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

Hello, and thank you for standing by. Welcome to the Property For Industry Interim Results Presentation. [Operator Instructions]. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Executive Officer, Simon Woodhams.

Good morning. Thanks for that introduction, Andrew. Welcome to PFI's 2023 Interim Results Briefing. Simon here, the CEO of PFI. And alongside me today is Craig Peirce, our Chief Finance and Operating Officer. This morning, Craig and I are going to speak to the topics outlined on the contents page, Slide 2. I'll begin by reviewing the highlights for the interim period and give a brief overview of the portfolio, its performance, along with a summary of the key leasing transactions throughout the period. Craig is then going to take you through the interim results and the section on capital management before giving an update on sustainability. I'll then give a brief update on the market before reviewing our priorities. We'll then close the presentation, at which time we'll take any questions that you may have. So we jump through to Slide 4 of the presentation, headed highlights, where we are pleased to report on what has been a solid start to 2023 for us here at PFI, highlights that Craig and I will expand on throughout the presentation include our resilient and well-located $2.1 billion industrial property portfolio has performed very well, with core assets delivering annualized rental growth of 4.2% across the $32.8 million of contract rent that was reviewed during the period, 4.6% of contract rent was leased during the interim period, rents were agreed on half of that at an average of 14.7% above previous contract rents. The remaining half is subject to market reviews on renewal date with the entire portfolio approximately 16% under rented at the end of the interim period. Our Green Star development pipeline has progressed with the company's brownfield development sites Bowden Road and Springs Road, with demolition works complete across both sites and civil and foundational works well underway. We continue to make good progress on our sustainability initiatives, including putting in place power metering across 7 of our properties and completing the company's first solar installation. And our balance sheet also remains in great shape with NTA confirmed at $2.88 per share, gearing at 29.2% and close to $200 million of available bank liquidity at the end of the interim period with additional liquidity secured in July. This activity is combined to deliver stable interim results for the first half of 2023 with our adjusted funds from operation or our AFFO, in line with the prior interim period. If you turn to Slide 6, headed portfolio snapshot. Here, we have a summary of the portfolio statistics as at 30 June, including the impact of our brownfield leases yet to commence. You can see that the company continues to own a portfolio of 93 properties, leased to 128 tenants. Pleasingly, the portfolio remains 100% occupied with a weighted average lease term of 5 years, moving to 5.78 years upon the inclusion of those brownfield leases. Contract rent decreased as leases at the company's brownfield development sites expired. But as you can see here, once the new leases commence at those sites, contract rent will move back over $100 million. We continue to focus solely on industrial property with the majority being held here in Auckland. Slide 7. We revalued 37 properties at the end of the interim period, resulting in a write-down on those properties for $55 million or an average decrease of 5.3%. This decrease was driven by 43% -- sorry, 43 basis points of cap rate expansion. We do note that in some cases, a large factor in the decrease of individual property values was the lack of access to market rents in the near term. However, these assets will naturally achieve reversion to market rents as time moves forward. As a result of these revaluations and portfolio activity, our passing yield, excluding brownfield development properties, has increased to 4.73%, and our portfolio is approximately 16% under rented. Just moving through to the next slide. During the period, the team leased almost 36,000 square meters of area or 4.6% of the portfolio by rent for an average lease term of 4.7 years. All of the leases completed during the interim period were renewals and on average, just 0.1 month of incentive per year of term was required to secure these transactions, reflecting the continued strength of industrial market. Of the $4.4 million of contract rents secured during this half of the year, rents were agreed on $2.2 million of the contract rent. And these transactions were settled 14.7% above previous contract rents. The remaining $2.2 million of contract rents secured is subject to market reviews on renewal, all of which are uncapped. Those leases were approximately 9% rented -- under-rented at the end of the interim period and have a weighted average review date of December 2023. Moving on to Slide 9. As I mentioned earlier, as of 30 June the portfolio was 100% occupied, and as the graph on the left-hand side illustrates, we have just 3.2% of contract rent due to expire during the remainder of 2023. Leasing demand remains robust, and we are pleased to report approximately 75% of the remaining expiries for the second half of the year have either been secured or in advanced stages of negotiation with positive outcomes expected. Excluding brownfield opportunities, which I'll touch on later in the presentation, 9.7% of contract rent was due to expire during 2024. And in line with recent years where historically, we've had about 10% due to expire at the start of the year. If you turn to Page 10 -- Slide 10. 61 rent reviews were completed during the interim period, resulting in an average annualized uplift of 4.2% on $32.8 million of contract rent. Around 45% of our portfolio is subject to some form of lease during the second half of 2023, allowing PFI to capture further rental growth. CBRE are forecasting rents to increase by 3.4% per annum over the next 5 years for prime properties and 2.9% per annum over the next 5 years for secondary properties, and I'll expand on these forecasts later in the presentation. Finally, before I hand over to Craig, we're also pleased to confirm that we have completed the transition of our facilities management services to an in-house team effective from 1 July. This is an important strategic change for the business, bringing PFI closer to our tenants and to the day-to-day operations at our buildings. It also positions PFI well to deliver on our sustainability aspirations in the future. Now I'm going to hand over to Craig, who will speak to several topics, including the interim results. Craig?

