in place and that policy hasn't changed over the last few years. I guess it's made to serve us during ups and downs of interest rate environments. So earlier this year, we have put on some additional hedging. We tend to try and work with our treasury advisors, Bancorp, to look for any different rates. So we did put in $40 million of additional hedging earlier on this year. And at the moment, I guess, like many people would tend to look at doing those as a forward start hedge. So I think it was a couple of years out and then it was a 4-year hedge after that. So I think 4 starting in 2 or 4 starting in 18 months is about what we did there. So...

Our next question comes from the line of Rohan Koreman-Smit of Forsyth Barr.

Just a couple for me. Just going back to the facilities management. Can you just give us an idea of how much cost goes in before you get the cost out? And what kind of [indiscernible] on by '23 or '24 kind of the timing as well?

Yes. So it's a '22-'23 cost, and I am just dragging up my notes right now, Rohan, because we actually have this detail in front of us, we've prepared earlier, something we've prepared earlier in my pile of papers. So total budget for that is around $885,000 for the project. And we have -- I think we've disclosed in the annual report, how much we've already spent, but off the top of my head, it's about $265,000. We split it out as a line item under administration costs there.

Yes, I saw it the earlier. And...

Yes. So the total project will be $885,000.

And then the timing of when you can drop the -- your new facilities management or your old facilities management contract and get your new team running?

So at the moment, that timing -- yes, yes, sure. So I'd say at the latest, it's the beginning of the fourth quarter, at the earliest, it's at the half year. So depending on how quickly the project concludes, there's sort of a 1 quarter window where we'll be able to drop out the old cost and have new team costs in there. So...

Perfect. And then the next one is just on valuations. I know valuations are what valuations are. But in the context of a 4.6% passing yield, which is below the debt costs on average, and CBRE talking to 5.25% to almost 6% for prime and secondary. Can you just talk us through about where you kind of believe or kind of what you think will happen to asset values over the short term? I mean I know you've got 11% under-renting, but that would just lift the passing yield to kind of 5.1%. So you're still below those CBRE numbers? Is it just a case the value as being too cautious? Just give us some insight there?

I think value has been too cautious. They can only compare to transactions that have occurred. So they look back historically rather than forward, which is the way they have to value. So yes, our view is there needs to be some more transactions into the market to stabilize and see where these cap rates get to. But right now, there's just been no transactional volume. There's some properties coming to market in the next quarter. So by midyear, we might have a bit of feel for that.

The other thing I'd point out, Rohan, is that obviously, CBRE's sort of market data is forecasts or estimates. So like all good forecasts or estimates, it's subject to some uncertainty themselves. So...

Yes, for sure. I understand. And then just on the forecasts and estimates, I know you called out 5.5% rent growth for the next 5 years. But you included 2022 in that number, don't you, which is...

Yes, that's -- well, they -- yes, they include '22 in that number. So they don't break out -- they don't break out '23 to -- in the 4 years after that. So yes, so we note that in the report that the number does include the spike in '22, which is something we've called out there.

If you were to just look forward the next 4 years, what does the forecasts tell you or their expectations tell you?

Would they don't disclose that detail, yes, that's what we're saying, they don't disclose that detail, so we can only kind of give that number and point out that it includes '22. So...

Yes. Perfect. And then last one, just when you -- you've got a couple of brownfields on the go at the moment. What kind of hurdle rates do you kind of have internally for progressing these developments in terms of an initial kind of yield on cost and also maybe if you think about it from an IRR basis?

Yes. So I think we've disclosed the yields on cost, including land on those projects, which, again, broadly speaking, sort of shade over 5% at the moment. And then we also have each of these valued up as part of those exercises to sort of check around the IRR as compared to the IRR of the rest of our portfolio. And so we're targeting shrunk in IRR above our portfolio IRR, and again, looking for some form of development margin on top of those sorts of things. I would add when it comes to something like a Bowden Road, those buildings are completely unleasable.

Obsolete.