Thanks, Simon, and good morning, everyone, and a special welcome to those dialing in from overseas. I know we've got a number of callers on the line from overseas this morning. So welcome to you all. As Simon mentioned earlier, we're pleased to share with you PFI's 2023 interim results. At a high level, fair value losses on properties of $55 million contributed to a loss after tax of $30.5 million, funds from operations were down 4% from the prior interim period to NZD 0.0492 per share. Adjusted funds from operations are in line with the prior interim period at NZD 0.0462 per share, and cash dividends for the first half of the year of NZD 0.039 per share are being paid. So let's dig into the numbers a little bit, starting with Slide 15. Here on this slide, we take a look at net rental income, which at $47.4 million is down $0.3 million or 0.7% from the prior interim period. As Simon explained earlier, first half of 2023 has seen PFI's portfolio continue to deliver strong levels of rental growth, which has translated into a positive contribution to net rental income of $1.5 million. The net impact of other activities such as current and prior year acquisitions, developments and divestments resulted in a decrease of $1.9 million, with the largest negative item to call out here in the loss of income from the company's brownfield development sites as the leases expire and works commenced. Looking now at Slide 14. We can see how the half year's activity has translated into adjusted funds from operations or AFFO and as mentioned earlier, at a headline level, AFFO earnings were in line with the first half of 2022. Under the hood, there are a few moving parts, on the positive side, current taxation of $3.3 million was down $2.7 million on the prior interim period with the change being largely due to an increase in deductible CapEx and tax deductions associated with the redevelopment projects. Net rental income including AFFO adjustments was also up $2.2 million or NZD 0.0044 per share. The main offsetting effect there was an increase in interest of $3.2 million or NZD 0.0064 per share. This being the result of an increase in the company's weighted average cost of debt to 5.34% as at the end of the interim period up from 4.07% at the end of the prior interim period. Administration expenses also increased due to continued investment in key projects, team and systems contributing to a reduction of 0.0031 per share, we'll go into further detail on that movement on the next slide. As noted here, admin expenses were up 34% on the first half of '22 or 16% on the second half of '22. The transition to in-house facilities management was a key driver of the increase, and we lay out on this slide, the detail of that transition. Other increases in admin expenses are associated with our development projects, corporate office move and other broad-based cost pressures, including employee remuneration, audit and professional fees. Moving now to Slide 16. [ Our attention ] to dividends, the PFI Board today has resolved to pay a second quarter dividend of NZD 0.0195 per share and there's no dividend reinvestment scheme for this dividend. The second quarter dividend will take cash dividends for the interim period of NZD 0.039 per share, resulting in FFO payout ratio of 83% and an AFFO dividend payout ratio of 89%. Consistent with earlier guidance, the PFI Board expects to declare 2023 cash dividends of between NZD 0.081 and NZD 0.083 per share, an increase of up to 2.5% on 2022 dividends. PFI's dividend policy is to distribute between 90% and 100% of AFFO on a rolling 3-year historic average basis, and cash dividends of between NZD 0.081 and NZD 0.083 per share are anticipated to result in a dividend payout ratio at the bottom of this policy range. Elevated interest rates have the potential to impact forecast earnings and PFI's guidance assumes an average BKBM throughout the remainder of 2023 of around 5.7%, which is up from 5.25% when PFI's 2023 guidance was first issued in February. Turning now to Slide 17. Looking at the balance sheet, here, we provide more detail on the change in value of PFI investment properties, including sets held for sale are valued at -- sorry, $2.06 billion, a little bit of a mouthful. The decrease from the end of 2022 was driven by the $55 million valuation loss Simon talked about earlier. As well as the disposal of the Canada Crescent properties in Christchurch for $21 million. $18.6 million was deployed on CapEx during the period, including almost $10 million into the company's Green Star development pipeline, yard works in New Plymouth, a warehouse extension in Neilson Street and the completion of a sustainable refurbishment at 3-5 Niall Burgess in Auckland. So turning to Slide 18, where we look at NTA. NTA decreased by NZD 0.106 per share or 3.5% from NZD 2.988 per share at the end of '22 to NZD 2.882 per share at the end of the interim period with valuation losses mentioned earlier, driving that decrease. Turning now to Slide 20 for an update on capital management. Towards the beginning of the year, we reached our BNZ facility, increasing the facility to $175 million and extending the facility expiry 2 years to 31 March '25, and this provided us with initial funding certainty through to the estimated completion of the company's committed Green Star developments at Bowden and Springs Road. However, post interim balance state, PFI launched its Green Finance Framework and this recognizes the company's commitment to invest in long-term sustainability initiatives. Concurrently, we established our inaugural $150 million green loan in accordance with that framework. And those loan facilities were provided by PFI's long-term banking partners at ANZ, BNZ, CBA and Westpac. And a big thanks to all those teams that had to work on that. Our facility with Pricoa Capital Group remains undrawn at this point, that does provide us with access to long-term funding should market conditions suit. And looking ahead, in terms of other capital management activities, we're also considering disposing $30 million to $40 million of smaller assets with a view to recycling this capital into the development projects we've been talking about. On Slide 21, we have 2 graphs. The top graph shows our bank facilities and bonds following the green loan activity I just mentioned, and the bottom graph illustrates our hedging profile. As can be seen in the bottom graph, interest rate hedging provides an average of 61% of the company's debt to be hedged at an average fixed rate of 2.35% during 2023, offering some near-term protection from floating interest rates. Turning now to Slide 23 for an update on sustainability. Early this year, we shared PFI's refreshed sustainability strategy with you all, and the strategy focuses on 5 key areas and the most material for PFI, greenhouse gas emissions, resources and waste, disaster and climate resilience, people and well-being and economic value. We're committed to the targets set out on this slide. First, significant new buildings to be developed by PFI will target a 5 Green Star rating, helping us to future proof our portfolio. Second, also targeting implementation of power metering across 50% of the portfolio, which will enable us to understand the energy use of our buildings and work towards some form of green performance rating. Third, we plan to install 5 solar installations at our buildings to provide renewable power for our tenants. And finally, we will continue to minimize and offset Scope 1 and 2 emissions. Turning to Slide 24. We're really pleased to confirm that we've made a strong start on delivering against this strategy. In the first 6 months of the year, we made progress across a number of the initiatives, including completion of our first solar installation, installing power metering and monitoring at 7 properties, continuing the work towards a 5 Green Star certification at Bowden and Springs Road, and these projects are now being backed by green finances I mentioned earlier. Speaking of Green Star developments, turning to Slide 25, we'll provide a bit more detail on what the Green Star rating entails at a site. So this slide is intended to give you a bit more context as to what Green Star means in practice. The tool takes a holistic approach to minimize the impact of the development and the operation of the building on the environment. Springs and Bowden Road developments that are currently underway, will use sustainable materials, are designed in a way to minimize water usage, with solar installations, will divert a minimum of 70% of all demolition and construction waste from landfill. The projects will also aim to reduce both upfront operational greenhouse gas emissions and they have dedicated parking for fuel-efficient and electric vehicles. That's all from me for now. I'll hand you back to Simon, and I'll be around for questions at the end. Simon?