Obsolete. So there is also a bit of a process of getting on with -- dealing with those sorts of properties, less so at Springs Road. And again, when it comes to Springs Road, I know there's already been some comments around how much of that's preleased. There's no sort of burning platform there in terms of that want to get on with the other 3 or 4 buildings. But at the end, new buildings that are there. We will, of course, refurbish the existing building, the Fisher & Paykel, when they're coming out of that in October '24 is the current lease expiry, whether they come out of it or not, we're not yet too sure. But the other 3 or 4 buildings, we don't have to push go on those. Those are just vacant land for us at the moment. And so if we can't get an acceptable hurdle ratio out of them at that time, then we can just hold fire on that.

Our next question comes from the line of Vijay Chhagan of ACC.

Just got one from me. Just on the USPP facility, what are the covenant terms for it?

The same as the bank covenants.

Back to back.

Back to back.

Perfect.

It's undrawn as well at the moment.

Our next question comes from the line of Nick Mar of Macquarie.

A couple from me. In terms of the balance sheet and in the context of where valuations are, where would you be comfortable gearing up to or having committed gearing sits with regards to any acquisitions or further development comment?

In terms of gearing, we've always run sort of in the mid-30s. For us to be a part, we're around the liquidity piece. So we've got $120 million to $125 million of liquidity right now, which is matched pretty much to the brownfields development piece. So while we're looking at acquisition opportunities, it's not high up on our -- very high up on our list of things to do in the next 3 months to 6 months. So...

Yes. I mean I think if you look at what committed gearing we get to and then if there's a potential for any further change in asset values that looks to be pretty full situation at the moment. And so as Simon is speaking, we'll always be casting our eyes over things and we might match those with sales and that sort of stuff. But yes, there wouldn't be a huge amount of desire to go and gear up at this point.

Great. And just across the sort of book, are you seeing any signs of stress on secular tenants? I haven't had time to look at the arrears numbers or anything like that, but just any comments you can provide there?

No. At the moment, the portfolio feels very strong is how I'd describe it, Nick. We obviously, over the last -- particularly last 5 years, but -- even going back 7 years or 8 years, have spent a lot of time when we're bringing new tenants into the portfolio, and it's probably one of the benefits of scale. We have had some vacancy coming up. We've made a decision not to rush and just to fill it with anyone. So most of our -- particularly our top 10 are in very, very good shape and they're listed entities, so you can sort of follow those, all the government agencies. But yes, as of today, the arrears is minimal, payment terms are very, very up-to-date. It's feeling pretty robust is how I'd describe it. So yes, long that continue.

Our next question comes from a follow-up from Shane Solly of Harbour Asset.

Yes. Sorry, just one more. When would you use the USPP?

Yes, good question. Well, obviously, one of the main attractions to that is existing term. If -- we felt that it was desirable to get term beyond what's currently available in the bank market or the bond market. So that's, I guess, the sort of dynamic that we'll be looking for. But at the moment, the rate environment doesn't really suits going for something like that. But we maintain sort of an open dialogue with these guys. And would -- yes, look, I actually said when the rates are protected vis-a-vis the sort of other options that we have.

It's about some braces for us, Shane, as well. It's another lever there we can use if we need to, whether the pricing is right or not, it's obviously something we focus on, but we've set it up, it's ready to go, and we're pretty happy with it sitting there.

I think the only other thing -- Shane, the only other thing I'd add is I don't think we'd see it as being a hugely significant part of our [indiscernible] mix at the moment, we probably see it as being more of a minor player can be to our other options.

Thank you. At this time, I would like to turn it back to Simon Woodhams for closing remarks.

All right. Hey, thanks very much, everyone, for dialing in today. As always, we appreciate you giving up your time. We've got a series of meetings lined up over the next few days and coming weeks. But if you do have any other questions that you haven't thought of, feel free to pick up the phone to Craig, myself or Nick Moloney, who's also been sitting in here listening and a lot of the work behind this presentation. So really appreciate your time. We'll catch up with hopefully most of you over the next coming days. Thanks very much.

Thank you.

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