Thanks, Craig. I'm on Slide 27. I'm just going to touch briefly on the current market conditions out there. As can be seen on this slide, Auckland industrial vacancy remains at historic lows, practically 0 across both prime and secondary stock. These favorable supply and demand conditions have led to unprecedented growth in market rents over the last 18 to 24 months. With PFI's portfolio now estimated to be approximately 16% under rented. Looking forward, our strong balance sheet and defensive, well-located portfolio affords us the ability to execute on the company's Green Star development pipeline while continuing to extract value from our core assets. If you turn to Slide 28, let's take through a couple of recent transactions. So as outlined on that previous slide, CBRE are now forecasting growth in the range of 9% to 12% for both prime and secondary properties, following growth of 17.4% and 13.8% in 2022, respectively. Post balance date, we have secured at benchmark portfolio rents across wider Auckland and 2 examples are presented on this slide. Firstly, we have a small nearly 3,000 square meter warehouse within our Rosebank Road industrial estate in Avondale, West Auckland. This is a shed that's in good condition, but it's no -- by no means prime. It was constructed in the late 1990s. Pleasingly, we've secured a lease to a new tenant at a warehouse rate of $190 per square meter on this space, while at the same time, negotiating the early exit of the existing tenant has paid out their lease tail. The newly agreed rents were settled at 54% above the previous contract rent and 30% above the June 2023 market rent estimates. Similarly, we've had one of our long-term tenants at East Tamaki agreed to renew subject to finalize documentation for a further 10 years from September 2024. This is at a warehouse rate of $183 per square meter, which when combined with $680,000 of solar and canopy works, which will be rentalized at a return on cost of 8%, results in 51% increase on the previous contract rent and is 11% above the June 2023 market rent estimates. With 85% of our portfolio located here in Auckland, we expect the portfolio and the renting debt to widen in the near term as evidence works its way into value calculations. At the same time, the PFI team remains focused on achieving reversion to market rents through our ongoing asset management strategies. I'll take you through to Slide 30. As many of you on the call today already know, we look at our portfolio -- 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 all 4 categories currently sit within their target ranges. Brownfield opportunities that is the redevelopment of existing holdings have been a huge focus of the team over the first 6 months of the year, which I'll now speak to on the next slide. As you can see here, approximately $232 million or 11% of our portfolio is currently classified as Brownfield. These redevelopments allow us to invest our capital into projects in key precepts, regenerating older assets that we own in best-in-class buildings that will underpin the company's performance for the next 50 years and beyond. We move through to Slide 33. I'll just talk to the 2 projects we've currently got on. So as you can see, the drone footage on this slide illustrates things are well underway at 30 to 32 Bowden Road in the heart of Mount Wellington here in Auckland. As previously outlined, we've secured a precommitment for approximately 40% of the site being built into with the remainder being developed on a speculative basis. Both buildings will target a 5 Green Star rating with close to 24,000 square meters of covered workable area once complete. The estimated incremental project cost remains unchanged at $65 million and we're targeting a Q3 2024 completion date for both of these warehouses. Let's move through to Slide 75 (sic) [ Slide 35 ], talk to Springs Road. Similarly, the initial phase of the 78 Springs Road development is progressing well with demolition complete and civil and foundation works in progress. As you will recall from last year, existing tenant Fisher & Paykel appliances have committed to the first stage of this significant redevelopment with a 15-year initial lease. Stage 1 has an estimated total incremental cost of about $76 million. And encouragingly, contract pricing shows signs of construction costs easing as compared to our initial estimates. Again, and consistent with our climate commitments, the Fisher & Paykel facility will take a 5 Green Star build rating. Finally, with approximately 5.3 hectares of development land available on the balance of the site, which Fisher & Paykel appliances are still occupying and operating out of. We are actively planning the configuration of future stages. Through to Slide 36, where we've been thinking beyond our immediate brownfield projects. And here, we have 2 sites that have been in our brownfield category for some time. Our purchase in March 2022, 318 Neilson Street was a strategic acquisition for PFI, it created 5 hectares of contiguous land in the highly sought after industrial Onehunga Penrose. At the time, we were confident that the acquisition would unlock further development opportunities across our neighboring holdings and preserve the company's future expansion missions with greater flexibility to meet the market. The parent tenant 304 Neilson Street next door has a terminal expiry in June 2027, providing us with the opportunity to develop approximately 15,000 square meters of workable area with drive around access in multiple egress points should market conditions suit. Now, earlier this year, we had the existing tenant at 92 to 98 Harris Road exercise the right of renewal for a further 5 years. Taking the terminal expiry out to November 2028. This 2.6 hectare site currently benefits from very low site coverage of just 25%. And early build concepts results in approximately 19,000 square meters of work [indiscernible] being able to be developed on site. Again, should market conditions suit. Turning to the next slide, 37. Further to our current brownfield projects and the near-term opportunities detailed on the previous slide, we have a collection of assets that provide further redevelopment opportunities over the medium term. Two of these opportunities sit at the company's Rosebank Road industrial estate, these projects would be the potential start of the regeneration of over 8.5 hectares of continuous land. That we own less than 250 meters from Auckland's Northwestern motorway. At the other end of the town, we have a site at 9 Nesdale Avenue on Wiri. This is a 1.6 hectare site with very low site coverage, below 20%, good access to both the Southern and Northern motorway system, as well as proximity to the airport. We envision the development of 11,000 square meters of workable area across this site with multiple configuration options available. We move through the final slide in the presentation I'll summarize. So we're really pleased to deliver this set of interim results. Industrial property is an asset class that continues to perform. Demand from occupiers remains robust supported by record low levels of vacancy and strong rental growth, pleasing our portfolio and our strategy of benefiting from these dynamics. Looking forward, as always, there's going to be some challenges, but we believe that PFI is well placed to execute on our current green star development pipeline, while at the same time, remaining ready to capitalize on any opportunities that will arise. Thank you for dialing in today. 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 with Craigs Investment Partners.

Congratulations on the result. Just looking at some of these market rent reviews, they look a bit punchy or very punchy, I should say. I was just wondering, when was the previous market for that rent review for these leases around that? Like was it sort of like 15.7% on a rent review that happened last year? Or did the -- was this sort of like rent reviews that happened, say, 3 years ago, in which case, there's like 3 years of market rents in there?

Yes. So I think it's 2.7 years. I think we may even say that but...

And your included average review period means -- cool.

Yes, that's what I mean. Yes.

Okay. Are you able to provide any sort of like color on the leasing inquiry for the expiries over 2024 and 2025?

Yes, we tend to be working with our tenants as far out as 3 years before expiries, especially the larger ones. If you look at our retention ratio over the last 5 years, we sit at about 80% to 85% of leases renewed. So it probably gives you an indication of where things are dialing at this stage for particularly '24 and then further out, '25. So yes, I mean, if you look at why the market, there's very, very little vacancy. There's very little options out there. We're pretty confident on the majority of that '24, '25 income.

And I think those deals, Simon, that you quoted in that market section there, again, they're all '24 -- '24 expiries there as by way of example. So while they didn't fall into the current period, that's of about September '24, I think there. So there's an example of sort of how far out people are making these decisions.

And in terms of sort of like the composition of these lease expires and tenancy or like the tenancy renewals you're looking at. Would it be sort of fair to say that if I took sort of the second half of 2023 lease expiries, how it's quite sort of top heavy with the sort of, I guess, you'd say, blue chip tenants well -- relatively well capitalized tenants, would be reflective of those FY '24, '25 lease expiries? Or is there some sort of difference there?

In terms of the tenants themselves, the actual quality of the tenants?

Yes.

Yes. I mean we haven't put sort of the details of the '24 expiries out there at this stage, Nick. Yes. So I don't think we could really comment on that at this stage. But I mean, generally speaking, if we think about the composition of the tenancies, I think top ten tenants make up around 40% of our portfolio and those top 10 include all the names you might sort of hope to see in there, the likes of Fletcher and the likes as well. So yes, high quality -- and EBOS, DHL, Mainfreight, these sort of people make up around 40% of our portfolio. So -- but yes, we haven't put out any details around exactly who is making up '24 at this stage.

In terms of sort of the behavior of prospective tenancies, sort of -- are you experiencing sort of more pushback or hesitancy around signing these sharper leases?

There's no doubt, deals are taking longer than they were 12 months ago. And I think that's a reflection of not only where rental levels are at but just the wider market in terms of business confidence in terms of taking on a new lease. So yes, it's taking longer to do transactions. What I would say, though, is in a normal market, these deals don't happen easily. So we've probably gone from a period over the last 2 or 3 years where it's been -- deals have happened very quickly, back to a bit more of normality. We have to work to get these transactions across the line. So a return to normality is what I'd call it.

And then just a last one from me. And when you're looking at divesting $30 million to $40 million of assets, would these -- would it be fair to say that most of these will be located outside of Auckland?

Probably half and half.

Your next question comes from the line of Vishal Bhula with Jarden.

I'll just start with some leasing questions, just to follow on from Nick. I mean, it's really good to see the strong leasing momentum continuing on from '22. Can you just talk to any changes in dynamics you're seeing in terms of new lease structures? Like are you able to get the mid-lease market reviews? Or is there a lot of pushback from tenants on those kind of contracts?

No, generally, the way we operate. If we're doing a lease longer than 5 years, we will get a midterm review in there, whether we can get that uncapped is the question at the moment. Obviously, with these big jumps. The annual clickers that we push for. They're more in the 3% to 4% range, whereas if you go back a few years, they were sort of 2% to 3%. So there's definitely been a market-wide trend for the annual clickers to get bigger. And the mid-term market reviews, we've always sort of tried to push for those in our leases. So again, depending on how long they are, where that initial rent is set gives us some comfort. So there -- we talked about at Rosebank Road, for instance, that's a 5-year term, obviously, at $190 a square meter. We think that's evident setting for the rest of the portfolio at a high level with that particular one, we've just got 5 years of straight annual clickers. I think from here, it's 3.5%. We're pretty comfortable with that knowing in 5 years' time, we'll have a reversion. So I mean every leasing deal was slightly different. What I would say though is generally, the annual clickers have gotten bigger and the interim market reviews are pretty standard these days.

Perfect. And I guess just going to expiries, they're pretty low at 3%, and you basically just secured about 75% of them and that kind of showed -- but going forward, maybe into '24, maybe a bit later, you can see leasing incentives picking up again as rental growth starts to slow?

I think that's the general -- in a more normal market, that's what happens. Your incentives do push up. What I would say is while there's very low vacancy out there. You can work with your tenants a little bit earlier to secure them, and we're not having to give away as much for an existing tenant. So yes. I mean -- and seen in terms of vacancy, they're at historically low levels. So at some point, they'll start to trend back up.

Perfect. And then just a quick one on underwriting. I mean, obviously, that's been building over the last 18 months and the options to close are pretty limited. But would you go to provide an estimate on just the more heavily under-rented leases, when are they kind of due for expiry? Like are you going to get a big kicker in 2 or 3 years when a lot of these under-rented leases go for renewal? Or is it more just kind of just an average kind of churn every year.

I think with 130 tenants and about 100 -- it's about 170 tenancies. So we can take it -- the doubles when we say 130 tenants. We've got 170 tenancies. It's just really a slow churn through that, Vishal. There's not sort of any 1 big or 2 or 3 big ones that will provide any sort of major upside or surprise there. Again, Fisher & Paykel appliances were our sort of our largest single tenant, in fact ones with the developments done, they'll probably be that again. But for instance Fletcher Building is our second largest tenant, they've got 8 leases with us. So it's not -- you're not going to capture a bump across all 8 at one go or anything like that. It will just be as they sort of come up. So I mean net lease expiry profile over the next 4 or 5 years is pretty standard between, I think, 7.5% and 12%, so in that range. So it's an annual thing that this is the benefit of running a portfolio to continue sort of live process is how I'd describe it.

Last one for me on the brownfield. There's 3 new sites the Nesdale Avenue and the Rosebank sites. Can you give any kind of sense of timing? I think you've only put timing details on 670 road.

Yes, both of those ones, the Rosebank road sites and new Nesdale road, they have various -- sorry, have right of renewals in place. So Nesdale has a right of renewal in December next year. So we're working with the tenant. So what we're trying to highlight there is stuff we're working on right now. There's a couple that are near term in the next 3 years. And then there's a suite of options or potential projects set further out. So both of those ones there, we don't really control in terms of the our -- rights of renewal available to the tenant. So yes, it's more just to highlight that within our own portfolio, we think there's a big body of work over the next 5 years that we can execute on.

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

Well done on the great progress on sustainability. I've got a couple of questions, if I may. Can you just expand -- you've obviously invested in our in-house facilities management in terms of what happens from here? What are you expecting in terms of that the teams [ embedded in ], is there more cost growth to come there? Or are you pretty much done?

No. So the team is in place now and there's 3 facilities managers in place in the various systems and things that are wrapped around them. There's a few minor pieces of software to be -- not mine. Sorry, there's a few other pieces of software that we stood up, as part of that transition that will happen Q3, Q4 this year, but that project is just wrapping up now and the team is in place. And it's our view that, that will be sort of cost neutral as compared to the costs that we used to pay to an outsourced provider, but really, the big benefit here is, I guess, having more joined-up decision making. The team in the building involved in all the conversations every day. And so already we're seeing the benefits of sort of more joined-up decision making around asset management, property management, facilities management decisions. So it's going really well, but no sort of big cost split to go after the sort of next few months there.

Got you. So you said it's a fully -- full period annualized that we're seeing now, Craig? Or is there a little bit more come through in the next period?

There's a little bit more in the second half of the year that needs to come in. Yes. There is because we...

Okay. Cool. Just moving on the next one then, the hedging structure in terms of what your strategy is there at the moment, Craig. Can you just expand a little bit on that?

We have taken on quite a bit of hedging over the first half of this year. I think we've -- off the top of my head, we've gone about $70 million of hedging in the first part of this year because obviously, our debt levels are building as we build out these Bowden and Springs Road projects. So we have taken on a little bit. I mean, obviously, I think this morning, I read somewhere that [indiscernible] tenures are at a 16-year high now. So it's pretty ugly. Yes, look, we continue to -- we continue to desire to cover as sort of opportunities arise because of the debt profile we'll build through these projects. That 61% for the year, we're not feeling too bad about that.

Got you. Okay. Just picking up on -- looked through gearing. And I guess, sort of -- I know you've not turned your DRP on. So you're obviously -- that cost of capital argument versus gearing versus asset sales. Can you just expand a little bit on that, where your comfort is on gearing?

So we think committed gearing at around 33.5% at the end of Springs Road project, which I think we feel comfortable with. The DRP, we tend to turn on when we're trading above NTA and leave it off when we're trading below NTA. So that's sort of -- it goes without saying at a share price of around $2.35, $2.40, NTA of NZD 2.88. We don't see that as being the thing to do at the moment. Yes, we've committed gearing of 33.5%. We feel pretty comfortable building those projects out using -- at the moment.

Okay, it makes a lot of sense. Just a last one for me. You talked about a rentalized return of 8% on your PV investment. Is that the way that you expect to go forward in terms of economic returns on that sustainability investment? Is that what we should think about? 8%-ish is a target? Or is that unique to that particular project?

I think each -- these are very case by case. The Electrolux site was another one where we had PV as part of the entire lease renewal package whereas here, this is a manufacturing site, and there's a real desire by the tenant to have solar, that really works for them in terms of their cost base. So it is a bit case-by-case, but one thing, I guess, we are conscious of is that often we're signing leases for, let's say, 10 years, where as these things have quite a bit longer life than that. So much in the same way as we might build a canopy as part of a deal or something like that. We think about them as part of the sort of long-term fabric of the building and look to generate a return over a slightly longer period than perhaps that initial 6 years or something like that, because being blunt, it doesn't work if you just focus on the initial lease term.

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

Congratulations on a solid start to the year. Just a couple of quick ones. First, incentives, first half, second half and maintenance CapEx came in a little bit lighter than what I had. Is there expected to be a bit of a tick up in both in the second half?

In terms of maintenance CapEx and incentives. I mean, obviously, incentives were very low. There was 1 renewal that had 1 month incentive, I think, -- so that is, as you point out, Rohan, very slow. In the second half of the year -- sorry, I'm just pulling out my giant spreadsheet. We're still seeing a pretty low -- I mean given it's only 3%, and most of these are looking like there will be renewals, it still is a very low period for incentives. But we would expect to see maintenance CapEx tick up in the second half of the year.

On the Bowden Road and Springs Road development, given you've still got some space to lease at Bowden, and you're seeing some pretty solid market rent numbers come through. Also, you talked about construction costs coming down. Can you just give us an update on the yield on cost?

Yes. So I think when we initially put these deals out, yield on costs were sort of around the 5-odd percent mark, maybe a touch high for those. Each of those fields have some moving parts. If we think about Bowden Road, the moving part there is obviously the rent that we strike for the second lease there. So we -- our underwriting on that deal was at a per square meter rate of around $190 and Simon -- we'd expect to put -- well, we're putting terms out at...

NZD 230 to NZD 240 square meter. So the revenue side has definitely improved. I would stress, we're not out of the ground completely on either of those sites. But yes, there's no doubt we've got 60% of the site or 12,000 square meters to lease at Bowden Road. The rental site has moved materially, which is really good. So we're happy with that. The cost side is probably where we thought it was going to be. But we haven't leased it yet, we've got some pretty good interest running on it. So we're working on that at the moment. Springs Road, yes, we've definitely seen compared to Bowden Road the construction costs from our original estimate have come back. But again, stress, we're not out of the ground there, and that's a 25,000 square meter shed. So these things can move around pretty quickly. But yes, locked income on that one, but costs are trending below where we thought they were going to be, which is pleasing at this very early stage.

Perfect. And just curious on Bowden Road, given indications and vacancy is low and everyone talks about how strong occupier demand is. But can you give reasons why it's taking so long to lease the second shed in the strong market? Is the tenant just not willing to commit that far ahead?

I think the big thing is, if you turn up on site as it is as opposed to -- so leasing a building that's up and established is infinitely more easy than leasing a concept is how I'd describe it. So we've always maintained that once the structure starts coming up, which is towards the end of this year, start of next year, that's when we would expect the lease and interest to really hot up. It's a bit like buying a house off the plans. There's some people that just won't do that. Others are comfortable doing it. So like I said, the leasing interest has picked up in the last couple of months as we've demolished what were some pretty old asbestos coving building. So it's a lot easier now when we take people to site, they can actually start to see the footprint of where it's going to come. So speculative development is always harder to lease than existing shed, but we're very comfortable where we're sitting at the moment.

Perfect. And then one final one, just yields that you expect to achieve on developments, given you're expanding your development pipeline? Can you just give an indication of yield on cost or -- target as a hurdle rate. I just noticed that some of your competitors have put out some pretty big numbers in terms of what they -- a minimum that they won't go below.

What did they put out of interest?

7% yield on cost.

So we haven't put out a revised number. I guess there's a couple of things to stress here. Number one, clearly, we're identifying some further opportunities within the portfolio to give you all sense of what potential is there. But I think we've made the point in the presentation and announcement, these things are subject to meeting acceptable levels of return and the like. We are in the process of updating our hurdle rates because we don't have any sort of live things that we're considering right now in terms of meeting that hurdle rate. We're in the process of updating our hurdle rates. I mean, obviously, there's been some recent election promises, which would impact on hurdle rates and rates of return that are required. So we need to think a bit carefully about this as well. But yes, I mean we do acknowledge that long-term interest rates have gone up and stayed up. And so we would need to achieve a pretty decent hurdle rate out of some of these things.

And sorry, I will ask one more just because you reminded me and thanks for doing it, Craig. Do you have a number in terms of the removal of structure depreciation for PFI's portfolio in terms of the loss of the tax deduction on cash?

We haven't put anything out there at the moment, Rohan. But I think if people kind of -- I've heard numbers [indiscernible] of around sort of 5%, 6%, 7%, I think if people put those numbers into their models, we wouldn't disagree with you.

And our next question comes from the line of Nick Mar with Macquarie.

And just talking about investments. Obviously, you want to get the best price possible. But do you think you'll be able to -- would you expect to achieve close to book value on what you're looking...

Look, I think that's the question out there. There's been very little transactional evidence in the market, Nick. But what has been transacted in the last 3 or 4 months. It's probably surprised us how strong it has been. So when we look at our book values, particularly here in Auckland, we'd like to think we'd be very close to those, but that will be the -- with asset test, right, when you decide to [indiscernible], can you achieve book value or not. Outside of Auckland, again, there hasn't been a lot of transactions. So yes, we'll test the market, and we'll see. We've got a pretty good track record over the years of selling at or above book value. So we're not in the game to break that habit. Let's put it that way.

Yes. So if it was 5% or 10% below, it would be the deal break of the year?

5% is probably margin of error. We'll just have to wait and see, yes.

Okay. That's good. And then just on funding. You've obviously done a few transactions on facilities lately. Can you just talk about how funding spreads are looking in the...

Yes, sure. So it's a very interesting topic at the moment. I think that we can start with the sort of listed bonds and those sort of things. Those spreads are pretty elevated right now. They're sort of around the 2% mark plus cost for that. The recent deals we did, one was a short-term deal and the other was a green deal. It's fair to say that the banks are very keen, as they should be, to support green transaction, and we received really, really strong support on that. And yes, while we can't go into the details of the pricing because it's confidential. What we can say is that there is a definite pricing benefit to going green and that benefit is probably bigger than we had perhaps expected when we started out the process. So that's a fantastic result. And as we look to do more either green development or green certification of our existing assets in folding those into sort of green structures will be something that we'll be looking to do more and more of. Yes. I mean I know there has been some chat that people are seeing bank spreads move around a bit, that certainly wouldn't be our experience at all that perhaps reflects the quality of the company properties.

Yes. No, that's great. And then on tax, always a fun question, how much of the, I guess, depreciation or write-off reduction to be taken through on those brownfield sites already? And is there much more to come in the second half?

Yes, most of that is done. So I guess, the specific pieces around some of the demolition and associated tax reductions with that and accelerated depreciation as you write-off the last bits of value that are in your tax asset register. So because most of the demolition and that was completed at 30 June is largely in H1, benefits. But there's a little bit of tidy up to go into H2 on that.

That's great. And just on the sort of your brownfield pipeline. And I guess going back to question about what your required return on capital is whether the assets are at end of life and there's no real other option to sort of keep them going. Of those sort of 4 or 5 other ones you've highlighted, how many of them are fully end of life versus, I guess, better utilization of sites?

Yes. So the Harris Road site that we've talked about, that would be end of life for the tenant with the final expiry there. That's a manufacturing site with very low site coverage. Neilson Street -- 304 Neilson Street, again, that's currently leased by Fletcher, the buildings on there are 1950s sort of state. So those 2 are probably the ones that stick out is -- can we keep squeezing the lemon, so to speak, without the tenant sort of side of it. The other ones, I'd say all 3 of them have the ability to be massaged and continued if required so, yes.

Yes. I mean going back to those first 2 that Simon mentioned, I mean it's safe to say they've been long-term occupiers of both of those sites that have renewed multiple times on both of those sites. What they wouldn't necessarily be, the most beautiful of buildings, each of them, they are seemingly working for these tenants and then renewing is potentially an option, particularly at Harris Road or something like that. So because of the nature of the operations. So yes, if they were to go, then, yes, we would be redeveloping them.

And I'm showing no further questions. So with that, I'll hand the call back over to CEO, Simon Woodhams for any closing remarks.

Thanks, Andrew. Thanks, everyone, for dialing in today. As always, it's a pleasure that Craig and I look forward to, to presenting to you all. I know some of you are coming down to the office and we're catching up with a series of you tomorrow. So look forward to that. However, if you've got any questions in the meantime or over the next week or so, just feel free to send them through to Craig or myself and we would do our best to answer them. So thanks very much, and enjoy the rest of your day and week.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.